Cardinal Financial (CFNL) 10-Q 2010 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, 2010

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

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

(703) 584-3400

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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:

28,761,939 shares of common stock, par value $1.00 per share,
outstanding as of November 3, 2010

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Condition At September 30, 2010 (unaudited) and December 31, 2009	3
Consolidated Statements of Income For the three and nine months ended September 30, 2010 and 2009 (unaudited)	4
Consolidated Statements of Comprehensive Income For the three and nine months ended September 30, 2010 and 2009 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity For the nine months ended September 30, 2010 and 2009 (unaudited)	6
Consolidated Statements of Cash Flows For the nine months ended September 30, 2010 and 2009 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	66
Item 4. Controls and Procedures	67
PART II — OTHER INFORMATION	68
Item 1. Legal Proceedings	68
Item 1A. Risk Factors	68
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3. Defaults Upon Senior Securities	68
Item 4. (Removed and Reserved)	68
Item 5. Other Information	68
Item 6. Exhibits	68
SIGNATURES	69

2

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2010 and December 31, 2009

(In thousands, except share data)

			September 30,			December 31,
			2010			2009
			(Unaudited)
Assets
Cash and due from banks			$	10,061		$	19,804
Federal funds sold			9,833			5,037
Total cash and cash equivalents			19,894			24,841
Investment securities available-for-sale			296,608			343,569
Investment securities held-to-maturity (market value of $19,254 and $31,436 at September 30, 2010 and December 31, 2009, respectively)			23,434			35,184
Investment securities-trading			1,843			3,724
Total investment securities			321,885			382,477
Other investments			16,467			16,467
Loans held for sale			341,413			179,469
Loans receivable, net of deferred fees and costs			1,351,703			1,293,432
Allowance for loan losses			(22,444		)	(18,636		)
Loans receivable, net			1,329,259			1,274,796
Premises and equipment, net			17,040			15,743
Deferred tax asset, net			4,454			7,691
Goodwill and intangibles, net			13,305			13,935
Bank-owned life insurance			34,211			33,712
Prepaid FDIC insurance premiums			4,717			6,683
Other real estate owned			2,615			4,991
Accrued interest receivable and other assets			22,051			15,380
Total assets			$	2,127,311		$	1,976,185
Liabilities and Shareholders’ Equity
Non-interest bearing deposits			$	211,762		$	166,019
Interest bearing deposits			1,185,914			1,130,986
Total deposits			1,397,676			1,297,005
Other borrowed funds			441,287			427,579
Mortgage funding checks			33,058			13,918
Escrow liabilities			5,278			2,079
Accrued interest payable and other liabilities			25,910			31,097
Total liabilities			1,903,209			1,771,678
	2010	2009
Common stock, $1 par value
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	28,761,939	28,717,839	28,762			28,718
Additional paid-in capital			160,372			159,798
Retained earnings			25,393			12,705
Accumulated other comprehensive income, net			9,575			3,286
Total shareholders’ equity			224,102			204,507
Total liabilities and shareholders’ equity			$	2,127,311		$	1,976,185

See accompanying notes to consolidated financial statements.

3

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and Nine months ended September 30, 2010 and 2009

(In thousands, except share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Interest income:
Loans receivable	$	18,701		$	16,585		$	54,454		$	47,969
Loans held for sale	2,808			1,630			6,070			5,651
Federal funds sold	11			57			39			102
Investment securities available-for-sale	3,028			3,264			10,279			8,578
Investment securities held-to-maturity	206			354			759			1,258
Other investments	17			33			38			13
Total interest income	24,771			21,923			71,639			63,571
Interest expense:
Deposits	3,572			5,710			12,009			18,514
Other borrowed funds	3,017			3,121			9,051			9,383
Total interest expense	6,589			8,831			21,060			27,897
Net interest income	18,182			13,092			50,579			35,674
Provision for loan losses	3,500			2,050			8,625			4,750
Net interest income after provision for loan losses	14,682			11,042			41,954			30,924
Noninterest income:
Service charges on deposit accounts	463			514			1,434			1,482
Loan fees	678			503			1,490			2,161
Investment fee income	1,048			975			3,072			2,665
Realized and unrealized gains on mortgage banking activities	5,325			2,833			11,855			9,579
Net realized gain on investment securities available-for-sale	193			73			726			625
Net realized gain (loss) on investment securities-trading	116			97			84			(422		)
Management fee income	1,255			553			2,676			1,267
Increase in cash surrender value of bank-owned life insurance	173			167			499			400
Litigation recovery on previously impaired investment	71			—			87			—
Other income (loss)	(16		)	(11		)	(58		)	(45		)
Total noninterest income	9,306			5,704			21,865			17,712
Noninterest expense:
Salary and benefits	8,923			5,897			21,782			17,546
Occupancy	1,376			1,321			4,301			4,055
Professional fees	571			562			1,576			1,566
Depreciation	462			464			1,469			1,515
Data communications	1,246			797			3,386			2,377
Amortization of intangibles	60			60			179			178
Impairment of goodwill	—			—			451			—
FDIC insurance assessment	524			463			1,592			2,202
Mortgage loan repurchases and settlements	(1,084		)	517			(686		)	1,692
Other operating expenses	3,291			2,897			8,500			7,590
Total noninterest expense	15,369			12,978			42,550			38,721
Income before income taxes	8,619			3,768			21,269			9,915
Provision for income taxes	2,716			1,164			6,857			3,000
Net income	$	5,903		$	2,604		$	14,412		$	6,915
Earnings per common share - basic	$	0.20		$	0.09		$	0.50		$	0.26
Earnings per common share - diluted	$	0.20		$	0.09		$	0.49		$	0.26
Weighted-average common shares outstanding - basic	29,140,193			28,999,230			29,110,038			26,559,683
Weighted-average common shares outstanding - diluted	29,639,114			29,524,878			29,582,342			27,047,915

See accompanying notes to consolidated financial statements.

4

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and nine months ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net income	$	5,903		$	2,604		$	14,412		$	6,915
Other comprehensive income:
Unrealized gain on available-for-sale investment securities:
Unrealized holding gain arising during the period, net of tax expense of $1.0 million and $3.4 million for the three and nine months ended September 30, 2010, respectively, and net of tax expense of $2.1 million and $2.9 million for the three and nine months ended September 30, 2009, respectively.	2,122			4,148			7,072			5,908
Less: reclassification adjustment for net gains included in net income net of tax expense of $14 thousand and $186 thousand for the three and nine months ended September 30, 2010, respectively, and net income net of tax expense of $25 thousand and $212 thousand for the three and nine months ended September 30, 2009, respectively.	(131		)	(48		)	(492		)	(412		)
	1,991			4,100			6,580			5,496
Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax expense of $36 thousand and net of tax benefit of $99 thousand for the three and nine months ended September 30, 2010, respectively, and net of tax expense of $153 thousand and $55 thousand for the three and nine months ended September 30, 2009, respectively.	69			467			(291		)	168
Comprehensive income	$	7,963		$	7,171		$	20,701		$	12,579

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, 2010 and 2009

(In thousands)

(Unaudited)

									Accumulated
				Additional					Other
	Common	Common		Paid-in		Retained			Comprehensive
	Shares	Stock		Capital		Earnings			Income (Loss)			Total
Balance, December 31, 2008	24,014	$	24,014	$	130,709	$	3,437		$	(154	)	$	158,006
Public offering shares issued	4,378	4,378		27,233		—			—			31,611
Stock compensation expense, net of tax benefits	—	—		300		—			—			300
Stock options exercised	11	11		47		—			—			58
Shares issued to employee benefits plan	287	287		1,278		—			—			1,565
Dividends on common stock of $0.03 per share	—	—		—		(769		)	—			(769		)
Change in accumulated other comprehensive income	—	—		—		—			5,664			5,664
Net income	—	—		—		6,915			—			6,915
Balance, September 30, 2009	28,690	$	28,690	$	159,567	$	9,583		$	5,510		$	203,350
Balance, December 31, 2009	28,718	$	28,718	$	159,798	$	12,705		$	3,286		$	204,507
Stock options exercised	44	44		122		—			—			166
Stock compensation expense, net of tax benefit	—	—		452		—			—			452
Dividends on common stock of $0.06 per share	—	—		—		(1,724		)	—			(1,724		)
Change in accumulated other comprehensive income	—	—		—		—			6,289			6,289
Net income	—	—		—		14,412			—			14,412
Balance, September 30, 2010	28,762	$	28,762	$	160,372	$	25,393		$	9,575		$	224,102

See accompanying notes to consolidated financial statements.

6

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

	2010			2009
Cash flows from operating activities:
Net income	$	14,412		$	6,915
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation	1,469			1,515
Amortization of premiums, discounts and intangibles	579			304
Impairment of goodwill	451			—
Provision for loan losses	8,625			4,750
Loans held for sale originated	(2,123,663		)	(2,003,234		)
Proceeds from the sale of loans held for sale	1,973,574			2,011,270
Realized and unrealized gains on mortgage banking activities	(6,829		)	(1,696		)
Proceeds from sale, maturity and call of investment securities trading	181			1,876
Purchase of investment securities trading	(884		)	(7,369		)
Unrealized (gain) loss on investment securities-trading	(84		)	447
Gain on sale of investment securities available-for-sale	(735		)	(768		)
Loss on sale of investment securities available-for-sale	9			144
Gain on sale of other assets	(3		)	(16		)
(Gain) loss on sale of other real estate owned	76			(25		)
Increase in cash surrender value of bank-owned life insurance	(499		)	(400		)
Stock compensation expense, net of tax benefits	452			300
Decrease in accrued interest receivable and other assets	(10,177		)	(3,330		)
Increase in accrued interest payable, escrow liabilities and other liabilities	10,679			2,834
Net cash provided by (used in) operating activities	(132,367		)	13,517
Cash flows from investing activities:
Net purchases of premises and equipment	(1,659		)	(614		)
Proceeds from maturity and call of investment securities available-for-sale	30,077			25,963
Proceeds from sale of investment securities available-for-sale	10,013			5,075
Proceeds from sale of mortgage-backed securities available-for-sale	24,175			43,589
Proceeds from maturity and call of investment securities held-to-maturity	5,857			2,000
Purchase of investment securities available-for-sale	(20,179		)	(71,572		)
Purchase of mortgage-backed securities available-for-sale	(37,809		)	(96,426		)
Purchase of other investments	—			(97		)
Redemptions of investment securities available-for-sale	40,876			33,010
Redemptions of investment securities held-to-maturity	6,000			10,564
Proceeds from the sale of other real estate owned	1,196			846
Net increase in loans receivable, net of deferred fees and costs	(63,088		)	(125,738		)
Net cash used in investing activities	(4,541		)	(173,400		)
Cash flows from financing activities:
Net increase in deposits	100,671			96,032
Net increase in other borrowed funds	13,708			11,447
Net increase (decrease) in mortgage funding checks	19,140			(6,011		)
Proceeds from issuance of stock	—			31,611
Proceeds from FHLB advances	10,000			—
Repayments of FHLB advances	(10,000		)	—
Stock options exercised	166			58
Shares issued to employee benefits plan	—			1,565
Dividends on common stock	(1,724		)	(769		)
Net cash provided by financing activities	131,961			133,933
Net decrease in cash and cash equivalents	(4,947		)	(25,950		)
Cash and cash equivalents at beginning of the year	24,841			45,928
Cash and cash equivalents at end of the period	$	19,894		$	19,978
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	23,874		$	27,926
Cash paid for income taxes	6,443			2,488

See accompanying notes to consolidated financial statements.

7

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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 and its subsidiary, George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. In January 2009, the Bank organized a second mortgage subsidiary, Cardinal First Mortgage, LLC (“Cardinal First”) also based in Fairfax, Virginia.  The Bank has a trust division, Cardinal Trust and Investment Services.  In addition to the Bank, the Company has two nonbank subsidiaries; Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an asset management firm, and Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.

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, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010. 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, 2009.

Note 2

Stock-Based Compensation

At September 30, 2010, 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. As of November 23, 2008, the Option Plan expired, and therefore, there are no shares of common stock available to grant under this plan.

In 2002, the Company adopted the Equity Plan. The Equity Plan authorizes the granting of options, which may be incentive stock options or 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 404,868 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of September 30, 2010.

8

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.

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, 2010 and 2009 was $61,000 and $72,000, respectively. Total stock compensation expense for the nine months ended September 30, 2010 and 2009 was $452,000 and $300,000, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $20,000 and $24,000 for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, the total income tax benefit recognized in the income statement for share-based compensation was $146,000 and $102,000, respectively.

