Cardinal Financial (CFNL) 10-Q 2013 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, 2013

or

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

For the transition period from                          to                         

Commission File Number:  0-24557

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(703) 584-3400

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  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 (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  o  No  x

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

30,284,106 shares of common stock, par value $1.00 per share, outstanding as of November 7, 2013

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Condition
At September 30, 2013 (unaudited) and December 31, 2012	3
Consolidated Statements of Income For the three and nine months ended September 30, 2013 and 2012 (unaudited)	4
Consolidated Statements of Comprehensive Income For the three and nine months ended September 30, 2013 and 2012 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity For the nine months ended September 30, 2013 and 2012 (unaudited)	6
Consolidated Statements of Cash Flows For the nine months ended September 30, 2013 and 2012 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3. Quantitative and Qualitative Disclosures About Market Risk	79
Item 4. Controls and Procedures	80
PART II — OTHER INFORMATION	81
Item 1. Legal Proceedings	81
Item 1A. Risk Factors	81
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3. Defaults Upon Senior Securities	81
Item 4. Mine Safety Disclosures	81
Item 5. Other Information	81
Item 6. Exhibits	81
SIGNATURES	82

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

September 30, 2013 and December 31, 2012

(In thousands, except share data)

			September 30,			December 31,
			2013			2012
			(Unaudited)
Assets
Cash and due from banks			$	23,652		$	17,552
Federal funds sold			45,073			49,588
Total cash and cash equivalents			68,725			67,140
Investment securities available-for-sale			347,567			271,903
Investment securities held-to-maturity (market value of $8,471 and $9,019 at September 30, 2013 and December 31, 2012, respectively)			9,811			11,366
Investment securities-trading			3,716			3,151
Total investment securities			361,094			286,420
Other investments			14,048			14,302
Loans held for sale			323,341			785,751
Loans receivable, net of deferred fees and costs			1,963,519			1,803,429
Allowance for loan losses			(27,392		)	(27,400		)
Loans receivable, net			1,936,127			1,776,029
Premises and equipment, net			19,880			19,192
Goodwill and intangibles, net			10,144			10,292
Bank-owned life insurance			31,958			31,652
Deferred tax asset, net			1,094			—
Prepaid FDIC insurance premiums			—			2,165
Accrued interest receivable and other assets			37,995			46,244
Total assets			$	2,804,406		$	3,039,187
Liabilities and Shareholders’ Equity
Non-interest bearing deposits			$	434,228		$	351,815
Interest bearing deposits			1,647,848			1,891,943
Total deposits			2,082,076			2,243,758
Other borrowed funds			355,321			392,275
Mortgage funding checks			10,140			51,679
Deferred tax liability, net			—			1,946
Escrow liabilities			2,253			4,629
Accrued interest payable and other liabilities			37,748			36,834
Total liabilities			2,487,538			2,731,121
Common stock, $1 par value	2013	2012
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	30,281,006	30,226,330	30,281			30,226
Additional paid-in capital			173,325			172,021
Retained earnings			107,599			92,777
Accumulated other comprehensive income, net			5,663			13,042
Total shareholders’ equity			316,868			308,066
Total liabilities and shareholders’ equity			$	2,804,406		$	3,039,187

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three and nine months ended September 30, 2013 and 2012

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Interest income:
Loans receivable	$	21,988		$	21,470	$	63,759		$	63,241
Loans held for sale	4,141			5,544		13,258			13,184
Federal funds sold	28			30		244			118
Investment securities available-for-sale	2,767			2,661		7,388			8,140
Investment securities held-to-maturity	44			73		148			236
Other investments	84			60		240			170
Total interest income	29,052			29,838		85,037			85,089
Interest expense:
Deposits	3,166			3,935		9,937			11,309
Other borrowed funds	2,194			2,245		6,554			6,943
Total interest expense	5,360			6,180		16,491			18,252
Net interest income	23,692			23,658		68,546			66,837
Provision for loan losses	157			1,500		(432		)	5,623
Net interest income after provision for loan losses	23,535			22,158		68,978			61,214
Non-interest income:
Service charges on deposit accounts	507			494		1,498			1,411
Loan fees	364			417		857			1,241
Title insurance & other related income	169			750		918			1,714
Investment fee income	195			655		1,143			1,916
Realized and unrealized gains (losses) on mortgage banking activities	(102		)	18,605		17,386			38,999
Net realized gain on investment securities-trading	18			—		100			158
Management fee income	374			943		1,483			2,834
Increase in cash surrender value of bank-owned life insurance	124			164		306			507
Gain (Loss) on sale of real estate	—			140		30			(333		)
Other loss	9			4		38			(32		)
Total non-interest income	1,658			22,172		23,759			48,415
Non-interest expense:
Salary and benefits	9,992			12,121		30,367			32,504
Occupancy	1,981			1,814		6,148			5,274
Professional fees	786			1,094		3,247			2,665
Depreciation	808			704		2,331			1,948
Data processing & communications	1,212			1,140		3,481			3,337
FDIC insurance premiums	401			327		1,049			980
Mortgage loan repurchases and settlements	111			172		(49		)	472
Merger and acquisition expenses	304			—		304			—
Amortization of intangibles	49			49		148			148
Other operating expenses	5,400			4,866		15,950			13,409
Total non-interest expense	21,044			22,287		62,976			60,737
Income before income taxes	4,149			22,043		29,761			48,892
Provision for income taxes	1,168			7,591		9,796			16,636
Net income	$	2,981		$	14,452	19,965			32,256
Earnings per common share - basic	$	0.10		$	0.49	0.65			1.09
Earnings per common share - diluted	$	0.10		$	0.48	0.64			1.07
Weighted-average common shares outstanding - basic	30,692,595			29,675,788		30,654,343			29,634,069
Weighted-average common shares outstanding - diluted	31,060,572			30,237,755		31,053,448			30,107,895

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and nine months ended September 30, 2013 and 2012

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income	$	2,981		$	14,452		$	19,965		$	32,256
Other comprehensive income:
Unrealized gain (loss) on available-for-sale investment securities:
Unrealized holding gain (loss) arising during the period, net of tax expense of $39,000 and net of tax benefit of $3.5 million for the three and nine months ended September 30, 2013, respectively, net of tax expense of $864 thousand and $1.4 million for the three and nine months ended September 30, 2012, respectively.	76			1,676			(6,802		)	2,641
Less: reclassification adjustment for net gains included in net income net of tax expense	—			—			—			—
	76			1,676			(6,802		)	2,641
Unrealized loss on derivative instruments designated as cash flow hedges, net of tax expense of $369 thousand and $392 thousand for the three and nine months ended September 30, 2013, respectively; and net of tax benefit of $1.1 million and $351 thousand for the three and nine months ended September 30, 2012, respectively.	(716		)	(2,043		)	(577		)	(732		)
Comprehensive income	$	2,341		$	14,085		$	12,586		$	34,165

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine months ended September 30, 2013 and 2012

(In thousands)

(Unaudited)

									Accumulated
				Additional					Other
	Common	Common		Paid-in		Retained			Comprehensive
	Shares	Stock		Capital		Earnings			Income			Total
Balance, December 31, 2011	29,199	$	29,199	$	163,730	$	53,372		$	11,516		$	257,817
Stock options exercised	73	73		530		—			—			603
Stock compensation expense, net of tax benefit	—	—		179		—			—			179
Dividends on common stock of $0.11 per share	—	—		—		(3,215		)	—			(3,215		)
Change in accumulated other comprehensive income	—	—		—		—			1,909			1,909
Net income	—	—		—		32,256			—			32,256
Balance, September 30, 2012	29,272	$	29,272	$	164,439	$	82,413		$	13,425		$	289,549
Balance, December 31, 2012	30,226	$	30,226	$	172,021	$	92,777		$	13,042		$	308,066
Stock options exercised	55	55		427		—			—			482
Stock compensation expense, net of tax benefit	—	—		877		—			—			877
Dividends on common stock of $0.17 per share	—	—		—		(5,143		)	—			(5,143		)
Change in accumulated other comprehensive income	—	—		—		—			(7,379		)	(7,379		)
Net income	—	—		—		19,965			—			19,965
Balance, September 30, 2013	30,281	$	30,281	$	173,325	$	107,599		$	5,663		$	316,868

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2013 and 2012

(In thousands)

(Unaudited)

	2013			2012
Cash flows from operating activities:
Net income	$	19,965		$	32,256
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,331			1,948
Amortization of premiums, discounts and intangibles	89			53
Provision for loan losses	(432		)	5,623
Loans held for sale originated	(4,713,809		)	(4,667,285		)
Proceeds from the sale of loans held for sale	5,193,605			4,433,831
Realized and unrealized gains on mortgage banking activities	(17,386		)	(38,999		)
Purchase of investment securities-trading	(1,218		)	(858		)
Unrealized gain on investment securities-trading	(100		)	(158		)
(Gain) Loss on sale of other real estate owned	(30		)	333
Loss on disposal of fixed assets	—			49
Stock compensation expense, net of tax benefits	877			179
Increase in cash surrender value of bank-owned life insurance	(306		)	(507		)
Increase (decrease) in accrued interest receivable and other assets	9,136			(24,974		)
Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities	(4,718		)	30,502
Net cash provided by (used in) operating activities	488,004			(228,007		)
Cash flows from investing activities:
Net purchases of premises and equipment	(3,019		)	(2,935		)
Proceeds from the sale of fixed assets	—			1,104
Proceeds from maturity and call of investment securities available-for-sale	11,244			—
Purchase of investment securities available-for-sale	(58,887		)	(22,810		)
Purchase of mortgage-backed securities available-for-sale	(63,584		)	—
Purchase of other investments	(1		)	(790		)
Proceeds from the sale of other investments	255			3,600
Proceeds from the sale of other real estate owned	—			5,839
Redemptions of investment securities available-for-sale	30,493			34,823
Redemptions of investment securities held-to-maturity	1,552			1,231
Net increase in loans receivable, net of deferred fees and costs	(159,636		)	(99,981		)
Net cash used in investing activities	(241,583		)	(79,919		)
Cash flows from financing activities:
Net increase (decrease) in deposits	(161,682		)	403,703
Net increase (decrease) in other borrowed funds - short term	(36,954		)	(34,634		)
Net increase (decrease) in mortgage funding checks	(41,539		)	57,858
Proceeds from FHLB advances	—			55,000
Repayment of FHLB advances	—			(135,000		)
Stock options exercised	482			603
Dividends on common stock	(5,143		)	(3,215		)
Net cash (used in) provided by financing activities	(244,836		)	344,315
Net decrease in cash and cash equivalents	1,585			36,389
Cash and cash equivalents at beginning of the year	67,140			37,139
Cash and cash equivalents at end of the period	$	68,725		$	73,528
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	16,543		$	18,759
Cash paid for income taxes	9,720			8,049
Supplemental schedule of noncash investing and financing activities:
Unsettled purchases of investment securities available-for-sale	$	5,175		$	—
Transfer of loans to other real estate owned	—			3,126

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(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. The Company had a second mortgage subsidiary, Cardinal First Mortgage, LLC (“Cardinal First”) also based in Fairfax, Virginia, but as of June 30, 2013, this subsidiary merged into George Mason.  In addition to the Bank, the Company has one nonbank subsidiary, Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.  As of June 30, 2013, the remaining operations of the Bank’s trust division, Cardinal Trust and Investment Services, merged into CWS.  Also as of June 30, 2013, Wilson/Bennett Capital Management, Inc., formerly the Company’s second nonbank subsidiary, merged into CWS.

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, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. 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, 2012.

Note 2

Stock-Based Compensation

At September 30, 2013, 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 was amended in 2011 to increase the number of shares available under the plan and extend the term to 2021.  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.  There were 704,518 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of September 30, 2013.

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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. Most employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service. Certain stock options granted to executive officers of the Company have ten year terms and vest in increments of 25% with immediate vesting of the first 25% on the date of grant and vesting of the remaining three increments on the anniversary date of the grant.

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, 2013 and 2012 was $125,000 and $48,000, respectively.  Total stock compensation expense for the nine months ended September 30, 2013 and 2012 was $561,000 and $179,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $41,000 and $16,000 for the three months ended September 30, 2013 and 2012, respectively.  For the nine months ended September 30, 2013 and 2012, total income tax benefit recognized in the income statement for share-based compensation arrangements was $185,000 and $60,000, respectively.

