Cardinal Financial (CFNL) 10-Q 2011 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, 2011

or

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

For the transition period from                          to                           

Commission File Number:  0-24557

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(703) 584-3400

(Registrant’s telephone number, including area code)

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

29,027,220 shares of common stock, par value $1.00 per share,

outstanding as of November 3, 2011

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Condition At September 30, 2011 (unaudited) and December 31, 2010	3
Consolidated Statements of Income For the three and nine months ended September 30, 2011 and 2010 (unaudited)	4
Consolidated Statements of Comprehensive Income For the three and nine months ended September 30, 2011 and 2010 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity For the nine months ended September 30, 2011 and 2010 (unaudited)	6
Consolidated Statements of Cash Flows For the nine months ended September 30, 2011 and 2010 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3. Quantitative and Qualitative Disclosures About Market Risk	76
Item 4. Controls and Procedures	77
PART II – OTHER INFORMATION	78
Item 1. Legal Proceedings	78
Item 1A. Risk Factors	78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3. Defaults Upon Senior Securities	78
Item 4. (Removed and Reserved)	78
Item 5. Other Information	78
Item 6. Exhibits	78
SIGNATURES	80

2

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2011 and December 31, 2010

(In thousands, except share data)

	September 30,			December 31,
	2011			2010
	(Unaudited)
Assets
Cash and due from banks	$	17,049		$	12,963
Federal funds sold	18,841			12,905
Total cash and cash equivalents	35,890			25,868
Investment securities available-for-sale	332,325			320,998
Investment securities held-to-maturity (market value of $9,298 and $17,733 at September 30, 2011 and December 31, 2010, respectively)	13,518			21,879
Investment securities-trading	2,145			2,107
Total investment securities	347,988			344,984
Other investments	16,451			16,469
Loans held for sale	552,838			206,047
Loans receivable, net of deferred fees and costs	1,515,286			1,409,302
Allowance for loan losses	(24,212		)	(24,210		)
Loans receivable, net	1,491,074			1,385,092
Premises and equipment, net	18,905			16,717
Deferred tax asset, net	6,504			10,690
Goodwill and intangibles, net	10,540			10,688
Bank-owned life insurance	34,961			34,358
Prepaid FDIC insurance premiums	3,627			4,574
Other real estate owned	3,957			1,250
Accrued interest receivable and other assets	31,747			15,281
Total assets	$	2,554,482		$	2,072,018
Liabilities and Shareholders’ Equity
Non-interest bearing deposits	$	264,857		$	229,575
Interest bearing deposits	1,531,522			1,174,150
Total deposits	1,796,379			1,403,725
Other borrowed funds	419,546			389,586
Mortgage funding checks	43,357			662
Escrow liabilities	4,968			1,454
Accrued interest payable and other liabilities	40,113			53,689
Total liabilities	2,304,363			1,849,116

	2011	2010
Common stock, $1 par value
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	28,932,489	28,769,849	28,932		28,770
Additional paid-in capital			162,631		160,859
Retained earnings			45,997		28,848
Accumulated other comprehensive income, net			12,559		4,425
Total shareholders’ equity			250,119		222,902
Total liabilities and shareholders’ equity			$	2,554,482	$	2,072,018

See accompanying notes to consolidated financial statements.

3

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and nine months ended September 30, 2011 and 2010

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011		2010
Interest income:
Loans receivable	$	19,753		$	18,701		$	57,568	$	54,454
Loans held for sale	2,851			2,808			6,045		6,070
Federal funds sold	15			11			72		39
Investment securities available-for-sale	3,306			3,028			10,217		10,279
Investment securities held-to-maturity	92			206			354		759
Other investments	30			17			93		38
Total interest income	26,047			24,771			74,349		71,639
Interest expense:
Deposits	3,371			3,572			10,105		12,009
Other borrowed funds	2,577			3,017			7,821		9,051
Total interest expense	5,948			6,589			17,926		21,060
Net interest income	20,099			18,182			56,423		50,579
Provision for loan losses	2,885			3,500			4,745		8,625
Net interest income after provision for loan losses	17,214			14,682			51,678		41,954
Non-interest income:
Service charges on deposit accounts	461			463			1,307		1,434
Loan fees	749			678			1,728		1,490
Investment fee income	643			1,048			1,902		3,072
Realized and unrealized gains on mortgage banking activities	11,343			5,325			18,735		11,855
Net realized gain on investment securities available-for-sale	411			193			1,238		726
Net realized gain (loss) on investment securities-trading	(2		)	116			48		84
Management fee income	1,156			1,255			2,138		2,676
Increase in cash surrender value of bank-owned life insurance	216			173			603		499
Litigation recovery on previously impaired investment	—			71			—		87
Other non-interest income (loss)	6			(16		)	4		(58		)
Total non-interest income	14,983			9,306			27,703		21,865
Non-interest expense:
Salary and benefits	8,418			8,923			22,970		21,782
Occupancy	1,543			1,376			4,430		4,301
Professional fees	1,467			571			2,946		1,576
Depreciation	761			462			1,978		1,469
Data communications	1,039			1,246			2,882		3,386
Impairment of goodwill	—			—			—		451
FDIC insurance premiums	(166		)	524			1,078		1,592
Mortgage loan repurchases and settlements	170			(1,084		)	670		(686		)
Amortization of intangibles	49			60			148		179
Loss on extinguishment of debt	1,822			—			2,271		—
Other operating expenses	3,826			3,291			9,980		8,500
Total non-interest expense	18,929			15,369			49,353		42,550
Income before income taxes	13,268			8,619			30,028		21,269
Provision for income taxes	4,643			2,716			10,277		6,857
Net income	$	8,625		$	5,903		$	19,751	$	14,412
Earnings per common share - basic	$	0.29		$	0.20		$	0.67	$	0.50
Earnings per common share - diluted	$	0.29		$	0.20		$	0.66	$	0.49
Weighted-average common shares outstanding - basic	29,403,304			29,140,193			29,359,365		29,110,038
Weighted-average common shares outstanding - diluted	29,871,668			29,639,114			29,847,607		29,582,342

See accompanying notes to consolidated financial statements.

4

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and nine months ended September 30, 2011 and 2010

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net income	$	8,625		$	5,903		$	19,751		$	14,412
Other comprehensive income:
Unrealized gain on available-for-sale investment securities:
Unrealized holding gain arising during the period, net of tax expense of $3.0 million and $4.4 million for the three and nine months ended September 30, 2011, respectively, net of tax expense of $1.0 million and $3.4 million for the three and nine months ended September 30, 2010, respectively.	6,152			2,122			9,338			7,072
Less: reclassification adjustment for net gains included in net income net of tax expense of $135 thousand and $407 thousand for the three and nine months ended September 30, 2011, respectively, and net of tax expense of $14 thousand and $186 thousand for the three and nine months ended September 30, 2010, respectively.	(276		)	(131		)	(831		)	(492		)
	5,876			1,991			8,507			6,580
Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $543 thousand and $197 thousand for the three and nine months ended September 30, 2011, respectively, and 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.	(1,031		)	69			(373		)	(291		)
Comprehensive income	$	13,470		$	7,963		$	27,885		$	20,701

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, 2011 and 2010

(In thousands)

(Unaudited)

									Accumulated
				Additional					Other
	Common	Common		Paid-in		Retained			Comprehensive
	Shares	Stock		Capital		Earnings			Income		Total
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
Balance, December 31, 2010	28,770	$	28,770	$	160,859	$	28,848		$	4,425	$	222,902
Stock options exercised	162	162		1,292		—			—		1,454
Stock compensation expense, net of tax benefit	—	—		480		—			—		480
Dividends on common stock of $0.09 per share	—	—		—		(2,602		)	—		(2,602		)
Change in accumulated other comprehensive income	—	—		—		—			8,134		8,134
Net income	—	—		—		19,751			—		19,751
Balance, September 30, 2011	28,932	$	28,932	$	162,631	$	45,997		$	12,559	$	250,119

See accompanying notes to consolidated financial statements.

6

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2011 and 2010

(In thousands)

(Unaudited)

	2011			2010
Cash flows from operating activities:
Net income	$	19,751		$	14,412
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,978			1,469
Amortization of premiums, discounts and intangibles	235			579
Impairment of goodwill	—			451
Provision for loan losses	4,745			8,625
Loans held for sale originated	(2,389,938		)	(2,123,663		)
Proceeds from the sale of loans held for sale	2,061,882			1,973,574
Realized and unrealized gains on mortgage banking activities	(18,735		)	(6,829		)
Proceeds from sale of investment securities-trading	474			181
Purchase of investment securities-trading	(944		)	(884		)
Unrealized (gain) loss on investment securities-trading	(48		)	(84		)
Gain on sale of investment securities available-for-sale	(1,238		)	(735		)
Loss on sale of investment securities available-for-sale	—			9
Gain on sale of other assets	—			(3		)
Loss on sale of other real estate owned	—			76
Stock compensation expense, net of tax benefits	480			452
Increase in cash surrender value of bank-owned life insurance	(603		)	(499		)
Increase in accrued interest receivable and other assets	(16,089		)	(10,177		)
Decrease in accrued interest payable, escrow liabilities and other liabilities	20,878			10,679
Net cash provided by (used in) operating activities	(317,172		)	(132,367		)
Cash flows from investing activities:
Net purchases of premises and equipment	(4,166		)	(1,659		)
Proceeds from maturity and call of investment securities available-for-sale	970			30,077
Proceeds from sale of investment securities available-for-sale	—			10,013
Proceeds from sale of mortgage-backed securities available-for-sale	16,682			24,175
Proceeds from maturity or call of investment securities held-to-maturity	5,618			5,857
Purchase of investment securities available-for-sale	(17,271		)	(20,179		)
Proceeds from the sale of other investments	18			—
Purchase of mortgage-backed securities available-for-sale	(62,538		)	(37,809		)
Purchases of other investments	—			—
Redemptions of investment securities available-for-sale	34,426			40,876
Redemptions of investment securities held-to-maturity	2,728			6,000
Proceeds from the sale of other real estate owned	531			1,196
Net increase in loans receivable, net of deferred fees and costs	(113,965		)	(63,088		)
Net cash used in investing activities	(136,967		)	(4,541		)
Cash flows from financing activities:
Net increase in deposits	392,654			100,671
Net increase in other borrowed funds	30,410			13,708
Net increase in mortgage funding checks	42,695			19,140
Proceeds from FHLB advances	15,000			10,000
Repayment of FHLB advances	(15,450		)	(10,000		)
Stock options exercised	1,454			166
Dividends on common stock	(2,602		)	(1,724		)
Net cash provided by financing activities	464,161			131,961
Net decrease in cash and cash equivalents	10,022			(4,947		)
Cash and cash equivalents at beginning of the year	25,868			24,841
Cash and cash equivalents at end of the period	$	35,890		$	19,894
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	17,789		$	23,874
Cash paid for income taxes	8,450			6,443

See accompanying notes to consolidated financial statements.

7

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(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, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011. 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, 2010.

Note 2

Stock-Based Compensation

At September 30, 2011, 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.  In April 2011, the shareholders approved an amendment to the Equity Plan to increase the number of shares of common stock reserved for issuance under it from 2,420,000 to 3,170,000, an increase of 750,000 shares.  In addition, the amendment extended the term of the Equity Plan to February 21, 2021.  There were 991,868 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of September 30, 2011.

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. Employee stock options 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, 2011 and 2010 was $73,000 and $61,000, respectively.  Total stock compensation expense for the nine months ended September 30, 2011 and 2010 was $567,000 and $452,000.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $24,000 and $20,000 for the three months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011 and 2010, the total income tax benefit recognized in the income statement for share-based compensation was $186,000 and $146,000, respectively.