Options granted during the three and nine months ended September 30, 2010 were 4,250 and 66,250, respectively. There were no options granted during the three months ended September 30, 2009. For the nine months ended September 30, 2009, options granted were 120,650.  The weighted average per share fair value of stock option grants during the three and nine months ended September 30, 2010 was $4.16 and $5.04 respectively. The weighted average per share fair value of stock option grants made for the nine months ended September 30, 2009 was $2.80.  The fair values of the options granted during all periods ended September 30, 2010 and 2009 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2010	2009	2010	2009
Estimated option life	6.5 years	—	6.5 years	6.5 years
Risk free interest rate	2.13%	—	2.13% - 3.30%	2.10% - 2.56%
Expected volatility	45.90%	—	45.90%	44.60%
Expected dividend yield	0.89%	—	0.89%	0.67%

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. 110. The risk free interest rate is based upon the seven-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, 2010 is summarized as follows:

9

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2009	2,139,433		$	8.43
Granted	66,250		11.05
Exercised	(44,100	)	3.78
Forfeited	(25,810	)	9.31
Expired	(6,424	)	4.39
Outstanding at September 30, 2010	2,129,349		$	8.61	4.41	$	2,123,970
Options exercisable at September 30, 2010	1,994,949		$	8.37	4.45	$	1,944,519

The intrinsic value of options exercised during the three and nine months ended September 30, 2010 was $36,000 and $261,000, respectively. For the options exercised during the nine months ended September 30, 2009, the intrinsic value was $41,000. No options were exercised during the three months ended September 30, 2009.

A summary of the status of the Company’s non-vested stock options and changes during the nine months ended September 30, 2010 is as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Balance at December 31, 2009	193,700		$	4.00
Granted	66,250		5.04
Vested	(114,400	)	5.01
Forfeited	(11,150	)	3.82
Balance at September 30, 2010	134,400		$	3.67

At September 30, 2010, there was $630,000 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 2.10 years. The total fair value of shares that vested during the three months ended September 30, 2010 and 2009 was $67,000 and $45,000, respectively. For the nine months ended September 30, 2010 and 2009, the total fair value of shares that vested was $573,000 and $290,000, respectively.

Note 3

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.

10

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, 2010 and 2009 is as follows:

At and for the Three Months Ended September 30, 2010 (in thousands):

	Commercial Banking		Mortgage Banking		Wealth Management and Trust Services		Other			Intersegment Elimination			Consolidated
Net interest income	$	17,745	$	647	$	—	$	(210	)	$	—		$	18,182
Provision for loan losses	3,500		—		—		—			—			3,500
Non-interest income	1,025		7,147		1,052		120			(38		)	9,306
Non-interest expense	10,074		2,342		913		2,078			(38		)	15,369
Provision for income taxes	1,507		1,894		47		(732		)	—			2,716
Net income (loss)	$	3,689	$	3,558	$	92	$	(1,436	)	$	—		$	5,903
Total Assets	$	2,072,959	$	373,167	$	3,021	$	229,526		$	(551,362	)	$	2,127,311
Average Assets	$	2,018,523	$	254,864	$	2,992	$	230,292		$	(474,384	)	$	2,032,287

At and for the Three Months Ended September 30, 2009 (in thousands):

	Commercial Banking		Mortgage Banking		Wealth Management and Trust Services		Other			Intersegment Elimination			Consolidated
Net interest income	$	12,649	$	655	$	—	$	(212	)	$	—		$	13,092
Provision for loan losses	2,050		—		—		—			—			2,050
Non-interest income	917		3,724		980		103			(20		)	5,704
Non-interest expense	8,334		3,192		785		687			(20		)	12,978
Provision for income taxes	961		408		66		(271		)	—			1,164
Net income (loss)	$	2,221	$	779	$	129	$	(525	)	$	—		$	2,604
Total Assets	$	1,861,401	$	177,183	$	3,477	$	228,528		$	(377,186	)	$	1,893,403
Average Assets	$	1,851,296	$	137,303	$	3,430	$	223,422		$	(363,556	)	$	1,851,895

At and for the Nine Months Ended September 30, 2010 (in thousands):

	Commercial Banking		Mortgage Banking		Wealth Management and Trust Services			Other			Intersegment Elimination			Consolidated
Net interest income	$	49,467	$	1,727	$	—		$	(615	)	$	—		$	50,579
Provision for loan losses	8,625		—		—			—			—			8,625
Non-interest income	3,157		15,605		3,086			97			(80		)	21,865
Non-interest expense	28,056		8,113		3,090			3,371			(80		)	42,550
Provision for income taxes	4,982		3,202		—			(1,327		)	—			6,857
Net income (loss)	$	10,961	$	6,017	$	(4	)	$	(2,562	)	$	—		$	14,412
Total Assets	$	2,072,959	$	373,167	$	3,021		$	229,526		$	(551,362	)	$	2,127,311
Average Assets	$	1,958,395	$	177,033	$	3,254		$	230,843		$	(399,975	)	$	1,969,550

At and for the Nine Months Ended September 30, 2009 (in thousands):

	Commercial Banking		Mortgage Banking		Wealth Management and Trust Services		Other			Intersegment Elimination			Consolidated
Net interest income	$	34,191	$	2,165	$	—	$	(682	)	$	—		$	35,674
Provision for loan losses	4,656		94		—		—			—			4,750
Non-interest income	3,077		12,419		2,686		(406		)	(64		)	17,712
Non-interest expense	25,504		9,154		2,376		1,751			(64		)	38,721
Provision for income taxes	2,025		1,835		105		(965		)	—			3,000
Net income (loss)	$	5,083	$	3,501	$	205	$	(1,874	)	$	—		$	6,915
Total Assets	$	1,861,401	$	177,183	$	3,477	$	228,528		$	(377,186	)	$	1,893,403
Average Assets	$	1,777,923	$	170,349	$	3,447	$	201,099		$	(369,438	)	$	1,783,380

The Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents an overhead function rather than an operating segment. The parent company’s most significant assets are its net investments in its subsidiaries. The parent company’s net interest expense is comprised of interest

11

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.

The Company is in the process of negotiating the service agreement with one of its largest Trust clients.  If the Company is unsuccessful in retaining this client, this would decrease revenues and cash flows derived from a reporting unit within the wealth management and trust services business segment, and result in the potential impairment of the goodwill and intangible assets recorded in the reporting unit.  The Company expects that the negotiations will be concluded in the next 30-60 days.

Note 4

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009.  Antidilutive outstanding stock options excluded from weighted average shares outstanding for the diluted earnings per share calculation were 81,211 and 245,990 for three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, antidilutive stock options excluded from weighted average shares outstanding for the diluted earnings per share calculation were 59,448 and 392,951, respectively.  These stock options have exercise prices that were greater than the average market price of the Company’s common stock for the periods presented.

	Three Months Ended				Nine Months Ended
(In thousands,	September 30,				September 30,
except per share data)	2010		2009		2010		2009
Net income available to common shareholders	$	5,903	$	2,604	$	14,412	$	6,915
Weighted average common shares - basic	29,140		28,999		29,110		26,560
Weighted average common shares - diluted	29,639		29,525		29,582		27,048
Earnings per common share - basic	$	0.20	$	0.09	$	0.50	$	0.26
Earnings per common share - diluted	$	0.20	$	0.09	$	0.49	$	0.26

Weighted average shares for basic earnings per share is increased by the number of shares required to be issued under the Company’s various deferred compensation plans.  These plans provide for a Company match, such match must be in the common stock of the Company.  Employees who participate in the Company’s deferred compensation plans can allocate, at their discretion, their contributions to various investment options, including an option to invest in Company Common Stock.  The incremental weighted average shares attributable to the deferred compensation plans included in diluted outstanding shares assumes the participants opt to invest all of their contributions into the Company’s Common Stock investment option.

The following shows the composition of basic outstanding shares for the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended September 30,		Nine Months Ended September 30,
(in thousands)	2010	2009	2010	2009
Weighted average common shares outstanding	28,760	28,690	28,740	26,269
Weighted average shares attributable to the deferred compensation plans	380	309	370	291
Total weighted average shares - basic	29,140	28,999	29,110	26,560

12

The following shows the composition of diluted outstanding shares for the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2010	2009	2010	2009
Weighted average shares outstanding - basic (from above)	29,140	28,999	29,110	26,560
Incremental weighted average shares attributable to deferred compensation plans	289	374	245	361
Weighted average shares attributable to vested stock options	210	152	227	127
Incremental shares attributable to unvested stock options	—	—	—	—
Total weighted average shares - diluted	29,639	29,525	29,582	27,048

Note 5

Investment Securities

The fair value and amortized cost of investment securities at September 30, 2010 and December 31, 2009 are shown below.

	September 30, 2010
(In thousands)	Gross Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	20,932	$	2,197	$	—		$	23,129
Mortgage-backed securities	190,788		9,297		(77		)	200,008
Municipal securities	64,793		3,510		(17		)	68,286
U.S. treasury securities	4,917		268		—			5,185
Total	$	281,430	$	15,272	$	(94	)	$	296,608
Investment Securities Held-to-Maturity
Mortgage-backed securities	15,430		752		—			16,182
Corporate bonds	8,004		—		(4,932		)	3,072
Total	$	23,434	$	752	$	(4,932	)	$	19,254

13

	December 31, 2009
(In thousands)	Gross Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	56,048	$	178	$	(567	)	$	55,659
Mortgage-backed securities	217,723		6,451		(769		)	223,405
Municipal securities	59,691		486		(569		)	59,608
U.S. treasury securities	4,901		—		(4		)	4,897
Total	$	338,363	$	7,115	$	(1,909	)	$	343,569
Investment Securities Held-to-Maturity
Mortgage-backed securities	27,180		917		(4		)	28,093
Corporate bonds	8,004		—		(4,661		)	3,343
Total	$	35,184	$	917	$	(4,665	)	$	31,436

The fair value and amortized cost of investment securities by contractual maturity at September 30, 2010 and December 31, 2009 are shown below.  Expected maturities may differ from contractual maturities because many issuers have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2010
	Available-for-Sale				Held-to-Maturity
(In thousands)	Amortized cost		Fair Value		Amortized cost		Fair Value
After 1 year but within 5 years	$	4,917	$	5,185	$	—	$	—
After 5 years but within 10 years	31,312		33,997		—		—
After 10 years	54,413		57,418		8,004		3,072
Mortgage-backed securities	190,788		200,008		15,430		16,182
Total	$	281,430	$	296,608	$	23,434	$	19,254

	December 31, 2009
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	cost		Value		cost		Value
After 1 year but within 5 years	$	4,901	$	4,897	$	—	$	—
After 5 years but within 10 years	32,164		32,186		—		—
After 10 years	83,575		83,081		8,004		3,343
Mortgage-backed securities	217,723		223,405		27,180		28,093
Total	$	338,363	$	343,569	$	35,184	$	31,436

The following table shows the Company’s investment securities’ gross unrealized losses and their fair value, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009.

14

September 30, 2010

Investment Securities Available-for-Sale	Less than 12 months				12 months or more					Total
(In thousands)	Fair Value		Unrealized loss		Fair Value		Unrealized loss			Fair Value		Unrealized loss
U.S. treasury securities	$	—	$	—	$	—	$	—		—		—
U.S. government - sponsored agencies	—		—		—		—			—		—
Mortgage-backed securities	—		—		838		(77		)	838		(77		)
Municipal securities	—		—		2,917		(17		)	2,917		(17		)
Total temporarily impaired securities	$	—	$	—	$	3,755	$	(94	)	$	3,755	$	(94	)

Investment Securities Held-to-Maturity	Less than 12 months				12 months or more					Total
(In thousands)	Fair Value		Unrealized loss		Fair Value		Unrealized loss			Fair Value		Unrealized loss
Mortgage-backed securities	$	—	$	—	$	—	$	—		$	—	$	—
Corporate bonds	—		—		3,072		(4,932		)	3,072		(4,932		)
Total temporarily impaired securities	$	—	$	—	$	3,072	$	(4,932	)	$	3,072	$	(4,932	)

December 31, 2009

Investment Securities Available-for-Sale	Less than 12 months					12 months or more					Total
(In thousands)	Fair Value		Unrealized loss			Fair Value		Unrealized loss			Fair Value		Unrealized loss
U.S. treasury securities	$	4,897	$	(4	)	$	—	$	—		4,897		(4		)
U.S. government - sponsored agencies	34,816		(567		)	—		—			34,816		(567		)
Mortgage-backed securities	28,665		(372		)	8,258		(397		)	36,923		(769		)
Municipal securities	22,504		(317		)	8,147		(252		)	30,651		(569		)
Total temporarily impaired securities	$	90,882	$	(1,260	)	$	16,405	$	(649	)	$	107,287	$	(1,909	)

Investment Securities Held-to-Maturity	Less than 12 months				12 months or more					Total
(In thousands)	Fair Value		Unrealized loss		Fair Value		Unrealized loss			Fair Value		Unrealized loss
Mortgage-backed securities	$	56	$	—	$	39	$	(4	)	$	95	$	(4	)
Corporate bonds	—		—		3,343		(4,661		)	3,343		(4,661		)
Total temporarily impaired securities	$	56	$	—	$	3,382	$	(4,665	)	$	3,438	$	(4,665	)

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of September 30, 2010, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency.  Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.  At September 30, 2010, 96% of the Company’s mortgage-related securities are guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA).

The Company has $7.9 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA to AA.  The various protective elements on the 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 these securities.

15

At September 30, 2010, certain of the Company’s investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment.  Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due.  The Company does not intend to sell nor does the Company believe it is probable to sell any of the temporarily impaired securities prior to the recovery of the amortized cost.

