Cardinal Financial (CFNL) 10-Q 2015 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2015

or

oTransition 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:

32,161,464 shares of common stock, par value $1.00 per share, outstanding as of May 4, 2015

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION	4
Item 1. Financial Statements:	4
Consolidated Statements of Condition At March 31, 2015 (unaudited) and December 31, 2014	4
Consolidated Statements of Income For the Three Months Ended March 31, 2015 and 2014 (unaudited)	5
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2015 and 2014 (unaudited)	6
Consolidated Statements of Changes in Shareholders’ Equity For the Three Months Ended March 31, 2015 and 2014 (unaudited)	7
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2015 and 2014 (unaudited)	8
Notes to Consolidated Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3. Quantitative and Qualitative Disclosures About Market Risk	76
Item 4. Controls and Procedures	77
PART II — OTHER INFORMATION	78
Item 1. Legal Proceedings	78
Item 1A. Risk Factors	78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3. Defaults Upon Senior Securities	78

2

Item 4. Mine Safety Disclosures	78
Item 5. Other Information	78
Item 6. Exhibits	78
SIGNATURES	79

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PART I - Financial Information

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

March 31, 2015 and December 31, 2014

(In thousands, except share data)

			March 31,			December 31,
			2015			2014
			(Unaudited)
Assets
Cash and due from banks			$	21,780		$	20,298
Federal funds sold			38,675			17,891
Total cash and cash equivalents			60,455			38,189
Investment securities available-for-sale			314,260			339,131
Investment securities held-to-maturity (market value of $3,425 and $3,334 at March 31, 2015 and December 31, 2014, respectively)			4,019			4,024
Investment securities - trading			5,453			5,067
Total investment securities			323,732			348,222
Other investments			15,049			15,941
Loans held for sale			315,014			315,323
Loans receivable, net of deferred fees and costs			2,625,430			2,581,114
Allowance for loan losses			(28,884		)	(28,275		)
Loans receivable, net			2,596,546			2,552,839
Premises and equipment, net			25,139			25,253
Deferred tax asset, net			4,823			4,831
Goodwill and intangibles, net			37,115			37,312
Bank-owned life insurance			32,664			32,546
Accrued interest receivable and other assets			36,233			28,678
Total assets			$	3,446,770		$	3,399,134
Liabilities and Shareholders’ Equity
Non-interest bearing deposits			$	564,583		$	572,071
Interest bearing deposits			2,080,548			1,963,259
Total deposits			2,645,131			2,535,330
Other borrowed funds			356,322			437,995
Mortgage funding checks			23,031			19,469
Escrow liabilities			2,611			2,035
Accrued interest payable and other liabilities			30,399			26,984
Total liabilities			3,057,494			3,021,813
Common stock, $1 par value	2015	2014
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	32,155,464	32,078,227	32,155			32,078
Additional paid-in capital			203,193			201,948
Retained earnings			143,327			133,129
Accumulated other comprehensive income, net			10,601			10,166
Total shareholders’ equity			389,276			377,321
Total liabilities and shareholders’ equity			$	3,446,770		$	3,399,134

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, 2015 and 2014

(In thousands, except per share data)

(Unaudited)

	2015		2014
Interest income:
Loans receivable	$	27,496	$	24,890
Loans held for sale	2,484		2,477
Federal funds sold	28		31
Investment securities available-for-sale	2,715		3,085
Investment securities held-to-maturity	21		39
Other investments	156		138
Total interest income	32,900		30,660
Interest expense:
Deposits	3,486		2,821
Other borrowed funds	1,975		2,172
Total interest expense	5,461		4,993
Net interest income	27,439		25,667
Provision for loan losses	130		1,926
Net interest income after provision for loan losses	27,309		23,741
Non-interest income:
Service charges on deposit accounts	544		535
Loan fees	454		212
Investment fee income	115		222
Realized and unrealized gains on mortgage banking activities	16,166		7,383
Net realized gain on investment securities-trading	—		169
Net realized gain (loss) on investment securities-available for sale	202		(17		)
Management fee income	—		21
Increase in cash surrender value of bank-owned life insurance	118		119
Other income	5		24
Total non-interest income	17,604		8,668
Non-interest expense:
Salary and benefits	12,081		11,389
Occupancy	2,484		2,630
Professional fees	1,589		818
Depreciation	876		966
Data processing & communications	1,504		1,615
FDIC insurance premiums	516		383
Merger and acquisition expenses	468		3,212
Amortization of intangibles	197		200
Other operating expenses	4,428		4,577
Total non-interest expense	24,143		25,790
Income before income taxes	20,770		6,619
Provision for income taxes	7,038		2,329
Net income	$	13,732	$	4,290
Earnings per common share - basic	$	0.42	$	0.13
Earnings per common share - diluted	$	0.42	$	0.13
Weighted-average common shares outstanding - basic	32,635		32,127
Weighted-average common shares outstanding - diluted	33,071		32,609