Options granted for the three and nine months ended September 30, 2011 were 9,000 and 149,600, respectively.  Options granted for the three and nine months ended September 30, 2010 were 4,250 and 66,250, respectively.  The weighted average per share fair value of stock option grants for the three and nine months ended September 30, 2011 was $4.25 and $4.86, respectively.  The weighted average per share fair value of stock option grants for the three and nine months ended September 30, 2010 was $4.16 and $5.04, respectively.  The fair values of the options granted during all periods ended September 30, 2011 and 2010 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2011	2010	2011	2010
Estimated option life	6.5 years	6.5 years	6.5 years	6.5 years
Risk free interest rate	1.45% - 2.22%	2.13%	1.45% - 2.81%	2.13% - 3.30%
Expected volatility	44.70%	45.90%	44.70%	45.90%
Expected dividend yield	1.02%	0.89%	1.02%	0.89%

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, 2011 is summarized as follows:

9

					Weighted
			Weighted		Average	Aggregate
			Average		Remaining	Intrinsic
	Number of		Exercise		Contractual	Value
	Shares		Price		Term (Years)	($000)
Outstanding at December 31, 2010	2,197,289		$	8.67
Granted	149,600		11.23
Exercised	(162,640	)	8.94
Forfeited	(62,550	)	11.14
Outstanding at September 30, 2011	2,121,699		$	8.76	4.06	$	—
Options exercisable at September 30, 2011	1,912,099		$	8.69	3.54	$	—

The intrinsic value of options exercised during the three and nine months ended September 30, 2011 was $1,000 and none, respectively. For the options exercised during the three and nine months ended September 30, 2010 the intrinsic value was $36,000 and $261,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the nine months ended September 30, 2011 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2010	211,500		$	3.93
Granted	149,600		4.86
Vested	(131,350	)	4.75
Forfeited	(20,150	)	4.74
Balance at September 30, 2011	209,600		$	4.00

At September 30, 2011, there was $775,000 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 3.8 years. The total fair value of shares that vested during the three months ended September 30, 2011 and 2010 was $62,000 and $67,000, respectively.  For the nine months ended September 30, 2011 and 2010, the total fair value of shares that vested was $624,000 and $573,000, 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, 2011 and 2010 is as follows:

11

At and for the Three Months Ended September 30, 2011 (in thousands):

					Wealth Management
	Commercial		Mortgage		and					Intersegment
	Banking		Banking		Trust Services		Other			Elimination			Consolidated
Net interest income	$	19,592	$	711	$	—	$	(204	)	$	—		$	20,099
Provision for loan losses	2,885		—		—		—			—			2,885
Non-interest income	1,315		13,037		643		2			(14		)	14,983
Non-interest expense	12,748		4,819		620		756			(14		)	18,929
Provision for income taxes	1,783		3,192		3		(335		)	—			4,643
Net income (loss)	$	3,491	$	5,737	$	20	$	(623	)	$	—		$	8,625
Total Assets	$	2,478,423	$	558,558	$	577	$	257,410		$	(740,486	)	$	2,554,482
Average Assets	$	2,218,271	$	255,336	$	586	$	251,782		$	(512,770	)	$	2,213,205

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

					Wealth Management
	Commercial		Mortgage		and					Intersegment
	Banking		Banking		Trust Services		Other			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 Nine Months Ended September 30, 2011 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	55,320	$	1,712	$	—		$	(609	)	$	—		$	56,423
Provision for loan losses	4,745		—		—			—			—			4,745
Non-interest income	3,841		21,947		1,902			61			(48		)	27,703
Non-interest expense	32,552		11,895		2,083			2,871			(48		)	49,353
Provision for income taxes	7,313		4,203		(68		)	(1,171		)	—			10,277
Net income (loss)	$	14,551	$	7,561	$	(113	)	$	(2,248	)	$	—		$	19,751
Total Assets	$	2,478,423	$	558,558	$	577		$	257,410		$	(740,486	)	$	2,554,482
Average Assets	$	2,105,281	$	176,547	$	588		$	252,023		$	(424,057	)	$	2,110,382

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

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			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

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.

12

The parent company’s net interest expense is comprised of interest income from short-term investments and interest expense on trust preferred securities.

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, 2011 and 2010.  Antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 44,531 and 81,211 for the three months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011 and 2010, antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 15,574 and 59,448, 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)	2011		2010		2011		2010
Net income available to common shareholders	$	8,625	$	5,903	$	19,751	$	14,412
Weighted average common shares - basic	29,403		29,140		29,359		29,110
Weighted average common shares - diluted	29,872		29,639		29,848		29,582
Earnings per common share - basic	$	0.29	$	0.20	$	0.67	$	0.50
Earnings per common share - diluted	$	0.29	$	0.20	$	0.66	$	0.49

Weighted average shares for the basic earnings per share calculation 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, 2011 and 2010:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2011	2010	2011	2010
Weighted average common shares outstanding	28,932	28,760	28,905	28,740
Weighted average shares attributable to the deferred compensation plans	471	380	454	370
Total weighted average shares - basic	29,403	29,140	29,359	29,110

The following shows the composition of diluted outstanding shares for the three and nine months ended September 30, 2011 and 2010:

13

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2011	2010	2011	2010
Weighted average shares outstanding - basic (from above)	29,403	29,140	29,359	29,110
Incremental weighted average shares attributable to deferred compensation plans	237	289	224	245
Weighted average shares attributable to vested stock options	232	210	265	227
Total weighted average shares - diluted	29,872	29,639	29,848	29,582

Note 5

Investment Securities

The approximate fair value and amortized cost of investment securities at September 30, 2011 and December 31, 2010 are shown in the table below.

14

	September 30, 2011
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	35,768	4,015		—			$	39,783
Mortgage-backed securities	194,876		12,383		(201		)	207,058
Municipal securities	75,584		4,743		(33		)	80,294
U.S. treasury securities	4,939		251		—			5,190
Total	$	311,167	$	21,392	$	(234	)	$	332,325
Investment Securities Held-to-Maturity
Mortgage-backed securities	5,515		331		—			5,846
Corporate bonds	8,003		—		(4,551		)	3,452
Total	$	13,518	$	331	$	(4,551	)	$	9,298

	December 31, 2010
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	30,941	$	1,262	$	(84	)	$	32,119
Mortgage-backed securities	212,583		6,979		(80		)	219,482
Municipal securities	64,284		424		(425		)	64,283
U.S. treasury securities	4,923		191		—			5,114
Total	$	312,731	$	8,856	$	(589	)	$	320,998
Investment Securities Held-to-Maturity
Mortgage-backed securities	13,875		661		—			14,536
Corporate bonds	8,004		—		(4,807		)	3,197
Total	$	21,879	$	661	$	(4,807	)	$	17,733

The fair value and amortized cost of investment securities by contractual maturity at September 30, 2011 and December 31, 2010 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.

15

	September 30, 2011
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
After 1 year but within 5 years	$	10,205	11,089		—		—
After 5 years but within 10 years	49,877		54,709		—		—
After 10 years	56,209		59,469		8,003		3,452
Mortgage-backed securities	194,876		207,058		5,515		5,846
Total	$	311,167	$	332,325	$	13,518	$	9,298

	December 31, 2010
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
After 1 year but within 5 years	$	4,923	$	5,114	$	—	$	—
After 5 years but within 10 years	41,322		42,637		—		—
After 10 years	53,903		53,765		8,004		3,197
Mortgage-backed securities	212,583		219,482		13,875		14,536
Total	$	312,731	$	320,998	$	21,879	$	17,733

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, 2011 and December 31, 2010.

September 30, 2011

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
Mortgage-backed securities	2,537		(112		)	741		(89		)	3,278		(201		)
Municipal securities	505		(25		)	1,476		(8		)	1,981		(33		)
Total temporarily impaired securities	$	3,042	$	(137	)	$	2,217	$	(97	)	$	5,259	$	(234	)

Investment Securities Held-to- Maturity	Less than 12 months				12 months or more					Total
(In thousands)	Fair value		Unrealized loss							Fair value		Unrealized loss
Corporate bonds	—		—		3,452		(4,551		)	3,452		(4,551		)
Total temporarily impaired securities	$	—	$	—	$	3,452	$	(4,551	)	$	3,452	$	(4,551	)

December 31, 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. government - sponsored agencies	$	9,957	$	(84	)	$	—	$	—		$	9,957	$	(84	)
Mortgage-backed securities	4,892		(14		)	814		(66		)	5,706		(80		)
Municipal securities	27,845		(415		)	1,475		(10		)	29,320		(425		)
Total temporarily impaired securities	$	42,694	$	(513	)	$	2,289	$	(76	)	$	44,983	$	(589	)

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
Corporate bonds	$	—	$	—	$	3,197	$	(4,807	)	$	3,197	$	(4,807	)
Total temporarily impaired securities	$	—	$	—	$	3,197	$	(4,807	)	$	3,197	$	(4,807	)

16

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of September 30, 2011, 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, 2011, 98% 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 $4.7 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, 2011, 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 will be required 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, 2011 (each security has a par value of $2.0 million).  These securities are presented as corporate bonds in the above tables.  The collateral underlying these structured securities are instruments issued by financial institutions or insurers.  The Company owns the senior A-3 tranches in each issuance.  Each of the bonds is rated by more than one rating agency.  One security has a composite rating of A, one security has a composite rating of A-, one of the securities has a composite rating of BB- and the other security has a composite rating of B-.  Observable trading activity remains limited 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 senior 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 senior A-3 tranches.  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 senior A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the senior A-3 contractual cash flows.  Significant judgment 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, 42% 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 $152 million of the remaining $308 million, or 50% of the performing collateral defaulted or deferred payment.  In another of the pooled trust preferred securities issues, 43% 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 $72 million of the remaining $238 million, or 31% of the performing collateral defaulted or deferred payment.  In the third of the pooled trust preferred securities issues, 68% 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 $136 million of the remaining $161 million, or 85% of the performing collateral defaulted or deferred payment.  In the fourth of the pooled trust preferred securities issues, 53% 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 $258 million of the remaining $341 million, or 76% of the performing collateral defaulted to deferred payment.

17

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, 2011.  The Company does not continue to hold any investment securities for which the Company previously recognized other-than-temporary impairment.

Note 6

Loans Receivable and Allowance for Loan Losses

The loan portfolio at September 30, 2011 and December 31, 2010 consist of the following:

(In thousands)	2011			2010
Commercial and industrial	$	217,984		$	200,384
Real estate - commercial	702,920			631,292
Real estate - construction	251,241			240,007
Real estate - residential	220,360			217,130
Home equity lines	122,192			119,403
Consumer	3,213			3,042
	1,517,910			1,411,258
Net deferred fees	(2,624		)	(1,956		)
Loans receivable, net of fees	1,515,286			1,409,302
Allowance for loan losses	(24,212		)	(24,210		)
Loans receivable, net	$	1,491,074		$	1,385,092

The Company’s allowance for loan losses is based first, on a segmentation of its loan portfolio by general loan type, or portfolio segments, as presented in the preceding table.  Certain portfolio segments are further disaggregated and evaluated collectively for impairment based on class segments, which are largely based on the type of collateral underlying each loan.

Activity in the Company’s allowance for loan losses for the three and nine months ended September 30, 2011 and 2010 is shown below.

18

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2011			2010			2011			2010
Allowance for loan losses, beginning of the period	$	22,626		$	21,058		$	24,210		$	18,636
Provision for loan losses	2,885			3,500			4,745			8,625
Loans charged off:
Commercial	(1,178		)	(1,750		)	(4,792		)	(3,112		)
Residential	(134		)	(425		)	(513		)	(1,732		)
Consumer	—			(2		)	(19		)	(50		)
Total loans charged off	(1,312		)	(2,177		)	(5,324		)	(4,894		)
Recoveries:
Commercial	3			—			276			3
Residential	10			52			305			62
Consumer	—			11			—			12
Total recoveries	13			63			581			77
Net (charge offs) recoveries	(1,299		)	(2,114		)	(4,743		)	(4,817		)
Ending balance, September 30,	$	24,212		$	22,444		$	24,212		$	22,444

An analysis of the allowance for loan losses based on loan type, or segment, and the Company’s loan portfolio, which identifies certain loans that are evaluated for individual or collective impairment, as of September 30, 2011 and December 31, 2010, are below:

Allowance for Loan Losses

For the Three Months Ended September 30, 2011

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction		Real Estate - Residential		Home Equity Lines			Consumer			Total
Allowance for loan losses:
Beginning Balance, July 1, 2011	$	3,190		$	10,577		$	5,728	$	1,860	$	1,197		$	74		$	22,626
Charge-offs	(400		)	(778		)	—		—		(134		)	—			(1,312		)
Recoveries	3			—			—		2		8			—			13
Provision for loan losses	971			1,485			295		5		131			(2		)	2,885
Ending Balance, September 30, 2011	$	3,764		$	11,284		$	6,023	$	1,867	$	1,202		$	72		$	24,212

19

Allowance for Loan Losses

For the Nine Months Ended September 30, 2011

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction			Real Estate - Residential			Home Equity Lines			Consumer			Total
Allowance for loan losses:
Beginning Balance, January 1	$	2,941		$	10,558		$	7,593		$	1,875		$	1,175		$	68		$	24,210
Charge-offs	(517		)	(3,177		)	(1,098		)	(120		)	(393		)	(19		)	(5,324		)
Recoveries	123			—			153			294			11			—			581
Provision for loan losses	1,217			3,903			(625		)	(182		)	409			23			4,745
Ending Balance, September 30, 2011	$	3,764		$	11,284		$	6,023		$	1,867		$	1,202		$	72		$	24,212
Ending Balance, September 30, 2011:
Individually evaluated for impairment	$	156		$	—		$	1,500		$	—		$	—		$	—		$	1,656
Collectively evaluated for impairment	3,608			11,284			4,523			1,867			1,202			72			22,556