The held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at September 30, 2010 (each security has a par value of $2.0 million).  These securities are presented as corporate bonds in the above table.  The collateral underlying these structured securities are instruments issued by financial institutions or insurers.  The Company owns the A-3 tranches in each issuance.  Each of the bonds is rated by more than one rating agency.  Two of the securities have a composite rating of AA, one of the securities has a composite rating of BB- and the other security has a composite rating of B-.  There is minimal observable trading activity for these types of securities.  The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the four securities, and concluded that these securities are not other-than-temporarily impaired.  The Company continuously monitors the financial condition of the underlying issues and the level of subordination below the A-3 tranche.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches.  In each of the ten adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.  Significant judgement is involved in the evaluation of other than temporary impairment.  The Company does not intend to sell nor does the Company believe it is probable that it will be required to sell these corporate bonds prior to the recovery of its investment.

In one of the pooled trust preferred securities issues, 40% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $157 million of the remaining $323 million, or 49% of the performing collateral defaulted or deferred payment.  In another of the pooled trust preferred securities issues, 41% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $88.5 million of the remaining $258 million, or 35% of the performing collateral defaulted or deferred payment.  In the third of the pooled trust preferred securities issues, 66% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $149 million of the remaining $176 million, or 85% of the performing collateral defaulted or deferred payment.  In the fourth of the pooled trust preferred securities issues, 50% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $278 million of the remaining $378 million, or 74% of the performing collateral defaulted to deferred payment.

No other-than-temporary impairment has been recognized on the securities in the Company’s investment portfolio for the three and nine months ended September 30, 2010, and the Company does not continue to hold any investment securities for which the Company previously recognized other than temporary impairment.

Note 6

Allowance for Loan Losses

Activity in the Company’s allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 is shown below.

16

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2010			2009			2010			2009
Allowance for loan losses, beginning of the period	$	21,058		$	16,150		$	18,636		$	14,518
Provision for loan losses	3,500			2,050			8,625			4,750
Loans charged off:
Commercial and industrial	(1,750		)	(25		)	(3,112		)	(40		)
Residential	(425		)	(701		)	(1,732		)	(1,756		)
Consumer	(2		)	(1		)	(50		)	(4		)
Total loans charged off	(2,177		)	(727		)	(4,894		)	(1,800		)
Recoveries:
Commercial and industrial	—			—			3			5
Residential	52			—			62			—
Consumer	11			—			12			—
Total recoveries	63			—			77			5
Net (charge offs) recoveries	(2,114		)	(727		)	(4,817		)	(1,795		)
Ending balance, September 30,	$	22,444		$	17,473		$	22,444		$	17,473

The allowance for loan losses at September 30, 2010 and December 31, 2009 was $22.4 million and $18.6 million, respectively. Allowance for loan losses ratio to loans receivable, net was 1.66% and 1.44% at September 30, 2010 and December 31, 2009, respectively.  Nonperforming loans at September 30, 2010 and December 31, 2009, were $9.6 million and $847,000, respectively. The increase in nonperforming loans was primarily the result of two commercial relationships which were previously impaired that deteriorated further during 2010.

For the nine months ending September 30, 2010, the Company charged off commercial loans totaling $3.1 million including three loans associated with one borrower and residential loans totaling $1.7 million.  In addition, consumer loans totaling $50,000 have been charged-off during 2010. Recoveries totaling $77,000 have been recorded during 2010.

For the nine months ending September 30, 2009, the Company charged off three residential mortgage loans totaling $1.7 million.  In addition, installment loans totaling $4,000 were charged off during 2009.  The Bank recorded partial charge offs of two commercial loans totaling $40,000 during 2009.

Note 7

Derivative Instruments and Hedging Activities

The Company enters into rate lock commitments with its mortgage customers.  The Company is also a party to forward mortgage loan sales contracts to sell loans servicing released.  The rate lock commitment and forward sales agreement are undesignated derivatives and marked to fair value through earnings.  On the date the mortgage loan closes, the loan held for sale is designated as the hedged item in a cash flow hedge relationship and the forward loan sale is designated as the hedging instrument.

At September 30, 2010, accumulated other comprehensive income included an unrealized loss, net of tax, of $35,000 related to forward loan sales contracts designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within sixty days of closing and, therefore, substantially all of the amount recorded in accumulated other comprehensive income at

17

September 30, 2010 that is related to the Company’s cash flow hedges will be recognized in earnings during the fourth quarter of 2010.

At September 30, 2010, the Company had $214.6 million in residential mortgage rate lock commitments and associated forward sales and $308.4 million in forward loan sales associated with $341.4 million of loans that had closed and presented as held for sale.

The Company has interest rate swaps to mitigate its exposure to interest rate risk.  These interest rate swaps have an aggregate notional amount of $10.0 million to hedge against changes in cash flows caused by movement in interest rates related to the Company’s issuance of $20.0 million in trust preferred securities.  In addition, the Company has an interest rate swap to mitigate the variability in the fair value for one loan receivable.  At September 30, 2010, accumulated other comprehensive income included an after-tax unrealized loss of $262,000 related to these interest rate swaps.

Note 8

Fair Value of Derivative Instruments and Hedging Activities

The following tables disclose the derivative instruments’ location on the Company’s statement of condition and the fair value of those instruments at September 30, 2010 and December 31, 2009.  In addition, the gains and losses related to these derivative instruments is provided for the nine months ended September 30, 2010 and 2009.

Derivative Instruments and Hedging Activities

At September 30, 2010

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Interest Rate Swaps	Accrued Interest Receivable and Other Assets	$	—	Accrued Interest Payable and Other Liabilities	$	2,152
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,754		Accrued Interest Payable and Other Liabilities	1,485
Total Derivatives Designated as Hedging Instruments		1,754			3,637
Derivatives Not Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	6,830		Accrued Interest Payable and Other Liabilities	21
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	21		Accrued Interest Payable and Other Liabilities	292
Total Derivatives Not Designated as Hedging Instruments		6,851			313
Total Derivatives		$	8,605		$	3,950

18

Derivative Instruments and Hedging Activities

At December 31, 2009

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Interest Rate Swaps	Accrued Interest Receivable and Other Assets	$	5	Accrued Interest Payable and Other Liabilities	$	1,437
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	2,163		Accrued Interest Payable and Other Liabilities	1,194
Total Derivatives Designated as Hedging Instruments		2,168			2,631
Derivatives Not Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	2,444		Accrued Interest Payable and Other Liabilities	3
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	3		Accrued Interest Payable and Other Liabilities	407
Total Derivatives Not Designated as Hedging Instruments		2,447			410
Total Derivatives		$	4,615		$	3,041

19

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended September 30, 2010

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	99	Other Income	$	(99	)
Total		$	99		$	(99	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	(77	)	Other Income	$	—		Other Income	$	—
Forward Loan Sales Commitments	146			Other Income	(1,058		)	Other Income	1
Total	$	69			$	(1,058	)		$	1

Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Forward Loan Sales Commitments	$	6,538		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	271			Other Income
Rate Lock Commitments	(271		)	Other Income
Total	$	6,538

20

Impact of Derivative Instruments on the Statement of Income

For the Nine Months Ended September 30, 2010

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	319	Other Income	$	(319	)
Total		$	319		$	(319	)

Derivatives in Cash Flow Hedging  Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	(262	)	Other Income	$	—		Other Income	$	—
Forward Loan Sales Commitments	(29		)	Other Income	(119		)	Other Income	1
Total	$	(291	)		$	(119	)		$	1

Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Forward Loan Sales Commitments	$	13,939		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	780			Other Income
Rate Lock Commitments	(780		)	Other Income
Total	$	13,939

21

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended September 30, 2009

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	86	Other Income	$	(86	)
Total		$	86		$	(86	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)		Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	98	Other Income	$	—	Other Income	$	—
Forward Loan Sales Commitments	369		Other Income	1,557		Other Income	1
Total	$	467		$	1,557		$	1

Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Forward Loan Sales Commitments	$	1,693		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(173		)	Other Income
Rate Lock Commitments	173			Other Income
Total	$	1,693

22

Impact of Derivative Instruments on the Statement of Income

For the Nine Months Ended September 30, 2009

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	(377	)	Other Income	$	(377	)
Total		$	(377	)		$	(377	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)		Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	64	Other Income	$	—	Other Income	$	—
Forward Loan Sales Commitments	103		Other Income	487		Other Income	1
Total	$	167		$	487		$	1

Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Forward Loan Sales Commitments	$	5,321		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	130			Other Income
Rate Lock Commitments	(130		)	Other Income
Total	$	5,321

23

Note 9

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at September 30, 2010 is as follows:

	Mortgage Banking				Wealth Management 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, 2009	$	1,781	$	1,039	$	795	$	576	$	2,576	$	1,615
2010 activity:
Customer relationship intangibles	—		149		—		30		—		179
Balance at September 30, 2010	$	1,781	$	1,188	$	795	$	606	$	2,576	$	1,794

The aggregate amortization expense was $60,000 for each of the three months ended September 30, 2010 and 2009. For the nine months ended September 30, 2010 and 2009, the aggregate amortization expense was $179,000 and $178,000, respectively.

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

(In thousands)
2010 (October – December)	$	60
2011	238
2012	238
2013	189
2014	41
2015 and thereafter	16

The carrying amount of goodwill at September 30, 2010 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Wealth Management and Trust Services			Total
Balance at December 31, 2009	$	22	$	10,120	$	2,832		$	12,974
Goodwill impairment charge	—		—		(451		)	(451		)
Balance at September 30, 2010	$	22	$	10,120	$	2,381		$	12,523

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 period ended September 30, 2010, the Company performed an evaluation of the goodwill associated with its acquisition of George Mason, which is included in the mortgage banking segment. Based on the results of the analysis, the fair value of George Mason exceeded its carrying value. As a result, no impairment was indicated.

24

As previously reported for the period ended June 30, 2010, the Company performed its annual review of goodwill at Wilson/Bennett, a reporting unit within its Wealth Management and Trust Services segment, and it recognized an impairment charge of $451,000.  The analysis included the use of the expected present value technique.  This technique uses the probability-weighted average of expected certainty equivalent cash flows.   The cash flow assumptions have been determined based upon recent experience in growth or declines of assets under management, recent expense trends and recent valuations of other asset management firms and the costs associated with executing our business plan.

Historically, Wilson/Bennett and Cardinal Trust and Investments have been separate reporting units within the Wealth Management and Trust Services business segment.    Both of these units manage financial assets for institutional clients and for upper middle class to wealthy individuals.  The Company now uses a single “wealth management” sales team to present financial products to prospects and also to service our existing clients.  The “back office” for each of these components is performed by the same administrative staff, and there is a single person that oversees the combined sales effort and manages the operations.   Prospectively and beginning in the third quarter of 2010, the Wilson/Bennett and Cardinal Trust and Investments reporting units have been combined into a single reporting unit and evaluations of the recoverability of goodwill and other intangible assets are now based on the combined cash flows of these businesses.

Note 10

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 and financial guarantees. 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 usually 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 cash requirements.  These instruments 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.

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.  The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligations.  All standby letters of credit outstanding at September 30, 2010 are collateralized.

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 upon management’s evaluation of the counterparty.  Collateral held varies but may include deposits held by the Company, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

25

Commitments to extend credit of $215.7 million as of September 30, 2010 are related to George Mason’s mortgage loan funding commitments and are of a short term nature.  Commitments to extend credit totaling $445.4 million primarily have floating rates as of September 30, 2010.  At September 30, 2010, standby letters of credit were $20.1 million.

These off-balance sheet financial instruments may 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 standby letters of credit and commitments to extend credit is represented by the contractual amounts of those instruments. It is uncertain as to the amounts that we will be required to fund on these commitments as many such arrangements expire with no amounts drawn.

George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities. The Company evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts paid to settle such claims. During the past two years, the Company has taken steps to limit its exposure to such loan repurchases through agreements entered into with various investors.  During 2010, the Company experienced favorable results in resolving various investor claims and has reduced its reserve related to such claims by $1.1 million. As of September 30, 2010, the Company had no outstanding loan repurchases or settlements.

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.  In addition, the Company has derivative counterparty risk relating to certain interest rate swaps it has with third parties.  This risk may arise from the inability of the third party to meet the terms of the contracts.  The Company monitors the financial condition of these third parties on an annual basis.  The Company does not expect any of these third parties to fail to meet its obligations.

26

Note 11

Fair Value Measurements

The fair value framework under U.S. generally accepted accounting principles defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring the fair value.  There are three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities as of the measurement date.

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Recurring Fair Value Measurements

All classes of the Company’s investment securities available-for-sale with the exception of its treasury securities, the Company’s trading investment securities, which include cash equivalents and mutual funds, and bank-owned life insurance are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service and therefore fall into the Level 2 category.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.  The Company’s treasury securities are recorded at fair value using unadjusted quoted market prices for identical securities and therefore fall under the Level 1 category.

The Company has an interest rate swap to hedge against the change in fair value of one fixed rate commercial loan.  This loan is recorded at fair value using published yield curve rates from a national valuation service.  These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.  Commercial and residential loans are evaluated for impairment and the carrying value of such loans is recorded at fair value based on appraisals of the underlying collateral completed by third parties using Level 2 valuation inputs.

The Company’s interest rate swap derivatives in fair value and cash flow hedges are recorded at fair value using published yield curve rates from a national valuation service.  These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.

The Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date.  In the normal course of business, George Mason and Cardinal First (collectively, the “mortgage companies”) enter into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage companies.  All borrowers are evaluated for credit worthiness prior to the extension of the commitment.  Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor.  To

27

mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the mortgage companies enter into best efforts forward sales contracts to sell loans to investors.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  Both the rate lock commitments to the borrowers and the forward sales contracts to investors through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value through earnings.  These valuations fall into a Level 2 category.