Options granted for the three and nine months ended September 30, 2013 were 3,000 and 270,500, respectively.  Options granted for the three and nine months ended September 30, 2012 were 7,500 and 57,500, respectively.  The weighted average per share fair value of stock option grants for the three and nine months ended September 30, 2013 was $6.18 and $5.82, respectively.  The weighted average per share fair value of stock option grants for the three and nine months ended September 30, 2012 was $4.97 and $4.55, respectively.  The fair values of the options granted during all periods ended September 30, 2013 and 2012 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,
	2013	2012	2013	2012
Estimated option life	6.5 Years	6.5 years	6.5 Years	6.5 years
Risk free interest rate	2.05 - 2.15%	0.97 - 1.08%	1.14 - 2.15%	0.97 - 1.69%
Expected volatility	39.50%	42.10%	39.50%	42.10%
Expected dividend yield	1.23%	1.10%	1.23%	1.10%

Expected volatility is based upon the average annual historical volatility of the Company’s common stock. The estimated option life is derived from specific historical data to estimate the expected term of the option, such as employee option exercise and employee post-vesting departure behavior. 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, 2013 is summarized as follows:

9

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Years)	Value
Outstanding at December 31, 2012	851,358		$	10.21
Granted	270,500		16.22
Exercised	(54,676	)	8.84
Forfeited	(9,550	)	10.12
Outstanding at September 30, 2013	1,057,632		$	11.82	5.46	$	4,977,068
Options exercisable at September 30, 2013	757,382		$	10.99	4.23	$	4,197,586

The intrinsic value of options exercised during the three and nine months ended September 30, 2013 was $165,000 and $466,000, respectively. For the options exercised during the three and nine months ended September 30, 2012 the intrinsic value was $101,000 and $439,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the nine months ended September 30, 2013 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2012	168,900		$	4.17
Granted	270,500		5.82
Vested	(136,250	)	5.16
Forfeited	(2,900	)	4.30
Balance at September 30, 2013	300,250		$	5.21

At September 30, 2013, there was $1.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted average period of 2.7 years. The total fair value of shares that vested during the three months ended September 30, 2013 and 2012 was $15,000 and $8,000, respectively.  For the nine months ended September 30, 2013 and 2012, the total fair value of shares that vested was $704,000 and $157,000, respectively.

Note 3

Segment Information

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management services.  As of June 30, 2013, the Company merged the remaining operations of its trust division and Wilson/Bennett Capital Management, Inc., both of which had been included in the wealth management services segment, into CWS.  In addition, as of June 30, 2013, the Company merged the operations of Cardinal First Mortgage, LLC into George Mason.  Results for the three and nine months ended September 30, 2013 include the operations of these subsidiaries.

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

10

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 services segment provides investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, and investment management.

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, 2013 and 2012 is as follows:

At and for the Three Months Ended September 30, 2013 (in thousands):

						Wealth Management
	Commercial		Mortgage			and					Intersegment
	Banking		Banking			Trust Services		Other			Elimination			Consolidated
Net interest income	$	23,110	$	750		$	—	$	(168	)	$	—		$	23,692
Provision for loan losses	157		—			—		—			—			157
Non-interest income	1,010		441			195		22			(10		)	1,658
Non-interest expense	11,100		8,764			101		1,089			(10		)	21,044
Provision for income taxes	4,291		(2,722		)	33		(434		)	—			1,168
Net income (loss)	$	8,572	$	(4,851	)	$	61	$	(801	)	$	—		$	2,981
Total Assets	$	2,762,206	$	335,253		$	2,195	$	325,271		$	(620,519	)	$	2,804,406
Average Assets	$	2,745,832	$	409,394		$	2,172	$	321,867		$	(711,107	)	$	2,768,158

At and for the Three Months Ended September 30, 2012 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	23,196	$	672	$	—		$	(210	)	$	—		$	23,658
Provision for loan losses	1,500		—		—			—			—			1,500
Non-interest income	1,129		20,406		655			5			(23		)	22,172
Non-interest expense	10,511		10,231		727			841			(23		)	22,287
Provision for income taxes	4,103		3,879		(24		)	(367		)	—			7,591
Net income (loss)	$	8,211	$	6,968	$	(48	)	$	(679	)	$	—		$	14,452
Total Assets	$	2,890,971	$	826,302	$	561		$	291,293		$	(997,441	)	$	3,011,686
Average Assets	$	2,765,709	$	582,677	$	542		$	285,308		$	(860,828	)	$	2,773,408

At and for the Nine Months Ended September 30, 2013 (in thousands):

							Wealth Management
	Commercial			Mortgage			and						Intersegment
	Banking			Banking			Trust Services			Other			Elimination			Consolidated
Net interest income	$	67,410		$	1,665		$	—		$	(529	)	$	—		$	68,546
Provision for loan losses	(517		)	85			—			—			—			(432		)
Non-interest income	2,530			20,000			1,143			112			(26		)	23,759
Non-interest expense	31,296			27,222			1,472			3,012			(26		)	62,976
Provision for income taxes	13,062			(2,028		)	(111		)	(1,127		)	—			9,796
Net income (loss)	$	26,099		$	(3,614	)	$	(218	)	$	(2,302	)	$	—		$	19,965
Total Assets	$	2,762,206		$	335,253		$	2,195		$	325,271		$	(620,519	)	$	2,804,406
Average Assets	$	2,780,602		$	461,212		$	2,342		$	328,183		$	(780,701	)	$	2,791,638

At and for the Nine Months Ended September 30, 2012 (in thousands):

					Wealth Management
	Commercial		Mortgage		and						Intersegment
	Banking		Banking		Trust Services			Other			Elimination			Consolidated
Net interest income	$	65,552	$	1,912	$	—		$	(627	)	$	—		$	66,837
Provision for loan losses	5,365		258		—			—			—			5,623
Non-interest income	2,472		43,893		1,917			172			(39		)	48,415
Non-interest expense	32,271		23,824		1,980			2,701			(39		)	60,737
Provision for income taxes	9,996		7,768		(23		)	(1,105		)	—			16,636
Net income (loss)	$	20,392	$	13,955	$	(40	)	$	(2,051	)	$	—		$	32,256
Total Assets	$	2,890,971	$	826,302	$	561		$	291,293		$	(997,441	)	$	3,011,686
Average Assets	$	2,605,355	$	442,198	$	557		$	284,067		$	(729,715	)	$	2,602,462

11

The Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents an overhead function rather than an operating segment. The parent company’s most significant assets are its net investments in its subsidiaries. The parent company’s net interest expense is comprised of interest 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, 2013 and 2012.  Antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 2,030 and none for the three months ended September 30, 2013 and 2012, respectively.  For the nine months ended September 30, 2013 and 2012, antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation were 721 and 2,823, 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)	2013		2012		2013		2012
Net income available to common shareholders	$	2,981	$	14,452	$	19,965	$	32,256
Weighted average common shares - basic	30,693		29,676		30,654		29,634
Weighted average common shares - diluted	31,061		30,238		31,053		30,108
Earnings per common share - basic	$	0.10	$	0.49	$	0.65	$	1.09
Earnings per common share - diluted	$	0.10	$	0.48	$	0.64	$	1.07

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, 2013 and 2012:

12

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2013	2012	2013	2012
Weighted average common shares outstanding	30,270	29,256	30,259	29,231
Weighted average shares attributable to the deferred compensation plans	423	420	395	403
Total weighted average shares - basic	30,693	29,676	30,654	29,634

The following shows the composition of diluted outstanding shares for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2013	2012	2013	2012
Weighted average shares outstanding - basic (from above)	30,693	29,676	30,654	29,634
Incremental weighted average shares attributable to deferred compensation plans	215	262	204	247
Weighted average shares attributable to vested stock options	153	300	160	227
Incremental Shares from stock option plan	—	—	35	—
Total weighted average shares - diluted	31,061	30,238	31,053	30,108

13

Note 5

Investment Securities

The approximate fair value and amortized cost of investment securities at September 30, 2013 and December 31, 2012 are shown in the table below.

	September 30, 2013
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	75,603	3,379		(692		)	$	78,290
Mortgage-backed securities	147,814		5,199		(227		)	152,786
Municipal securities	107,563		4,071		(195		)	111,439
U.S. treasury securities	4,986		66		—			5,052
Total	$	335,966	$	12,715	$	(1,114	)	$	347,567
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,689		151		—			2,840
Pooled trust preferred securities	7,122		—		(1,491		)	5,631
Total	$	9,811	$	151	$	(1,491	)	$	8,471

	December 31, 2012
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	55,756	$	5,777	$	—		$	61,533
Mortgage-backed securities	110,214		8,704		(5		)	118,913
Municipal securities	79,055		7,292		—			86,347
U.S. treasury securities	4,968		142		—			5,110
Total	$	249,993	$	21,915	$	(5	)	$	271,903
Investment Securities Held-to-Maturity
Mortgage-backed securities	3,705		242		—			3,947
Pooled trust preferred securities	7,661		—		(2,589		)	5,072
Total	$	11,366	$	242	$	(2,589	)	$	9,019

The fair value and amortized cost of investment securities by contractual maturity at September 30, 2013 and December 31, 2012 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.

14

	September 30, 2013
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
After 1 year but within 5 years	$	28,393	30,495		—		—
After 5 years but within 10 years	69,632		73,396		—		—
After 10 years	90,127		90,890		7,122		5,631
Mortgage-backed securities	147,814		152,786		2,689		2,840
Total	$	335,966	$	347,567	$	9,811	$	8,471

	December 31, 2012
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
After 1 year but within 5 years	$	35,701	$	38,295	$	—	$	—
After 5 years but within 10 years	60,140		66,859		—		—
After 10 years	43,938		47,836		7,661		5,072
Mortgage-backed securities	110,214		118,913		3,705		3,947
Total	$	249,993	$	271,903	$	11,366	$	9,019

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, 2013 and December 31, 2012.

September 30, 2013

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	$	29,415	$	(692	)	$	—	$	—		$	29,415	$	(692	)
Mortgage-backed securities	15,907		(212		)	325		(15		)	16,232		(227		)
Municipal securities	13,401		(195		)	—		—			13,401		(195		)
Total temporarily impaired securities	$	58,723	$	(1,099	)	$	325	$	(15	)	$	59,048	$	(1,114	)

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
Pooled trust preferred securities	$	—	$	—	$	5,631	$	(1,491	)	$	5,631	$	(1,491	)
Total temporarily impaired securities	$	—	$	—	$	5,631	$	(1,491	)	$	5,631	$	(1,491	)

At December 31, 2012

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	$	—	$	—	$	362	$	(5	)	$	362	$	(5	)
Total temporarily impaired securities	$	—	$	—	$	362	$	(5	)	$	362	$	(5	)

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
Pooled trust preferred securities	$	—	$	—	$	5,072	$	(2,589	)	$	5,072	$	(2,589	)
Total temporarily impaired securities	$	—	$	—	$	5,072	$	(2,589	)	$	5,072	$	(2,589	)

15

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of September 30, 2013, 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, 2013, 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 $2.7 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, 2013, 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 $7.1 million of par value at September 30, 2013.  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 AA-, one security has a composite rating of A-, and two securities have a composite rating of BBB+.  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, 53% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $177 million of the remaining $267 million, or 66% of the performing collateral defaulted or deferred payment.  In another of the pooled trust preferred securities issues, 53% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $154 million of the remaining $255 million, or 60% of the performing collateral defaulted or deferred payment.  In the third of the pooled trust preferred securities issues, 73% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $141 million of the remaining $156 million, or 91% of the performing collateral defaulted or deferred payment.  In the fourth of the pooled trust preferred securities issues, 68% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $246 million of the remaining $281 million, or 88% of the performing collateral defaulted to deferred payment.

16

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, 2013.  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, 2013 and December 31, 2012 consist of the following:

(In thousands)	2013			2012
Commercial and industrial	$	207,729		$	222,961
Real estate - commercial	999,128			827,243
Real estate - construction	353,241			373,717
Real estate - residential	294,105			260,352
Home equity lines	109,125			117,647
Consumer	3,818			4,204
	1,967,146			1,806,124
Net deferred fees	(3,627		)	(2,695		)
Loans receivable, net of fees	1,963,519			1,803,429
Allowance for loan losses	(27,392		)	(27,400		)
Loans receivable, net	$	1,936,127		$	1,776,029

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, 2013 and 2012 is shown below.