Loans Receivable

At September 30, 2011

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Loans Receivable:
Ending Balance, September 30, 2011	$	217,984	$	702,920	$	251,241	$	220,360	$	122,192	$	3,213	$	1,517,910
Ending Balance, September 30, 2011:
Individually evaluated for impairment	$	7,057	$	6,926	$	11,324	$	559	$	—	$	—	$	25,866
Collectively evaluated for impairment	210,927		695,994		239,917		219,801		122,192		3,213		1,492,044

20

Allowance for Loan Losses

At December 31, 2010

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Allowance for loan losses:
Ending Balance, December 31, 2010	$	2,941	$	10,558	$	7,593	$	1,875	$	1,175	$	68	$	24,210
Ending Balance, December 31, 2010:
Individually evaluated for impairment	$	162	$	418	$	3,550	$	—	$	—	$	—	$	4,130
Collectively evaluated for impairment	2,779		10,140		4,043		1,875		1,175		68		20,080

Loans Receivable

At December 31, 2010

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Loans Receivable:
Ending Balance, December 31, 2010	$	200,384	$	631,292	$	240,007	$	217,130	$	119,403	$	3,042	$	1,411,258
Ending Balance, December 31, 2010:
Individually evaluated for impairment	$	4,142	$	13,955	$	16,494	$	845	$	49	$	—	$	35,485
Collectively evaluated for impairment	196,242		617,337		223,513		216,285		119,354		3,042		1,375,773

The accounting policy related to the allowance for loan losses is considered a critical accounting policy given the level of estimation, judgment and uncertainty in evaluating the levels of the allowance required for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment and uncertainty can be on the consolidated financial results.

The Company’s ongoing credit quality management process relies on a system of activities to assess and evaluate various factors that impact the estimation of the allowance for loan losses.  These factors include, but are not limited to; current economic conditions; loan concentrations, collateral adequacy and value; past loss experience for particular types of loans, size, composition and nature of loans; migration of loans through our loan rating methodology; trends in charge-offs and recoveries.  This process also contemplates a disciplined approach to managing and monitoring credit exposures to ensure that the structure and pricing of credit is always consistent with the Company’s assessment of risk.  The loan officer has frequent contact with the borrower and is a key player in the credit management process and must develop and diligently practice sound credit management skills and habits to ensure effectiveness.  Under the direction of our loan committee and the chief credit officer, the credit risk management function works with the loan officers and other groups within the Company to monitor our loan portfolio, maintain our watch list, and compile the analysis necessary to determine the allowance for loan losses.

Loans are added to the watch list when circumstances appear to warrant the inclusion of the relationship.  As a general rule, loans are added to the watch list when they are deemed to be problem assets.  Problem assets are defined as those that have been risk rated substandard or lower.   Successful problem asset management requires early recognition of deteriorating credits and timely corrective or risk management actions.  Generally, risk ratings are either approved or amended by the loan committee accordingly.  Problem loans are maintained on the watch list until the loan is either paid off or circumstances around the borrower’s situation improve to the point that the risk rating on the loan is adjusted upward.

21

In addition to internal activities, the Company also engages an external consultant on a quarterly basis to review the Company’s loan portfolio.  This external loan review function helps to ensure the soundness of the loan portfolio t hrough a third party review of existing exposures in the portfolio, supporting the commercial loan officers in the execution of its credit management responsibilities, and promoting and monitoring the adherence to the Company’s credit risk management standards.

The following tables report the Company’s nonaccrual and past due loans at September 30, 2011 and December 31, 2010.  In addition, the credit quality of the loan portfolio is provided as of September 30, 2011 and December 31, 2010.

Nonaccrual and Past Due Loans

At September 30, 2011

( In thousands)

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due (includes nonaccrual)		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	—	$	—	$	6,325	$	6,325	$	211,659	217,984		$	—	$	6,325
Real estate - commercial
Owner occupied	—		—		1,838		1,838		181,764		183,602		208		1,630
Non-owner occupied	—		—		—		—		519,318		519,318		—		—
Real estate - construction
Residential	—		—		—		—		30,406		30,406		—		—
Commercial	—		—		2,283		2,283		218,552		220,835		—		2,283
Real estate - residential
Single family	—		—		559		559		176,619		177,178		—		559
Multi-family	—		—		—		—		43,182		43,182		—		—
Home equity lines	48		—		—		48		122,144		122,192		—		—
Consumer
Installment	—		—		—		—		2,831		2,831		—		—
Credit cards	15		—		—		15		367		382		—		—
	$	63	$	—	$	11,005	$	11,068	$	1,506,842	$	1,517,910	$	208	$	10,797

22

Nonaccrual and Past Due Loans

At December 31, 2010

(In thousands)

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due (includes nonaccrual)		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	664	$	—	$	2,887	$	3,551	$	196,833	200,384		$	—	$	2,887
Real estate - commercial
Owner occupied	—		—		238		238		196,139		196,377		—		238
Non-owner occupied	—		—		—		—		434,915		434,915		—		—
Real estate - construction
Residential	715		—		—		715		60,020		60,735		—		—
Commercial	—		—		3,546		3,546		175,726		179,272		—		3,546
Real estate - residential
Single family	653		—		845		1,498		169,505		171,003		—		845
Multi-family	—		—		—		—		46,127		46,127		—		—
Home equity lines	99		—		49		148		119,255		119,403		49		—
Consumer
Installment	—		—		—		—		2,203		2,203		—		—
Credit cards	—		—		—		—		839		839		—		—
	$	2,131	$	—	$	7,565	$	9,696	$	1,401,562	$	1,411,258	$	49	$	7,516

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of September 30, 2011 and December 31, 2010, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

23

Impaired Loans

At September 30, 2011

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	6,534	$	6,807	$	—	$	101
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	6,926		7,779		—		432
Real estate - construction
Residential	—		—		—		—
Commercial	6,243		8,465		—		447
Real estate - residential
Single family	559		651		—		6
Multi-family	—		—		—		—
Home equity lines
With related allowance:
Commercial and industrial	$	523	$	520	$	156	$	24
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	5,081		5,051		1,500		214
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
By segment total:
Commercial and industrial	$	7,057	$	7,327	$	156	$	125
Real estate - commercial	6,926		7,779		—		432
Real estate - construction	11,324		13,516		1,500		661
Real estate - residential	559		651		—		6
Home equity lines	—		—		—		—
Total	$	25,866	$	29,273	$	1,656	$	1,224

24

Impaired Loans

At December 31, 2010

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	3,587	$	5,046	$	—	$	271
Real estate - commercial
Owner occupied	6,187		6,235		—		323
Non-owner occupied	4,038		4,038		—		250
Real estate - construction
Residential	1,800		1,800		—		124
Commercial	3,796		4,987		—		273
Real estate - residential
Single family	845		1,196		—		23
Multi-family	—		—		—		—
Home equity lines	49		49		—		—
With related allowance:
Commercial and industrial	$	555	$	555	$	162	$	33
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	3,730		3,730		418		192
Real estate - construction							—
Residential							—
Commercial	10,898		10,898		3,550		537
Real estate - residential							—
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
By segment total:
Commercial and industrial	$	4,142	$	5,601	$	162	$	304
Real estate - commercial	13,955		14,003		418		765
Real estate - construction	16,494		17,685		3,550		934
Real estate - residential	845		1,196		—		23
Home equity lines	49		49		—		—
Total	$	35,485	$	38,534	$	4,130	$	2,026

One of the most significant factors in assessing the credit quality of the Company’s loan portfolio is the risk rating.  The Company uses the following risk ratings to manage the credit quality of its loan portfolio: pass, substandard, doubtful and loss.  Substandard risk rated loans are those loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management.  Loans that have a risk rating of doubtful has all the weakness inherent in one graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable.  A loss loan is one that is considered uncollectible and will be charged-off immediately.  All other loans not rated substandard, doubtful or loss are considered to have a pass risk rating.  Substandard and doubtful risk rated loans are evaluated for impairment.  The following table presents a summary of the risk ratings by portfolio segment and class segment as of September 30, 2011 and December 31, 2010.

25

Internal Risk Rating Grades

At September 30, 2011

(In thousands)

	Pass		Substandard		Doubtful		Loss
Commercial and industrial	$	214,487	$	3,497	$	—	$	—
Real estate - commercial
Owner occupied	183,602		—		—		—
Non-owner occupied	508,832		5,504		4,982		—
Real estate - construction
Residential	30,406		—		—		—
Commercial	209,511		11,324		—		—
Real estate - residential
Single family	176,619		—		559		—
Multi-family	43,182		—		—		—
Home equity lines	122,192		—		—		—
Consumer
Installment	2,831		—		—		—
Credit cards	382		—		—		—
	$	1,492,044	$	20,325	$	5,541	$	—

26

Internal Risk Rating Grades

At December 31, 2010

(In thousands)

	Pass		Substandard		Doubtful		Loss
Commercial and industrial	$	196,242	$	4,142	$	—	$	—
Real estate - commercial
Owner occupied	190,190		6,187		—		—
Non-owner occupied	427,147		7,768		—		—
Real estate - construction
Residential	58,935		1,800		—		—
Commercial	164,578		14,694		—		—
Real estate - residential
Single family	170,158		—		845		—
Multi-family	46,127		—		—		—
Home equity lines	119,354		—		49		—
Consumer
Installment	839		—		—		—
Credit cards	2,203		—		—		—
	$	1,375,773	$	34,591	$	894	$	—

In the event that the Company modifies the provisions for a loan, it is general practice to enhance the collateral position and obtain additional guarantees from the borrowers.  The Company has not recognized any material incremental impairment in connection with the modification of any loans.

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 sale agreement are undesignated derivatives and marked to fair value through earnings.  The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates.  Realized and unrealized gains on mortgage banking activities presents the gain recognized for the period presented and associated with these elements of fair value.  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 commitment is designated as the hedging instrument.

At September 30, 2011, accumulated other comprehensive income included an unrealized loss, net of tax, of $395,000 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, all or substantially all of the amount recorded in accumulated other comprehensive income at September 30, 2011 which is related to the Company’s cash flow hedges will be recognized in earnings during the fourth quarter of 2011.

27

At September 30, 2011, the Company had $386.5 million in residential mortgage rate lock commitments and associated forward sales, and $478.5 million in forward loan sales associated with $552.8 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.  At September 30, 2011, accumulated other comprehensive income included an after-tax unrealized gain of $22,000 related to these interest rate swaps.  In addition, the Company has an interest rate swap to mitigate the variability in the fair value for one loan receivable.  For the nine months ended September 30, 2011 and 2010, the change in fair value recorded for this fair value hedge was a loss of $248,000 and a gain of $319,000, respectively.  The amount of ineffectiveness reflected in earnings was not significant in either period.

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, 2011 and December 31, 2010.  In addition, the gains and losses related to these derivative instruments is provided for the three and nine months ended September 30, 2011 and 2010.

Derivative Instruments and Hedging Activities

At September 30, 2011

(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	$	1,555
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	4,068		Accrued Interest Payable and Other Liabilities	5,170
Total Derivatives Designated as Hedging Instruments		4,068			6,725
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	13,916		Accrued Interest Payable and Other Liabilities	977
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	977		Accrued Interest Payable and Other Liabilities	412
Total Derivatives Not Designated as Hedging Instruments		14,893			1,389
Total Derivatives		$	18,961		$	8,114

28

Derivative Instruments and Hedging Activities

At December 31, 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	$	1,837
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,465		Accrued Interest Payable and Other Liabilities	2,441
Total Derivatives Designated as Hedging Instruments		1,465			4,278
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	2,951		Accrued Interest Payable and Other Liabilities	264
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	264		Accrued Interest Payable and Other Liabilities	77
Total Derivatives Not Designated as Hedging Instruments		3,215			341
Total Derivatives		$	4,680		$	4,619

29

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended September 30, 2011

(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			$	(97	)	Other Income		$	97
Total				$	(97	)			$	97
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	$	12		Other Income			$	—	Other Income		$	—
Forward Loan Sales Commitments	(1,043		)	Other Income			885		Other Income		—
Total	$	(1,031	)				$	885			$	—
	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Forward Loan Sales Commitments and Rate Lock Commitments	$	13,503		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(565		)	Other Income
Rate Lock Commitments	565			Other Income
Total	$	13,503

30

Impact of Derivative Instruments on the Statement of Income

For the Nine Months Ended September 30, 2011

(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			$	(248	)	Other Income			$	248
Total				$	(248	)				$	248
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	$	22		Other Income			$	—		Other Income		$	—
Forward Loan Sales Commitments	(395		)	Other Income			(1,378		)	Other Income		—
Total	$	(373	)				$	(1,378	)			$	—
	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Forward Loan Sales Commitments	$	22,425		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	252			Other Income
Rate Lock Commitments	(252		)	Other Income
Total	$	22,425

31

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		3,144		Other Income			1
Total	$	69				$	3,144				$	1
	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Forward Loan Sales Commitments and Rate Lock 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

32

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		939		Other Income			1
Total	$	(291	)			$	939				$	1
	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Forward Loan Sales Commitments and Rate Lock 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

Note 9

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at September 30, 2011 is as follows:

33

	Mortgage Banking
(In thousands)	Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2010	$	1,781	$	1,237
2011 activity:
Customer relationship intangibles	—		148
Balance at September 30, 2011	$	1,781	$	1,385

The aggregate amortization expense was $49,000 and $60,000 for the three months ended September 30, 2011 and 2010, respectively.    For the nine months ended September 30, 2011 and 2010, the aggregate amortization expense was $148,000 and $179,000, respectively.