There were no significant transfers into and out of Level 1, Level 2 and Level 3 measurements in the fair value hierarchy during the three and nine months ended September 30, 2010.  Transfers between levels are recognized at the end of each reporting period.  The valuation technique used for fair value measurements using significant other observable inputs (Level 2) is the market approach for each class of assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 are shown below:

At September 30, 2010 (in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,185	$	5,185	$	—	$	—
U.S. government- sponsored agencies	23,129		—		23,129		—
Mortgage-backed securities	200,008		—		200,008		—
Municipal securities	68,286		—		68,286		—
Total investment securities available-for-sale	296,608		5,185		291,423		—
Investment securities - trading	1,843		—		1,843		—
Loans receivable	13,303		—		13,303		—
Bank-owned life insurance	34,211		—		34,211		—
Derivative liability - interest rate swaps	2,152		—		2,152		—
Derivative asset - forward loan sales commitments	8,584		—		8,584		—
Derivative asset — interest rate lock commitments	21		—		21		—
Derivative liability - forward loan sales commitments	1,506		—		1,506		—
Derivative liability — interest rate lock commitments	292		—		292		—

28

At December 31, 2009 (in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:	$	343,569	$	4,897	$	338,672	$	—
Investment securities - trading	3,724		—		3,724		—
Loans receivable	13,078		—		13,078		—
Bank-owned life insurance	33,712		—		33,712		—
Derivative liability - interest rate swaps	1,437		—		1,437		—
Derivative Asset - interest rate swaps	5		—		5		—
Derivative asset - forward loan sales commitments	4,607		—		4,607		—
Derivative asset — interest rate lock commitments	3		—		3		—
Derivative liability - forward loan sales commitments	1,197		—		1,197		—
Derivative liability — interest rate lock commitments	407		—		407		—

Nonrecurring Fair Value Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are not included in the tables above.  These assets include the valuation of the Company’s corporate bonds held in its held-to-maturity investment securities portfolio, nonaccrual loans and other real estate owned.

29

At September 30, 2010 (in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
George Mason — Reporting Unit	$	24,010	$	—	$	—	$	24,010
Corporate bonds	3,072		—		—		3,072
Nonaccrual loans	9,581		—			9,581	—
Other real estate owned	2,615		—		2,615		—

At December 31, 2009 (in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
George Mason — Reporting Unit	$	24,010	$	—	$	—	$	24,010
Wilson/Bennett — Reporting Unit	3,551		—		—		3,551
Corporate bonds	3,343		—		—		3,343
Nonaccrual loans	696		—		696		—
Other real estate owned	4,991		—		4,991		—

See Note 5 for information on the valuation of the Company’s corporate bond portfolio.

The Company’s nonaccrual loans are measured at the present value of its expected future cash flows discounted at the loan’s coupon rate, or at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.  The Company measures the collateral value on impaired loans by obtaining an updated appraisal of the underlying collateral and may discount further the appraised value, if necessary, to an amount equal to the expected cash proceeds in the event the loan is foreclosed upon and the collateral is sold.  In addition, an estimate of costs to sell the collateral is assumed.  The Company values other real estate owned by obtaining an updated appraisal of the property foreclosed upon, and discounts further the appraised value to an amount equal to the expected cash proceeds upon the sale of the property.  Both nonaccrual loans and other real estate owned are valued using adjusted market quotes and therefore fall into the Level 2 category.

Although management uses its best judgment in estimating the fair value of financial instruments, there are inherent limitations in any estimation technique.  Because of the wide range of valuation techniques and the numerous estimates and assumptions which must be made, it may be difficult to make reasonable comparisons between the Company’s fair value information and that of other banking institutions.  It is important that the many uncertainties be considered when using the estimated fair value disclosures and that, because of these uncertainties, the aggregate fair value amount should not be construed as representative of the underlying value of the Company.

30

Fair Value of Financial Instruments

The assumptions used and the estimates disclosed represent management’s best judgment of appropriate valuation methods for estimating the fair value of financial instruments.  These estimates are based on pertinent information available to management at the valuation date.  In certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and management’s evaluation of those factors change.

The following summarizes the significant methodologies and assumptions used in estimating the fair values presented in the following table, and not disclosed elsewhere in this footnote.

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents is used as a reasonable estimate of fair value.

Investment Securities Held-to-Maturity and Other Investments

Fair values for investment securities held-to-maturity are based on quoted market prices or prices quoted for similar financial instruments.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or estimated fair value.  The estimated fair value is based upon the related purchase price commitments from secondary market investors.

Loans Receivable, Net

In order to determine the fair market value for loans receivable, the loan portfolio was segmented based on loan type, credit quality and maturities.  For certain variable rate loans with no significant credit concerns and frequent repricings, estimated fair values are based on current carrying amounts.  The fair values of other loans are estimated using discounted cash flow analyses, at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  This method of estimating fair value does not incorporate the exit-price concept of fair value which is acceptable for this disclosure.

Deposits

The fair values for demand deposits are equal to the carrying amount since they are payable on demand at the reporting date.  The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date.  Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on CDs to a schedule of aggregated expected monthly maturities on time deposits.

Other Borrowed Funds

The fair value of other borrowed funds is estimated using a discounted cash flow calculation that applies interest rates currently available for loans with similar terms.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

31

The following summarizes the carrying amount of these financial assets and liabilities that the Company has not recorded at fair value on a recurring basis at September 30, 2010 and December 31, 2009:

	September 30, 2010
	Carrying		Estimated
(In thousands)	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	19,894	$	19,894
Investment securities held-to-maturity and other investments	39,901		35,721
Loans held for sale	341,413		341,413
Loans receivable, net	1,328,819		1,354,144
Accrued interest receivable	6,627		6,627
Financial liabilities:
Demand deposits	$	211,762	$	211,762
Interest checking	128,252		128,252
Money market and statement savings	382,550		382,550
Certificates of deposit	675,112		687,956
Other borrowed funds	441,287		470,701
Accrued interest payable	1,476		1,476

	December 31, 2009
	Carrying		Estimated
(In thousands)	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	24,841	$	24,841
Investment securities held-to-maturity and other investments	51,651		47,903
Loans held for sale	179,469		179,469
Loans receivable, net	1,279,657		1,279,515
Accrued interest receivable	6,151		6,151
Financial liabilities:
Demand deposits	$	166,019	$	166,019
Interest checking	129,795		129,795
Money market and statement savings	353,694		353,694
Certificates of deposit	647,497		655,049
Other borrowed funds	427,579		448,657
Accrued interest payable	1,368		1,368

32

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, 2010 and December 31, 2009 and the unaudited results of our operations for the three and nine months ended September 30, 2010 and 2009. 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, 2009.

Caution About Forward-Looking Statements

We make certain 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 risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

·changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchases of mortgage loans sold and other estimates;

·changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;

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

·declines in the prices of assets and market illiquidity may cause us to record an other-than-temporary impairment or other lossses, specifically in our pooled trust preferred securities portfolio resulting from increases in underlying issuers’ defaulting or deferring payments.

·changes in operations of our wealth management and trust services segment, its customer base and assets under management and any associated impact on the fair value of goodwill in the future;

·changes in operations of George Mason Mortgage, LLC as a result of the activity in the residential real estate market and any associated impact on the fair value of goodwill in the future;

·exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;

33

·the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

·the ability to successfully manage our growth or implement our growth strategies as we implement new or change internal operating systems or if we are unable to identify attractive markets, locations or opportunities to expand in the future; the effects of future economic, business and market conditions;

·governmental monetary and fiscal policies;

·legislative and regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in the scope and cost of FDIC insurance and other coverages;

·changes in accounting policies, rules and practices;

·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;

·risks and uncertainties related to future trust operations;

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

·problems with technology utilized by us;

·changing trends in customer profiles and behavior; and

·other factors described from time to time in our reports filed with the SEC.

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 Part II, Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

We are a financial holding company formed in 1997 and headquartered in Fairfax County, Virginia.  We were formed principally in response to opportunities resulting from the consolidation of several Virginia-based banks.  These bank consolidations were typically accompanied by the dissolution of local boards of directors and relocation or termination of management and customer service professionals and a general deterioration of personalized customer service.

We own Cardinal Bank (the “Bank”), a Virginia state-chartered community bank with 26 banking offices located in Northern Virginia and the greater Washington D.C. metropolitan area.  The Bank offers a wide range of traditional bank loan and deposit 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.

Additionally, we complement our core banking operations by offering a wide range of services through our various subsidiaries, including mortgage banking through George Mason Mortgage, LLC (“George Mason”) and Cardinal First Mortgage, LLC, (“Cardinal First”),

34

collectively the “mortgage banking segment,” retail securities brokerage through Cardinal Wealth Services, Inc. (“CWS”), asset management through Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), and trust, estate, custody, investment management and retirement planning through the trust division of Cardinal Bank.

Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest 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, noninterest income is an 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 mortgage loans, and management fee income.

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, the fair value measurements of certain assets and liabilities, accounting for economic hedging activities, accounting for impairment testing of goodwill, accounting for the impairment of amortizing intangible assets and other long-lived 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

35

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.   In certain instances, we evaluate the impairment of certain loans on a loan by loan basis.  For these loans, we analyze the fair value of the collateral underlying the loan and consider estimated costs to sell the collateral.  If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan.

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.

Fair Value Measurements

We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.  Our investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.  For certain of our held-to-maturity investment securities where there is minimal observable trading activity, we use a discounted cash flow approach to estimate fair value based on internal calculations and compare our results to information provided by external pricing sources.  Our interest rate swap derivatives are recorded at fair value using observable inputs from a national valuation service.  These inputs are applied to a third party industry-wide valuation model.

We also fair value our interest rate lock commitments and forward loan sales commitments.  The fair value of our interest rate lock commitments considers the expected premium (discount) to par and we apply certain fallout rates for those rate lock commitments for which we do not close a mortgage loan.  In addition, we calculate the effects of the changes in interest rates from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices.  The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date.  At loan closing, the fair value of the interest rate lock commitment is included in the cost basis of loans held for sale, which are carried at the lower of cost or fair value.

36

Accounting for Economic Hedging Activities

We record all derivative instruments 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 statement 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 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. 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 in 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.   The forward sales contract is then designated as a hedge against the variability in cash to be received from the loan sale.  Loans held for sale are accounted for at the lower of cost or fair value.

Accounting for Impairment Testing of Goodwill

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. This discounted cash flow analysis involves the use of unobservable inputs including:  estimated future cash flows from operations; an estimate of a terminal value; a discount rate; and

37

other inputs.  Our estimated future cash flows are largely based on our historical actual cash flows.  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

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

In January 2010, we adopted Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.  It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions.  This statement requires additional year-end and interim disclosures for public companies.  The adoption of this standard did not have a material impact on our consolidated financial condition or results of operations.

In January 2010, we adopted ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.  This ASU amends the guidance on variable interest entities (“VIE”) in ASC Topic 810 related to the consolidation of variable interest entities.  It requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company

38

is the primary beneficiary of a VIE.  It also clarifies, but does not significantly change, the characteristics that identify a VIE.  This statement requires additional year-end and interim disclosures for public companies.  The adoption of this standard did not have a material impact on our consolidated financial condition or results of operations.

In January 2010, we adopted ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which requires disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements.  This standard also clarifies existing fair value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, so that SEC filers, as defined in the ASU, no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  This guidance significantly expands required disclosures for the allowance for loan losses and the credit quality of financing receivables.  The disclosures will provide information about the nature of credit risks inherent in entities’ financing receivables, how credit risk is analyzed and assessed when determining the allowance for loan losses, and the reasons for the change in the allowance for loan losses.  Public entities will need to begin providing disclosures for all periods ending on or after December 15, 2010.  We will provide the required disclosures in our financial statements for the year ending December 31, 2010.

2010 Economic Environment

Our credit quality remains strong despite the challenging economic environment.  Through the third quarter of 2010, the U.S. economy has continued its slow recovery with slight increases in consumer spending and while the unemployment rate has receded from its peak, it remains elevated.  Despite encouraging signs of improvement, the levels of business and consumer demand and production remain low.  Businesses are reluctant to hire and certain real estate markets remain stressed.  At September 30, 2010, we have non-accrual loans totaling $9.6 million and loans contractually past due 90 days or more as to principal or interest of $266,000.  Annualized net charge-offs were 0.49% of our average loans receivable for the nine months ended September 30, 2010. Due to historically low mortgage loan rates, originations from our mortgage banking segment for the first nine months of 2010 have surpassed originations for the same period of 2009.  Originations during the third quarter of 2010 alone almost matched mortgage loan originations for the first six months of 2010.  As a result, net income from our mortgage banking segment increased to $3.6 million for the three months ended September 30, 2010 compared to net income of $779,000 for the same period of 2009.

Market illiquidity continues to impact certain portions of our investment securities portfolio, specifically the ratings of certain corporate bonds in our portfolio. We hold investments of $8.0 million in par value of pooled trust preferred securities, which are significantly below

39

book value as of September 30, 2010 due to the lack of liquidity in the market and investor apprehension for investing in these types of investments.