17

	Three months ended September 30,					Nine months ended September 30,
(In thousands)	2013		2012			2013			2012
Allowance for loan losses, beginning of the period	$	26,934	$	26,660		$	27,400		$	26,159
Provision for loan losses	157		1,500			(432		)	5,623
Loans charged off:
Commercial and industrial	—		(1,478		)	(42		)	(5,613		)
Residential	—		(331		)	(185		)	(713		)
Consumer	—		—			(1		)	(15		)
Total loans charged off	—		(1,809		)	(228		)	(6,341		)
Recoveries:
Commercial and industrial	290		11			609			727
Residential	11		7			41			201
Consumer	—		—			2			—
Total recoveries	301		18			652			928
Net (charge offs) recoveries	301		(1,791		)	424			(5,413		)
Ending balance, September 30,	$	27,392	$	26,369		$	27,392		$	26,369

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, 2013 and December 31, 2012, are below:

Allowance for Loan Losses

For the Three Months Ended September 30, 2013

(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, 2013	$	31	$	19,909		$	6,700		$	133	$	112	$	49	$	26,934
Charge-offs	—		—			—			—		—		—		—
Recoveries	—		289			1			11		—		—		301
Provision for loan losses	669		(552		)	(234		)	229		29		16		157
Ending Balance, September 30, 2013	$	700	$	19,646		$	6,467		$	373	$	141	$	65	$	27,392

18

Allowance for Loan Losses

At and for the Nine Months Ended September 30, 2013

(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	$	525		$	17,990	$	7,675		$	857		$	266		$	87		$	27,400
Charge-offs	(42		)	—		—			(185		)	—			(1		)	(228		)
Recoveries	306			293		10			41			—			2			652
Provision for loan losses	(89		)	1,363		(1,218		)	(340		)	(125		)	(23		)	(432		)
Ending Balance, September 30, 2013	$	700		$	19,646	$	6,467		$	373		$	141		$	65		$	27,392
Ending Balance, September 30, 2013
Individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—		$	—		$	—
Collectively evaluated for impairment	700			19,646		6,467			373			141			65			27,392

Loans Receivable

At September 30, 2013

(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, 2013	$	207,729	$	999,128	$	353,241	$	294,105	$	109,125	$	3,818	$	1,967,146
Ending Balance, September 30, 2013
Individually evaluated for impairment	$	—	$	1,738	$	1,022	$	—	$	—	$	—	$	2,760
Collectively evaluated for impairment	207,729		997,390		352,219		294,105		109,125		3,818		1,964,386

Allowance for Loan Losses

For the Three Months Ended September 30, 2012

(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, 2012	$	1,586		$	15,048		$	6,456	$	3,005		$	450		$	115	$	26,660
Charge-offs	(756		)	(722		)	—		—			(331		)	—		(1,809		)
Recoveries	3			—			8		—			7			—		18
Provision for loan losses	485			582			108		(49		)	326			48		1,500
Ending Balance, September 30, 2012	$	1,318		$	14,908		$	6,572	$	2,956		$	452		$	163	$	26,369

19

Allowance for Loan Losses

At and for the Nine Months Ended September 30, 2012

(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	$	3,390		$	13,377		$	6,495		$	1,709		$	1,119		$	69		$	26,159
Charge-offs	(991		)	(4,622		)	—			(291		)	(422		)	(15		)	(6,341		)
Recoveries	5			104			618			176			25			—			928
Provision for loan losses	(1,086		)	6,049			(541		)	1,362			(270		)	109			5,623
Ending Balance, September 30, 2012	$	1,318		$	14,908		$	6,572		$	2,956		$	452		$	163		$	26,369
Ending Balance, September 30, 2012:
Individually evaluated for impairment	$	—		$	—		$	—		$	1,157		$	—		$	—		$	1,157
Collectively evaluated for impairment	1,318			14,908			6,572			1,799			452			163			25,212

Loans Receivable

At September 30, 2012

(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, 2012	$	211,419	$	755,308	$	368,961	$	267,612	$	118,203	$	4,489	$	1,725,992
Ending Balance, September 30, 2012:
Individually evaluated for impairment	$	2,154	$	6,426	$	5,062	$	1,925	$	—	$	—	$	15,567
Collectively evaluated for impairment	209,265		748,882		363,899		265,687		118,203		4,489		1,710,425

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 the Company’s 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 the loan portfolio, maintain the watch list, and compile the analysis necessary to determine the allowance for loan losses.

20

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.

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 through a third party review of existing exposures in the portfolio, supporting the commercial loan officers in the execution of its credit management responsibilities, 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, 2013 and December 31, 2012. In addition, the credit quality of the loan portfolio is provided as of September 30, 2013 and December 31, 2012.

Nonaccrual and Past Due Loans

At September 30, 2013

(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	$	111	$	320	$	—	$	431	$	207,298	207,729		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		279,637		279,637		—		—
Non-owner occupied	84		—		1,738		1,822		717,669		719,491		—		1,738
Real estate - construction
Residential	—		—		—		—		82,714		82,714		—		—
Commercial	—		—		772		772		269,755		270,527		—		772
Real estate - residential
Single family	707		507		—		1,214		208,450		209,664		—		—
Multi-family	—		—		—		—		84,441		84,441		—		—
Home equity lines	74				—		74		109,051		109,125		—		—
Consumer
Installment	—		—		—		—		3,542		3,542		—		—
Credit cards	—		—		—		—		276		276		—		—
	$	976	$	827	$	2,510	$	4,313	$	1,962,833	$	1,967,146	$	—	$	2,510

21

Nonaccrual and Past Due Loans

At December 31, 2012

(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	$	—	$	—	$	2,064	$	2,064	$	220,897	222,961		$	—	$	2,064
Real estate - commercial
Owner occupied	—		—		—		—		255,343		255,343		—		—
Non-owner occupied	—		—		3,800		3,800		568,100		571,900		—		3,800
Real estate - construction
Residential	—		—		—		—		84,551		84,551		—		—
Commercial	—		—		1,762		1,762		287,404		289,166		—		1,762
Real estate - residential
Single family	—		—		—		—		209,740		209,740		—		—
Multi-family	—		—		—		—		50,612		50,612		—		—
Home equity lines	—		—		—		—		117,647		117,647		—		—
Consumer
Installment	—		—		—		—		3,916		3,916		—		—
Credit cards	—		—		—		—		288		288		—		—
	$	—	$	—	$	7,626	$	7,626	$	1,798,498	$	1,806,124	$	—	$	7,626

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of September 30, 2013 and December 31, 2012, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

22

Impaired Loans

At September 30, 2013

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	1,022		3,176		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
With related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
By segment total:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	1,022		3,176		—		—
Real estate - residential	—		—		—		—
Home equity lines	—		—		—		—
Total	$	2,760	$	7,048	$	—	$	—

The difference between the recorded investment and the unpaid principal balance in the above table is a result of partial loan charge-offs that the Company has recorded on these impaired loans.

23

Impaired Loans

At December 31, 2012

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	2,064	$	2,985	$	—	$	269
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	4,370		6,943		—		35
Real estate - construction
Residential	—		—		—		—
Commercial	2,012		5,449		—		469
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
With related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
By segment total:
Commercial and industrial	$	2,064	$	2,985	$	—	$	269
Real estate - commercial	4,370		6,943		—		35
Real estate - construction	2,012		5,449		—		469
Real estate - residential	—		—		—		—
Home equity lines	—		—		—		—
Total	$	8,446	$	15,377	$	—	$	773

In order to maximize the collection of certain loans, the Company will attempt to work with borrowers when necessary to extend or modify loan terms to better align with the borrower’s ability to repay. Extensions and modifications to loans are made in accordance with the Company’s policy and conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. The Company considers regulatory guidelines when restructuring a loan to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan.

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Company has granted a concession to the borrower. The Company determines that a borrower may be experiencing financial difficulty if the borrower is currently in default on any of its debt, or if the Company is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk, and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Company also considers whether the borrower has

24

provided additional collateral or guarantors and whether such additions adequately compensate the Company for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reductions in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

Nonaccruing loans that are modified can be placed back on accrual status when both the principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

At September 30, 2013 and December 31, 2012, the Company had TDRs totaling $2.5 million and $7.3 million, respectively, all of which were on nonaccrual. Nonaccrual TDRs that are reasonably assured of repayment according to their modified terms may be returned to accrual status by the Company upon a detailed credit evaluation of the borrower’s financial condition and prospects for repayment under the revised terms. Consistent with regulatory guidance, upon sustained performance and classification as a TDR over the Company’s year-end, the loan will be removed from TDR status as long as the modified terms were market-based at the time of the modification. The following table reconciles the beginning and ending balances on TDRs as of September 30, 2013 and 2012, respectively:

Troubled Debt Restructurings

At and For the Nine Months Ended September 30, 2013

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2013	$	1,776		$	3,800		$	1,762		$	—	$	—	$	—	$	7,338
New TDRs	—			570			—			—		—		—		570
Increases to existing TDRs	—			—			—			—		—		—		—
Charge-Offs Post Modification	—			—			—			—		—		—		—
Sales, paydowns, or other decreases	(1,776		)	(2,632		)	(990		)	—		—		—		(5,398		)
Ending Balance, September 30, 2013	$	—		$	1,738		$	772		$	—	$	—	$	—	$	2,510

25

Troubled Debt Restructurings

At and For the Nine Months Ended September 30, 2012

(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, 2012	$	3,497		$	9,098		$	2,750		$	—	$	—	$	—	$	15,345
New TDRs	—			—			—			—		—		—		—
Increases to existing TDRs	—			41			—			—		—		—		41
Charge-Offs Post Modification	(915		)	(3,412		)	—			—		—		—		(4,327		)
Sales, paydowns, or other decreases	(428		)	(799		)	(988		)	—		—		—		(2,215		)
Ending Balance, September 30, 2012	$	2,154		$	4,928		$	1,762		$	—	$	—	$	—	$	8,844

At September 30, 2013, TDRs make up one relationship with the Bank.  These loans are performing as expected post-modification.  For restructured loans in the portfolio, the Company had no loan loss reserves as of September 30, 2013 and December 31, 2012, respectively.

Loans modified as TDRs within the previous 12 months and for which there was a payment default during the period are calculated by first identifying TDRs that defaulted during the period and then determining whether they were modified within the 12 months prior to the default.  For the period ended September 30, 2013, one loan identified as a TDR had a payment default within the last twelve months.  For the period ended December 31, 2012, no loans identified as TDRs had a payment default within the last twelve months.

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.  During 2011, the Company added an additional risk rating, other loans especially mentioned (“OLEM”), for the monitoring of credit quality.  Other loans especially mentioned are those loans in which the borrower exhibits potential weakness that may, if not corrected or reversed, weaken the bank’s credit position at some future date.  These loans may not show problems as yet due to the borrower’s apparent ability to service the debt, but special circumstances surround the loans of which the Bank’s management should be aware.  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 have 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 other loans especially mentioned, 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 at September 30, 2013 and December 31, 2012.

26

Internal Risk Rating Grades

At September 30, 2013

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	207,130	$	599	$	—	$	—	$	—
Real estate - commercial
Owner occupied	279,637		—		—		—		—
Non-owner occupied	686,726		31,027		1,738		—		—
Real estate - construction
Residential	82,714		—		—		—		—
Commercial	268,105		1,400		1,022		—		—
Real estate - residential
Single family	209,664		—		—		—		—
Multi-family	84,441		—		—		—		—
Home equity lines	109,052		73		—		—		—
Consumer
Installment	3,541		1		—		—		—
Credit cards	276		—		—		—		—
	$	1,931,286	$	33,100	$	2,760	$	—	$	—

27

Internal Risk Rating Grades

At December 31, 2012

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	220,266	$	631	$	2,064	$	—	$	—
Real estate - commercial
Owner occupied	255,343		—		—		—		—
Non-owner occupied	542,983		27,260		1,657		—		—
Real estate - construction
Residential	84,551		—		—		—		—
Commercial	281,163		3,278		4,725		—		—
Real estate - residential
Single family	209,740		—		—		—		—
Multi-family	50,612		—		—		—		—
Home equity lines	117,647		—		—		—		—
Consumer
Installment	3,916		—		—		—		—
Credit cards	288		—		—		—		—
	$	1,766,509	$	31,169	$	8,446	$	—	$	—

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, 2013, accumulated other comprehensive income included an unrealized loss, net of tax, of $651,000 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, 2013 which is related to the Company’s cash flow hedges will be recognized in earnings during the fourth quarter of 2013. At September 30, 2013, the Company recognized minimal amounts due to hedge ineffectiveness.

At September 30, 2013, the Company had $351.0 million in residential mortgage rate lock commitments and associated forward sales, and $247.3 million in forward loan sales associated with $323.3 million of loans that had closed and were presented as held for sale.

28

The Company has an interest rate swap to mitigate its exposure to interest rate risk. This interest rate swap has an aggregate notional amount of $5.0 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, 2013, accumulated other comprehensive income included an after-tax unrealized gain of $74,000 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, 2013 and 2012, the change in fair values recorded for this fair value hedge were losses of $430,000 and $377,000, 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, 2013 and December 31, 2012. In addition, the gains and losses related to these derivative instruments is provided for the three and nine months ended September 30, 2013 and 2012.