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

	2015			2014
Net income	$	13,732		$	4,290
Other comprehensive income:
Unrealized gain on available-for-sale investment securities:
Unrealized holding gain arising during the period, net of tax expense of $375 thousand in 2015 and $1.7 million in 2014	815			2,988
Less: reclassification adjustment for net (gains) losses included in net income net of tax expense of $67 thousand in 2015 and net of tax benefit of $6 thousand in 2014	(135		)	11
	680			2,999
Unrealized loss on derivative instruments designated as cash flow hedges, net of tax benefit of $137 thousand in 2015 and $82 thousand in 2014	(245		)	(150		)
Other comprehensive income	435			2,849
Comprehensive income	$	14,167		$	7,139

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three months ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

									Accumulated
				Additional					Other
	Common	Common		Paid-in		Retained			Comprehensive
	Shares	Stock		Capital		Earnings			Income		Total
Balance, December 31, 2013	30,333	$	30,333	$	174,001	$	111,323		$	4,875	$	320,532
Stock options exercised	12	12		101		—			—		113
Stock compensation expense, net of tax benefit	—	—		411		—			—		411
Shares issued from acquisition of United Financial Banking Companies, Inc.	1,617	1,617		25,191		—			—		26,808
Dividends on common stock of $0.08 per share	—	—		—		(2,558		)	—		(2,558		)
Change in accumulated other comprehensive income	—	—		—		—			2,849		2,849
Net income	—	—		—		4,290			—		4,290
Balance, March 31, 2014	31,962	$	31,962	$	199,704	$	113,055		$	7,724	$	352,445
Balance, December 31, 2014	32,078	$	32,078	$	201,948	$	133,129		$	10,166	$	377,321
Stock options exercised	70	70		692		—			—		762
Vesting of restricted stock grants	7	7		131		—			—		138
Stock compensation expense, net of tax benefit	—	—		422		—			—		422
Dividends on common stock of $0.11 per share	—	—		—		(3,534		)	—		(3,534		)
Change in accumulated other comprehensive income	—	—		—		—			435		435
Net income	—	—		—		13,732			—		13,732
Balance, March 31, 2015	32,155	$	32,155	$	203,193	$	143,327		$	10,601	$	389,276

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

	2015			2014
Cash flows from operating activities:
Net income	$	13,732		$	4,290
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	876			966
Amortization of premiums, discounts and intangibles	335			267
Provision for loan losses	130			1,926
Loans held for sale originated	(843,734		)	(562,594		)
Proceeds from the sale of loans held for sale	860,209			678,657
Realized and unrealized gains on mortgage banking activities	(16,166		)	(7,383		)
Purchase of investment securities-trading	(700		)	(678		)
Unrealized gain on investment securities-trading	—			(169		)
Unrealized loss on investment securities-available for sale	—			17
Gain on call of investment securities available-for-sale	(202		)	—
Stock compensation expense, net of tax benefits	553			411
Increase in cash surrender value of bank-owned life insurance	(118		)	(119		)
Increase (decrease) in accrued interest receivable and other assets	(7,928		)	(7,218		)
Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities	4,066			(10,986		)
Net cash provided by operating activities	11,053			97,387
Cash flows from investing activities:
Net purchases of premises and equipment	(762		)	75
Proceeds from the sale of investment securities available-for-sale	—			10,617
Proceeds from maturity and call of investment securities available-for-sale	23,315			1,500
Purchase of mortgage-backed securities available for sale	—			(2,050		)
Purchase of investment securities available for sale	(752		)	—
Purchase of other investments	(133		)	(2,250		)
Proceeds from the sale of other investments	1,025			6,762
Redemptions of investment securities available-for-sale	3,427			4,759
Redemptions of investment securities held-to-maturity	5			125
Acquisitions, net of cash and cash equivalents	—			36,472
Net increase (decrease) in loans receivable, net of deferred fees and costs	(43,837		)	(67,959		)
Net cash used in investing activities	(17,712		)	(11,949		)
Cash flows from financing activities:
Net increase (decrease) in deposits	109,801			22,865
Net decrease in other borrowed funds - short term	(71,673		)	(21,057		)
Net increase (decrease) in mortgage funding checks	3,562			(54		)
Proceeds from FHLB advances	—			75,000
Repayment of FHLB advances	(10,000		)	(150,000		)
Stock options exercised	762			113
Stock issuance	7			—
Dividends on common stock	(3,534		)	(2,558		)
Net cash provided by (used in) financing activities	28,925			(75,691		)
Net increase in cash and cash equivalents	22,266			9,747
Cash and cash equivalents at beginning of the year	38,189			29,209
Cash and cash equivalents at end of the period	$	60,455		$	38,956
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	5,629		$	4,821
Income taxes	5,319			3,703
Acquisition of noncash assets and liabilities:
Assets acquired	—			265,364
Liabilities assumed	—			301,836