We expect very challenging economic and operating conditions to continue for the foreseeable future.  These conditions could continue to affect the markets in which we do business and could adversely impact our results for the remainder of 2010. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

While our loan growth has continued to be strong, continued negative economic conditions could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which we expect could impact our charge-offs and provision for loan losses.  Deterioration in real estate values and household incomes could result in higher credit losses for us.  Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially. The systems by which we set limits and monitor the level of our credit exposure to individual entities and industries also may not function as we have anticipated.

Liquidity is essential to our business.  The primary sources of funding for our Bank include customer deposits and wholesale funding.  Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits.  This situation may arise due to circumstances that we may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us.  Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events.  While we believe we have a healthy liquidity position, any of the above factors could materially impact our liquidity position in the future.

The U.S. government continues to enact legislation and develop various programs and initiatives designed to stabilize the housing markets and stimulate the economy.  In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was signed into law.  We are unsure of the impact this Act will have on our business, operations or our financial condition.

Statements of Income

General

For the three months ended September 30, 2010 and 2009, we reported net income of $5.9 million and $2.6 million, respectively, an increase of $3.3 million, or 127%.  Net interest income after the provision for loan losses increased $3.6 million to $14.7 million for the three months ended September 30, 2010 compared to $11.0 million for the three months ended September 30, 2009.  Provision for loan losses for the three months ended September 30, 2010 was $3.5 million, an increase of $1.5 million, compared to $2.1 million for the same period of 2009.  Despite the increase in our provision for loan losses, the increase in net interest income after provision for loan losses was due to an increase in our net interest income of $5.1 million to $18.2 million for the three months ended September 30, 2010.  Noninterest income for the three months ended September 30, 2010 and 2009 was $9.3 million and $5.7 million, respectively, an increase of $3.6 million.  Realized and unrealized gains on mortgage banking activities increased $2.5 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009.  In addition, income from managed companies increased $702,000 to

40

$1.3 million for the three months ended September 30, 2010 compared to $553,000 for the same three month period of 2009.  For the three months ended September 30, 2010, noninterest expense increased to $15.4 million, compared to $13.0 million for the same period of 2009.  The increase in noninterest expense is attributable to increases in salary and benefits expense as we have added business development officers in our commercial banking, wealth management and mortgage banking operations.

For the three months ended September 30, 2010, basic and diluted income per common share were each $0.20.  Basic and diluted earnings per common share for the three months ended September 30, 2009 were each $0.09.  Weighted average fully diluted shares outstanding for the three months ended September 30, 2010 and 2009 were 29,639,114 and 29,524,878, respectively.

Return on average assets for the three months ended September 30, 2010 and 2009 was 1.16% and 0.56%, respectively. Return on average equity for the three months ended September 30, 2010 and 2009 was 10.56% and 5.20%, respectively.

Net income for the nine months ended September 30, 2010 and 2009 was $14.4 million and $6.9 million, respectively, an increase of $7.5 million, or 108%.  Net interest income after provision for loan losses for the nine months ended September 30, 2010 increased $11.0 million to $42.0 million, compared to $30.9 million for the same nine month period of 2009.  The increase in net interest income after provision for loan losses is directly related to our increase in net interest income for the periods presented, despite an increase in provision for loan losses.  Net interest income increased to $50.6 million for the nine months ended September 30, 2010, compared to $35.7 million for the nine months ended September 30, 2009.  Provision for loan losses for the nine months ended September 30, 2010 and 2009 was $8.6 million and $4.8 million, respectively, an increase of $3.8 million.  Noninterest income increased $4.2 million to $21.9 million for the nine months ended September 30, 2010, compared to $17.7 million for the same period of 2009.  The increase in noninterest income is primarily related to an increase in realized and unrealized gains on mortgage banking activities and associated management fee income due to increased loan origination activity from this business line.  Noninterest expense was $42.6 million for the nine months ended September 30, 2010, an increase of $3.8 million compared to $38.7 million for the nine months ended September 30, 2009.

For the nine months ended September 30, 2010, basic and diluted income per common share were $0.50 and $0.49, respectively.  Basic and diluted earnings per common share for the nine months ended September 30, 2009 were each $0.26.  Weighted average fully diluted shares outstanding for the nine months ended September 30, 2010 and 2009 were 29,582,342 and 27,047,915, respectively.

Return on average assets for the nine months ended September 30, 2010 and 2009 was 0.98% and 0.52%, respectively. Return on average equity for the nine months ended September 30, 2010 and 2009 was 8.95% and 5.12%, respectively.

General —Business Segments

We operate in three business segments: commercial banking, mortgage banking, and wealth management and trust services.  Net income attributable to the commercial banking segment for the three months ended September 30, 2010 was $3.7 million compared to net income of $2.2 million for the three months ended September 30, 2009.  Net interest income increased $5.1 million to $17.7 million for the three months ended September 30, 2010, compared to $12.6 million for the same period of 2009.  Provision for loan losses increased $1.5 million to

41

$3.5 million for the three months ended September 30, 2010 compared to $2.1 million for the same period of 2009.  The increase in provision expense is related to current economic and market conditions and an increase in loan charge-offs and nonperforming loans during 2010.  Noninterest income increased to $1.0 million for the three months ended September 30, 2010 compared to $917,000 for the three months ended September 30, 2009.  During the third quarter of 2010, gains of $193,000 were recorded on sales of investment securities available-for-sale, compared to $73,000 for the three months ended September 30, 2009.  Noninterest expense was $10.1 million for the three months ended September 30, 2010, compared to $8.3 million for the same period of 2009.  The increase in noninterest expense for the third quarter of 2010 as compared to the same period of 2009 is primarily due to expenses related to our core system conversion, branch expansion and additions to our business development staff at the Bank.

For the nine months ended September 30, 2010, net income attributable to the commercial banking segment was $11.0 million, and an increase of $5.9 million, from $5.1 million for the same nine month period of 2009.  The increase in net income is attributable to the increase in our net interest income for the periods presented.  Net interest income increased $15.3 million to $49.5 million for the nine months ended September 30, 2010, compared to $34.2 million for the nine months ended September 30, 2009.  Provision for loan losses increased $4.0 million to $8.6 million for the nine months ended September 30, 2010, again as a result of the current economic and market conditions and these impacts on our borrowers.  Noninterest income for the nine months ended September 30, 2010 and 2009 was $3.2 million and $3.1 million, respectively.  Noninterest expense increased to $28.1 million from $25.5 million for the nine months ended September 30, 2010 compared to the same period of 2009.

The mortgage banking segment reported net income of $3.6 million for the three months ended September 30, 2010 compared to a net income of $779,000 for the three months ended September 30, 2009.  The increase in net income for the three months ended September 30, 2010 was primarily attributable to the increase in loan origination activity during 2010 as compared to 2009.  For the nine months ended September 30, 2010, net income was $6.0 million, an increase of $2.5 million, compared to $3.5 million for the nine months ended September 30, 2009.

The wealth management and trust services segment, which includes CWS, Wilson/Bennett and the trust division of the Bank, recorded net income of $92,000 for the three months ended September 30, 2010, compared to net income of $129,000 for the three months ended September 30, 2009.  For the nine months ended September 30, 2010, this business segment recorded a net loss of $4,000 compared to net income of $205,000 for the same period of 2009.  The decrease in net income during 2010 is primarily attributable to our recording an impairment charge of $451,000 as a result of our annual impairment assessment related to the Wilson/Bennett goodwill.

Net Interest Income

Net interest income is our primary source of revenue, representing 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, 2010 and 2009 was $18.2 million and $13.1 million, respectively, a period-to-period increase of $5.1 million, or 39%. For the nine months ended September 30, 2010, our net interest income was $50.6 million, compared to $35.7 million for the same period of 2009, an increase of $14.9 million, or 42%.  The net yields on our assets

42

increased as a result of our moderately increasing interest-earning assets while lowering the interest rates on our deposit liabilities.

Specifically, interest income on loans receivable, increased $2.1 million for the three months ended September 30, 2010 compared to the same three month period of 2009.  For the nine months ended September 30, 2010, interest income on loans receivable increased $6.5 million as compared to the nine months ended September 30, 2009.  The increase in interest income on loans receivable is primarily a result of an increase in the volume of our loans receivable portfolio.  Interest income on loans held for sale increased $1.2 million to $2.8 million for the three months ended September 30, 2010, a direct result of a period-to-period increase in mortgage loan originations in our held for sale portfolio.  For the nine months ended September 30, 2010, interest income from loans held for sale increased $419,000 to $6.1 million compared to $5.7 million for the nine months ended September 30, 2009.

Interest income on investment securities, decreased $384,000 for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009.  The decrease in interest income on investment securities is due to the decreased yield of the portfolio for the three months ended September 30, 2010 compared to the same period of 2009.  For the nine months ended September 30, 2010, interest income on investment securities increased $1.2 million.  The increase in interest income on investment securities is related to an increase in purchases of investment securities over the past year.

Total interest expense has decreased $2.2 million for the three months ended September 30, 2010 as compared to the same period of 2009.  For the nine months ended September 30, 2010, total interest expense decreased $6.8 million as compared to the same nine month period of 2009.  The decrease in total interest expense is mostly related to reductions in the interest rates we pay on our interest checking and savings deposit accounts given the current low interest rate environment.  In addition, our certificates of deposit are repricing at lower interest rates.

Our net interest margin, on a tax-equivalent basis, which equals net interest income divided by average interest earning assets, was 3.82% and 2.97% for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, net interest margin was 3.65% and 2.81%, respectively.  The increases in our net interest margin are again attributable to our balance sheet management and strategically decreasing the interest rates we pay on our deposit liabilities.  The following tables 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.

43

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

Three Months Ended September 30, 2010, 2009 and 2008

(In thousands)

	2010							2009							2008
				Interest		Average					Interest		Average					Interest		Average
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial and industrial	$	162,810		$	1,904	4.67	%	$	148,446		$	1,781	4.80	%	$	119,891		$	1,843	6.15	%
Real estate - commercial	609,800			9,812		6.40	%	567,150			8,893		6.27	%	454,513			7,447		6.55	%
Real estate - construction	203,948			2,959		5.80	%	178,585			2,251		5.04	%	189,041			2,703		5.72	%
Real estate - residential	230,707			2,935		5.09	%	201,500			2,596		5.15	%	213,360			2,984		5.60	%
Home equity lines	120,709			1,065		3.50	%	114,414			1,033		3.58	%	96,196			1,131		4.66	%
Consumer	2,611			39		5.93	%	2,815			42		5.92	%	2,608			40		6.08	%
Total loans	1,330,585			18,714		5.63	%	1,212,910			16,596		5.47	%	1,075,609			16,148		6.01	%
Loans held for sale	243,064			2,808		4.62	%	131,417			1,630		4.96	%	118,009			1,709		5.79	%
Investment securities available-for-sale	290,903			3,206		4.41	%	286,835			3,384		4.72	%	258,807			3,421		5.29	%
Investment securities held-to-maturity	25,495			206		3.23	%	39,347			354		3.60	%	54,373			586		4.30	%
Other investments	15,728			17		0.44	%	15,728			33		0.84	%	15,726			113		2.91	%
Federal funds sold	19,810			11		0.22	%	91,776			57		0.25	%	19,068			118		2.45	%
Total interest-earning assets and interest income (2)	1,925,585			24,962		5.19	%	1,778,013			22,054		4.96	%	1,541,592			22,095		5.73	%
Noninterest earning assets:
Cash and due from banks	12,348							1,213							7,241
Premises and equipment, net	17,079							15,723							17,276
Goodwill and other intangibles, net	13,343							14,025							17,060
Accrued interest and other assets	86,113							59,613							50,487
Allowance for loan losses	(22,181		)					(16,692		)					(12,763		)
Total assets	$	2,032,287						$	1,851,895						$	1,620,893
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	131,355			85		0.26	%	120,990			282		0.92	%	114,362			605		2.10	%
Money markets	113,375			145		0.51	%	54,539			113		0.82	%	40,434			230		2.26	%
Statement savings	268,665			276		0.41	%	314,226			967		1.22	%	345,687			2,379		2.73	%
Certificates of deposit	671,236			3,066		1.81	%	631,746			4,348		2.73	%	446,411			4,030		3.58	%
Total interest - bearing deposits	1,184,631			3,572		1.20	%	1,121,501			5,710		2.02	%	946,894			7,244		3.04	%
Other borrowed funds	389,969			3,017		3.07	%	362,391			3,121		3.42	%	359,976			3,427		3.78	%
Total interest-bearing liabilities and interest expense	1,574,600			6,589		1.66	%	1,483,892			8,831		2.36	%	1,306,870			10,671		3.24	%
Noninterest-bearing liabilities:
Demand deposits	208,391							150,336							136,575
Other liabilities	25,698							17,280							17,477
Common shareholders’ equity	223,598							200,387							159,971
Total liabilities and shareholders’ equity	$	2,032,287						$	1,851,895						$	1,620,893
Net interest income and net interest margin (2)				$	18,373	3.82	%				$	13,223	2.97	%				$	11,424	2.96	%

(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on non-accruing loans was not material for the periods presented.

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 32%.