Derivative Instruments and Hedging Activities

At September 30, 2013

(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	$	123
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	3,977		Accrued Interest Payable and Other Liabilities	6,526
Total Derivatives Designated as Hedging Instruments		3,977			6,649
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	11,871		Accrued Interest Payable and Other Liabilities	4,879
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	4,879		Accrued Interest Payable and Other Liabilities	149
Total Derivatives Not Designated as Hedging Instruments		16,750			5,028
Total Derivatives		$	20,727		$	11,677

29

Derivative Instruments and Hedging Activities

At December 31, 2012

(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	$	616
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	2,136			Accrued Interest Payable and Other Liabilities	3,623
Total Derivatives Designated as Hedging Instruments		2,136				4,239
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	24,657			Accrued Interest Payable and Other Liabilities	449
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	449			Accrued Interest Payable and Other Liabilities	91
Total Derivatives Not Designated as Hedging Instruments		25,106				540
Total Derivatives		$		27,242		$	4,779

30

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended September 30, 2013

(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	$	142	Other Income	$	(142	)
Total		$	142		$	(142	)

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	$	(15	)	Other Income	$	—		Other Income	$	—
Forward Loan Sales Commitments	(701		)	Other Income	(37,928		)	Other Income	—
Total	$	(716	)		$	(37,928	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	11,722		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(4,730		)	Other Income
Rate Lock Commitments	4,730			Other Income
Total	$	11,722

31

Impact of Derivative Instruments on the Statement of Income

For the Nine Months Ended September 30, 2013

(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	$	430	Other Income	$	(430	)
Total		$	430		$	(430	)

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	$	74		Other Income	$	—	Other Income	$	—
Forward Loan Sales Commitments	(651		)	Other Income	4,744		Other Income	—
Total	$	(577	)		$	4,744		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	50,131		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	4,877			Other Income
Rate Lock Commitments	(4,877		)	Other Income
Total	$	50,131

32

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended September 30, 2012

(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	$	131	Other Income	$	(131	)
Total		$	131		$	(131	)

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	$	27		Other Income	$	—		Other Income	$	—
Forward Loan Sales Commitments	(2,070		)	Other Income	(3,101		)	Other Income	—
Total	$	(2,043	)		$	(3,101	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	26,898		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(1,819		)	Other Income
Rate Lock Commitments	1,819			Other Income
Total	$	26,898

33

Impact of Derivative Instruments on the Statement of Income

For the Nine Months Ended September 30, 2012

(in thousands)

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

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	80		Other Income	$	—	Other Income	$	—
Forward Loan Sales Commitments	(812		)	Other Income	4,744		Other Income	—
Total	$	(732	)		$	4,744		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	55,012		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(2,517		)	Other Income
Rate Lock Commitments	2,517			Other Income
Total	$	55,012

34

Note 9

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at September 30, 2013 is as follows:

	Mortgage Banking
(In thousands)	Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2012	$	1,781	$	1,633
2013 activity:
Customer relationship intangibles	—		148
Balance at September 30, 2013	$	1,781	$	1,781

The aggregate amortization expense was $49,000 for each of the three months ended September 30, 2013 and 2012, respectively.  For each of the nine months ended September 30, 2013 and 2012, the aggregate amortization expense was $148,000, respectively.

There is no additional amortization expense.

The carrying amount of goodwill at September 30, 2013 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2012	$	24	$	10,120	$	10,144
No activity	—		—		—
Balance at September 30, 2013	$	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 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.

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. 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

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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.

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.

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, 2013 are collateralized.

Commitments to extend credit of $1.2 billion primarily have floating rates as of September 30, 2013.  At September 30, 2013, standby letters of credit were $31.7 million. Commitments to extend credit of $351.0 million as of September 30, 2013 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 the Company 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. George Mason has a reserve of $261,000 at September 30, 2013 and $628,000 at December 31, 2012.

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.

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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 enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage companies.  All borrowers are evaluated for credit worthiness prior to the extension of the commitment.  Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to 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.

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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, 2013.  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, 2013 and December 31, 2012 are shown below:

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At September 30, 2013

(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	$	5,052	$	5,052	$	—	$	—
U.S. government- sponsored agencies	78,290		—		78,290		—
Mortgage-backed securities	152,786		—		152,786		—
Municipal securities	111,439		—		111,439		—
Total investment securities available-for-sale	347,567		5,052		342,515		—
Investment securities — trading	3,716		—		3,716		—
Loans receivable — designated for fair value hedge	11,045		—		11,045		—
Bank-owned life insurance	31,958		—		31,958		—
Derivative liability - interest rate swaps	123		—		123		—
Derivative asset - rate lock and forward loan sales commitments	15,848		—		15,848		—
Derivative asset — interest rate lock commitments	4,879		—		4,879		—
Derivative liability - rate lock and forward loan sales commitments	11,405		—		11,405		—
Derivative liability — interest rate lock commitments	149		—		149		—

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At December 31, 2012 (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	$	5,110	$	5,110	$	—	$	—
U.S. government- sponsored agencies	61,533				61,533		—
Mortgage-backed securities	118,913		—		118,913		—
Municipal securities	86,347		—		86,347		—
Total investment securities available-for-sale	271,903		5,110		266,793		—
Investment securities — trading	3,151		—		3,151		—
Loan receivable designated in fair value hedge	11,652		—		11,652		—
Bank-owned life insurance	31,652		—		31,652		—
Derivative liability - interest rate swaps	616		—		616		—
Derivative asset - rate lock and forward loan sales commitments	26,793		—		26,793		—
Derivative asset — interest rate lock commitments	449		—		449		—
Derivative liability - rate lock and forward loan sales commitments	4,072		—		4,072		—
Derivative liability — interest rate lock commitments	91		—		91		—

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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 pooled trust preferred securities held in its held-to-maturity investment securities portfolio, loans receivable — evaluated for impairment and other real estate owned.

At September 30, 2013

(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)
Pooled trust preferred securities	$	5,631	$	—	$	—	$	5,631
Loans receivable — evaluated for impairment	2,760		—		250		2,510

At December 31, 2012 (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)
Pooled trust preferred securities	$	5,072	$	—	$	—	$	5,072
Loans receivable — evaluated for impairment	8,446		—		820		7,626

The Company’s held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $7.1 million of par value at September 30, 2013.  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

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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 in yield 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 $2.5 million at September 30, 2013.  The total amount for each period presented represents the entire population of loans receivable — evaluated for impairment, and of this amount, $2.5 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, 2013, the Company’s Level 3 loans consisted of one relationship totaling $2.5 million which were secured primarily by commercial real estate which did not have a valuation allowance.

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.

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.

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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.  The fair value analysis also included other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, as appropriate.  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, 2013 and December 31, 2012:

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	September 30, 2013
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1	Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	23,652	$	23,652	23,652	$	—	$	—
Investment securities available-for-sale	347,567		347,567		5,052	342,515		—
Investment securities held-to-maturity and other investments	23,859		22,519		—	16,888		5,631
Loans held for sale	323,341		323,341		—	323,341		—
Loans receivable, net	1,963,519		1,951,586		—	11,295		1,940,291
Accrued interest receivable	7,321		7,321		7,321	—		—
Financial liabilities:
Demand deposits	$	434,228	$	434,228	434,228	$	—	$	—
Interest checking	386,139		386,139		386,139	—		—
Money market and statement savings	516,513		516,513		516,513	—		—
Certificates of deposit	745,196		750,688		—	750,688		—
Other borrowed funds	355,321		373,044		—	373,044		—
Accrued interest payable	873		873		873	—		—

	December 31, 2012
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	67,140	$	67,140	$	67,140	$	—	$	—
Investment securities available-for-sale	271,903		271,903		5,110		266,793		—
Investment securities held-to-maturity and other investments	25,668		23,321		—		18,249		5,072
Loans held for sale	785,751		785,751		—		785,751		—
Loans receivable, net	1,776,029		1,823,356		—		12,472		1,810,884
Accrued interest receivable	7,333		7,333		7,333		—		—
Financial liabilities:
Demand deposits	$	351,815	$	351,815	$	351,815	$	—	$	—
Interest checking	347,697		347,697		347,697		—		—
Money market and statement savings	430,391		430,391		430,391		—		—
Certificates of deposit	1,113,855		1,124,235		—		1,124,235		—
Other borrowed funds	392,275		418,808		—		418,808		—
Accrued interest payable	974		974		974		—		—

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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, 2013 and December 31, 2012 and the results of our operations for the three and nine months ended September 30, 2013 and 2012. 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, 2012.

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;

·decrease in the volume of loan originations at our mortgage banking subsidiaries as a result of the cyclical nature of mortgage banking, changes in interest rates, economic conditions, decreased economic activity, and slowdowns in the housing market which would negatively impact the income recorded on the sales of loans held for sale;

·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 within the wealth management 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, 2012.

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.

On September 9, 2013, the Company and United Financial Banking Companies (“United Financial”) announced the signing of a definitive merger agreement under which the Company will acquire United Financial, the holding company of The Business Bank (“TBB”). TBB, headquartered in Vienna, Virginia, currently operates eight banking locations in the northern Virginia market.  Based on the financials the Company and United Financial reported for their respective quarters ended June 30, 2013, on a pro forma basis, the combined organization would have total assets of $3.2 billion, gross loans held for investment of $2.1 billion and deposits of $2.4 billion.  The merger will solidify Cardinal as the largest community bank headquartered in the northern Virginia market and will be accretive to earnings per share in the first full year.  Under the terms of the merger agreement, common shareholders of United Financial will receive 1.154 shares of the Company’s common stock plus $19.13 in cash for each share of United Financial.  The companies expect to consummate the transaction in early January 2014, subject to customary closing conditions, including regulatory and shareholder approvals. The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-4 to register the shares of its common stock that will be issued in the merger and to provide the appropriate information about the merger in connection with the solicitation of the approval of the merger by the shareholders of United Financial.  The Form S-4 was declared effective by the Securities and Exchange Commission on November 4, 2013 and the definitive proxy statement/prospectus was mailed to shareholders of United Financial on or about November 7, 2013.

We own Cardinal Bank (the “Bank”), a Virginia state-chartered community bank with 28 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 retail securities brokerage through Cardinal Wealth Services, Inc. (“CWS”).

Prior to June 30, 2013, the Bank had a trust division, Cardinal Trust and Investment Services.  This division merged its remaining operations as of June 30, 2013 into CWS.  In addition, as of June 30, 2013, Wilson/Bennett Capital Management, Inc., formerly the Company’s second nonbank subsidiary, merged its operations into CWS.  During the second quarter of 2013, we exited the third party institutional custody and trustee component of our trust services division due to our limited opportunity to leverage this platform.  As a result of our reorganization of the wealth management business segment, the remaining personal and commercial trust area of this business consolidated into CWS.  In addition, the remaining Wilson/Bennett clients are now serviced on the CWS platform beginning in the third quarter of 2013.  Results for the three and nine months ended September 30, 2013 include the operations of these subsidiaries.

We had a second mortgage subsidiary, Cardinal First Mortgage, LLC (“Cardinal First”) based in Fairfax, Virginia, but as of June 30, 2013, this subsidiary merged into George Mason to improve operational efficiency.  Results for the three and nine months ended September 30, 2013 include the operations of this subsidiary.

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, gains and losses on sales of investment securities available-for-sale, gains on sales of mortgage loans, and management fee income. Realized and unrealized gains on mortgage banking activities has become a larger component of our noninterest income as we have added offices throughout the Washington metropolitan region and increased the number of loan originators in our mortgage banking segment over the past year.

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.

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The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, the fair value measurements of certain assets and liabilities, accounting for economic hedging activities, accounting for impairment testing of goodwill, accounting for the impairment of amortizing intangible assets and other long-lived assets, and the valuation of deferred tax assets.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in our loan portfolio.  Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.  Unusual and infrequently occurring events, such as weather-related disasters, may impact our assessment of possible credit losses.  As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions, and concentrations of credit, competition, and loan review results 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. Typically, financial institutions use their historical loss experience and trends in losses for each loan category which are then adjusted for portfolio trends and economical and environmental factors in determining their allowance for loan losses.  Prior to 2008, we experienced minimal loss history within our loan portfolio and it has only been since the economic downturn that we have recorded a higher level of loan losses.  Because of this, our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular loan portfolio characteristics and environmental factors.   The indicated loss factors resulting from this analysis are applied for each of the five categories of loans.

Our peer groups are defined by selecting commercial banking institutions of similar size within Virginia, Maryland, and the District of Columbia. This is known as our custom peer group.   The commercial banking institutions comprising the custom peer group can change based on certain factors including but not limited to the characteristics, size, and geographic footprint of the institution. We have identified 20 banks for our custom peer group which are within $500 million to $5 billion in total assets, the majority of whom are geographically concentrated in the Washington metropolitan area in which we operate as this area has seen less of an economic downturn than other areas of the country.  We evaluate the loan quality indicators of our custom peer group to those within our national FDIC peer group, all banks in Virginia, and all banks in Maryland.  These baseline peer group loss rates are then adjusted by an estimated loss emergence factor in order to determine loss coverage for pass-level credits.  Finally, we make adjustments to these loss factors based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk.  Our peer loss rates are updated on at least an annual basis.

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. In certain cases, we apply, in accordance with regulatory guidelines, a 5% loss factor to loans classified as special

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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.   However, in most instances, we evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated.  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.  Because of the limited number of impaired loans in our portfolio, we are able to evaluate each impaired loan individually and therefore our specific reserves for impaired loans are generally less than those recommended by the listed regulatory guidelines above.

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, 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.

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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.

Accounting for Impairment Testing of Goodwill

During 2011, we adopted 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

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impairment test. We perform our annual review of the goodwill related to our mortgage banking segment during the third quarter.

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 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

The FASB issued ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This ASU allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets. An organization that elects to perform a qualitative assessment is required to perform the quantitative impairment test for an indefinite-lived intangible asset if it is more likely than not that the asset is impaired. The ASU, which applies to all public, private, and not-for-profit organizations, is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The adoption of

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this standard did not have a material impact on our consolidated financial condition or results of operations.

2013 Economic Environment

The banking environment and the markets in which we conduct our businesses will continue to be strongly influenced by developments in the U.S. and global economies, as well as the continued implementation of rulemaking from recent financial reforms.  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 regions.  Our credit quality continues to remain strong despite the challenging economic environment.  At September 30, 2013, we had nonaccrual loans totaling $2.5 million and no loans contractually past due 90 days or more as to principal or interest and still accruing.  We had annualized net recoveries of 0.03% of our average loans receivable for the nine months ended September 30, 2013.