See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

Note 1

Organization

Cardinal Financial Corporation (the “Company” or “Cardinal”) is incorporated under the laws of the Commonwealth of Virginia as a financial holding company whose activities consist of investment in its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the “Bank”), a state-chartered institution and its subsidiary, George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. In addition to the Bank, the Company has one nonbank subsidiary, Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.

On January 16, 2014, the Company announced the completion of its acquisition of United Financial Banking Companies, Inc. (“UFBC”), the holding company of The Business Bank (“TBB”), pursuant to a previously announced definitive merger agreement.  The merger of UFBC into Cardinal was effective January 16, 2014.  TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014.

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 months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015. 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, 2014.

Note 2

Business Combinations

UFBC Acquisition

On January 16, 2014, the Company acquired UFBC, the holding company for The Business Bank, a commercial bank with approximately $356 million in assets, after purchase accounting adjustments.  For each share of UFBC common stock outstanding, the shareholders of UFBC received a fixed exchange ratio of $19.13 in cash and 1.154 shares of the Company’s common stock.  The total consideration for the acquisition was $54.3 million, which was comprised of $26.8 million in cash and 1.6 million shares of the Company’s common stock.

In connection with the acquisition, the Company acquired all of the voting and common shares of UFBC Capital Trust I (the “UFBC Trust”), which is a wholly-owned subsidiary established for the sole purpose of issuing $5.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”).  These trust preferred securities are due in 2035 and have an interest rate of LIBOR (London Interbank Offering Rate) plus 2.10%, which adjusts quarterly.  The UFBC Trust is an unconsolidated subsidiary since the Company is not the primary beneficiary of this entity.  The additional $155,000 that is payable by the Company to the UFBC Trust represents the Company’s unfunded capital investment in the UFBC Trust.

Merger and acquisition expense was $5.8 million and $464,000 for the years ended December 31, 2014 and 2013, respectively, which are primarily related to legal and accounting costs, contract termination expenses, system conversion and integration expenses, employee retention and severance payments.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

9

	January 16, 2014
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	63,313
Investment securities available-for-sale	16,278
Loans	238,272
Premises and equipment	7,652
Accrued interest receivable	522
Goodwill	24,706
Other intangible assets	2,740
Other assets	2,640
Total assets acquired	$	356,123
Liabilities assumed:
Deposits:
Non-interest bearing	90,206
Savings, NOW and money market	131,312
Certificates of deposit	73,686
Total deposits	295,204
Junior subordinated debentures issued to Trust	3,679
Other liabilities	2,953
Total liabilities assumed	$	301,836
Total consideration paid	$	54,287

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information relative to closing dates fair values becomes available.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

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

Investment securities available for sale.  The estimated fair values of investment securities available-for-sale was based on 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.

Loans. The acquired loan portfolio was segregated into one of two categories for valuation purposes: purchased credit impaired loans and performing loans.  Purchased credit impaired loans were identified as those loans that were nonaccrual prior to the business combination and those loans that had been identified as potentially impaired.  Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms.  Performing loans were those loans that were

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currently performing in accordance with the loan contract and do not appear to have any significant credit issues.