44

Rate and Volume Analysis

Three Months Ended September 30, 2010, 2009 and 2008

(In thousands)

	2010 Compared to 2009									2009 Compared to 2008
	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	$	205		$	(82	)	$	123		$	439		$	(501	)	$	(62	)
Real estate - commercial	669			250			919			1,846			(400		)	1,446
Real estate - construction	320			388			708			(150		)	(302		)	(452		)
Real estate - residential	376			(37		)	339			(164		)	(224		)	(388		)
Home equity lines	57			(25		)	32			210			(308		)	(98		)
Consumer	(3		)	0			(3		)	3			(1		)	2
Total loans	1,624			494			2,118			2,184			(1,736		)	448
Loans held for sale	1,385			(207		)	1,178			194			(273		)	(79		)
Investment securities available-for-sale	48			(226		)	(178		)	370			(407		)	(37		)
Investment securities held-to-maturity	(125		)	(23		)	(148		)	(163		)	(69		)	(232		)
Other investments	—			(16		)	(16		)	2			(82		)	(80		)
Federal funds sold	(45		)	(1		)	(46		)	442			(503		)	(61		)
Total interest income (2)	2,887			21			2,908			3,029			(3,070		)	(41		)
Interest expense:
Interest - bearing deposits:
Interest checking	24			(221		)	(197		)	35			(358		)	(323		)
Money markets	122			(90		)	32			80			(197		)	(117		)
Statement savings	(140		)	(551		)	(691		)	(217		)	(1,195		)	(1,412		)
Certificates of deposit	272			(1,554		)	(1,282		)	1,673			(1,355		)	318
Total interest - bearing deposits	278			(2,416		)	(2,138		)	1,571			(3,105		)	(1,534		)
Other borrowed funds	238			(342		)	(104		)	23			(329		)	(306		)
Total interest expense	516			(2,758		)	(2,242		)	1,594			(3,434		)	(1,840		)
Net interest income (2)	$	2,371		$	2,779		$	5,150		$	1,435		$	364		$	1,799

(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 and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 32%.

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

45

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

Nine Months Ended September 30, 2010, 2009 and 2008

(In thousands)

	2010							2009							2008
				Interest		Average					Interest		Average					Interest		Average
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial and industrial	$	160,116		$	5,580	4.65	%	$	158,966		$	5,721	4.80	%	$	127,572		$	6,080	6.35	%
Real estate - commercial	606,537			28,428		6.21	%	531,923			24,984		6.26	%	432,948			21,304		6.56	%
Real estate - construction	197,108			8,315		5.62	%	177,728			6,095		4.57	%	190,428			8,723		6.11	%
Real estate - residential	227,272			8,819		5.17	%	202,133			8,094		5.34	%	213,018			8,970		5.61	%
Home equity lines	119,248			3,233		3.62	%	109,935			3,003		3.65	%	90,593			3,338		4.92	%
Consumer	2,634			114		5.79	%	2,586			118		6.05	%	2,680			130		6.48	%
Total loans	1,312,915			54,489		5.53	%	1,183,271			48,015		5.41	%	1,057,239			48,545		6.12	%
Loans held for sale	167,947			6,070		4.82	%	168,428			5,651		4.47	%	132,921			5,792		5.81	%
Investment securities available-for-sale	317,195			10,797		4.54	%	239,301			8,905		4.96	%	264,376			10,400		5.25	%
Investment securities held-to-maturity	30,400			759		3.33	%	44,351			1,258		3.78	%	61,475			1,963		4.25	%
Other investments	15,728			38		0.32	%	15,697			13		0.11	%	15,138			548		4.82	%
Federal funds sold	22,304			39		0.23	%	57,563			102		0.24	%	23,023			433		2.52	%
Total interest-earning assets and interest income (2)	1,866,489			72,192		5.16	%	1,708,611			63,944		4.99	%	1,554,172			67,681		5.81	%
Noninterest earning assets:
Cash and due from banks	12,719							1,026							7,526
Premises and equipment, net	16,256							15,977							17,765
Goodwill and other intangibles, net	13,699							14,090							17,140
Accrued interest and other assets	80,676							59,401							52,042
Allowance for loan losses	(20,289		)					(15,725		)					(12,192		)
Total assets	$	1,969,550						$	1,783,380						$	1,636,453
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	133,166			403		0.40	%	121,062			960		1.06	%	121,338			2,101		2.31	%
Money markets	98,749			444		0.60	%	49,504			397		1.07	%	40,860			764		2.50	%
Statement savings	277,845			1,191		0.57	%	286,180			3,255		1.52	%	366,209			8,312		3.03	%
Certificates of deposit	656,142			9,971		2.03	%	619,158			13,902		3.00	%	450,650			13,274		3.93	%
Total interest - bearing deposits	1,165,902			12,009		1.38	%	1,075,904			18,514		2.30	%	979,057			24,451		3.34	%
Other borrowed funds	376,443			9,051		3.21	%	363,422			9,383		3.45	%	349,178			10,172		3.89	%
Total interest-bearing liabilities and interest expense	1,542,345			21,060		1.83	%	1,439,326			27,897		2.59	%	1,328,235			34,623		3.48	%
Noninterest-bearing liabilities:
Demand deposits	189,865							144,233							127,945
Other liabilities	22,730							19,780							18,706
Common shareholders’ equity	214,610							180,041							161,567
Total liabilities and shareholders’ equity	$	1,969,550						$	1,783,380						$	1,636,453
Net interest income and net interest margin (2)				$	51,132	3.65	%				$	36,047	2.81	%				$	33,058	2.84	%

(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 and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 32%.

46

Rate and Volume Analysis

Nine Months Ended September 30, 2010, 2009 and 2008

(In thousands)

	2010 Compared to 2009									2009 Compared to 2008
	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	$	161		$	(302	)	$	(141	)	$	1,496		$	(1,855	)	$	(359	)
Real estate - commercial	3,505			(61		)	3,444			4,870			(1,190		)	3,680
Real estate - construction	665			1,555			2,220			(582		)	(2,046		)	(2,628		)
Real estate - residential	1,007			(282		)	725			(458		)	(418		)	(876		)
Home equity lines	254			(24		)	230			713			(1,048		)	(335		)
Consumer	1			(5		)	(4		)	(4		)	(8		)	(12		)
Total loans	5,593			881			6,474			6,035			(6,565		)	(530		)
Loans held for sale	(16		)	435			419			1,547			(1,688		)	(141		)
Investment securities available-for-sale	2,899			(1,007		)	1,892			(986		)	(509		)	(1,495		)
Investment securities held-to-maturity	(396		)	(103		)	(499		)	(550		)	(155		)	(705		)
Other investments	0			25			25			19			(554		)	(535		)
Federal funds sold	(62		)	(1		)	(63		)	656			(987		)	(331		)
Total interest income (2)	8,018			230			8,248			6,721			(10,458		)	(3,737		)
Interest expense:
Interest - bearing deposits:
Interest checking	96			(653		)	(557		)	(7		)	(1,134		)	(1,141		)
Money markets	395			(348		)	47			161			(528		)	(367		)
Statement savings	(95		)	(1,969		)	(2,064		)	(1,822		)	(3,235		)	(5,057		)
Certificates of deposit	829			(4,760		)	(3,931		)	4,946			(4,318		)	628
Total interest - bearing deposits	1,225			(7,730		)	(6,505		)	3,278			(9,215		)	(5,937		)
Other borrowed funds	336			(668		)	(332		)	405			(1,194		)	(789		)
Total interest expense	1,561			(8,398		)	(6,837		)	3,683			(10,409		)	(6,726		)
Net interest income (2)	$	6,457		$	8,628		$	15,085		$	3,038		$	(49	)	$	2,989

(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 and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 32%.

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

47

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2010 and 2009 was $3.5 million and $2.1 million, respectively. For the nine months ended September 30, 2010 and 2009, our provision for loan losses was $8.6 million and $4.8 million, respectively.  The increase in our provision expense during 2010 compared to 2009 is a direct result of increases in non-performing loans and the adverse migration of certain loans through our allowance for loan losses calculation model because of ongoing adverse economic conditions.  While we continue to report strong credit quality in our loan portfolio, we have experienced increases in our watch list credits and net charge-offs.  Our provision expense was also impacted by 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.”

During the first nine months of 2010, we charged off residential loans totaling $1.7 million and consumer loans totaling $50,000.  We recorded charge-offs on four previously impaired commercial loans totaling $3.1 million through September 30, 2010.

The allowance for loan losses at September 30, 2010 and December 31, 2009 was $22.4 million and $18.6 million, respectively. Our allowance for loan losses ratio to loans receivable, net was 1.66% and 1.44% at September 30, 2010 and December 31, 2009, respectively.  Nonperforming loans at September 30, 2010 and December 31, 2009, were $9.6 million and $847,000, respectively. The increase in nonperforming loans was a result of two commercial relationships, which were previously impaired, having deteriorated further in 2010.

Continued challenging economic conditions could adversely affect our home equity loans of credit, credit card and other loan portfolios, including causing increases in delinquencies and default rates, which we expect could impact our charge-offs and provision for loan losses.  Continued deterioration in commercial and residential real estate values, employment data and household incomes could result in higher credit losses for us.  Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer.  At September 30, 2010, our commercial real estate portfolio was 46% of our total loan portfolio.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.

Additional information on the allowance for loan losses, its allocation to the loans receivable portfolio and information on nonperforming loans can be found in the following tables.

48

Allowance for Loan Losses

Three amd Nine Months Ended September 30, 2010 and 2009

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Balance, beginning of the period	$	21,058		$	16,150		$	18,636		$	14,518
Provision for loan losses	3,500			2,050			8,625			4,750
Loans charged off:
Commercial and industrial	(1,750		)	(25		)	(3,112		)	(40		)
Residential	(425		)	(701		)	(1,732		)	(1,756		)
Consumer	(2		)	(1		)	(50		)	(4		)
Total loans charged off	(2,177		)	(727		)	(4,894		)	(1,800		)
Recoveries:
Commercial and industrial	—			—			3			5
Residential	52			—			62			—
Consumer	11			—			12			—
Total recoveries	63			—			77			5
Net (charge offs) recoveries	(2,114		)	(727		)	(4,817		)	(1,795		)
Ending balance, September 30,	$	22,444		$	17,473		$	22,444		$	17,473

	September 30,			September 30,
	2010			2009
Loans:
Balance at period end	$	1,351,703		$	1,263,291
Allowance for loan losses to loans receivable, net of fees	1.66		%	1.38		%
Annualized net charge-offs to average loans receivable	0.49		%	0.20		%

49

Allocation of the Allowance for Loan Losses

At September 30, 2010 and December 31, 2009

(In thousands)

	September 30,				December 31,
	2010				2009
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	2,405	12.01	%	$	2,797	12.45	%
Real estate - commercial	11,027		45.54	%	9,666		45.80	%
Real estate - construction	5,046		15.83	%	2,829		14.80	%
Real estate - residential	2,592		17.46	%	2,096		17.67	%
Home equity lines	1,307		8.95	%	1,182		9.07	%
Consumer	67		0.21	%	66		0.21	%
Total allowance for loan losses	$	22,444	100.00	%	$	18,636	100.00	%

* Percentage of loan type to the total loan portfolio.

50

Nonperforming Loans Receivable

At September 30, 2010 and December 31, 2009

(In thousands)

	September 30,		December 31,
	2010		2009
Nonaccruing loans	$	9,315	$	696
Loans contractually past-due 90 days or more and still accruing	266		151
Total nonperforming loans receivable	$	9,581	$	847

51

Noninterest Income

Noninterest income includes service charges on deposits and loans, realized and unrealized gains on mortgage banking activities, investment fee income, management fee income, and gains on sales of investment securities available-for-sale, and continues to be an important factor in our operating results. Noninterest income for the three months ended September 30, 2010 and 2009 was $9.3 million and $5.7 million, respectively.  Noninterest income for the nine months ended September 30, 2010 and 2009 was $21.9 million and $17.7 million, respectively.  Realized and unrealized gains on mortgage banking activities by our mortgage banking segment for the three months ended September 30, 2010 and 2009 were $5.3 million and $2.8 million, respectively, an increase of $2.5 million, or 88%.  During the third quarter of 2010, our mortgage loan origination volume significantly increased as a result of historically low mortgage rates.  In addition, the margin we earn on loan sales has significantly increased contributing to the increase in our gains.  Included in realized and unrealized gains on mortgage banking activities are any origination, underwriting, and discount points and other funding fees and gains associated with our sales of loans to third party investors.  Costs include direct costs associated with the loan origination, such as commissions and salaries that are deferred at the time of origination.  For the nine months ended September 30, 2010 and 2009, realized and unrealized gains on mortgage banking activities were $11.9 million and $9.6 million, respectively.  This increase is attributable to the aforementioned increase in loan origination and sales volume for the year to date 2010 compared to 2009, in addition to the increase in the margin we earn on our loan sales over the past year.

Management fee income, which 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 sales, increased $702,000 to $1.3 million for the three months ended September 30, 2010 as compared to $553,000 for the three months ended September 30, 2009.  For the nine months ended September 30, 2010 and 2009, management fee income was $2.7 million and $1.3 million, respectively.  This component of our mortgage banking business has seen increases in loan origination and sales volume, which has contributed to the increase in our management fee income.

Loan fees increased $175,000 to $678,000 for the three months ended September 30, 2010 as compared to the same period of 2009.  For the nine months ended September 30, 2010 and 2009, loan fees were $1.5 million and $2.2 million, respectively, a decrease of $671,000.  The decrease is primarily related to a decrease in fee income from our mortgage banking segment, specifically, at George Mason’s title company.