The interest rate environment and expectations that the Federal Reserve will moderate its qualitative easing (“QE”) programs may impact the results of our mortgage banking segment.  Typically, during periods of increasing interest rates, mortgage originations decrease.  The degree of the impact is dependent upon the severity and duration of QE pullback and increasing interest rates.

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 2013. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

Continued uncertainty and sluggish economic conditions could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses.  Deterioration in real estate values and household incomes may also 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 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.  The banking industry is awaiting many of the regulations resulting from

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the implementation of the Financial Reform Act.  We remain unsure of the full impact this legislation will have on our business, operations or our financial condition.

Statements of Income

General

For the three months ended September 30, 2013 and 2012, we reported net income of $3.0 million and $14.5 million, respectively, a decrease of $11.5 million, or 79%.  Net interest income after the provision for loan losses increased $1.3 million to $23.5 million for the three months ended September 30, 2013 compared to $22.2 million for the three months ended September 30, 2012.  Provision for loan losses for the three months ended September 30, 2013 was $157,000, a decrease of $1.3 million, compared to $1.5 million for the same period of 2012, a result of the improvement we have seen in the credit quality within our loans receivable portfolio.  Noninterest income for the three months ended September 30, 2013 and 2012 was $1.7 million and $22.2 million, respectively, a decrease of $20.5 million.  Realized and unrealized gains on mortgage banking activities decreased $18.7 million.  This decrease was primarily due to the significant decrease in mortgage loan originations along with the compression of the gain on sale margin experienced during the third quarter of 2013 due to increases in interest rates.  In addition, management fee income decreased $569,000 primarily as a result of the discontinuation of two managed company relationships and the current mortgage industry environment.  Title insurance & other related income were also impacted by the slowdown in the mortgage business; decreasing $581,000 during the third quarter of 2013 as compared to the same 2012 period.  For the three months ended September 30, 2013, noninterest expense decreased to $21.0 million, compared to $22.3 million for the same period of 2012.  The decrease in noninterest expense is primarily attributable to a decrease in the variable component of our salaries & benefits expense, which was impacted directly by the decrease in operating results during the current period.  Expenses related to the geographic expansion of our mortgage banking business segment partially offset this decrease in compensation expense.

For the three months ended September 30, 2013, basic and diluted earnings per common share were each $0.10.  Basic and diluted earnings per common share for the three months ended September 30, 2012 were $0.49 and $0.48, respectively.  Weighted average fully diluted shares outstanding for the three months ended September 30, 2013 and 2012 were 31,060,572 and 30,237,755, respectively.

Return on average assets for the three months ended September 30, 2013 and 2012 was 0.43% and 2.08%, respectively. Return on average equity for the three months ended September 30, 2013 and 2012 was 3.73% and 20.09%, respectively.

Net income for the nine months ended September 30, 2013 and 2012 was $20.0 million and $32.3 million, respectively, a decrease of $12.3 million, or 38%.  Net interest income after provision for loan losses for the nine months ended September 30, 2013 increased $7.8 million to $69.0 million, compared to $61.2 million for the same nine month period of 2012.  Provision for loan losses for the nine months ended September 30, 2013 was $(432,000), a decrease of $6.1 million, compared to $5.6 million for the same period of 2012, a result of the improvement we have seen in the credit quality within our loans receivable portfolio.    Net interest income increased to $68.5 million for the nine months ended September 30, 2013, compared to $66.8 million for the nine months ended September 30, 2012.  Noninterest income decreased $24.6 million to $23.8 million for the nine months ended September 30, 2013, compared to $48.4 million for the same period of 2012.  Noninterest expense was $63.0 million for the nine months

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ended September 30, 2013, an increase of $2.3 million compared to $60.7 million for the nine months ended September 30, 2012.

For the nine months ended September 30, 2013, basic and diluted earnings per common share were $0.65 and $0.64, respectively.  Basic and diluted earnings per common share for the nine months ended September 30, 2012 were $1.09 and $1.07, respectively.  Weighted average fully diluted shares outstanding for the nine months ended September 30, 2013 and 2012 were 31,053,448 and 30,107,895, respectively.

Return on average assets for the nine months ended September 30, 2013 and 2012 was 0.95% and 1.65%, respectively. Return on average equity for the nine months ended September 30, 2013 and 2012 was 8.34% and 15.58%, respectively.

General —Business Segments

We operate in three business segments: commercial banking, mortgage banking, and wealth management services.  As of June 30, 2013, we merged operations of our trust division and Wilson/Bennett Capital Management, Inc., both of which had been included in the wealth management services segment, into CWS.  In addition, as of June 30, 2013, we merged operations of Cardinal First Mortgage, LLC into George Mason.  Results for the three and nine months ended September 30, 2013 include the operations of these subsidiaries.

Net income attributable to the commercial banking segment for the three months ended September 30, 2013 was $8.6 million compared to net income of $8.2 million for the three months ended September 30, 2012.  Net interest income decreased $86,000 to $23.1 million for the three months ended September 30, 2013, compared to $23.2 million for the same period of 2012.  Provision for loan losses decreased $1.3 million to $157,000 for the three months ended September 30, 2013 compared to $1.5 million for the same period of 2012. The decrease in our provision expense was primarily related to a decrease in our watch list credits and net recoveries recorded during the third quarter of 2013.  Noninterest income decreased to $1.0 million for the three months ended September 30, 2013 compared to $1.1 million for the three months ended September 30, 2012.  Noninterest expense was $11.1 million for the three months ended September 30, 2013, compared to $10.5 million for the same period of 2012.

For the nine months ended September 30, 2013, net income attributable to the commercial banking segment was $26.1 million, an increase of $5.7 million, from $20.4 million for the same nine month period of 2012.  Net interest income increased $1.8 million to $67.4 million for the nine months ended September 30, 2013, compared to $65.6 million for the nine months ended September 30, 2012.  Provision for loan losses decreased $5.9 million to $(517,000) million for the nine months ended September 30, 2013.  Noninterest income increased $58,000 during the nine months ended September 30, 2013 compared to the same period of 2012.  Noninterest expense decreased to $31.3 million from $32.3 million for the nine months ended September 30, 2013 compared to the same period of 2012.

The mortgage banking segment reported a net loss of $4.9 million for the three months ended September 30, 2013 compared to net income of $7.0 million for the three months ended September 30, 2012.  For the nine months ended September 30, 2013, this segment reported a net loss of $3.6 million, compared to net income of $14.0 million for the nine months ended September 30, 2012. The decrease in net income is primarily a result of decreases in unrealized gains associated with the fair value of commitments and loans held for sale due to the significant decrease in mortgage loan originations and gain on sale margin compression experienced during

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the third quarter of 2013 as a result of increases in interest rates.  For the three months ended September 30, 2013, we experienced a decrease of $18.7 million of realized and unrealized gains associated with the fair value of commitments and loans held for sale that affected income for the third quarter of 2013 compared to the same 2012 period.  For the nine months ended September 30, 2013, we recorded a decrease of $21.6 million of realized and unrealized gains compared to the nine months ended of 2012.

Loan commitments are accounted for as derivative instruments and are recorded at fair value through earnings.  This causes an unrealized gain to be recognized in income at the time of the commitment.  When the loan actually closes, the unrealized gain is added to the basis of the ensuing loan held for sale (LHFS).  At any point in time, the fair value of the locked commitments and the premium to the basis of existing LHFS represent unrealized gains that have been recognized in income, either in the current period or prior periods.  At the time the loan is sold to investors, the “investor buy price” is equal to the basis of the loan held for sale, and there is no gain or loss recognized.  However, this accounting creates a mismatch between the income recognition on loan production and the expense recognition for those same loans.  Direct (e.g. commissions) and indirect loan expenses associated with originating, underwriting and closing loans are deferred and recognized at the time of investor purchase of the loan which often occurs in the quarter subsequent to the original commitment, creating a mismatch in the timing of the revenue and expense.  These expenses are “netted” from the gain on sale from mortgage banking activities and resulted in a net loss for the current quarter ended September 30, 2013.

We have continued to expand the mortgage banking business segment through increases in loan origination officers and number of locations, which has contributed to increases in noninterest expense during 2013 compared to 2012.

The wealth management services segment, which includes CWS, and the results of operations of Wilson/Bennett and the trust division of the Bank prior to the merging of these entities into CWS during the second quarter of 2013, recorded net income of $61,000 for the three months ended September 30, 2013, compared to a net loss of $48,000 for the three months ended September 30, 2012.  For the nine months ended September 30, 2013, this business segment recorded a net loss of $218,000 compared a net loss of $40,000 for the same period in 2012. The increase in the net loss during 2013 is primarily attributable to our streamlining the business operations within this business segment.  We do not expect the wealth management services segment to incur losses at this level now that we have completed the reorganization.  During the second quarter of 2012, we decided to exit the third party institutional custody and trustee component of our trust services division due to our limited opportunity to leverage the platform.  This portion of our trust services division ended during the second quarter of 2013.  In addition, as a result of our reorganization of our wealth management business segment, the majority of the remaining personal and commercial trust area of this business consolidated into CWS.  We consolidated Wilson/Bennett into CWS and as a result, the remaining former Wilson/Bennett clients are now serviced on the CWS platform.

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. For each of the three month periods ended September 30, 2013 and 2012, net interest income was $23.7 million.  For the nine months ended September 30, 2013, our net interest income was $68.5

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million compared to $66.8 million for the same period in 2012, an increase of $1.7 million, or 3%. The yields on our loans receivable portfolio decreased 35 basis points for the three months ended September 30, 2013 compared to the same period of 2012.   This decrease was partially offset by the decrease in the rate of our interest-bearing liabilities of 9 basis points as we have taken efforts to reduce our overall funding costs as a result of the current low interest rate environment.

Interest income on loans receivable decreased $518,000 for the three months ended September 30, 2013 compared to the same three month period of 2012.  For the nine months ended September 30, 2013 and 2012, interest income on loans receivable was $63.8 million and $63.2 million, respectively.  The increase in interest income on loans receivable is primarily a result of the increase in the volume of the loans receivable portfolio.  Interest income on loans held for sale was $4.1 million and $5.5 million for the three months ended September 30, 2013 and 2012, respectively, a decrease of $1.4 million, reflecting the significant decrease in origination activity within the mortgage banking segment during the third quarter of 2013.  For the nine months ended September 30, 2013, interest income from loans held for sale increased to $13.3 million compared to $13.2 million for the nine months ended September 30, 2012.

Interest income on investment securities increased $77,000 for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. The increase in interest income in our investment securities portfolio is attributable to our purchasing over $122 million in investment securities during the third quarter of 2013 as a result of having excess cash available to invest from the decrease in the loans held for sale portfolio during this same period.  For the nine months ended September 30, 2012, interest income on investment securities decreased $840,000.  The decrease in interest income on investment securities is due to the decrease in our investment securities portfolio year over year.  Because of the previously high volume of loan origination activity and low interest rate environment, we had limited our purchase activity within the investment securities prior to the third quarter of 2013.

Total interest expense decreased $820,000 for the three months ended September 30, 2013 as compared to the same period of 2012.  For the nine months ended September 30, 2013, total interest expense decreased $1.8 million compared to the same nine month period of 2012. During the first quarter of 2012, we introduced a high-yield interest checking product, which paid an interest rate of 2.01% on balances up to $100,000 and 0.31% on balances over $100,000.  We expected that this product would negatively impact our 2012 net interest margin slightly as we increased deposit market share through this promotion.  We have since decreased the rate to 1.01% gradually over the past year on this particular deposit product, which has contributed to the decrease in interest expense all while maintaining depositor balances.

Also contributing to the decrease in interest expense is the blend and extend cost reduction strategy we implemented during the second quarter of 2012 on certain of our FHLB advances.  As anticipated, this strategy contributes to the reduction of our interest expense by approximately $500,000 annually.

Our net interest margin, on a tax-equivalent basis, which is calculated as net interest income divided by average interest earning assets, was 3.65% and 3.62% for the three months ended September 30, 2013 and 2012, respectively.  For the nine months ended September 30, 2013 and 2012, net interest margin was 3.47% and 3.63% respectively.  Our net interest margin was negatively impacted as a result of a temporary increase in our fed funds sold average balances during 2013 by $63.3 million as compared to the same nine month period of 2012.  This increase in short term investments was a result of the decline we experienced in our loans held for sale portfolio during the first quarter of 2013 as we saw a rapid decrease due to investors purchasing loans we had originated during the fourth quarter of 2012.  We had not anticipated such a quick increase in loan purchases and therefore had short-term liabilities outstanding that would have otherwise assisted in funding the loans held for sale portfolio.  We expect that our net interest margin will increase during the 2013 as cash invested in fed funds sold has been used to fund loans in our loans receivable portfolio and new purchases of investment securities.

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.