For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the “income approach”).  Performing loans were segmented into pools based on loan type (1-4 family residential, commercial, commercial owner occupied, construction and development), and further segmented based on payment type (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity.  The estimated cash flows expected to be collected for each loan was determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates and discount rates.  Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan.  Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a credit review by management and a third party consultant on a selection of loans within the acquired portfolio.  The discount rates used were based on rates market participants might charge for cash flows with similar risk characteristics at the acquisition date.  The market rates were estimated using a build up approach which included assumptions with respect to loan servicing costs, interest rate volatility, and systemic risk, among other factors.

For loans that were identified as purchased credit impaired (“PCI”), either the above income approach was used or the asset approach was used.  The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract.  Management used the asset approach for all nonaccrual loans to reflect market participant assumptions.  Under the asset approach, the fair value of each loan was determined based on the estimated values of the underlying collateral.

The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used.  While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (“ASC”) topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.”  See Note 6 for further details.

Premises and equipment.  The land and buildings acquired were recorded at fair value as determined by third party appraisals.

Other intangible assets.  Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent.  The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source.  The CDI is being amortized over an estimated useful life of 6.7 years to approximate the existing deposit relationships acquired.

Deposits.  The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand.  The fair values of the certificates of deposit represent contractual cash flows, discounted to

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present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Junior subordinated debentures issued to Trust.  There is no active market for trust preferred securities issued by UFBC Capital Trust I; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach.  Under the income approach, the expected cash flows over the remaining estimated life of the debentures were discounted at the prevailing market rate.  The prevailing market rate was based on: (i) a third-party broker opinion; (ii) implied market yields for recent trust preferred sales; and (iii) new trust preferred issuances for instruments with similar long durations.

Gainesville Branch Acquisition

On November 7, 2014, the Company acquired a branch location in Gainesville, VA, with approximately $66.3 million in assets, after purchase accounting adjustments.  The total consideration for the acquisition was $195,000 in cash.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

	November 7, 2014
	(in thousands)
Assets acquired:
Cash	$	65,786
Goodwill	157
Other intangible assets	340
Total assets acquired	$	66,283
Liabilities assumed:
Deposits:
Non-interest bearing	4,234
Savings, NOW and money market	9,859
Certificates of deposit	50,528
Total deposits	64,621
Other borrowed funds	1,467
Total liabilities assumed	$	66,088
Total consideration paid	$	195

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

Cash.  The carrying amount of the cash received was used as a reasonable estimate of fair value.

Other intangible assets.  Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent.  The fair value of the CDI stemming from any given business

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combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source.  The CDI is being amortized over an estimated useful life of 5.9 years to approximate the existing deposit relationships acquired.

Deposits.  The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand.  The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Other borrowed funds. Other borrowed funds consist of one customer repurchase agreement.  The fair value of this repurchase agreement is equal to the carrying amount payable on demand as the stated maturity for customer repurchases agreements is between one and four days.

Note 3

Stock-Based Compensation

At March 31, 2015, 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 269,918 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of March 31, 2015.

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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.  Stock options granted to executive officers during 2014 and the first quarter of 2015 have ten year terms with one-third of the options vested on the grant date and the remaining unvested options vesting over the next two years. Restricted stock awards are granted at the fair market value of the Company’s common stock on the grant date.  One-third of restricted stock awards vested on the grant date and the remaining unvested options vest over the next two years.

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

Total expense related to the Company’s share-based compensation plans for the three months ended March 31, 2015 and 2014 was $560,000 and $152,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $186,000 and $51,000 for the three months ended March 31, 2015 and 2014, respectively.