Investment fee income increased $73,000 to $1.0 million for the three months ended September 30, 2010 compared to $975,000 for the same period of 2009. For the nine months ended September 30, 2010 and 2009, investment fee income was $3.1 million and $2.7 million, respectively.  The increase in investment fee income is attributable to increases in the market values of managed and custodial assets and an increase in the number of customer relationships in our trust division.

The increase in the cash surrender value of our bank-owned life insurance for the three and nine months ended September 30, 2010 and 2009 was $173,000 and $499,000, respectively.  For the same three and nine month periods of 2009, income from our bank-owned life insurance was $167,000 and $400,000, respectively.  The increase is directly related to increases in the underlying value of the investments.

For the three months ended September 30, 2010 and 2009, we recorded net gains on sales of investment securities available-for-sale of $193,000 and $73,000, respectively.  For the year-to-date September 30, 2010 and 2009, net gains on sales of investment securities were $726,000 and $625,000, respectively.  For the three months ended September 30, 2010 and 2009, net gains on investment securities held for trading purposes was $116,000 and $97,000, respectively.  For the nine months ended September 30, 2010 we recorded net gains of $84,000 on investment securities held for trading purposes compared to a net loss of $422,000 for the same period of 2009.  The loss recorded during 2009 was a result of our purchase of investments to economically hedge against fair value changes of our nonqualified deferred compensation plan liability.  These investments are designated as trading securities, and as such, the changes in fair value are reflected in earnings.  These trading losses were primarily the result of lower stock prices and were partially offset by a reduction in the period’s compensation expense associated with this benefit plan.

Noninterest income represented 34% and 30% of our total revenues for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, noninterest income as a percentage of our total revenues was 30% and 33%, respectively.

52

Noninterest Expense

Noninterest expense includes, among other things, salaries and benefits, occupancy costs, professional fees, depreciation, data processing, telecommunications and miscellaneous expenses. Noninterest expense for the three months ended September 30, 2010 was $15.4 million, compared to $13.0 million for the same period of 2009, an increase of $2.4 million, or 18%.  For the nine months ended September 30, 2010 and 2009, noninterest expense was $42.6 million and $38.7 million, respectively, an increase of $3.8 million, or 10%.

For the quarter ended September 30, 2010, salaries and benefits expense increased to $8.9 million up from $5.9 million for the quarter ended September 30, 2009.  The increase in salaries and benefits expense is mostly related to increases in our business development personnel at our commercial banking, wealth management and mortgage banking segments.  Also, we recorded an additional $801,000 during the third quarter of 2010 related to our CEO’s new employment agreement, which includes the immediate vesting of his supplemental executive retirement plan.  In addition, accruals for incentive pay for 2010 have increased compared to 2009 as a result of better than expected financial results for the quarter and year-to-date 2010.  Data communications expense increased $449,000 to $1.2 million for the three months ended September 30, 2010 as compared to $797,000 for the same period of 2009, for core IT system conversion costs.  Offsetting these increases is a reversal of accruals related to mortgage loan repurchases and putbacks of $1.1 million during the third quarter of 2010.  During the past two years, we have taken steps to limit our exposure to loan repurchases through agreements entered into with various investors.  During 2010, we experienced favorable results in resolving various investor claims and reduced our reserve by $1.1 million.  At September 30, 2010, there were no outstanding loan repurchases or settlements.  Additional increases in noninterest expense are related to branch expansion as we added a banking office and a mortgage banking office during the 2010 quarter.

For the year to date September 30, 2010, salaries and benefits expense increased to $21.8 million up from $17.5 million for the nine months ended September 30, 2009.  Data communications expense increased $1.0 million to $3.4 million for the nine months ended September 30, 2010 as compared to $2.4 million for the same period of 2009.  These increases were attributable to the aforementioned increases in personnel, benefits and our core system conversion.  Additional increases in noninterest expense are related to branch expansion as we added a banking office and a mortgage banking office during 2010.  FDIC insurance premiums decreased $610,000 to $1.6 million for the nine months ended September 30, 2010 compared to $2.2 million for the same period of 2009.  The decrease in the assessment is due to the FDIC’s special assessment which occurred during the second quarter of 2009.  Mortgage loan repurchases and settlements decreased $2.4 million during the nine months ended September 30, 2010 as compared to the same period of 2009, again due to our taking steps to reduce our exposure to loan repurchases and putbacks in our mortgage banking segment. Also contributing to the increase in our noninterest expense for 2010 was an impairment charge of $451,000 related to our annual impairment analysis of the goodwill associated with our acquisition of Wilson/Bennett.

Income Taxes

For the three months ended September 30, 2010, we recorded a provision for income taxes of $2.7 million, compared to $1.2 million for the same period of 2009.  Our effective tax rate for the three months ended September 30, 2010 and 2009 was 32% and 31%, respectively.  For the nine months ended September 30, 2010, we recorded a provision for income taxes of $6.9 million, compared to $3.0 million for the same period of 2009.  Our effective tax rate for the nine months ended September 30, 2010 and 2009 was 32% and 30%, respectively.  Our effective rate as of September 30, 2010 increased compared to September 30, 2009 because the income we

53

realize on our tax-exempt investments has been a smaller portion of our overall net income during the first nine months of 2010.  Our effective tax rate is less than the statutory rate because of income we receive on tax-exempt investments.  See also “Critical Accounting Policies — Valuation of Deferred Tax Assets.”

Statements of Condition

Total assets were $2.13 billion and $1.98 billion at September 30, 2010 and December 31, 2009, respectively.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $321.9 million at September 30, 2010, compared to $382.5 million at December 31, 2009, a decrease of $60.6 million.  The decrease in investment securities during 2010 as compared to 2009 is a result of paydowns and sales of investment securities during 2010. We have not replaced these securities with new purchases because this funding has been reallocated to support the increase in our loans held for sale. The investment securities portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and trading securities. 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. Investment securities-trading are securities we purchase to economically hedge against fair value changes in our nonqualified deferred compensation plan liability.  These securities include cash equivalents, equities and mutual funds.  At September 30, 2010, investment securities available-for-sale were $296.6 million, investment securities held-to-maturity were $23.4 million and investment securities-trading were $1.8 million. At December 31, 2009, investment securities available-for-sale were $343.6 million, investment securities held-to-maturity were $35.2 million, and investment securities-trading were $3.7 million.  See the following table for additional information on our investment securities portfolio.

We complete reviews for other-than-temporary impairment at least quarterly.  As of September 30, 2010, the majority of our investment securities portfolio consisted of securities rated AAA by a leading rating agency.  Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.  At September 30, 2010, 96% of our mortgage-related investment securities portfolio is guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA).

We have $7.9 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA to AA.  The various protective elements on the 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 these securities.

At September 30, 2010 certain of our investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due.

54

In addition, our held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at September 30, 2010 (each security has a par value of $2.0 million).  These securities are presented as corporate bonds in the table below.  The collateral underlying these structured securities are instruments issued by financial institutions or insurers.  We own the A-3 tranches in each issuance.  Each of the bonds are rated by more than one rating agency.  Two of the securities have a composite rating of AA, one of the securities has a composite rating of BB- and the other security has a composite rating of B-.  These ratings are consistent with the grades from the other rating agencies.  There is minimal observable trading activity for these types of securities.  We have estimated the fair value of these securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below our A-3 tranches, and the actual and expected performance of the underlying collateral, we expect to receive all contractual interest and principal payments recovering the amortized cost basis of each of the four securities, and concluded that these securities are not other-than-temporarily impaired.

No other-than-temporary impairment has been recognized on the securities in our investment portfolio during 2010.  We do not intend to sell nor do we believe it is probable that we will be required to sell any of our temporarily impaired securities prior to the recovery of the amortized cost.

See Note 5 to our notes to the consolidated financial statements for additional information on our investment securities portfolio.

FHLB stock at each of September 30, 2010 and December 31, 2009 was $15.7 million, and is included in other investments on the consolidated statements of condition.  During 2008, the FHLB of Atlanta announced a change in their dividend declaration and payment schedule beginning during the fourth quarter of 2008.  The change was initiated so that the dividend can be declared and paid to member banks after the FHLB has calculated their net income for the preceding quarter.  During 2009, the FHLB announced changes to its capital stock requirements.  Specifically, the Board of Directors increased the dollar cap on its stock purchases from $25 million to $26 million and repurchases of member excess stock will be evaluated on a quarterly basis instead of a daily basis.  We do not expect the above changes to materially impact our liquidity position.

55

Investment Securities

At September 30, 2010 and December 31, 2009

(In thousands)

	Amortized		Fair		Average
Available-for-sale at September 30, 2010	Cost		Value		Yield
U.S. government-sponsored agencies
Five to ten years	$	20,932	$	23,129	4.14	%
Total U.S. government-sponsored agencies	20,932		23,129		4.14	%
Mortgage-backed securities (1)
One to five years	7		7		9.01	%
Five to ten years	24,325		25,550		4.20	%
After ten years	166,456		174,451		4.54	%
Total mortgage-backed securities	190,788		200,008		4.49	%
Tax exempt municipal securities (2)
Five to ten years	7,566		7,972		3.42	%
After ten years	52,910		55,806		3.98	%
Taxable municipal securities
Five to ten years	2,814		2,896		5.04	%
After ten years	1,503		1,612		4.90	%
Total municipal securities	64,793		68,286		3.98	%
U. S. treasury securities
One to five years	4,917		5,185		2.36	%
Total U.S. treasury securities	4,917		5,185		2.36	%
Total investment securities available-for-sale	$	281,430	$	296,608	4.31	%

	Amortized		Fair		Average
Held-to-maturity at September 30, 2010	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	406		426		4.16	%
Five to ten years	4,350		4,587		4.61	%
After ten years	10,674		11,169		4.12	%
Total mortgage-backed securities	15,430		16,182		4.26	%
Corporate bonds
After ten years	8,004		3,072		1.49	%
Total corporate bonds	8,004		3,072		1.49	%
Total investment securities held-to-maturity	23,434		19,254		3.31	%
Total investment securities	$	304,864	$	315,862	4.23	%

56

	Amortized		Fair		Average
Available-for-sale at December 31, 2009	Cost		Value		Yield
U.S. government-sponsored agencies
Five to ten years	$	26,074	$	26,030	4.15	%
After ten years	29,974		29,629		5.01	%
Total U.S. government-sponsored agencies	56,048		55,659		4.61	%
Mortgage-backed securities (1)
One to five years	9		9		8.97	%
Five to ten years	33,079		33,964		4.21	%
After ten years	184,635		189,432		4.84	%
Total mortgage-backed securities	217,723		223,405		4.74	%
Tax exempt municipal securities (2)
Five to ten years	6,090		6,156		3.34	%
After ten years	50,270		50,227		4.01	%
Taxable municipal securities
After ten years	3,331		3,225		4.96	%
Total municipal securities	59,691		59,608		3.99	%
U. S. treasury securities
One to five years	4,901		4,897		2.36	%
Total U.S. treasury securities	4,901		4,897		2.36	%
Total investment securities available-for-sale	$	338,363	$	343,569	4.55	%

	Amortized		Fair		Average
Held-to-maturity at December 31, 2009	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	1,833	$	1,884	4.43	%
Five to ten years	6,244		6,478		4.59	%
After ten years	19,103		19,731		4.26	%
Total mortgage-backed securities	27,180		28,093		4.35	%
Corporate bonds
After ten years	8,004		3,343		1.33	%
Total corporate bonds	8,004		3,343		1.33	%
Total investment securities held-to-maturity	35,184		31,436		3.66	%
Total investment securities	$	373,547	$	375,005	4.47	%

(1)  Based on contractual maturities.

(2) Yields for tax-exempt municipal securities are not reported on a tax-equivalent basis.

57

Loans Receivable

Total loans receivable, net of deferred fees and costs, were $1.35 billion at September 30, 2010 and $1.29 billion at December 31, 2009, an increase of $58.3 million.  This increase is a result of additions to our sales and lending staff over the past year.  See the following table for details on the loans receivable portfolio. Loans held for sale at September 30, 2010 were $341.4 million compared to $179.5 million at December 31, 2009.  Loans held for sale are valued at the lower of cost or fair value.

Loans Receivable

At September 30, 2010 and December 31, 2009

(In thousands)

	September 30, 2010					December 31, 2009
Commercial and industrial	$	162,505		12.01	%	$	161,156		12.45	%
Real estate - commercial	616,280			45.54	%	592,780			45.80	%
Real estate - construction	214,157			15.83	%	191,523			14.80	%
Real estate - residential	236,314			17.46	%	228,693			17.67	%
Home equity lines	121,088			8.95	%	117,392			9.07	%
Consumer	2,832			0.21	%	2,859			0.21	%
Gross loans	$	1,353,176		100.00	%	1,294,403			100.00	%
Net deferred (fees) costs	(1,473		)			(971		)
Less: allowance for loan losses	(22,444		)			(18,636		)
Loans receivable, net	$	1,329,259				$	1,274,796

Deposits

Total deposits were $1.40 billion at September 30, 2010 compared to $1.30 billion at December 31, 2009. During 2010, we have had increases in our noninterest bearing checking products, money market checking, savings and certificates of deposit. We have had success in attracting deposit balances from customers seeking to deposit their money with smaller, local banks and depositors are increasing balances held with financial institutions as a result of the increased protection of their money by the FDIC.  See the following table for details on certificates of deposit with balances of $100,000 or more. We are a member of the Certificates of Deposit

58

Account Registry Service (“CDARS”).   CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At September 30, 2010 and December 31, 2009, we had $110.4 million and $59.4 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $10.0 million and $28.2 million at September 30, 2010 and December 31, 2009, respectively.