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

(In thousands)
2011 (October – December)	$	49
2012	198
2013	149

The carrying amount of goodwill at September 30, 2011 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2010	$	24	$	10,120	$	10,144
No activity	—		—		—
Balance at September 30, 2011	$	24	$	10,120	$	10,144

Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.

The Company performs its annual recoverability assessment each September.  The Company adopted the provisions of Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (“ASU No. 2011-08”).  For purposes of performing the recoverability assessment, ASU No. 2011-08 requires an entity to assess all relevant events and circumstances in evaluating whether it is more likely than not that the fair value of the mortgage banking reporting unit is less than its carrying amount.  After evaluating all relevant facts and circumstances, the Company has determined that it is more likely than not that the fair value of the mortgage banking reporting unit exceeds its carrying value and no goodwill impairment is indicated.

34

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, 2011 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.

Commitments to extend credit of $592.5 million primarily have floating rates as of September 30, 2011.  At September 30, 2011, standby letters of credit were $32.8 million. Commitments to extend credit of $389.8 million as of September 30, 2011 are related to George Mason’s mortgage loan funding commitments and are of a short term nature.

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 amount, if any, 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. There was no reserve at September 30, 2011 and December 31, 2010.

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.

35

The Company was informed by letter July 1, 2011 that the U.S. Department of Justice (the “DOJ”) might initiate the filing of a complaint against Cardinal Bank and George Mason Mortgage, LLC alleging certain violations of the Fair Housing Act and the Equal Credit Opportunity Act.  The Company believes that its lending practices have complied with these laws.  The Company continues to cooperate fully with the DOJ in its investigation and has provided relevant information to resolve the issues. It is too early to assess whether the resolution of this matter will have an effect on the Company.

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 two other interest rate swap derivatives designated as 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

36

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 the investor.  To 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 the 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 months ended September 30, 2011.  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, 2011 and December 31, 2010 are shown below:

At September 30, 2011

(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	$	5,190	$	5,190	$	—	$	—
U.S. government- sponsored agencies	39,783		—		39,783		—
Mortgage-backed securities	207,058		—		207,058		—
Municipal securities	80,294		—		80,294		—
Total investment securities available-for-sale	332,325		5,190		327,135		—
Investment securities — trading	2,145		—		2,145		—
Loans receivable — designated for fair value hedge	12,602		—		12,602		—
Bank-owned life insurance	34,961		—		34,961		—
Derivative liability - interest rate swaps	1,555		—		1,555		—
Derivative asset - rate lock and forward loan sales commitments	17,984		—		17,984		—
Derivative asset — interest rate lock commitments	977		—		977		—
Derivative liability - rate lock and forward loan sales commitments	6,147		—		6,147		—
Derivative liability — interest rate lock commitments	412		—		412		—

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At December 31, 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	$	5,114	$	5,114	$	—	$	—
U.S. government- sponsored agencies	32,119		—		32,119		—
Mortgage-backed securities	219,482		—		219,482		—
Municipal securities	64,283		—		64,283		—
Total investment securities available-for-sale	320,998		5,114		315,884		—
Investment securities — trading	2,107		—		2,107		—
Loan receivable - designated for fair value hedge	13,004		—		13,004		—
Bank-owned life insurance	34,358		—		34,358		—
Derivative liability - interest rate swaps	1,837		—		1,837		—
Derivative asset - rate lock and forward loan sales commitments	4,416		—		4,416		—
Derivative asset — interest rate lock commitments	264		—		264		—
Derivative liability - rate lock and forward loan sales commitments	2,705		—		2,705		—
Derivative liability — interest rate lock commitments	77		—		77		—

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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, loans receivable — evaluated for impairment and other real estate owned.

At September 30, 2011

(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)
Corporate bonds	$	3,452	$	—	$	—	$	3,452
Loans receivable — evaluated for impairment	$	24,210	—		9,603		14,607
Other real estate owned	3,957		—		719		3,238

At December 31, 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	$	27,490	$	—	$	—	$	27,490
Corporate bonds	3,197		—		—		3,197
Loans receivable — evaluated for impairment	31,355		—		12,942		18,413
Other real estate owned	1,250		—		1,250		—

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The Company’s held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at September 30, 2011 (each security has a par value of $2.0 million).  The collateral underlying these structured securities are instruments issued by financial institutions or insurers.  The Company owns the A-3 tranches in each issuance.  Observable trading activity remains limited 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 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 adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

The Company’s loans receivable — evaluated for impairment 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 loans receivable — evaluated for impairment 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.  Loans receivable — evaluated for impairment and other real estate owned are valued using third party appraisal data that is based on market comparisons and may be subject to further adjustment for certain non-observable criteria.

Loans receivable — evaluated for impairment that are measured at fair value using Level 3 inputs on a nonrecurring basis total $14.6 million at September 30, 2011.  The total amount for each period presented represents the entire population of loans receivable — evaluated for impairment, and of this amount, $14.6 million was determined to be impaired and recorded at fair value.  Collateral is in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The vast majority of the Company’s collateral is real estate.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2).  However, in certain instances, the Company applies a discount to the valuation of the collateral if the collateral being evaluated is in process of construction or a residence.  In addition, the Company considers past experience of actual sales of collateral and may further discount the appraisal of the collateral being evaluated.  This is considered a Level 3 valuation.  The value of business equipment is based upon the net book value on the applicable business’s financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).  Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.  At September 30, 2011, the Company’s Level 3 loans consisted of four relationships, secured primarily by commercial real estate of $11.0 million with a valuation allowance of $1.5 million; one relationship, secured by accounts receivable, inventory, equipment and commercial real estate of $2.8 million which did not have a valuation allowance; and two relationships, primarily secured by residential real estate of $789,000 which had a valuation allowance of $114,000.

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.

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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 appropriate 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.

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, 2011 and December 31, 2010:

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	September 30, 2011
	Carrying		Estimated
(In thousands)	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	35,890	35,890
Investment securities held-to-maturity and other investments	21,966		22,297
Loans held for sale	552,838		552,838
Loans receivable, net	1,476,818		1,514,289
Accrued interest receivable	6,738		6,738
Financial liabilities:
Demand deposits	$	264,857	264,857
Interest checking	134,167		134,167
Money market and statement savings	391,731		391,731
Certificates of deposit	1,005,623		1,018,166
Other borrowed funds	419,546		446,679
Accrued interest payable	1,871		1,871

	December 31, 2010
	Carrying		Estimated
(In thousands)	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	25,868	$	25,868
Investment securities held-to-maturity and other investments	30,344		30,999
Loans held for sale	206,047		206,047
Loans receivable, net	1,360,813		1,384,836
Accrued interest receivable	6,699		6,699
Financial liabilities:
Demand deposits	$	229,575	$	229,575
Interest checking	135,395		135,395
Money market and statement savings	379,320		379,320
Certificates of deposit	659,435		668,247
Other borrowed funds	389,586		416,396
Accrued interest payable	1,415		1,415

Note 12

Loss on Extinguishment of Debt

During the first quarter of 2011, the Company extinguished $15.0 million in Federal Home Loan Bank (“FHLB”) advances which had an average cost of 2.81%, or $422,000 annually.  As part of the prepayment arrangement with the FHLB, the Company paid a one-time penalty of $450,000 during the first quarter of 2011 related to these advances.  During the third quarter of 2011, the Company extinguished $40.0 million in FHLB advances with an average cost of 2.89%, or $1.2 million. These advances were to mature in 24 to 36 months.  The Company incurred a prepayment penalty of $1.8 million as a result of this transaction.

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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, 2011 and December 31, 2010 and the unaudited results of our operations for the three and nine months ended September 30, 2011 and 2010. 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, 2010.

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;

·the possibility of the Department of Justice filing a complaint against Cardinal Bank and George Mason Mortgage, LLC alleging certain violations of the Fair Housing Act and the Equal Credit Opportunity Act and the impact a resolution to this matter will have on our business, operations or financial condition;

·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 losses, specifically in our pooled trust preferred securities portfolio resulting from increases in underlying issuers’ defaulting or deferring payments.

·changes in operations of wealth management and trust services segment, its customer base and assets under management;

·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;

·legislative and regulatory changes, including the Dodd Frank Wall Street Reform and

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Consumer Protection Act (the “Financial Reform Act”), and other 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;

·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;

·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;

·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 I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

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 27 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.

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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”), collectively the “mortgage banking” segment; and 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, collectively the “wealth management and trust services” segment.

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

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and trends in delinquencies and nonaccrual loans, national and local economic trends and conditions and concentrations of loans exhibiting similar risk profiles to support our estimates.

For purposes of our analysis, we categorize our loans into one of five categories:  commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer loans. In the absence of meaningful historical loss factors, peer group loss factors are applied and are adjusted by the qualitative factors mentioned above. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans. In addition, we individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. Since we have limited historical data on which to base loss factors for classified loans, we typically apply, in accordance with regulatory guidelines, a 5% loss factor to loans classified as special mention, a 15% loss factor to loans classified as substandard and a 50% loss factor to loans classified as doubtful. Loans classified as loss loans are fully reserved or charged off.  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 on a discounted basis.  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 appropriate, 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,

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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.

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. Exclusive of the fair value elements of the rate lock commitment related to servicing and the wholesale and retail rate spread, the changes in fair value related to movements in market rates of the rate lock commitments and the 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.

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Accounting for Impairment Testing of Goodwill

During the third quarter of 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment.  This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. We elected to early adopt this standard as of September 30, 2011.  We perform our annual review of the goodwill related to our mortgage banking segment during the third quarter.  After evaluating all relevant facts and circumstances, we determined that it is more likely than not that the fair value of the mortgage banking reporting unit exceeds its carrying value and no goodwill impairment is indicated.

In the event we are required to perform a step 1 fair value evaluation 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 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

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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 April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  This amendment clarifies the guidance on the evaluation made by a creditor on whether a restructuring constitutes a troubled debt restructuring.  It clarifies the guidance related to a creditor’s evaluation of whether it has granted a concession to a debtor and also clarifies the guidance on a creditor’s evaluation of whether the debtor is experiencing financial difficulties.  The amendment is effective for public entities for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The disclosures required which were deferred by ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, is effective for interim and annual period beginning on or after June 15, 2011.  We have adopted this standard and it did not have a material impact on our consolidated financial condition or results of operations.

The FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  This ASU was issued concurrently with IFRS 13, Fair Value Measurements, to provide largely identical guidance about fair value measurement and disclosure requirements.  The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP.  For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.  A public entity is required to apply the ASU prospectively for interim and annual periods after December 15, 2011.  Early adoption is not permitted for a public entity.  In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying the ASU and to quantify the total effect, if practical.  The adoption of this standard will not have a material impact on our consolidated financial condition or results of operations.

During the third quarter of 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment.  This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. We elected to early adopt this standard as of September 30, 2011.  We perform our annual review of the goodwill related to our mortgage banking segment during the third quarter.  After evaluating all relevant facts and circumstances, we determined that it is more likely than not that the fair value of the mortgage banking reporting unit exceeds its carrying value and no goodwill impairment is indicated.

2011 Economic Environment

Although economic conditions remain unsettled, the metropolitan Washington, D.C. area, the region we operate in, continues to perform relatively well as compared to other geographic

49

regions.  Our credit quality continues to remain strong despite the challenging economic environment.  At September 30, 2011, we have non-accrual loans totaling $10.8 million and $208,000 in loans contractually past due 90 days or more as to principal or interest and still accruing.  Annualized net charge-offs were 0.44% of our average loans receivable for the nine months ended September 30, 2011. Due to continued low mortgage loan rates, originations from our mortgage banking segment for the third quarter of 2011 have surpassed originations for the first six months of 2011.