Options granted for the three months ended March 31, 2015 and 2014 were 109,250 and 218,000, respectively.  The weighted average per share fair value of stock option grants for the three months ended March 31, 2015 and 2014 was $5.93 and $5.60, respectively.  The fair values of the options granted during all periods ended March 31, 2015 and 2014 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Three Months Ended March 31,
	2015	2014
Estimated option life	6.5 Years	6.5 Years
Risk free interest rate	1.73 - 1.83%	2.17 - 2.34%
Expected volatility	36.90%	37.40%
Expected dividend yield	2.46%	1.80%

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 three months ended March 31, 2015 is summarized as follows:

14

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Years)	Value
Outstanding at December 31, 2014	1,189,193		$	13.53
Granted	109,250		20.04
Exercised	(70,574	)	10.80
Forfeited	(5,150	)	13.43
Outstanding at March 31, 2015	1,222,719		$	14.27	6.47	$	6,978,208
Options exercisable at March 31, 2015	894,994		$	13.33	5.67	$	5,951,634

The intrinsic value of options exercised during the three months ended March 31, 2015 and 2014 and was $560,000 and $103,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the three months ended March 31, 2015 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2014	378,550		$	5.56
Granted	109,250		5.93
Vested	(156,425	)	5.75
Forfeited	(3,650	)	4.97
Balance at March 31, 2015	327,725		$	5.60

A summary of the Company’s restricted stock grant activity during the three months ended March 31, 2015 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2014	—		$	—
Granted	20,000		20.05
Vested	(6,663	)	20.05
Forfeited	—		—
Balance at March 31, 2015	13,337		$	20.05

At March 31, 2015, there was $1.9 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 2.0 years. The total fair value of shares from stock options that vested during the three months ended March 31, 2015 and 2014 was $900,000 and $667,000, respectively. The total fair value of restricted stock grants that vested during the three months ended March 31, 2015 was $134,000.

15

Note 4

Segment Information

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management services.

The commercial banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis. The wealth management 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 months ended March 31, 2015 and 2014 is as follows:

At and for the Three Months Ended March 31, 2015 (in thousands):

					Wealth Management
	Commercial		Mortgage		and					Intersegment
	Banking		Banking		Trust Services		Other			Elimination			Consolidated
Net interest income	$	27,105	$	511	$	—	$	(177	)	$	—		$	27,439
Provision for loan losses	130		—		—		—			—			130
Non-interest income	1,278		16,216		105		5			—			17,604
Non-interest expense	15,146		7,319		104		1,574			—			24,143
Provision for income taxes	4,215		3,434		—		(611		)	—			7,038
Net income (loss)	$	8,892	$	5,974	$	1	$	(1,135	)	$	—		$	13,732
Total Assets	$	3,371,660	$	358,024	$	2,391	$	415,545		$	(700,850	)	$	3,446,770
Average Assets	$	3,322,472	$	267,313	$	2,409	$	417,547		$	(628,081	)	$	3,381,660

At and for the Three Months Ended March 31, 2014 (in thousands):

						Wealth Management
	Commercial		Mortgage			and					Intersegment
	Banking		Banking			Trust Services		Other			Elimination			Consolidated
Net interest income	$	25,193	$	638		$	—	$	(164	)	$	—		$	25,667
Provision for loan losses	1,926		—			—		—			—			1,926
Non-interest income	932		7,391			167		178			—			8,668
Non-interest expense	15,792		8,293			112		1,593			—			25,790
Provision for income taxes	2,895		(97		)	19		(488		)	—			2,329
Net income (loss)	$	5,512	$	(167	)	$	36	$	(1,091	)	$	—		$	4,290
Total Assets	$	3,095,847	$	321,958		$	2,301	$	387,898		$	(664,667	)	$	3,143,337
Average Assets	$	2,943,545	$	230,424		$	2,300	$	379,810		$	(534,206	)	$	3,021,873

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.

16

Note 5

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014.  There were 167 antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation for the three months ended March 31, 2015.    There were no antidilutive outstanding stock options excluded from

the weighted average shares outstanding for the diluted earnings per share calculation for the three months ended March 31, 2014.

(In thousands,	Three Months Ended
except per share data)	2015		2014
Net income available to common shareholders	$	13,732	$	4,290
Weighted average common shares - basic	32,635		32,127
Weighted average common shares - diluted	33,071		32,609
Earnings per common share - basic	$	0.42	$	0.13
Earnings per common share - diluted	$	0.42	$	0.13

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, and 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 months ended March 31, 2015 and 2014:

(in thousands)	2015	2014
Weighted average common shares outstanding	32,123	31,686
Weighted average shares attributable to the deferred compensation plans	512	441
Total weighted average shares - basic	32,635	32,127

The following shows the composition of diluted outstanding shares for the three months ended March 31, 2015 and 2014:

17

(in thousands)	2015	2014
Weighted average shares outstanding - basic (from above)	32,635	32,127
Incremental weighted average shares attributable to deferred compensation plans	259	248
Weighted average shares attributable to stock options	177	180
Incremental Shares from stock option plan	—	54
Total weighted average shares - diluted	33,071	32,609

Note 6

Investment Securities

The approximate fair value and amortized cost of investment securities at March 31, 2015 and December 31, 2014 are shown in the table below.