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

Three Months Ended September 30, 2013, 2012 and 2011

(In thousands)

	2013							2012							2011
				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	$	214,301		$	2,167	4.04	%	$	218,233		$	2,338	4.27	%	$	210,912		$	2,300	4.34	%
Real estate - commercial	960,770			11,439		4.65	%	752,653			10,149		5.39	%	674,589			10,003		5.91	%
Real estate - construction	345,072			4,555		5.28	%	364,238			4,828		5.30	%	249,600			3,515		5.63	%
Real estate - residential	259,395			2,800		4.31	%	259,782			3,002		4.62	%	222,814			2,729		4.90	%
Home equity lines	110,297			1,020		3.67	%	119,554			1,104		3.67	%	122,350			1,144		3.71	%
Consumer	2,601			34		5.18	%	4,089			50		4.86	%	3,127			43		5.58	%
Total loans	1,892,436			22,015		4.65	%	1,718,549			21,471		5.00	%	1,483,392			19,734		5.33	%
Loans held for sale	373,318			4,141		4.44	%	571,715			5,544		3.88	%	242,309			2,851		4.71	%
Investment securities available-for-sale	294,445			3,023		4.11	%	270,450			2,889		4.27	%	319,890			3,522		4.40	%
Investment securities held-to-maturity	10,146			44		1.72	%	11,972			73		2.43	%	14,626			92		2.50	%
Other investments	13,312			84		2.50	%	14,166			60		1.68	%	15,714			30		0.76	%
Federal funds sold	44,788			28		0.25	%	52,519			30		0.23	%	28,382			15		0.22	%
Total interest-earning assets and interest income (2)	2,628,445			29,335		4.46	%	2,639,371			30,067		4.56	%	2,104,313			26,244		4.99	%
Noninterest-earning assets:
Cash and due from banks	16,876							14,172							14,607
Premises and equipment, net	19,846							19,275							18,197
Goodwill and other intangibles, net	10,168							10,368							10,571
Accrued interest and other assets	120,034							117,522							89,665
Allowance for loan losses	(27,211		)					(27,300		)					(24,148		)
Total assets	$	2,768,158						$	2,773,408						$	2,213,205
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	$	387,367		518		0.53	%	$	319,617		860		1.07	%	$	137,063		66		0.19	%
Money markets	300,920			177		0.23	%	380,531			298		0.31	%	169,717			174		0.41	%
Statement savings	219,021			145		0.26	%	221,549			144		0.26	%	231,963			213		0.36	%
Certificates of deposit	761,246			2,326		1.21	%	870,470			2,633		1.20	%	781,319			2,918		1.48	%
Total interest - bearing deposits	1,668,554			3,166		0.75	%	1,792,167			3,935		0.87	%	1,320,062			3,371		1.01	%
Other borrowed funds	291,787			2,194		2.98	%	296,515			2,245		3.01	%	357,759			2,577		2.86	%
Total interest-bearing liabilities and interest expense	1,960,341			5,360		1.08	%	2,088,682			6,180		1.18	%	1,677,821			5,948		1.41	%
Noninterest-bearing liabilities:
Demand deposits	426,265							347,346							261,911
Other liabilities	62,150							49,567							27,505
Common shareholders’ equity	319,402							287,813							245,968
Total liabilities and shareholders’ equity	$	2,768,158						$	2,773,408						$	2,213,205
Net interest income and net interest margin (2)				$	23,975	3.65	%				$	23,887	3.62	%				$	20,296	3.86	%

(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 35% for all periods presented.

57

Rate and Volume Analysis

Three Months Ended September 30, 2013, 2012 and 2011

(In thousands)

	2013 Compared to 2012									2012 Compared to 2011
	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	$	(53	)	$	(118	)	$	(171	)	$	80		$	(42	)	$	38
Real estate - commercial	3,070			(1,780		)	1,290			1,120			(974		)	146
Real estate - construction	(254		)	(19		)	(273		)	1,614			(301		)	1,313
Real estate - residential	2			(204		)	(202		)	453			(180		)	273
Home equity lines	(83		)	(1		)	(84		)	(29		)	(11		)	(40		)
Consumer	(18		)	2			(16		)	14			(7		)	7
Total loans	2,664			(2,120		)	544			3,252			(1,515		)	1,737
Loans held for sale	(1,924		)	521			(1,403		)	3,876			(1,183		)	2,693
Investment securities available-for-sale	256			(122		)	134			(544		)	(89		)	(633		)
Investment securities held-to-maturity	(11		)	(18		)	(29		)	(17		)	(2		)	(19		)
Other investments	(3		)	27			24			(3		)	33			30
Federal funds sold	(4		)	2			(2		)	14			1			15
Total interest income (2)	978			(1,710		)	(732		)	6,578			(2,755		)	3,823
Interest expense:
Interest - bearing deposits:
Interest checking	169			(511		)	(342		)	96			698			794
Money markets	(55		)	(66		)	(121		)	216			(92		)	124
Statement savings	(1		)	2			1			(15		)	(54		)	(69		)
Certificates of deposit	(324		)	17			(307		)	312			(597		)	(285		)
Total interest - bearing deposits	(211		)	(558		)	(769		)	609			(45		)	564
Other borrowed funds	(30		)	(21		)	(51		)	(442		)	110			(332		)
Total interest expense	(241		)	(579		)	(820		)	167			65			232
Net interest income (2)	$	1,219		$	(1,131	)	$	88		$	6,411		$	(2,820	)	$	3,591

(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 35% for all periods presented.

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

58

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

Nine Months Ended September 30, 2013, 2012 and 2011

(In thousands)

	2013							2012							2011
				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	$	214,232		$	6,499	4.04	%	$	231,389		$	7,260	4.17	%	$	195,482		$	6,521	4.43	%
Real estate - commercial	881,570			32,118		4.79	%	745,099			30,433		5.45	%	648,786			29,198		5.97	%
Real estate - construction	351,975			13,918		5.27	%	330,372			13,204		5.32	%	245,370			10,152		5.52	%
Real estate - residential	240,380			8,012		4.44	%	245,051			8,880		4.83	%	216,742			8,234		5.06	%
Home equity lines	113,573			3,135		3.69	%	120,284			3,338		3.71	%	122,337			3,394		3.71	%
Consumer	3,156			127		5.33	%	3,361			130		5.16	%	3,103			124		5.34	%
Total loans	1,804,886			63,809		4.71	%	1,675,556			63,245		5.03	%	1,431,820			57,623		5.36	%
Loans held for sale	447,519			13,258		3.95	%	438,898			13,184		4.01	%	172,927			6,045		4.66	%
Investment securities available-for-sale	256,059			8,087		4.21	%	269,037			8,816		4.37	%	328,911			10,856		4.40	%
Investment securities held-to-maturity	10,647			148		1.85	%	12,373			236		2.55	%	17,090			354		2.76	%
Other investments	13,387			240		2.39	%	15,646			170		1.45	%	15,721			93		0.78	%
Federal funds sold	129,884			244		0.25	%	66,626			118		0.24	%	41,752			72		0.23	%
Total interest-earning assets and interest income (2)	2,662,382			85,786		4.71	%	2,478,136			85,769		4.61	%	2,008,221			75,043		4.98	%
Noninterest-earning assets:
Cash and due from banks	16,773							15,444							14,513
Premises and equipment, net	19,602							18,738							17,487
Goodwill and other intangibles, net	10,217							10,420							10,618
Accrued interest and other assets	110,004							106,809							84,028
Allowance for loan losses	(27,340		)					(27,085		)					(24,485		)
Total assets	$	2,791,638						$	2,602,462						$	2,110,382
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	371,099			1,651		0.59	%	265,287			1,906		0.96	%	134,838			192		0.19	%
Money markets	292,232			624		0.28	%	281,045			737		0.35	%	162,009			500		0.41	%
Statement savings	213,498			425		0.27	%	218,657			507		0.31	%	242,824			659		0.36	%
Certificates of deposit	853,174			7,237		1.13	%	883,548			8,159		1.23	%	698,683			8,754		1.68	%
Total interest - bearing deposits	1,730,003			9,937		0.77	%	1,648,537			11,309		0.92	%	1,238,354			10,105		1.09	%
Other borrowed funds	290,509			6,554		3.02	%	318,350			6,943		2.91	%	363,901			7,821		2.87	%
Total interest-bearing liabilities and interest expense	2,020,512			16,491		1.09	%	1,966,887			18,252		1.24	%	1,602,255			17,926		1.50	%
Noninterest-bearing liabilities:
Demand deposits	403,881							320,242							245,915
Other liabilities	48,052							39,293							25,539
Common shareholders’ equity	319,193							276,040							236,673
Total liabilities and shareholders’ equity	$	2,791,638						$	2,602,462						$	2,110,382
Net interest income and net interest margin (2)				$	69,295	3.47	%				$	67,517	3.63	%				$	57,117	3.79	%

(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 35% for all periods presented.

59

Rate and Volume Analysis

Nine Months Ended September 30, 2013, 2012 and 2011

(In thousands)

	2013 Compared to 2012									2012 Compared to 2011
	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	$	(554	)	$	(207	)	$	(761	)	$	1,180		$	(441	)	$	739
Real estate - commercial	6,037			(4,352		)	1,685			4,167			(2,932		)	1,235
Real estate - construction	837			(123		)	714			3,542			(490		)	3,052
Real estate - residential	(169		)	(699		)	(868		)	1,057			(411		)	646
Home equity lines	(186		)	(17		)	(203		)	(57		)	1			(56		)
Consumer	(7		)	4			(3		)	11			(5		)	6
Total loans	5,958			(5,394		)	564			9,900			(4,278		)	5,622
Loans held for sale	259			(185		)	74			9,298			(2,159		)	7,139
Investment securities available-for-sale	(425		)	(304		)	(729		)	(1,976		)	(64		)	(2,040		)
Investment securities held-to-maturity	(32		)	(56		)	(88		)	(99		)	(19		)	(118		)
Other investments	(25		)	95			70			(2		)	79			77
Federal funds sold	112			14			126			43			3			46
Total interest income (2)	5,847			(5,830		)	17			17,164			(6,438		)	10,726
Interest expense:
Interest - bearing deposits:
Interest checking	760			(1,015		)	(255		)	186			1,528			1,714
Money markets	51			(164		)	(113		)	367			(130		)	237
Statement savings	(12		)	(70		)	(82		)	(66		)	(86		)	(152		)
Certificates of deposit	(280		)	(642		)	(922		)	2,316			(2,911		)	(595		)
Total interest - bearing deposits	519			(1,891		)	(1,372		)	2,803			(1,599		)	1,204
Other borrowed funds	(629		)	240			(389		)	(955		)	77			(878		)
Total interest expense	(110		)	(1,651		)	(1,761		)	1,848			(1,522		)	326
Net interest income (2)	$	5,957		$	(4,179	)	$	1,778		$	15,316		$	(4,916	)	$	10,400

(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 35% for all periods presented.

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

60

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2013 and 2012 was $157,000 and $1.5 million, respectively. For the nine months ended September 30, 2013 and 2012, our provision for loan losses was $(432,000) and $5.6 million, respectively. The decrease in our provision expense during 2013 compared to 2012 is a result of net recoveries recorded during 2013 and a decrease in our watch list credits during 2013.

During 2013, we recorded one charge-off of $85,000 on a residential mortgage.  In addition, we charged-off home equity loans of $100,000 during the second quarter of 2013.  Recoveries from previously charged-off loans totaled $301,000 for the three months ended September 30, 2013 and $648,000 for the year-to- date 2013 period.  During 2013, we sold several loans that encompassed one relationship.  These loans had been on a nonaccrual status for several years with limited possibility of improvement.  The majority of our recoveries were a result of these loan sales.  Nonperforming loans at September 30, 2013 and December 31, 2012, were $2.5 million and $7.6 million, respectively.

The allowance for loan losses was $27.4 million at September 30, 2013 and December 31, 2012. Our allowance for loan losses ratio as a percent of total loans was 1.40% and 1.52% at September 30, 2013 and December 31, 2012, respectively.

A sluggish job market could adversely affect our home equity lines 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.  Deterioration in commercial and residential real estate values, employment data and household incomes may also result in higher credit losses in our commercial loan portfolio.  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, 2013, our commercial real estate (including construction lending) portfolio was 69% 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.

61

Allowance for Loan Losses

Three and Nine Months Ended September 30, 2013 and 2012

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Balance, beginning of the period	$	26,934		$	26,660		$	27,400		$	26,159
Provision for loan losses	157			1,500			(432		)	5,623
Loans charged off:
Commercial and industrial	—			(1,478		)	(42		)	(5,613		)
Residential	—			(331		)	(185		)	(713		)
Consumer	—			—			(1		)	(15		)
Total loans charged off	—			(1,809		)	(228		)	(6,341		)
Recoveries:
Commercial and industrial	290			11			609			727
Residential	11			7			41			201
Consumer	—			—			2			—
Total recoveries	301			18			652			928
Net (charge offs) recoveries	301			(1,791		)	424			(5,413		)
Ending balance, September 30,	$	27,392		$	26,369		$	27,392		$	26,369
	September 30,			September 30,
	2013			2012
Loans:
Balance at period end	$	1,963,519		$	1,723,324
Allowance for loan losses to loans receivable, net of fees	1.40		%	1.53		%
Annualized net charge-offs to average loans receivable	-0.03		%	0.43		%

62

Allocation of the Allowance for Loan Losses

At September 30, 2013 and December 31, 2012

(In thousands)

	September 30,				December 31,
	2013				2012
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	700	10.56	%	$	525	12.35	%
Real estate - commercial	19,646		50.79	%	17,990		45.80	%
Real estate - construction	6,467		17.96	%	7,675		20.69	%
Real estate - residential	373		14.95	%	857		14.42	%
Home equity lines	141		5.55	%	266		6.51	%
Consumer	65		0.19	%	87		0.23	%
Total allowance for loan losses	$	27,392	100.00	%	$	27,400	100.00	%

* Percentage of loan type to the total loan portfolio.