Market illiquidity continues to impact certain portions of our investment securities portfolio, specifically the ratings of certain corporate bonds. We hold investments of $8.0 million in par value of pooled trust preferred securities, which are significantly below book value as of September 30, 2011 due to the lack of liquidity in the market, deferrals and defaults of issuers, and investor apprehension for investing in these types of investments.

We expect challenging economic and operating conditions and an evolving regulatory regime 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 2011 and into 2012. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

While we continue to experience loan growth, 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 regulate the financial services industry, stabilize the housing markets and stimulate the economy.  In July 2010, the Financial Reform Act was signed into law.  Many of the regulations implementing the Financial Reform Act have not been finalized, so we remain unsure of the full impact this legislation will have on our business, operations or our financial condition.

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Statements of Income

General

For the three months ended September 30, 2011 and 2010, we reported net income of $8.6 million and $5.9 million, respectively, an increase of $2.7 million, or 46%.  Net interest income after the provision for loan losses increased $2.5 million to $17.2 million for the three months ended September 30, 2011 compared to $14.7 million for the three months ended September 30, 2010.  Provision for loan losses for the three months ended September 30, 2011 was $2.9 million, a decrease of $615,000, compared to $3.5 million for the same period of 2010.  The decrease in our provision expense was primarily related to a decrease in our watch list credits and recoveries recorded during the third quarter of 2011 compared to the same period of 2010.  Noninterest income for the three months ended September 30, 2011 and 2010 was $15.0 million and $9.3 million, respectively, an increase of $5.7 million.  The increase in noninterest income is mostly attributable to the increase in realized and unrealized gains on mortgage banking activities, a result of our increased origination activity year over year.  For the three months ended September 30, 2011, noninterest expense increased to $18.9 million, compared to $15.4 million for the same period of 2010.  The increase in noninterest expense is attributable to losses on extinguishment of debt of $1.8 million during the third quarter of 2011 and a reversal of accruals related to mortgage loan repurchases and settlements of $1.1 million during the third quarter of 2010.

For the three months ended September 30, 2011, basic and diluted earnings per common share were each $0.29.  Basic and diluted earnings per common share for the three months ended September 30, 2010 were each $0.20.  Weighted average fully diluted shares outstanding for the three months ended September 30, 2011 and 2010 were 29,871,668 and 29,639,114, respectively.

Return on average assets for the three months ended September 30, 2011 and 2010 was 1.56% and 1.16%, respectively. Return on average equity for the three months ended September 30, 2011 and 2010 was 14.03% and 10.56%, respectively.

Net income for the nine months ended September 30, 2011 and 2010 was $19.8 million and $14.4 million, respectively, an increase of $5.3 million, or 37%.  Net interest income after provision for loan losses for the nine months ended September 30, 2011 increased $9.7 million to $51.7 million, compared to $42.0 million for the same nine month period of 2010.  The increase in net interest income after provision for loan losses is related to our increase in net interest income for the periods presented in addition to a decrease in provision for loan losses.  Net interest income increased to $55.4 million for the nine months ended September 30, 2011, compared to $50.6 million for the nine months ended September 30, 2010.  Provision for loan losses for the nine months ended September 30, 2011 and 2010 were $4.7 million and $8.6 million, respectively, a decrease of $3.9 million.  Noninterest income increased $5.8 to $27.7 million for the nine months ended September 30, 2011, compared to $21.9 million for the same period of 2010.  Noninterest expense was $49.4 million for the nine months ended September 30, 2011, an increase of $6.8 million compared to $42.6 million for the nine months ended September 30, 2010.

For the nine months ended September 30, 2011, basic and diluted income per common share were $0.67 and $0.66, respectively.  Basic and diluted earnings per common share for the nine months ended September 30, 2010 were $0.50 and $0.49, respectively.  Weighted average fully diluted shares outstanding for the nine months ended September 30, 2011 and 2010 were 29,847,607 and 29,582,342, respectively.

Return on average assets for the nine months ended September 30, 2011 and 2010 was 1.19% and 0.95%, respectively. Return on average equity for the nine months ended September 30, 2011 and 2010 was 10.66% and 8.59%, respectively.

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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, 2011 was $3.5 million compared to net income of $3.7 million for the three months ended September 30, 2010.  Net interest income increased $1.8 million to $19.6 million for the three months ended September 30, 2011, compared to $17.7 million for the same period of 2010.  Provision for loan losses decreased $615,000 to $2.9 million for the three months ended September 30, 2011 compared to $3.5 million for the same period of 2010. The decrease in our provision expense was primarily related to a decrease in our watch list credits and charge-offs recorded during the third quarter of 2011.  Noninterest income increased to $1.3 million for the three months ended September 30, 2011 compared to $1.0 million for the three months ended September 30, 2010.  Noninterest expense was $12.7 million for the three months ended September 30, 2011, compared to $10.1 million for the same period of 2010.  The increase in noninterest expense for the third quarter of 2011 as compared to the same period of 2010 is primarily due to the losses recorded for FHLB advance extinguishments of $1.8 million in addition to expenses related to an increase in business development staff at the Bank.

For the nine months ended September 30, 2011, net income attributable to the commercial banking segment was $14.6 million, an increase of $3.6 million from $11.0 million for the same nine month period of 2010.  The increase in net income is attributable to the increase in our net interest income for the periods presented.  Net interest income increased $5.9 million to $55.3 million for the nine months ended September 30, 2011, compared to $49.5 million for the nine months ended September 30, 2010.  Provision for loan losses decreased $3.9 million to $4.7 million for the nine months ended September 30, 2011, again as a result of the current economic and market conditions.  Noninterest income for the nine months ended September 30, 2011 and 2010 was $3.8 million and $3.2 million, respectively.  Noninterest expense increased to $32.6 million from $28.1 million for the nine months ended September 30, 2011 compared to the same period of 2010. The increase in noninterest expense for 2011 as compared to 2010 is primarily due to expenses related to additions to our business development staff at the Bank and expenses related to marketing and branch expansion.  We have also recorded losses related to debt extinguishments of $2.3 million for the nine months ended September 30, 2011 compared to none for the same period of 2010.

The mortgage banking segment reported net income of $5.7 million for the three months ended September 30, 2011 compared to net income of $3.6 million for the three months ended September 30, 2010.  For the nine months ended September 30, 2011, net income was $7.6 million, an increase of $1.5 million compared to $6.0 million for the nine months ended September 30, 2010.  The increase in net income for the mortgage banking segment for the three and nine months ended September 30, 2011 compared to the same period of 2010 is primarily related to office expansion and increases in loan origination officers and staff over the past year.  In addition, during the third quarter of 2011, our market experienced a refinance boom as a result of the low interest rate environment.  As a result, we originated over $1.9 billion in loans during the third quarter of 2011, more than what we originated during the first six months of 2011.

The wealth management and trust services segment, which includes CWS, Wilson/Bennett and the trust division of the Bank, recorded net income of $20,000 for the three months ended September 30, 2011, compared to net income of $92,000 for the three months ended September 30, 2010.  For the nine months ended September 30, 2011, this business

52

segment recorded net loss of $113,000 compared to a net loss of $4,000 for the same period in 2010. The decrease in net year-to-date income during 2011 is primarily attributable to our renegotiation of a service agreement with a trust customer.

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, 2011 and 2010 was $20.1 million and $18.2 million, respectively, a period-to-period increase of $1.9 million, or 11%.  For the nine months ended September 30, 2011, our net interest income was $56.4 million, compared to $50.6 million for the same period in 2010, an increase of $5.8 million, or 12%.  The yields on our loans receivable portfolio decreased marginally for the three and nine months ended September 30, 2011 compared to the same period of 2010.  During 2011, we continued to decrease our overall funding costs by lowering the interest rates on our deposit liabilities and extending the near term maturities on $95 million of our FHLB advances for an average cost savings of 0.99% annually on those borrowings.  We further decreased our funding costs on our FHLB advances by prepaying $40 million during the third quarter of 2011 saving approximately 0.40% annually in interest expense.

Interest income on loans receivable increased $1.1 million for the three months ended September 30, 2011 compared to the same three month period of 2010. For the nine months ended September 30, 2011, interest income on loans receivable increased $3.1 million as compared to the nine months ended September 30, 2010.  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 was $2.9 million and $2.8 million for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 interest income from loans held for sale increased to $6.0 million compared to $6.1 million for the nine months ended September 30, 2010.

Interest income on investment securities increased $164,000 for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.  For the nine months ended September 30, 2011, interest income on investment securities decreased $467,000.  The year-to-date decrease in interest income on investment securities is due to the decreased yield of the portfolio for the three and nine months ended September 30, 2011 compared to the same period of 2010.  Because of the current low interest rate environment, new purchases of investment securities are at lower rates which are contributing to the decrease in the yield in the portfolio.

Total interest expense has decreased $641,000 for the three months ended September 30, 2011 as compared to the same period of 2010.  For the nine months ended September 30, 2011, total interest expense decreased $3.1 million as compared to the same nine month period in 2010.  The decrease in total interest expense is mostly related to the reductions in the interest rates we pay on our interest and money market checking and savings deposit accounts given the current low interest rate environment.  In addition, our certificates of deposit are repricing at lower interest rates.  During the first quarter of 2011, we implemented two cost of funds reduction strategies related to our FHLB advances.  Approximately $95 million of these advances with near term maturities were extended by an average maturity of 2.9 years.  We are now paying an average 3.22% on these borrowings, a yield reduction of 0.99%, equating to approximately

53

$940,000 in interest expense annually.  As part of the prepayment arrangement with the FHLB, we paid a one-time penalty of $450,000 during the first quarter of 2011 related to these advances.  We further decreased future interest expense related to FHLB advances by prepaying $40.0 million in advances during the third quarter of 2011.  This will save an additional 0.40% in interest expense annually.  As a result of this prepayment, we recorded a loss on the extinguishment of this debt totaling $1.8 million.

Our net interest margin, on a tax-equivalent basis, which equals net interest income divided by average interest earning assets, was 3.86% and 3.82% for the three months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011 and 2010, net interest margin was 3.79% and 3.65%, respectively.  The increase in our net interest margin is 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.

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

Three Months Ended September 30, 2011, 2010 and 2009

(In thousands)

	2011							2010							2009
				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	$	210,912		$	2,300	4.34	%	$	162,810		$	1,904	4.67	%	$	148,446		$	1,781	4.80	%
Real estate - commercial	674,589			10,003		5.91	%	609,800			9,812		6.40	%	567,150			8,893		6.27	%
Real estate - construction	249,600			3,515		5.63	%	203,948			2,959		5.80	%	178,585			2,251		5.04	%
Real estate - residential	222,814			2,729		4.90	%	230,707			2,935		5.09	%	201,500			2,596		5.15	%
Home equity lines	122,350			1,144		3.71	%	120,709			1,065		3.50	%	114,414			1,033		3.58	%
Consumer	3,127			43		5.58	%	2,611			39		5.93	%	2,815			42		5.92	%
Total loans	1,483,392			19,734		5.33	%	1,330,585			18,714		5.63	%	1,212,910			16,596		5.47	%
Loans held for sale	242,309			2,851		4.71	%	243,064			2,808		4.62	%	131,417			1,630		4.96	%
Investment securities available-for-sale	319,890			3,522		4.40	%	290,903			3,206		4.41	%	286,835			3,384		4.72	%
Investment securities held-to-maturity	14,626			92		2.50	%	25,495			206		3.23	%	39,347			354		3.60	%
Other investments	15,714			30		0.76	%	15,728			17		0.44	%	15,728			33		0.84	%
Federal funds sold	28,382			15		0.22	%	19,810			11		0.22	%	91,776			57		0.25	%
Total interest-earning assets and interest income (2)	2,104,313			26,244		4.99	%	1,925,585			24,962		5.19	%	1,778,013			22,054		4.96	%
Noninterest earning assets:
Cash and due from banks	14,607							12,348							1,213
Premises and equipment, net	18,197							17,079							15,723
Goodwill and other intangibles, net	10,571							13,343							14,025
Accrued interest and other assets	89,665							86,113							59,613
Allowance for loan losses	(24,148		)					(22,181		)					(16,692		)
Total assets	$	2,213,205						$	2,032,287						$	1,851,895
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	$	137,063		66		0.19	%	131,355			85		0.26	%	120,990			282		0.92	%
Money markets	169,717			174		0.41	%	113,375			145		0.51	%	54,539			113		0.82	%
Statement savings	231,963			213		0.36	%	268,665			276		0.41	%	314,226			967		1.22	%
Certificates of deposit	781,319			2,918		1.48	%	671,236			3,066		1.81	%	631,746			4,348		2.73	%
Total interest - bearing deposits	1,320,062			3,371		1.01	%	1,184,631			3,572		1.20	%	1,121,501			5,710		2.02	%
Other borrowed funds	357,759			2,577		2.86	%	389,969			3,017		3.07	%	362,391			3,121		3.42	%
Total interest-bearing liabilities and interest expense	1,677,821			5,948		1.41	%	1,574,600			6,589		1.66	%	1,483,892			8,831		2.36	%
Noninterest-bearing liabilities:
Demand deposits	261,911							208,391							150,336
Other liabilities	27,505							25,698							17,280
Common shareholders’ equity	245,968							223,598							200,387
Total liabilities and shareholders’ equity	$	2,213,205						$	2,032,287						$	1,851,895
Net interest income and net interest margin (2)				$	20,296	3.86	%				$	18,373	3.82	%				$	13,223	2.97	%

(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 33% for 2011, 32% for 2010 and 2009.