	March 31, 2015
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	51,215	$	3,390	$	—		$	54,605
Mortgage-backed securities	115,445		7,390		(21		)	122,814
Municipal securities	127,662		6,827		(28		)	134,461
Pooled trust preferred & corporate securities	2,323		57		—			2,380
Total	$	296,645	$	17,664	$	(49	)	$	314,260
Investment Securities Held-to-Maturity
Mortgage-backed securities	15		—		—			15
Pooled trust preferred securities	4,004		—		(594		)	3,410
Total	$	4,019	$	—	$	(594	)	$	3,425

	December 31, 2014
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	71,035	$	3,132	$	(14	)	$	74,153
Mortgage-backed securities	118,808		6,704		(31		)	125,481
Municipal securities	130,405		6,738		(21		)	137,122
Pooled trust preferred & corporate securities	2,323		52		—			2,375
Total	$	322,571	$	16,626	$	(66	)	$	339,131
Investment Securities Held-to-Maturity
Mortgage-backed securities	19		—		—			19
Pooled trust preferred securities	4,005		—		(690		)	3,315
Total	$	4,024	$	—	$	(690	)	$	3,334

18

The fair value and amortized cost of investment securities by contractual maturity at March 31, 2015 and December 31, 2014 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.

	March 31, 2015
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Within One Year	$	7,542	$	7,640	$	—	$	—
After 1 year but within 5 years	50,632		53,731		—		—
After 5 years but within 10 years	40,232		43,430		—		—
After 10 years	82,794		86,645		4,004		3,410
Mortgage-backed securities	115,445		122,814		15		15
Total	$	296,645	$	314,260	$	4,019	$	3,425

	December 31, 2014
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	cost		Value		cost		Value
Within One Year	$	5,179	$	5,272	$	—	$	—
After 1 year but within 5 years	35,045		36,555		—		—
After 5 years but within 10 years	56,334		60,451		—		—
After 10 years	107,205		111,372		4,005		3,315
Mortgage-backed securities	118,808		125,481		19		19
Total	$	322,571	$	339,131	$	4,024	$	3,334

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 March 31, 2015 and December 31, 2014.

At March 31, 2015

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	$	3,376	$	(15	)	$	264	$	(6	)	$	3,640	$	(21	)
Municipal securities	5,474		(27		)	535		(1		)	6,009		(28		)
Total temporarily impaired securities	$	8,850	$	(42	)	$	799	$	(7	)	$	9,649	$	(49	)

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	$	—	$	—	$	3,410	$	(594	)	$	3,410	$	(594	)
Total temporarily impaired securities	$	—	$	—	$	3,410	$	(594	)	$	3,410	$	(594	)

At December 31, 2014

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	$	10,099	$	(14	)	$	—	$	—		$	10,099	$	(14	)
Mortgage-backed securities	3,295		(25		)	272		(6		)	3,567		(31		)
Municipal securities	4,820		(21		)	—		—			4,820		(21		)
Total temporarily impaired securities	$	18,214	$	(60	)	$	272	$	(6	)	$	18,486	$	(66	)

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	$	—	$	—	$	3,315	$	(690	)	$	3,315	$	(690	)
Total temporarily impaired securities	$	—	$	—	$	3,315	$	(690	)	$	3,315	$	(690	)

19

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2015, 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 March 31, 2015, 99% 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 $1.5 million in non-government non-agency mortgage-related securities.  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 March 31, 2015, 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 Company owns three pooled trust preferred securities which were all previously classified as held-to-maturity within the investment securities portfolio.  As a result of the issuance of the final rules to implement Section 619 of the Financial Reform Act, commonly known as the “Volcker Rule” (the “Final Rule”), only one of the three investments were exempt from the covered fund definition.  For the one investment that was not exempt as a result of the Final Rule, the Company will be required to divest its investment in this particular pooled trust preferred securities prior to the effectiveness of the Final Rule on July 21, 2017.  The remaining available-for-sale pooled trust preferred security had a par value of $2.0 million and a carrying value of $1.8 million as of March 31, 2015.