63

Nonperforming Loans

At September 30, 2013 and December 31, 2012

(In thousands)

	September 30,		December 31,
	2013		2012
Nonaccruing loans	$	2,510	$	7,626
Loans contractually past-due 90 days or more and still accruing	—		—
Total nonperforming loans	$	2,510	$	7,626

64

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.  Realized and unrealized gains on mortgage banking activities has become a larger component of our noninterest income as we have added offices throughout the Washington metropolitan region and increased the number of loan originators in our mortgage banking segment over the past year.

Noninterest income for the three months ended September 30, 2013 and 2012 was $1.7 million and $22.2 million, respectively.  For the nine months ended September 30, 2013 and 2012, noninterest income was $23.8 million and $48.4 million, respectively.  Noninterest income decreased in 2013 as compared to 2012 primarily as a result of significant decreases in mortgage loan originations and margin compression and the corresponding decrease in realized and unrealized gains we record on mortgage banking activities.  Realized and unrealized gains (losses) on mortgage banking activities, which are reported net of commission & incentive expense, totaled $(102,000) for the three months ended September 30, 2013 compared to $18.6 million for the same period of 2012.  For the nine months ended September 30, 2013 and 2012, realized and unrealized gains on mortgage banking activities were $17.4 million and $39.0 million, respectively.

The decrease in net gains from mortgage banking activities is mainly due to changes in the unrealized gains associated with the fair market value of our locked commitments and closed loans held for sale.  For the third quarter of 2013, the unrealized gain decreased $15.5 million as compared to the year ago quarter.  For the nine months ended September 30, 2013 the unrealized gain decreased $6.2 million compared to the comparable 2012 period.  In accordance with GAAP, if a lender enters into a mortgage loan commitment with a customer and intends to sell the mortgage loan after it is funded, the written loan commitment is to be accounted for as a derivative instrument and is to be recorded at fair value through earnings.  George Mason enters into commitments where individual loans are “locked in” at a specified interest rate for a fixed period.  At the time of commitment, George Mason also enters into a “best efforts” forward contract with an investor to sell the loan at an agreed upon price if, and after, the loan is closed. This price represents the fair value of the “interest rate lock commitment” (IRLC) and is an unrealized gain that is included in earnings during the period of the IRLC.  This gain is also recognized earlier in earnings than the expenses associated with originating, underwriting and closing the loan, which, under GAAP, are recognized and deferred by the Company at the time of loan sale to the investor.  When the loan actually closes, the unrealized gain is added to the basis of the ensuing loan held for sale (LHFS).  At any point in time (e.g. quarter end) the fair value of the existing IRLCs (not yet closed) and the premium to the basis of existing LHFS (loans closed but not yet purchased by investors) represent unrealized gains that have been recognized in income, either in the current period or prior periods.  At the time the loan is sold to investors, the “investor buy price” is equal to the basis of the loan held for sale, and there is no gain or loss recognized.  This accounting creates a mismatch between the income recognition on loan production and the expense recognition for those same loans.

As mentioned, direct costs associated with loan origination, such as commission and salaries, are recorded as a reduction to realized and unrealized gains on mortgage banking activities.

65

For the third quarter of 2013, we closed $927.5 million in mortgage originations.  This compares to $1.20 billion in mortgage originations for the three months ended September 30, 2012.  The decrease in mortgage originations is a result of the aforementioned market conditions during the third quarter of 2013.  Refinance activity represented approximately 20% of the originations during the third quarter of 2013, a decrease from 64% experienced during the year ago quarter.  For the year-to-date 2013, we closed $3.4 billion in mortgage originations compared to $2.8 billion for the 2012 year-to-date period.  Refinance activity represented approximately 35% of these originations for the year-to-date 2013 compared to 62% for the comparable 2012 period.  We have increased our mortgage banking presence to 20 offices, which include the Richmond and Virginia Beach areas of the Commonwealth of Virginia, and have added over 50 loan origination officers and support staff during the last twelve months to help increase our market share.

Management fee income, which represents the income earned for services George Mason provides to other mortgage companies and generally fluctuates based on the volume of loan sales, decreased $569,000 to $374,000 for the three months ended September 30, 2013 as compared to $943,000 for the three months ended September 30, 2012. For the nine months ended September 30, 2013 and 2012, management fee income was $1.5 million and $2.8 million, respectively.   The decrease in management fee income is a result of the discontinuation of two managed company relationships within the last year in addition to the decrease in loan origination volume experienced recently during the third quarter of 2013.

Investment fee income decreased $460,000 to $195,000 for the three months ended September 30, 2013 compared to $655,000 for the same period of 2012. For the nine months ended September 30, 2013 and 2012, investment fee income was $1.1 million and $1.9 million, respectively.  This is a result of the aforementioned restructuring that occured within the wealth management services business segment.

The increase in the cash surrender value of our bank-owned life insurance for the three and nine months ended September 30, 2013 was $124,000 and $306,000, respectively.  For the same three and nine month periods of 2012, income from bank-owned life insurance was $164,000 and $507,000, respectively.  This decrease is result of our receiving a death benefit payment of $6.6 million during the fourth quarter of 2012, which resulted in a decrease in the underlying investments of our bank-owned life insurance.

Noninterest income represented 7% and 48% of our total revenues for the three months ended September 30, 2013 and 2012, respectively.  For the nine months ended September 30, 2013 and 2012, noninterest income as a percentage of our total revenues was 26% and 42%, 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, 2013 was $21.0 million, compared to $22.3 million for the same period of 2012, a decrease of $1.3 million, or 6%.  For the nine months ended September 30, 2013 and 2012, noninterest expense was $63.0 million and $60.7 million, respectively.

For the quarter ended September 30, 2013, salaries and benefits expense decreased to $10.0 million from $12.1 million for the quarter ended September 30, 2012.  For the nine months

66

ended September 30, 2013 and 2012, salaries and benefits expense was $30.4 million and $32.5 million, respectively.  The decrease in salaries and benefits expense during 2013 compared to 2012 is a result of the decrease in the variable component of our compensation as a result of our 2013 performance.  Professional fees decreased $308,000 to $786,000 for the three months ended September 30, 2013 compared to $1.1 million for the same period of 2012 as a result of the decrease in temporary staffing we had at George Mason to handle the increase in loan origination volume we experienced during the third quarter of 2012; due to the increase in refinance activity during that period.  For the nine months ended September 30, 2013 and 2012, professional fees were $3.2 million and $2.7 million, respectively.  The level of temporary staffing was maintained at George Mason until the beginning of the third quarter of 2013 when we experienced a significant decrease to loan origination volumes as a result of the aforementioned mortgage market conditions.

Occupancy expense was $2.0 million for the three months ended September 30, 2013, an increase of $167,000 when compared to the same period of 2012.  For the nine months ended September 30, 2013 and 2012, occupancy expense was $6.1 million and $5.3 million, respectively.  The increase in occupancy expense during 2013 as compared to 2012 is primarily attributable to an increase in mortgage banking offices as we strategically increased our market share in this line of business.  Cardinal Bank also opened a new office in Washington, D.C. during the third quarter of 2013 which contributed to the increase in occupancy expense.

Additional increases in noninterest expense are mostly related to the expansion of the mortgage banking business segment over the past year.  In addition, during the third quarter of 2013, we announced our plan to acquire United Financial Banking Companies, Inc., the holding company of The Business Bank.  As a result, we incurred $304,000 in merger related expenses during the third quarter of 2013 compared to none for the same 2012 period.

Income Taxes

For the three months ended September 30, 2013, we recorded a provision for income taxes of $1.2 million, compared to $7.6 million for the same period of 2012.  Our effective tax rate for the three months ended September 30, 2013 and 2012 was 28.2% and 34.4%, respectively.  For the nine months ended September 30, 2013, we recorded a provision for income taxes of $9.8 million, compared to $16.6 million for the same period in 2012. Our effective tax rate for the nine months ended September 30, 2013 and 2012 was 32.9% and 34.0%. Our effective tax rate is less than the statutory rate because of income we receive on tax-exempt investments.  See also “Critical Accounting Policies — Valuation of Deferred Tax Assets.”

Statements of Condition

Total assets were $2.80 billion and $3.04 billion at September 30, 2013 and December 31, 2012, respectively.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $361.1 million at September 30, 2013, compared to $286.4 million at December 31, 2012, an increase of $74.7 million.  We purchased approximately $122 million in investment securities during the third quarter of 2013 as a result of an excess cash position we had at the Bank due to the decrease in our loans held for sale portfolio.  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-

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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, 2013 and December 31, 2012

(In thousands)

	Amortized		Fair		Average
Available-for-sale at September 30, 2013	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	15,495	$	17,106	4.15	%
Five to ten years	30,138		31,743		3.02	%
After ten years	29,970		29,441		3.59	%
Total U.S. government-sponsored agencies	75,603		78,290		3.48	%
Mortgage-backed securities (1)
One to five years	41		42		4.48	%
Five to ten years	19,965		20,365		3.62	%
After ten years	127,808		132,379		3.83	%
Total mortgage-backed securities	147,814		152,786		3.80	%
Tax exempt municipal securities (2)
One to five years	7,912		8,337		4.15	%
Five to ten years	35,217		36,970		3.60	%
After ten years	59,162		60,410		3.62	%
Taxable municipal securities
Five to ten years	4,277		4,683		4.99	%
After ten years	995		1,039		5.33	%
Total municipal securities	107,563		111,439		3.72	%
U. S. treasury securities
One to five years	4,986		5,052		2.36	%
Total U.S. treasury securities	4,986		5,052		2.36	%
Total investment securities available-for-sale	$	335,966	$	347,567	3.68	%

	Amortized		Fair		Average
Held-to-maturity at September 30, 2013	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	761	$	806	4.60	%
Five to ten years	144		151		5.45	%
After ten years	1,784		1,883		2.04	%
Total mortgage-backed securities	2,689		2,840		2.95	%
Pooled trust preferred securities
After ten years	7,122		5,631		1.30	%
Total pooled trust preferred securities	7,122		5,631		1.30	%
Total investment securities held-to-maturity	9,811		8,471		1.75	%
Total investment securities	$	345,777	$	356,038	3.62	%

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	Amortized		Fair		Average
Available-for-sale at December 31, 2012	Cost		Value		Yield
U.S. government-sponsored agencies
One to five years	$	25,596	$	27,757	3.01	%
Five to ten years	30,160		33,776		3.01	%
Total U.S. government-sponsored agencies	55,756		61,533		3.01	%
Mortgage-backed securities (1)
Five to ten years	4,956		5,261		4.18	%
After ten years	105,258		113,652		4.26	%
Total mortgage-backed securities	110,214		118,913		4.26	%
Tax exempt municipal securities (2)
One to five years	5,137		5,428		4.13	%
Five to ten years	26,191		28,738		3.51	%
After ten years	42,445		46,163		4.03	%
Taxable municipal securities
Five to ten years	3,789		4,345		4.97	%
After ten years	1,493		1,673		5.27	%
Total municipal securities	79,055		86,347		3.93	%
U. S. treasury securities
One to five years	4,968		5,110		2.36	%
Total U.S. treasury securities	4,968		5,110		2.36	%
Total investment securities available-for-sale	$	249,993	$	271,903	3.84	%

	Amortized		Fair		Average
Held-to-maturity at December 31, 2012	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	186	$	201	4.48	%
Five to ten years	928		991		4.77	%
After ten years	2,591		2,755		3.86	%
Total mortgage-backed securities	3,705		3,947		4.12	%
Pooled trust preferred securities
After ten years	7,661		5,072		1.38	%
Total pooled trust preferred securities	7,661		5,072		1.38	%
Total investment securities held-to-maturity	11,366		9,019		2.27	%
Total investment securities	$	261,359	$	280,922	3.77	%

(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, 2013, 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, 2013, 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 $2.7 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, 2013, certain of our investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes 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.  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 $7.1 million of par value at September 30, 2013.  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 AA-, one security has a composite rating of A-, and two securities have a composite rating of BBB+.  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 utilize 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-

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temporary impairment.  We do not intend to sell nor do we believe it is probable that we will be required to sell these pooled trust preferred securities prior to the recovery of our investment.