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Rate and Volume Analysis

Three Months Ended September 30, 2011, 2010 and 2009

(In thousands)

	2011 Compared to 2010									2010 Compared to 2009
	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	$	569		$	(173	)	$	396		$	205		$	(82	)	$	123
Real estate - commercial	1,009			(818		)	191			669			250			919
Real estate - construction	662			(106		)	556			320			388			708
Real estate - residential	(100		)	(106		)	(206		)	376			(37		)	339
Home equity lines	15			64			79			57			(25		)	32
Consumer	7			(3		)	4			(3		)	0			(3		)
Total loans	2,162			(1,142		)	1,020			1,624			494			2,118
Loans held for sale	(9		)	52			43			1,385			(207		)	1,178
Investment securities available-for-sale	319			(3		)	316			48			(226		)	(178		)
Investment securities held-to-maturity	(87		)	(27		)	(114		)	(125		)	(23		)	(148		)
Other investments	(0		)	13			13			—			(16		)	(16		)
Federal funds sold	4			(0		)	4			(45		)	(1		)	(46		)
Total interest income (2)	2,389			(1,107		)	1,282			2,887			21			2,908
Interest expense:
Interest - bearing deposits:
Interest checking	4			(23		)	(19		)	24			(221		)	(197		)
Money markets	72			(43		)	29			122			(90		)	32
Statement savings	(32		)	(31		)	(63		)	(140		)	(551		)	(691		)
Certificates of deposit	502			(650		)	(148		)	272			(1,554		)	(1,282		)
Total interest - bearing deposits	546			(747		)	(201		)	278			(2,416		)	(2,138		)
Other borrowed funds	(249		)	(191		)	(440		)	238			(342		)	(104		)
Total interest expense	297			(938		)	(641		)	516			(2,758		)	(2,242		)
Net interest income (2)	$	2,092		$	(169	)	$	1,923		$	2,371		$	2,779		$	5,150

(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 33% for 2011, 32% for 2010 and 2009.

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

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

Nine Months Ended September 30, 2011, 2010 and 2009

(In thousands)

	2011							2010							2009
				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	$	195,482		$	6,521	4.43	%	$	160,116		$	5,580	4.65	%	$	158,966		$	5,721	4.80	%
Real estate - commercial	648,786			29,198		5.97	%	606,537			28,428		6.21	%	531,923			24,984		6.26	%
Real estate - construction	245,370			10,152		5.52	%	197,108			8,315		5.62	%	177,728			6,095		4.57	%
Real estate - residential	216,742			8,234		5.06	%	227,272			8,819		5.17	%	202,133			8,094		5.34	%
Home equity lines	122,337			3,394		3.71	%	119,248			3,233		3.62	%	109,935			3,003		3.65	%
Consumer	3,103			124		5.34	%	2,634			114		5.79	%	2,586			118		6.05	%
Total loans	1,431,820			57,623		5.36	%	1,312,915			54,489		5.53	%	1,183,271			48,015		5.41	%
Loans held for sale	172,927			6,045		4.66	%	167,947			6,070		4.82	%	168,428			5,651		4.47	%
Investment securities available-for-sale	328,911			10,856		4.40	%	317,195			10,797		4.54	%	239,301			8,905		4.96	%
Investment securities held-to-maturity	17,090			354		2.76	%	30,400			759		3.33	%	44,351			1,258		3.78	%
Other investments	15,721			93		0.78	%	15,728			38		0.32	%	15,697			13		0.11	%
Federal funds sold	41,752			72		0.23	%	22,304			39		0.23	%	57,563			102		0.24	%
Total interest-earning assets and interest income (2)	2,008,221			75,043		4.98	%	1,866,489			72,192		5.16	%	1,708,611			63,944		4.99	%
Noninterest earning assets:
Cash and due from banks	14,513							12,719							$	1,026
Premises and equipment, net	17,487							16,256							15,977
Goodwill and other intangibles, net	10,618							13,699							14,090
Accrued interest and other assets	84,028							80,676							59,401
Allowance for loan losses	(24,485		)					(20,289		)					(15,725		)
Total assets	$	2,110,382						$	1,969,550						$	1,783,380
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	134,838			192		0.19	%	133,166			403		0.40	%	121,062			960		1.06	%
Money markets	162,009			500		0.41	%	98,749			444		0.60	%	49,504			397		1.07	%
Statement savings	242,824			659		0.36	%	277,845			1,191		0.57	%	286,180			3,255		1.52	%
Certificates of deposit	698,683			8,754		1.68	%	656,142			9,971		2.03	%	619,158			13,902		3.00	%
Total interest - bearing deposits	1,238,354			10,105		1.09	%	1,165,902			12,009		1.38	%	1,075,904			18,514		2.30	%
Other borrowed funds	363,901			7,821		2.87	%	376,443			9,051		3.21	%	363,422			9,383		3.45	%
Total interest-bearing liabilities and interest expense	1,602,255			17,926		1.50	%	1,542,345			21,060		1.83	%	1,439,326			27,897		2.59	%
Noninterest-bearing liabilities:
Demand deposits	245,915							189,865							144,233
Other liabilities	25,539							22,730							19,780
Common shareholders’ equity	236,673							214,610							180,041
Total liabilities and shareholders’ equity	$	2,110,382						$	1,969,550						$	1,783,380
Net interest income and net interest margin (2)				$	57,117	3.79	%				$	51,132	3.65	%				$	36,047	2.81	%

(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 33% for 2011, 32% for 2010 and 2009.

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Rate and Volume Analysis

Nine Months Ended September 30, 2011, 2010 and 2009

(In thousands)

	2011 Compared to 2010									2010 Compared to 2009
	Change Due to									Change Due to
	Average			Average			Increase			Average			Average			Increase
	Volume (3)			Rate			(Decrease)			Volume (3)			Rate			(Decrease)
Interest income:
Loans (1):
Commercial and industrial	$	1,262		$	(321	)	$	941		$	161		$	(302	)	$	(141	)
Real estate - commercial	1,932			(1,162		)	770			3,505			(61		)	3,444
Real estate - construction	2,036			(199		)	1,837			665			1,555			2,220
Real estate - residential	(393		)	(192		)	(585		)	1,007			(282		)	725
Home equity lines	84			77			161			254			(24		)	230
Consumer	21			(11		)	10			1			(5		)	(4		)
Total loans	4,942			(1,808		)	3,134			5,593			881			6,474
Loans held for sale	180			(205		)	(25		)	(16		)	435			419
Investment securities available-for-sale	399			(340		)	59			2,899			(1,007		)	1,892
Investment securities held-to-maturity	(332		)	(73		)	(405		)	(396		)	(103		)	(499		)
Other investments	1			54			55			0			25			25
Federal funds sold	34			(1		)	33			(62		)	(1		)	(63		)
Total interest income (2)	5,224			(2,373		)	2,851			8,018			230			8,248
Interest expense:
Interest - bearing deposits:
Interest checking	5			(216		)	(211		)	96			(653		)	(557		)
Money markets	284			(228		)	56			395			(348		)	47
Statement savings	(150		)	(382		)	(532		)	(95		)	(1,969		)	(2,064		)
Certificates of deposit	646			(1,863		)	(1,217		)	829			(4,760		)	(3,931		)
Total interest - bearing deposits	785			(2,689		)	(1,904		)	1,225			(7,730		)	(6,505		)
Other borrowed funds	(302		)	(928		)	(1,230		)	336			(668		)	(332		)
Total interest expense	483			(3,617		)	(3,134		)	1,561			(8,398		)	(6,837		)
Net interest income (2)	$	4,741		$	1,244		$	5,985		$	6,457		$	8,628		$	15,085

(1) Non-accrual loans are included in average balances and do not have a material effect on the average yield.  Interest income on non-accruing loans was not material for the 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 33% for 2011, 32% for 2010 and 2009.

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

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Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2011 and 2010 was $2.9 million and $3.5 million, respectively. For the nine months ended September 30, 2011 and 2010, our provision for loan losses was $4.7 million and $8.6 million, respectively.  The decrease in our provision expense during 2011 compared to 2010 is a result of a decrease in our watch list credits, recoveries recorded during 2011 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 2011, we recorded charge-offs on four impaired commercial loans totaling $4.8 million.  Impairment was recognized during 2010 on two of these loans, and we placed them on nonaccrual status during the first quarter of 2011 because they had deteriorated further by falling significantly past-due.  Repayment of these two loans under their current agreements with the Bank became highly unlikely.  During the second quarter of 2011, a third impaired loan deteriorated further by becoming significantly past due with repayment under current terms unlikely.  This loan was placed on nonaccrual during the second quarter of 2011 and we charged-off $2.4 million at that time.  During the third quarter of 2011, a commercial real estate collateralized loan deteriorated as a result of falling significantly past due.  As a result of the borrower losing its ability to generate future income to repay the loan, we charged-off $1.2 million and placed the loan on nonaccrual.  The deterioration of these loans is based on isolated incidences with respect to these specific borrowers and we do not believe it is indicative of a broader deterioration of the overall credit quality of our loan portfolio.  Residential loans of $134,000 were charged off during the third quarter of 2011.  For the year-to-date 2011, residential loans totaling $513,000 were charged-off.  In addition, consumer loans totaling $19,000 were charged-off during 2011.  Recoveries from previously charged-off loans totaled $581,000 for the nine months ended September 30, 2011.  The majority of these recoveries were from previously charged-off residential loans. Nonperforming loans at September 30, 2011 and December 31, 2010, were $11.0 million and $7.6 million, respectively.

The allowance for loan losses was $24.2 million at September 30, 2011 and December 31, 2010. Our allowance for loan losses ratio to loans receivable, net was 1.60% and 1.72% at September 30, 2011 and December 31, 2010, respectively.  The

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decrease in our reserve ratio is a result of a modest improvement in the overall credit quality of our loan portfolio.

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, 2011, our commercial real estate (including construction lending) portfolio was 63% 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.

Allowance for Loan Losses

Three and Nine Months Ended September 30, 2011 and 2010

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Balance, beginning of the period	$	22,626		$	21,058		$	24,210		$	18,636
Provision for loan losses	2,885			3,500			4,745			8,625
Loans charged off:
Commercial and industrial	(1,178		)	(1,750		)	(4,792		)	(3,112		)
Residential	(134		)	(425		)	(513		)	(1,732		)
Consumer	—			(2		)	(19		)	(50		)
Total loans charged off	(1,312		)	(2,177		)	(5,324		)	(4,894		)
Recoveries:
Commercial and industrial	3			—			276			3
Residential	10			52			305			62
Consumer	—			11			—			12
Total recoveries	13			63			581			77
Net (charge offs) recoveries	(1,299		)	(2,114		)	(4,743		)	(4,817		)
Ending balance, June 30,	$	24,212		$	22,444		$	24,212		$	22,444

	September 30,			September 30,
	2011			2010
Loans:
Balance at period end	$	1,515,286		$	1,351,703
Allowance for loan losses to loans receivable, net of fees	1.60		%	1.66		%
Annualized net charge-offs to average loans receivable	0.44		%	0.49		%

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Allocation of the Allowance for Loan Losses

At September 30, 2011 and December 31, 2010

(In thousands)

	September 30,				December 31,
	2011				2010
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	3,764	14.36	%	$	2,941	14.20	%
Real estate - commercial	11,284		46.31	%	10,558		44.73	%
Real estate - construction	6,023		16.55	%	7,593		17.01	%
Real estate - residential	1,867		14.52	%	1,875		15.39	%
Home equity lines	1,202		8.05	%	1,175		8.46	%
Consumer	72		0.21	%	68		0.21	%
Total allowance for loan losses	$	24,212	100.00	%	$	24,210	100.00	%

* Percentage of loan type to the total loan portfolio.