The par value of the two pooled trust preferred securities still classified as held-to-maturity totaled $4.0 million at March 31, 2015.  The collateral underlying these structured securities are instruments issued by financial institutions.  The Company owns the A-3 tranches in each issuance.  Each of the bonds is rated by more than one rating agency.  One security has a composite rating of A- and the other security has 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 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 securities, and concluded that these securities are not other-than-temporarily impaired.  The Company continuously monitors the financial condition of the underlying issues and the level of subordination below the A-3 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 A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

In one of the pooled trust preferred securities, 71% 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 $185 million of the remaining $217 million, or 85% of the performing collateral defaulted or deferred payment.  In the other pooled trust preferred security, 63% 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 $157 million of the remaining $219 million, or 72% of the performing collateral defaulted or deferred payment. 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 pooled trust preferred securities prior to the recovery of its investment.

20

No other-than-temporary impairment has been recognized on the securities in the Company’s investment portfolio for the three months ended March 31, 2015.

Note 7

Loans Receivable and Allowance for Loan Losses

The loan portfolio at March 31, 2015 and December 31, 2014 consist of the following:

	March 31, 2015
(In thousands)	Originated			Acquired		Total
Commercial and industrial	$	302,871		$	21,019	$	323,890
Real estate - commercial	1,171,692			96,975		1,268,667
Real estate - construction	486,656			4,129		490,785
Real estate - residential	399,238			7,129		406,367
Home equity lines	131,796			3,480		135,276
Consumer	4,065			704		4,769
	2,496,318			133,436		2,629,754
Net deferred fees	(4,324		)	—		(4,324		)
Loans receivable, net of fees	2,491,994			133,436		2,625,430
Allowance for loan losses	(28,884		)	—		(28,884		)
Loans receivable, net	$	2,463,110		$	133,436	$	2,596,546

	December 31, 2014
(In thousands)	Originated			Acquired		Total
Commercial and industrial	$	328,711		$	25,210	$	353,921
Real estate - commercial	1,154,093			103,761		1,257,854
Real estate - construction	424,745			10,163		434,908
Real estate - residential	393,894			8,784		402,678
Home equity lines	127,004			3,881		130,885
Consumer	4,341			742		5,083
	2,432,788			152,541		2,585,329
Net deferred fees	(4,215		)	—		(4,215		)
Loans receivable, net of fees	2,428,573			152,541		2,581,114
Allowance for loan losses	(28,275		)	—		(28,275		)
Loans receivable, net	$	2,400,298		$	152,541	$	2,552,839

During 2014, as a result of the Company’s acquisition of UFBC, the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).

The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification (“ASC”) Topic 310-30 or ASC 310-20.  The outstanding principal balance and related carrying amount of acquired loans included in the consolidated statements of condition at March 31, 2015 and December 31, 2014 are as follows:

21

(in thousands)	March 31, 2015
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	15,750
Carrying amount	12,080
Other acquired loans
Outstanding principal balance	122,271
Carrying amount	121,356
Total acquired loans
Outstanding principal balance	138,021
Carrying amount	133,436

(in thousands)	December 31, 2014
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	19,176
Carrying amount	14,960
Other acquired loans
Outstanding principal balance	138,419
Carrying amount	137,581
Total acquired loans
Outstanding principal balance	157,595
Carrying amount	152,541

The following table presents changes in the accretable discount, which includes income recognized from contractual interest cash flows.

(in thousands)
Balance at January 1, 2015	$	(5,053	)
Charge-offs	$	504
Accretion	(36		)
Balance at March 31, 2015	$	(4,585	)

(in thousands)
Balance at January 1, 2014	$	—
Recorded discount at acquisition date	(3,872		)
Accretion	(1,181		)
Balance at December 31, 2014	$	(5,053	)

22

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.  For originated loans, 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.  The Company also maintains an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

Activity in the Company’s allowance for loan losses for the three months ended March 31, 2015 and 2014 is shown below.