Certificates of Deposit of $100,000 or More

At September 30, 2010

(In thousands)

	Fixed Term		No-Penalty*		Total
Maturities:
Three months or less	$	129,022	$	18,393	$	147,415
Over three months through six months	49,013		4,335		53,348
Over six months through twelve months	57,670		8,156		65,826
Over twelve months	100,355		25,628		125,983
	$	336,060	$	56,512	$	392,572

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

Borrowings

Other borrowed funds increased $13.7 million to $441.3 million at September 30, 2010, compared to $427.6 million at December 31, 2009.  Treasury, Tax & Loan Note option borrowings decreased $987,000 to $999,000 at September 30, 2010 compared to $2.0 million at December 31, 2009.  FHLB advances remained at $280.0 million at September 30, 2010 compared to December 31, 2009. Customer repurchase agreements increased $1.7 million to $81.7 million at September 30, 2010 compared to $80.0 million at December 31, 2009.  We had federal funds purchased of $58.0 million at September 30, 2010 compared to $45.0 million at December 31, 2009.  The following table provides information on our borrowings.

Short-Term Borrowings and Other Borrowed Funds

At September 30, 2010

(In thousands)

	Yield		Amount
Short-term borrowed funds:
TT&L note option	0.00	%	$	999
Customer repurchase agreements	0.25	%	81,669
Federal Funds Purchased	0.29	%	58,000
Total short-term borrowed funds and weighted average rate	0.26	%	$	140,668
Other borrowed funds:
Trust preferred	3.99	%	$	20,619
FHLB advances - long term	3.90	%	280,000
Other borrowed funds and weighted average rate	3.91	%	$	300,619
Total other borrowed funds and weighted average rate	2.75	%	$	441,287

Shareholders’ Equity

Shareholders’ equity at September 30, 2010 was $224.1 million compared to $204.5 million at December 31, 2009, an increase of $19.6 million, or 10%. The increase in shareholders’ equity at September 30, 2010 compared to December 31, 2009 is primarily attributable to net income of $14.4 million for the nine months ended September 30, 2010.  In addition, accumulated other comprehensive income increased $6.3 million for the nine months ended September 30, 2010.  Book value per share at September 30, 2010 was $7.79 compared to $7.12 at December 31, 2009. 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, 2010 was $7.00 compared to $6.52 at December 31, 2009.

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, 2010, the commercial banking segment recorded net income of $3.7 million compared to $2.2 million for the same period of 2009. For

59

the nine months ended September 30, 2010, the commercial banking segment recorded net income of $11.0 million compared to $5.1 million for the nine months ended September 30, 2009.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for the commercial banking segment for the periods presented.  At September 30, 2010, total assets for this segment were $2.07 billion, loans receivable, net of deferred fees and costs, were $1.35 billion and total deposits were $1.40 billion. At September 30, 2009, total assets were $1.86 billion, loans receivable, net of deferred fees and costs, were $1.26 billion and total deposits were $1.28 billion.

Mortgage Banking

The operations of the mortgage banking segment are conducted through George Mason, and Cardinal First. Both George Mason and Cardinal First engage primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis.

For the three months ended September 30, 2010 and 2009, the mortgage banking segment recorded net income of $3.6 million and $779,000, respectively. For the nine months ended September 30, 2010 and 2009, the mortgage banking segment recorded net income of $6.0 million and $3.5 million, respectively.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for the mortgage banking segment for the periods presented.  At September 30, 2010, total assets for this segment were $373.2 million; loans held for sale were $341.4 million and mortgage funding checks were $33.1 million. At September 30, 2009, total assets were $177.2 million; loans held for sale were $151.8 million and mortgage funding checks were $13.2 million.

Wealth Management and Trust Services

The wealth management and trust services segment provides investment and financial services to businesses and individuals, including financial planning, retirement/estate planning, trusts, estates, custody, investment management, escrows, and retirement plans. Operations of the Bank’s trust division, CWS and Wilson/Bennett are included in this operating segment.

For the three months ended September 30, 2010 and 2009, the wealth management and trust services segment recorded net income of $92,000 and $129,000, respectively. For the nine months ended September 30, 2009, the wealth management and trust services segment recorded a net loss of $4,000 and net income of $205,000, respectively.  We recorded an impairment charge of $451,000 in this business segment during the second quarter of 2010 related to the goodwill associated with the acquisition of Wilson/Bennett.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for this business segment for the periods presented.  We are in the process of negotiating our service agreement with one of our largest Trust clients.  If we are unsuccessful in retaining this client, this would decrease revenues and cash flows derived from a reporting unit within our wealth management and trust services business segment, and result in the potential impairment of the goodwill and intangible assets recorded in the reporting unit.  We expect that the negotiations will be concluded in the next 30-60 days.  At September 30, 2010, total assets were $3.0 million and managed and custodial assets were $3.1 billion. At September 30, 2009, total assets for this segment were $3.5 million and managed and custodial assets were $3.1 billion.

Additional information pertaining to our business segments can be found in Note 3 to the notes to consolidated financial statements.

Capital Resources

Capital adequacy is an important measure of financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

60

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 and 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, 2010, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were 12.28% and 13.57%, respectively. At December 31, 2009, our Tier 1 and total risk-based capital ratios were 12.97% and 14.15%, respectively.  Our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions.  The decrease in our risk-based capital ratios was primarily a result of the increase in assets on our balance sheet and changes in the risk weightings of certain assets during 2010, offset by an increase in shareholders’ equity at September 30, 2010 compared to December 31, 2009.

The following table provides additional information pertaining to our capital ratios.

Capital Components

At September 30, 2010 and December 31, 2009

(In thousands)

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
	Amount		Ratio		Amount		Ratio			Amount		Ratio
Cardinal Financial Corporation (Consolidated):
At September 30, 2010
Total risk-based capital/Total capital to risk-weighted assets	$	239,939	13.57	%	$	141,455	>	8.00	%	$	176,819	>	10.00	%
Tier I capital/Tier I capital to risk-weighted assets	217,222		12.28	%	70,728		>	4.00	%	106,091		>	6.00	%
Tier I capital/Total capital to average assets	217,222		10.76	%	80,758		>	4.00	%	100,947		>	5.00	%
At December 31, 2009
Total risk-based capital/ Total capital to risk-weighted assets	$	226,137	14.15	%	$	127,869	>	8.00	%	$	159,837	>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	207,286		12.97	%	63,935		>	4.00	%	95,902		>	6.00	%
Tier I capital/ Total capital to average assets	207,286		11.03	%	75,185		>	4.00	%	93,981		>	5.00	%

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
	Amount		Ratio		Amount		Ratio			Amount		Ratio
Cardinal Bank:
At September 30, 2010
Total risk-based capital/Total capital to risk-weighted assets	$	224,218	12.74	%	$	140,765	>	8.00	%	$	175,956	>	10.00	%
Tier I capital/Tier I capital to risk-weighted assets	201,501		11.45	%	70,383		>	4.00	%	105,574		>	6.00	%
Tier I capital/Total capital to average assets	201,501		10.02	%	80,407		>	4.00	%	100,509		>	5.00	%
At December 31, 2009
Total risk-based capital/ Total capital to risk-weighted assets	$	206,413	12.98	%	$	127,257	>	8.00	%	$	159,071	>	10.00	%
Tier I capital/ Tier I capital to risk-weighted assets	187,562		11.79	%	63,629		>	4.00	%	95,443		>	6.00	%
Tier I capital/ Total capital to average assets	187,562		10.02	%	74,884		>	4.00	%	93,605		>	5.00	%

61

Contractual Obligations

We have entered into a number of long-term contractual obligations to support our ongoing activities. These contractual obligations will be funded through operating revenues and liquidity sources held or available to us and exclude contractual interest costs, where applicable. The required payments under such obligations are detailed in the following table.

Contractual Obligations

At September 30, 2010

(In thousands)

	Payments Due by Period
	Total		Less than 1 Year		1 - 2 Years		3 - 5 Years		More than 5  Years
Long-Term Debt Obligations:
Certificates of deposit	$	555,215	$	300,275	$	105,417	$	135,845	$	13,678
Brokered certificates of deposit	120,440		112,992		7,448		—		—
Advances from the Federal Home Loan Bank of Atlanta	280,000		—		75,000		50,000		155,000
Trust preferred securities	20,619		—		—		—		20,619
Operating lease obligations	29,551		4,656		3,379		8,928		12,588
Total	$	1,005,825	$	417,923	$	191,244	$	194,773	$	201,885

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk

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

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.

We have counter-party risk which 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.  We do not expect any third-party investor to fail to meet its obligation.  In addition, we have derivative counterparty risk relating to certain interest rate swaps we have with third parties.  This risk may arise from the inability of the third party to meet the terms of the contract.  We continuously monitor the financial condition of these third parties.  We do not expect these third parties to fail to meet their obligations.

62

George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposures to its investors related to loan sales activities. We evaluate the merits of each claim and estimate the reserve based on actual and expected claims received and consider the historical amounts paid to settle such claims.  During the past two years, we have taken steps to limit our exposure to loan repurchases through agreements entered into with various investors.  During 2010, we experienced favorable results in resolving various investor claims and had no outstanding loan repurchases or settlement as of September 30, 2010 and therefore reduced our reserves by $1.1 million.

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

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

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

At September 30, 2010, commitments to extend credit were $445.4 million and standby letters of credit were $20.1 million. Commitments to extend credit of $215.7 million as of September 30, 2010 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature.

63

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 different wholesale funding markets. These markets include the brokered CD market, the repurchase agreement market and the federal funds market. We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  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 flows from amortizing assets or maturing assets and our investment securities available-for-sale portfolio 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.

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $316.5 million at September 30, 2010 or 15% of total assets. We held investments that are classified as held-to-maturity in the amount of $23.4 million at September 30, 2010. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged roughly half of its investment securities and a portion of its residential real estate and commercial real estate loan portfolios to the Federal Home Loan Bank of Atlanta with additional investment securities and certain loans in its commercial & industrial portfolios pledged to the Federal Reserve Bank of Richmond. Additional borrowing capacity at the Federal Home Loan Bank of Atlanta at September 30, 2010 was $153.7 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $100 million at September 30, 2010. These facilities are subject to the FHLB and the Federal Reserve approving disbursement to us.  In addition, we have unsecured federal funds purchased lines of $315 million available to us.  We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.

64

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 interest checking, money market checking, savings accounts as well as certificates of deposit. With the funding markets still lacking liquidity, forecasts for deposit rate movements carry greater uncertainty than when this market is functioning normally.  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 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the current level of interest rates.  In the ramped down rate change, the model moves rates gradually down 100 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, 2010, our asset/liability position was neutral based on our interest rate sensitivity model.  Currently, our net interest income would decrease by less than 1.2% in a down 100 basis point scenario and would be neutral in an up 200 basis point scenario over a one-year time frame.  In the two-year time horizon, our net interest income would decrease by less than 2.6% in a down 100 basis point scenario and would be neutral in an up 200 basis point scenario.

65

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 interest checking, money market checking, savings accounts as well as certificates of deposit. With the funding markets still lacking liquidity, forecasts for deposit rate movements carry greater uncertainty than when this market is functioning normally.  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 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the current level of interest rates.  In the ramped down rate change, the model moves rates gradually down 100 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, 2010, our asset/liability position was neutral based on our interest rate sensitivity model.  Currently, our net interest income would decrease by less than 1.2% in a down 100 basis point scenario and would be neutral in an up 200 basis point scenario over a one-year time frame.  In the two-year time horizon, our net interest income would decrease by less than 2.6% in a down 100 basis point scenario and would be neutral in an up 200 basis point scenario.

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

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.  We do not expect any third-party investor to fail to meet its obligation.  In addition, we have derivative counterparty risk relating to certain interest rate swaps we have with a third party.  This risk may arise from the inability of the third party to meet the terms of the contracts.  We monitor the financial condition of this third party on an annual basis.  We do not expect this third party to fail to meet its obligation.

66

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.

67

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 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, including the risk factors that are outlined in our Annual Report on Form 10-K for the year ended December 31, 2009.  There have been no material changes in our risk factors from those disclosed.

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

(a)  None.

(b)  Not applicable.

(c)  For the three months ended September 30, 2010, we did not purchase shares of our common stock.

Item 3.  Defaults Upon Senior Securities

(a)  None.

(b)  None.

Item 4.  (Removed and Reserved)

Item 5.  Other Information

(a)  None.

(b)  None.

Item 6.  Exhibits

31.1         Rule 13a-14(a) Certification of Chief Executive Officer

31.2         Rule 13a-14(a) Certification of Chief Financial Officer

32.1         Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2         Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

68

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 5, 2010	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: November 5, 2010	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: November 5, 2010	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Senior Vice President and Chief Accounting Officer
	(Principal Accounting Officer)

69

EXHIBIT INDEX

Exhibit No.	Description
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

70