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Nonperforming Loans

At September 30, 2011 and December 31, 2010

(In thousands)

	September 30,		December 31,
	2011		2010
Nonaccruing loans	$	10,797	$	7,516
Loans contractually past-due 90 days or more	208		49
Total nonperforming loans	$	11,005	$	7,565

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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, 2011 and 2010 was $15.0 million and $9.3 million, respectively.  Realized and unrealized gains on mortgage banking activities by our mortgage banking segment for the three months ended September 30, 2011 and 2010 were $11.3 million and $5.3 million, respectively, an increase of $6.0 million, or 113%.  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, 2011 and 2010, realized and unrealized gains on mortgage banking activities were $18.7 million and $11.9 million, respectively, an increase of $6.9 million, or 58%. The increase for both the three and nine month periods of 2011 compared to the same periods of 2010 are directly related to the substantial increase in loan origination and sales volume during 2011 compared to 2010, as mortgage rates declined to historic lows. We continue to invest resources in our mortgage business and have added over 30 loan origination officers during the last twelve months.

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, decreased $99,000 to $1.2 million for the three months ended September 30, 2011 as compared to $1.3 million for the three months ended September 30, 2010.  For the nine months ended September 30, 2011 and 2010, management fee income was $2.1 million and $2.7 million, respectively, a decrease of $538,000, or 20%.  During the first quarter of 2011, one of the managed companies ceased operating independently and was converted to a branch office of George Mason because of the increased regulatory requirements placed on mortgage companies.  The employees of this managed company are now employees of George

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Mason.  The income once earned from this managed company is now reflected in realized and unrealized gains on mortgage banking activities.

Investment fee income decreased $405,000 to $643,000 for the three months ended September 30, 2011 compared to $1.0 million for the same period of 2010. For the nine months ended September 30, 2011 and 2010, investment fee income was $1.9 million and $3.1 million, respectively.  The decrease in fee income is directly attributable to the renegotiation of our service contract with a trust customer.  We are currently repositioning our wealth management operations for future growth and less risk.

The increase in the cash surrender value of our bank-owned life insurance for the three and nine months ended September 30, 2011 was $216,000, and $603,000, respectively.  For the same three and nine month periods of 2010, income from bank-owned life insurance was $173,000 and $499,000, respectively.  The increase is directly related to increases in the underlying value of the investments.

For the three and nine months ended September 30, 2011, we recorded net gains on sales of investment securities available-for-sale of $411,000 and $1.2 million, respectively.  For the three and nine months ended September 30, 2010, we recorded net gains on sales of investments securities available-for-sale of $193,000 and $726,000, respectively.

Noninterest income represented 43% and 34% of our total revenues for the three months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011 and 2010, noninterest income as a percentage of our total revenues was 33% and 30%, respectively.

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, 2011 was $18.9 million, compared to $15.4 million for the same period of 2010, an increase of $3.6 million, or 23%.  For the nine months ended September 30, 2011 and 2010, respectively, noninterest expense was $49.4 million and $42.6 million, respectively.

For the quarter ended September 30, 2011, salaries and benefits expense decreased to $8.4 million down from $8.9 million for the quarter ended September 30, 2010.  The decrease in salaries and benefits expense for the three months September 30, 2011 compared to the same period of 2010 is primarily a result of our recording $801,000 during 2010 for the immediate vesting of our CEO’s supplemental retirement plan, a result of his new employment agreement.  For the nine months ended September 30, 2011 and 2010, salaries and benefits expense was $23.0 million and $21.8 million, respectively.  The increase in salaries and benefits expense for the nine months ended September 30, 2011 is mostly related to increases in our business development personnel at our commercial banking and mortgage banking segments.

Mortgage loan repurchases and settlements for the three months ended September 30, 2011 and 2010 were $170,000 and ($1.1 million) respectively.  The increase in mortgage loan repurchases and settlements during the third quarter of 2011 was a result of a settlement with one investor on a possible mortgage loan repurchase.  For the nine months ended September 30, 2011 and 2010, mortgage loan repurchases and settlements were $670,000 and $(686,000), respectively.  During the third quarter of 2010, we reversed our accruals related to mortgage loan

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repurchases and putbacks of $1.1 million, a result of our limiting exposure to loan repurchases through agreements entered into with various investors.

Professional fees were $1.5 million for the three months ended September 30, 2011, an increase of $896,000 when compared to the same period of 2010.  For the nine months ended September 30, 2011 and 2010, professional fees were $2.9 million and $1.6 million, respectively.  The increase in professional fees expense during 2011 as compared to 2010 is primarily attributable due to increased legal expenses related to the potential complaint by the Department of Justice.  We also incurred expenses earlier in 2011 for exploring the possibility of further growth of the Company through acquisitions.  However, until the potential complaint by the Department of Justice, which is more fully discussed in Part II, Item 1 of this report, is resolved, our ability to complete any potential acquisition may be limited.

For the three months ended September 30, 2011 and 2010, depreciation expense was $761,000 and $462,000, respectively.  For the nine months ended September 30, 2011 and 2010, depreciation expense was $2.0 million and $1.5 million, respectively.  The mortgage banking segment is currently implementing a new loan origination system, requiring the acceleration in depreciation on the incumbent system.

FDIC insurance premiums for the three and nine months ended September 30, 2011 were ($166,000) and $1.1 million, respectively.  For the three and nine months ended September 30, 2010, FDIC insurance premiums were $524,000 and $1.6 million, respectively.  Effective June 30, 2011, the FDIC changed the premium assessment calculation from a measure based on deposits to a measure based on net tangible assets.  This change results in a lower premium expense amount for us.  The expense recognized for the three months ending June 30, 2011 was calculated based on our deposit base, instead of net tangible assets.  Therefore, and for the three months ending September 30, 2011, it was necessary to reverse a portion of the expense recognized in the second fiscal quarter to reflect the proper amount of premium expense for the nine months ending September 30, 2011.  The amount of the expense based on net tangible assets for the three months ending September 30, 2011 was $267,000, and the amount of the expense reversal was $433,000.

During the third quarter of 2010, we recorded an impairment charge of $451,000 related to the annual impairment analysis of the goodwill associated with our Wilson/Bennett reporting unit.  No such analysis occurred during 2011 as we recorded an additional impairment during the fourth quarter of 2010, which resulted in an impairment charge of the remaining balance of goodwill and other intangible assets assigned to the Wilson/Bennett reporting unit.

During 2011, we extinguished a total of $55 million in FHLB advances to reduce our funding costs at the Bank.  As part of the arrangement with the FHLB, we paid a prepayment penalty of $1.8 million during the third quarter of 2011 and $2.3 million year-to-date 2011 to extinguish these borrowings prior to their maturity.  No such expense occurred during 2010.

Additional increases in noninterest expense are related to increases in marketing and business development expense.

Income Taxes

For the three months ended September 30, 2011, we recorded a provision for income taxes of $4.6 million, compared to $2.7 million for the same period of 2010.  Our effective tax rate for the three months ended September 30, 2011 and 2010 was 35.0% and 31.5%,

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respectively.  For the nine months ended September 30, 2011, we recorded a provision for income taxes of $10.3 million, compared to $6.9 million for the same period of 2010.  Our effective tax rate for the nine months ended September 30, 2011 and 2010 was 34.2% and 32.2%, respectively.  Our effective tax rate is less than the statutory rate because of income we receive on tax-exempt investments.  For both the quarter-to-date and year-to-date periods ended September 30, 2011, our effective tax rate has increased as a result of our tax-exempt income becoming a smaller portion of our overall net income.  See also “Critical Accounting Policies — Valuation of Deferred Tax Assets.”

Statements of Condition

Total assets were $2.55 billion and $2.07 billion at September 30, 2011 and December 31, 2010, respectively.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $348.0 million at September 30, 2011, compared to $345.0 million at December 31, 2010, an increase of $3.0 million. 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.  See the following table for additional information on our investment securities portfolio.

Investment Securities

At September 30, 2011 and December 31, 2010

(In thousands)

	Amortized		Fair		Average
Available-for-sale at September 30, 2011	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	5,266	$	5,899	3.92	%
Five to ten years	$	30,502	$	33,884	3.98	%
Total U.S. government-sponsored agencies	35,768		39,783		3.97	%
Mortgage-backed securities (1)
Five to ten years	14,213		15,020		4.19	%
After ten years	180,663		192,038		4.31	%
Total mortgage-backed securities	194,876		207,058		4.30	%
Tax exempt municipal securities (2)
Five to ten years	16,067		17,168		3.47	%
After ten years	55,213		58,358		4.03	%
Taxable municipal securities
Five to ten years	3,308		3,657		4.96	%
After ten years	996		1,111		5.10	%
Total municipal securities	75,584		80,294		3.97	%
U. S. treasury securities
One to five years	4,939		5,190		2.36	%
Total U.S. treasury securities	4,939		5,190		2.36	%
Total investment securities available-for-sale	$	311,167	$	332,325	4.15	%
	Amortized		Fair		Average
Held-to-maturity at September 30, 2011	Cost		Value		Yield
Mortgage-backed securities (1)
Five to ten years	1,840		1,956		4.67	%
After ten years	3,675		3,890		4.21	%
Total mortgage-backed securities	5,515		5,846		4.36	%
Corporate bonds
After ten years	8,003		3,452		1.33	%
Total corporate bonds	8,003		3,452		1.33	%
Total investment securities held-to-maturity	13,518		9,298		2.57	%
Total investment securities	$	324,685	$	341,623	4.09	%

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	Amortized		Fair		Average
Available-for-sale at December 31, 2010	Cost		Value		Yield
U.S. government-sponsored agencies
Five to ten years	$	30,941	$	32,119	3.95	%
Total U.S. government-sponsored agencies	30,941		32,119		3.95	%
Mortgage-backed securities (1)
One to five years	7		7		9.02	%
Five to ten years	21,976		22,997		4.24	%
After ten years	190,600		196,478		4.54	%
Total mortgage-backed securities	212,583		219,482		4.51	%
Tax exempt municipal securities (2)
Five to ten years	7,063		7,198		3.38	%
After ten years	52,907		52,776		3.98	%
Taxable municipal securities
Five to ten years	3,318		3,320		4.96	%
After ten years	996		989		5.10	%
Total municipal securities	64,284		64,283		3.73	%
U. S. treasury securities
One to five years	4,923		5,114		2.36	%
Total U.S. treasury securities	4,923		5,114		2.36	%
Total investment securities available-for-sale	$	312,731	$	320,998	4.26	%
	Amortized		Fair		Average
Held-to-maturity at December 31, 2010	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	351	$	368	4.14	%
Five to ten years	3,766		3,965		4.63	%
After ten years	9,758		10,203		4.12	%
Total mortgage-backed securities	13,875		14,536		4.26	%
Corporate bonds
After ten years	8,004		3,197		1.34	%
Total corporate bonds	8,004		3,197		1.34	%
Total investment securities held-to-maturity	21,879		17,733		3.19	%
Total investment securities	$	334,610	$	338,731	4.19	%

(1) Based on contractual maturities.

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

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We complete reviews for other-than-temporary impairment at least quarterly.  As of September 30, 2011, 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, 2011, 98% 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 $4.7 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, 2011, 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

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that the contractual cash flows will not be received when due.  We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of their amortized cost.

Our held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at September 30, 2011 (each security has a par value of $2.0 million).  These securities are presented as corporate bonds in the table above.  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.  One security has a composite rating of A, one security has a composite rating of A-, one of the securities has a composite rating of BB- and the other security has a composite rating of B-.  Observable trading activity remains limited 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.  We continuously monitor the financial condition of the underlying issues and the level of subordination below the A-3 tranches.  We also use 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 adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.  Significant judgment is involved in the evaluation of other-than-temporary impairment.  We do not intend to sell nor do we believe it is probable that we will be required to sell these corporate bonds prior to the recovery of our investment.

No other-than-temporary impairment has been recognized on the securities in our investment portfolio during 2011.

We hold $15.7 million in FHLB stock at September 30, 2011, which is included in other investments on the statement of condition.

Loans Receivable

Total loans receivable, net of deferred fees and costs, were $1.52 billion at September 30, 2011 and December 31, 2010.  See the following table for details on the loans receivable portfolio. Loans held for sale at September 30, 2011 were $552.8 million compared to $206.0 million at December 31, 2010.  The increase in our loans held for sale portfolio is a result of seasonal increased loan origination activity and increased refinance activity due to the historically low interest rate environment during the third quarter of 2011.  Loans held for sale are valued at the lower of cost or fair value.