In one 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 $177 million of the remaining $267 million, or 66% of the performing collateral defaulted or deferred payment.  In another 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 $154 million of the remaining $255 million, or 60% of the performing collateral defaulted or deferred payment.  In the third of the pooled trust preferred securities issues, 73% 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 $141 million of the remaining $156 million, or 91% of the performing collateral defaulted or deferred payment.  In the fourth 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 $246 million of the remaining $281 million, or 88% of the performing collateral defaulted to deferred payment.

No other-than-temporary impairment has been recognized on the securities in our investment portfolio as of September 30, 2013 and December 31, 2012, and we do not continue to hold investment securities for which we previously recognized other-than-temporary impairment.

We hold $13.3 million in FHLB stock at September 30, 2013, which is included in other investments on the statement of condition.

Loans Receivable

Total loans receivable, net of deferred fees and costs, were $1.96 billion and $1.80 billion at September 30, 2013 and December 31, 2012, respectively.  See the following table for details on the loans receivable portfolio. Loans held for sale at September 30, 2013 were $323.3 million compared to $785.8 million at December 31, 2012.  The decrease in our loans held for sale balances at September 30, 2013 compared to December 31, 2012 is directly attributable to the decrease in loan origination volume during the third quarter of 2013.  Loans held for sale are valued at the lower of cost or fair value.

Loans Receivable

At September 30, 2013 and December 31, 2012

(In thousands)

	September 30, 2013					December 31, 2012
Commercial and industrial	$	207,729		10.56	%	$	222,961		12.35	%
Real estate - commercial	999,128			50.79	%	827,243			45.80	%
Real estate - construction	353,241			17.96	%	373,717			20.69	%
Real estate - residential	294,105			14.95	%	260,352			14.42	%
Home equity lines	109,125			5.55	%	117,647			6.51	%
Consumer	3,818			0.19	%	4,204			0.23	%
Gross loans	$	1,967,146		100.00	%	1,806,124			100.00	%
Net deferred (fees) costs	(3,627		)			(2,695		)
Less: allowance for loan losses	(27,392		)			(27,400		)
Loans receivable, net	$	1,936,127				$	1,776,029

Deposits

Total deposits were $2.08 billion at September 30, 2013 compared to $2.24 billion at December 31, 2012. During 2013, we have seen increases in our non-interest bearing checking products, interest checking, money market checking, and decreases in savings deposits and certificates of deposit. The decreases in certificates of deposit are primarily a result of the decrease in brokered certificates of deposit at September 30, 2013 compared to December 31, 2012.  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

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protection.  At September 30, 2013 and December 31, 2012, we had $30.6 million and $293.6 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  The decrease in our CDARS deposits is primarily due to our repayment of obligations the Company had in the network’s one-way buy program.  Brokered certificates of deposit not in the CDARS network were $227.7 million and $323.0 million at September 30, 2013 and December 31, 2012, respectively. We use this type of funding to lock in low cost term funding to support mortgage loans we originate and intend to sell.  As loans held for sale decreased during 2013, our levels of brokered CDs decreased as well.

Certificates of Deposit of $100,000 or More

At September 30, 2013

(In thousands)

	Fixed Term		No-Penalty*		Total
Maturities:
Three months or less	$	47,024	$	11,289	$	58,313
Over three months through six months	54,952		1,067		56,019
Over six months through twelve months	69,407		1,483		70,890
Over twelve months	91,137		45,489		136,626
	$	262,520	$	59,328	$	321,848

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

Borrowings

Other borrowed funds decreased $37.0 million to $355.3 million at September 30, 2013, compared to $392.3 million at December 31, 2012.  FHLB advances remained at $215.0 million at each of September 30, 2013 and December 31, 2012.  Customer repurchase agreements increased $13.0 million to $119.7 million at September 30, 2013 compared to $106.7 million at December 31, 2012.  We had no federal funds purchased outstanding at September 30, 2013 compared to $50.0 million at December 31, 2012.  The following table provides information on our borrowings.

Short-Term Borrowings and Other Borrowed Funds

At September 30, 2013

(In thousands)

			Amount
	Interest Rate		Outstanding
Other short-term borrowed funds:
Customer repurchase agreements	0.16	%	$	119,702
Total other short-term borrowed funds and weighted average rate	0.16	%	$	119,702
Other borrowed funds:
Trust preferred	3.44	%	$	20,619
FHLB advances - long term	4.45	%	215,000
Other borrowed funds and weighted average rate	4.36	%	$	235,619
Total other borrowed funds and weighted average rate	2.95	%	$	355,321

Shareholders’ Equity

Shareholders’ equity at September 30, 2013 was $316.9 million compared to $308.1 million at December 31, 2012, an increase of $8.8 million, or 3%. The increase in shareholders’ equity at September 30, 2013 compared to December 31, 2012 is primarily attributable to net income of $20.0 million for the nine months ended September 30, 2013 less dividends of $5.1 million that were declared during 2013.  In addition, accumulated other comprehensive income decreased $7.4 million for the nine months ended September 30, 2013 as a result of the recent increase in interest rates.  Book value per share at September 30, 2013 was $10.46 compared to $10.19 at December 31, 2012. Tangible book value per share (which is book value per share less goodwill and other intangible assets) at September 30, 2013 was $10.13 compared to $9.85 at December 31, 2012.

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 services.  As of June 30, 2013, we merged operations of our trust division and Wilson/Bennett into CWS, both of which had been included in the wealth management services segment.  In addition, as of June 30, 2013, we merged operations of Cardinal First Mortgage, LLC, and merged this subsidiary into George Mason.  Results for the three and nine months ended September 30, 2013 include the operations of these subsidiaries prior to their closure.

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

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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, 2013, the commercial banking segment recorded net income of $8.6 million compared to $8.2 million for the same period of 2012.  For the nine months ended September 30, 2013, the commercial banking segment recorded net income of $26.1 million compared to $20.4 million for the same period of 2012.  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, 2013, total assets for this segment were $2.76 billion, loans receivable, net of deferred fees and costs, were $1.96 billion and total deposits were $2.08 billion. At September 30, 2012, total assets for this segment were $2.77 billion, loans receivable, net of deferred fees and costs, were $1.72 billion and total deposits were $2.18 billion.

Mortgage Banking

The operations of the mortgage banking segment are conducted through George Mason. During the second quarter of 2013, Cardinal First Mortgage, LLC was merged into George Mason.  George Mason engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis.

For the three months ended September 30, 2013 and 2012, the mortgage banking segment recorded a net loss of $4.9 million and net income of $7.0 million, respectively.  For the nine months ended September 30, 2013 and 2012, the mortgage banking segment recorded a net loss of $3.6 million and net income of $14.0 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, 2013, total assets for this segment were $335.3 million; loans held for sale were $361.1 million and mortgage funding checks were $10.1 million. At September 30, 2012, total assets for this segment were $582.7 million; loans held for sale were $802.0 million and mortgage funding checks were $83.8 million.

Wealth Management Services

The wealth management services segment provides investment and financial services to businesses and individuals, including financial planning, retirement/estate planning, and investment management.  As mentioned previously, prior to June 30, 2013, the Bank had a trust division, Cardinal Trust and Investment Services which merged remaining operations into CWS as of June 30, 2013.   In addition, as of June 30, 2013, Wilson/Bennett Capital Management, Inc., formerly the Company’s second nonbank subsidiary, merged operations into CWS.  During the second quarter of 2013, we exited the third party institutional custody and trustee component of our trust services division due to our limited opportunity to leverage this platform.  As a result of our reorganization of the wealth management business segment, the majority of the remaining personal and commercial trust area of this business consolidated into CWS.  In addition, the remaining Wilson/Bennett clients are now serviced on the CWS platform beginning in the third quarter of 2013.  Results for the three and nine months ended September 30, 2013 include the operations of these subsidiaries.

For the three months ended September 30, 2013 and 2012, the wealth management services segment recorded net income of $61,000 and a net loss of $48,000, respectively.  For the nine months ended September 30, 2013 and 2012, the wealth management services segment recorded a net loss of $218,000 and a net loss of $40,000, respectively. See “Statements of

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Income — General—Business Segments” above for additional information regarding the operating results for this business segment for the periods presented.  At September 30, 2013, total assets were $2.2 million and managed and custodial assets were $203 million. At September 30, 2012, total assets were $561,000 and managed and custodial assets were $3.0 billion.   The decrease in managed and custodial assets at September 30, 2013 compared to a year ago is a direct result of our wealth management reorganization.

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, 2013, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were 12.21% and 13.28%, respectively. At December 31, 2012, our Tier 1 and total risk-based capital ratios were 11.94% and 13.04%, respectively.  Our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions.  The increase in our risk-based capital ratios was a result of the increase in shareholders’ equity at September 30, 2013 compared to December 31, 2012 and a decrease in certain risk weighted assets, mostly loans held for sale.

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

Capital Components

At September 30, 2013 and December 31, 2012

(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, 2013
Total risk-based capital	$	344,774	13.28	%	$	207,715	>	8.00	%	$	259,644	>	10.00	%
Tier I risk-based capital	317,060		12.21	%	103,857		>	4.00	%	155,786		>	6.00	%
Leverage capital ratio	317,060		11.50	%	110,320		>	4.00	%	137,900		>	5.00	%
At December 31, 2012
Total risk-based capital	$	328,547	13.04	%	$	201,530	>	8.00	%	$	251,913	>	10.00	%
Tier I risk-based capital	300,732		11.94	%	100,765		>	4.00	%	151,148		>	6.00	%
Leverage capital ratio	300,732		10.49	%	114,693		>	4.00	%	143,366		>	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, 2013
Total risk-based capital	��	$	336,420	13.05	%	$	206,311	>	8.00	%	$	257,889	>	10.00	%
Tier I risk-based capital		308,706		11.97	%	103,156		>	4.00	%	154,733		>	6.00	%
Leverage capital ratio		308,706		11.25	%	109,767		>	4.00	%	137,209		>	5.00	%
At December 31, 2012
Total risk-based capital		$	315,511	12.59	%	$	200,440	>	8.00	%	$	250,550	>	10.00	%
Tier I risk-based capital		287,695		11.48	%	100,220		>	4.00	%	150,330		>	6.00	%
Leverage capital ratio		287,695		10.08	%	114,196		>	4.00	%	142,745		>	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

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protection.  At September 30, 2013 and December 31, 2012, we had $30.6 million and $293.6 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  The decrease in our CDARS deposits is primarily due to our repayment of obligations the Company had in the network’s one-way buy program.  Brokered certificates of deposit not in the CDARS network were $227.7 million and $323.0 million at September 30, 2013 and December 31, 2012, respectively. We chose not to replace brokered certificates of deposit that matured during 2013 as a result of the decrease in our 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, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. 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 $416.3 million at September 30, 2013 or 14.8% of total assets. We held investments that are classified as held-to-maturity in the amount of $9.8 million at September 30, 2013. 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, 2013 was $335.5 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $94.2 million at September 30, 2013. 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.

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

Contractual Obligations

At September 30, 2013

(In thousands)

			Payments Due by Period
	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
Long-Term Debt Obligations:
Certificates of deposit	$	486,895	$	264,911	$	169,293	$	50,092	$	2,599
Brokered certificates of deposit	286,125		158,117		93,779		34,229		—
Advances from the Federal Home Loan Bank of Atlanta	215,000		—		40,000		145,000		30,000
Trust preferred securities	20,619		—		—		—		20,619
Operating lease obligations	37,440		7,851		12,353		7,506		9,730
Total	$	1,046,079	$	430,879	$	315,425	$	236,827	$	62,948

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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, 2013 and December 31, 2012, commitments to extend credit were $1.20 billion and $1.25 billion, respectively.  Standby letters of credit were $31.7 million and $36.5 million at September 30, 2013 and December 31, 2012, respectively. Commitments to extend credit of $351.0 million as of September 30, 2013 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature, compared to $481.7 million as of December 31, 2012.  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 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

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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.  We have taken steps to limit our exposure to such loan repurchases through agreements entered into with various investors.  As a result, we receive a limited number of additional claims.  As of September 30, 2013, the reserve for loan repurchases had a balance of $261,000.

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.

At September 30, 2013, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.3% in a down 100 basis point scenario and would increase by no more than 0.3% 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

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less than 2.8% in a down 100 basis point scenario and would increase by no more than 1.5% 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, 2013, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.3% in a down 100 basis point scenario and would increase by no more than 0.3% 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 2.8% in a down 100 basis point scenario and would increase by no more than 1.5% 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 (as defined in Rule 13a — 15(e) under the Exchange Act).  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

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, 2012.  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, 2013, we did not purchase shares of our common stock.

Item 3.  Defaults Upon Senior Securities

(a)  None.

(b)  None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

(a)  None.

(b)  None.

Item 6.  Exhibits

2.1	Agreement and Plan of Reorganization, dated as of September 9, 2013, between Cardinal Financial Corporation and United Financial Banking Companies, Inc.
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, 2013, 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, 2013	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: November 8, 2013	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: November 8, 2013	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Executive Vice President and Chief Accounting Officer
	(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
2.1	Agreement and Plan of Reorganization, dated as of September 9, 2013, between Cardinal Financial Corporation and United Financial Banking Companies, Inc.
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, 2013, 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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