Loans Receivable

At September 30, 2011 and December 31, 2010

(In thousands)

	September 30, 2011					December 31, 2010
Commercial and industrial	$	217,984		14.36	%	$	200,384		14.20	%
Real estate - commercial	702,920			46.31	%	631,292			44.73	%
Real estate - construction	251,241			16.55	%	240,007			17.01	%
Real estate - residential	220,360			14.52	%	217,130			15.39	%
Home equity lines	122,192			8.05	%	119,403			8.46	%
Consumer	3,213			0.21	%	3,042			0.21	%
Gross loans	$	1,517,910		100.00	%	1,411,258			100.00	%
Net deferred (fees) costs	(2,624		)			(1,956		)
Less: allowance for loan losses	(24,212		)			(24,210		)
Loans receivable, net	$	1,491,074				$	1,385,092

Deposits

Total deposits were $1.80 billion at September 30, 2011 compared to $1.40 billion at December 31, 2010. During 2011, we had increases in our noninterest bearing checking products, interest checking and certificates of deposit. These increases were related to customers who held larger deposit balances at September 30, 2011 compared to December 31, 2010, a result of certain

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business activities for those particular customers.  In addition, we held more brokered certificates of deposit at September 30, 2011 compared to December 31, 2010.  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 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, 2011 and December 31, 2010, we had $261.3 million and $43.5 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  The increase in our CDARS deposits is primarily due to our participation in the network’s one-way buy program.  We purchased $237.0 million in one-way buys in order to lock in short-term funding as a result of the seasonal increase in our loans held for sale portfolio.  Brokered certificates of deposit not in the CDARS network were $189.2 million and $44.8 million at September 30, 2011 and December 31, 2010, respectively. We issued additional brokered certificates of deposit during 2011 to lock in low cost term funding to support the increase in our loans held for sale portfolio.

Certificates of Deposit of $100,000 or More

At September 30, 2011

(In thousands)

	Fixed Term		No-Penalty*		Total
Maturities:
Three months or less	$	249,433	$	9,922	$	259,355
Over three months through six months	90,291		1,779		92,070
Over six months through twelve months	62,444		6,181		68,625
Over twelve months	114,672		26,867		141,539
	$	516,840	$	44,749	$	561,589

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

Borrowings

Other borrowed funds increased $30.0 million to $419.5 million at September 30, 2011, compared to $389.6 million at December 31, 2010.  Treasury, Tax & Loan Note option borrowings decreased $669,000 to $802,000 at September 30, 2011 compared to $1.5 million at December 31, 2010.  FHLB advances were $280.0 million at each of September 30, 2011 and December 31, 2010.  Customer repurchase agreements decreased $4.4 million to $83.1 million at September 30, 2011 compared to $87.5 million at December 31, 2010.  We had federal funds purchased of $35.0 million at September 30, 2011 compared to none at December 31, 2010.  We purchased federal funds at the end of September 2011 due to short-term funding needs related to increased loan production at George Mason.  The following table provides information on our borrowings.

Short-Term Borrowings and Other Borrowed Funds

At September 30, 2011

(In thousands)

	Interest Rate		Amount Outstanding
Other short-term borrowed funds:
TT&L note option	0.00	%	$	802
Customer repurchase agreements	0.24	%	83,125
Federal funds purchased	0.17	%	35,000
Total other short-term borrowed funds and weighted average rate	0.22	%	$	118,927
Other borrowed funds:
Trust preferred	3.95	%	$	20,619
FHLB advances - long term	3.44	%	280,000
Other borrowed funds and weighted average rate	3.47	%	$	300,619
Total other borrowed funds and weighted average rate	2.55	%	$	419,546

Shareholders’ Equity

Shareholders’ equity at September 30, 2011 was $250.1 million compared to $222.9 million at December 31, 2010, an increase of $27.2 million, or 12%. The increase in shareholders’ equity at September 30, 2011 compared to December 31, 2010 is primarily attributable to net income of $19.8 million for the nine months ended September 30, 2011.  In addition, accumulated other comprehensive income increased $8.1 million for the nine months ended September 30, 2011.  Book value per share at September 30, 2011 was $8.65 compared to $7.75 at December 31, 2010. 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, 2011 was $7.85 compared to $7.22 at December 31, 2010.

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.

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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, 2011, the commercial banking segment recorded net income of $3.5 million compared to $3.7 million for the same period of 2010. For the nine months ended September 30, 2011, the commercial banking segment recorded net income of $14.6 million compared to $11.0 million for the nine months ended September 30, 2010. 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, 2011, total assets for this segment were $2.48 billion, loans receivable, net of deferred fees and costs, were $1.52 billion and total deposits were $1.80 billion. At September 30, 2010, total assets were $2.07 billion, loans receivable, net of deferred fees and costs, were $1.35 billion and total deposits were $1.40 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, 2011 and 2010, the mortgage banking segment recorded net income of $5.7 million and $3.6 million, respectively. For the nine months ended September 30, 2011 and 2010, the mortgage banking segment recorded net income of $7.6 million and $6.0 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, 2011, total assets for this segment were $558.6 million; loans held for sale were $523.1 million and mortgage funding checks were $43.4 million. At September 30, 2010, total assets were $373.2 million; loans held for sale were $341.4 million and mortgage funding checks were $33.1 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, 2011 and 2010, the wealth management and trust services segment recorded net income of $20,000 and of $92,000, respectively. For the nine months ended September 30, 2011 and 2010, the wealth management and trust services segment recorded net losses of $113,000 and $4,000, respectively.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for this business segment for the periods presented.  At September 30, 2011, total assets were $577,000 and managed and custodial assets were $2.7 billion. At September 30, 2010, total assets for this segment were $3.0 million and managed and custodial assets were $3.1 billion.

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

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. The guidelines define capital as both Tier 1 (which includes common shareholders’ equity 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, 2011, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were 11.51% and 12.67%, respectively. At December 31, 2010, our Tier 1 and total risk-based capital ratios were 12.67% and 14.06%, 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 an increase in our total risk-weighted assets, offset by an increase in shareholders’ equity at September 30, 2011 compared to December 31, 2010.

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

Capital Components

At September 30, 2011 and December 31, 2010

(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, 2011
Total risk-based capital	$	267,629	12.67	%	$	168,979	>	8.00	%	$	211,224	>	10.00	%
Tier I risk-based capital	243,020		11.51	%	84,490		>	4.00	%	126,734		>	6.00	%
Leverage capital ratio	243,020		11.03	%	88,105		>	4.00	%	110,132		>	5.00	%
At December 31, 2010
Total risk-based capital	$	248,294	14.06	%	$	141,284	>	8.00	%	$	176,606	>	10.00	%
Tier I risk-based capital	223,789		12.67	%	70,642		>	4.00	%	105,963		>	6.00	%
Leverage capital ratio	223,789		10.82	%	82,753		>	4.00	%	103,441		>	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, 2011
Total risk-based capital	$	254,761	12.14	%	$	167,927	>	8.00	%	$	209,909	>	10.00	%
Tier I risk-based capital	230,152		10.96	%	83,964		>	4.00	%	125,945		>	6.00	%
Leverage capital ratio	230,152		10.51	%	87,556		>	4.00	%	109,445		>	5.00	%
At December 31, 2010
Total risk-based capital	$	232,274	13.25	%	$	140,262	>	8.00	%	$	175,328	>	10.00	%
Tier I risk-based capital	207,768		11.85	%	70,131		>	4.00	%	105,197		>	6.00	%
Leverage capital ratio	207,768		10.09	%	82,383		>	4.00	%	102,979		>	5.00	%

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.  At September 30, 2011 and December 31, 2010, we had $261.3 million and $43.5 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  The increase in our CDARS deposits is primarily due to our participation in the network’s one-way buy program.  We purchased $237.0 million in one-way buys in order to lock in short-term funding as a result of the increase in our loans held for sale portfolio due to refinance activity resulting from the historically low interest rate environment.  Brokered certificates of deposit not in the CDARS network were $189.2 million and $44.8 million at September 30, 2011 and December 31, 2010, respectively. We issued additional brokered

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certificates of deposit during 2011 to lock in low cost term funding to support the increase in our loans receivable and loans held for sale portfolio.

We also maintain secured lines of credit with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta. Having diverse funding alternatives reduces our reliance on any one source for funding.

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

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

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $368.2 million at September 30, 2011 or 14% of total assets. We held investments that are classified as held-to-maturity in the amount of $13.5 million at September 30, 2011. 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 commercial real estate and residential real estate loan portfolios to the Federal Home Loan Bank of Atlanta with additional investment securities and certain loans in its commercial & industrial loan portfolio pledged to the Federal Reserve Bank of Richmond. Additional borrowing capacity at the Federal Home Loan Bank of Atlanta at September 30, 2011 was $128.2 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $145.2 million at September 30, 2011. 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.

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. During the first quarter of 2011, we implemented two cost of funds reduction strategies related to our FHLB advances.  Approximately $95 million of these advances with near term maturities were extended by an average maturity of 2.9 years.  We are now paying an average 3.22% on these borrowings, a yield reduction of 0.99%, equating to approximately $940,000 in interest expense annually.  These transactions pushed our FHLB advance funding further out from the 1-3 year maturity term to the 3-5 year maturity term.

The required payments under such obligations are detailed in the following table.

Contractual Obligations

At September 30, 2011

(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	$	555,186	$	307,746	$	91,410	$	132,108	$	23,922
Brokered certificates of deposit	450,437		313,556		51,768		85,113		—
Advances from the Federal Home Loan Bank of Atlanta	280,000		25,000		10,000		110,000		135,000
Trust preferred securities	20,619		—		—		—		20,619
Operating lease obligations	27,699		4,556		4,627		9,023		9,493
Total	$	1,333,941	$	650,858	$	157,805	$	336,244	$	189,034

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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 evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary.  The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

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 up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of condition.  The rates and terms of these instruments are competitive with others in the market in which we do business.

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, 2011 and December 31, 2010, commitments to extend credit were $592.5 million and $526.6 million, respectively.  Standby letters of credit were $32.8 million and $22.3 million at September 30, 2011 and December 31, 2010, respectively. Commitments to extend credit of $389.8 million as of September 30, 2011 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature, compared to $87.8 million as of December 31, 2010.  The increase in mortgage loan funding commitments is related to the increased origination production which occurred at our mortgage banking subsidiaries.

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

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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 three 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.

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 exposure 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 such loan repurchases through agreements entered into with various investors.  During 2010, we experienced favorable results in resolving various investor claims and have reduced our reserve related to such claims.  During 2011, we received a limited number of additional claims which we are in the process of resolving.  As of September 30, 2011, there was no reserve for loan repurchases as we had no possible repurchases or putbacks outstanding.

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 our 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. 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.

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At September 30, 2011, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.05% 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 2.3% in a down 100 basis point scenario and would be neutral in an up 200 basis point scenario.

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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. 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, 2011, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.05% 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 2.3% 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 third parties.  This risk may arise from the inability of the third party to meet the terms of the contracts.  We monitor the financial condition of these third parties on an annual basis.  We do not expect these third parties to fail to meet its obligation.

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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 that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

The Company was informed by letter July 1, 2011 that the U.S. Department of Justice (the “DOJ”) may initiate the filing of a complaint against Cardinal Bank and George Mason Mortgage, LLC alleging certain violations of the Fair Housing Act and the Equal Credit Opportunity Act. The complaint would allege that Cardinal Bank and George Mason Mortgage, LLC have not met the credit needs for residential real estate related loans in market segments outside the Company’s FDIC approved Community Reinvestment Act assessment area.  The Company believes that its lending practices have complied with these laws. In addition, the Company has always received a satisfactory rating on all of its Community Reinvestment Act exams conducted by primary federal regulators since its inception. The Company continues to cooperate fully with the DOJ in its investigation and has provided relevant information to resolve this issue. It is too early to assess whether the resolution of this matter will have an effect on the Company.

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 except as noted above 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, 2010.  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, 2011, 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

10.1Addendum to Executive Employment Agreement of Christopher W. Bergstrom (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K

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filed August 23, 2001).

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

31.2Rule 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

101The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (furnished herewith).

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SIGNATURES

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

	CARDINAL FINANCIAL CORPORATION
	(Registrant)
Date: November 8, 2011	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: November 8, 2011	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)
Date: November 8, 2011	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Senior Vice President and Chief Accounting Officer
	(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Addendum to Executive Employment Agreement of Christopher W. Bergstrom (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed August 23, 2001).
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
101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (furnished herewith).

81