	2015			2014
Beginning balance, January 1	$	28,275		$	27,864
Provision for loan losses	130			1,926
Loans charged off:
Commercial and industrial	(3		)	(783		)
Residential	—			—
Consumer	(16		)	(2		)
Total loans charged off	(19		)	(785		)
Recoveries:
Commercial and industrial	485			7
Residential	10			81
Consumer	3			—
Total recoveries	498			88
Net recoveries (charge offs)	479			(697		)
Ending balance, March 31,	$	28,884		$	29,093

For the three months ended March 31, 2015 and 2014, the Company recorded an allowance for loan losses for the acquired loan portfolio of $0 and $169,000, respectively.  There were no impairments recorded in the purchase credit impaired portfolio as of March 31, 2015 and 2014.

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 March 31, 2015 and 2014, are below:

23

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2015

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction		Real Estate - Residential			Home Equity Lines		Consumer			Total
Allowance for loan losses:
Beginning Balance, January 1	$	2,061		$	17,820		$	6,105	$	1,954		$	301	$	34		$	28,275
Charge-offs	(3		)	—			—		—			—		(16		)	(19		)
Recoveries	187			293			5		10			3		—			498
Provision for loan losses	(120		)	(398		)	613		(3		)	22		16			130
Ending Balance, March 31, 2015	$	2,125		$	17,715		$	6,723	$	1,961		$	326	$	34		$	28,884
Ending Balance, March 31, 2015
Individually evaluated for impairment	$	—		$	—		$	—	$	—		$	—	$	—		$	—
Collectively evaluated for impairment	2,125			17,715			6,723		1,961			326		34			28,884

Loans Receivable

At March 31, 2015

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Loans Receivable:
Ending Balance, March 31, 2015	$	323,890	$	1,268,667	$	490,785	$	406,367	$	135,276	$	4,769	$	2,629,754
Ending Balance, March 31, 2015
Individually evaluated for impairment	$	1,171	$	273	$	250	$	—	$	51	$	—	$	1,745
Purchased Credit Impaired Loans	2,878		6,736		1,641		326		496		3		12,080
Collectively evaluated for impairment	319,841		1,261,658		488,894		406,041		134,729		4,766		2,615,929

24

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2014

(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	$	3,329		$	16,076		$	5,336	$	2,421	$	609	$	93		$	27,864
Charge-offs	(262		)	(521		)	—		—		—		(2		)	(785		)
Recoveries	2			—			5		81		—		—			88
Provision for loan losses	893			449			380		205		—		(1		)	1,926
Ending Balance, March 31, 2014	$	3,962		$	16,004		$	5,721	$	2,707	$	609	$	90		$	29,093
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	38		$	—		$	—	$	131	$	—	$	—		$	169
Collectively evaluated for impairment	3,924			16,004			5,721		2,576		609		90			28,924

Loans Receivable

At March 31, 2014

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Loans Receivable:
Ending Balance, March 31, 2014	$	291,208	$	1,191,953	$	414,711	$	332,288	$	115,045	$	5,045	$	2,350,250
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	299	$	1,738	$	496	$	346	$	51	$	—	$	2,930
Purchased Credit Impaired Loans	4,990		8,379		1,688		448		467		8		15,980
Collectively evaluated for impairment	285,919		1,181,836		412,527		331,494		114,527		5,037		2,331,340

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 remains 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.

25

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 March 31, 2015 and December 31, 2014.  In addition, the credit quality of the loan portfolio is provided as of March 31, 2015 and December 31, 2014.

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At March 31, 2015

(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	$	—	$	15	$	976	$	991	$	301,880	302,871		$	—	$	976
Real estate - commercial
Owner occupied	—		—		—		—		295,416		295,416		—		—
Non-owner occupied	—		—		273		273		876,003		876,276		—		273
Real estate - construction
Residential	—		—		—		—		172,391		172,391		—		—
Commercial	—		—		—		—		314,265		314,265		—		—
Real estate - residential
Single family	15		—		—		15		293,696		293,711		—		—
Multi-family	—		—		—		—		105,527		105,527		—		—
Home equity lines	243		—		51		294		131,502		131,796		—		51
Consumer
Installment	—		—		—		—		3,760		3,760		—		—
Credit cards	6		47		—		53		252		305		—		—
	$	264	$	62	$	1,300	$	1,626	$	2,494,692	$	2,496,318	$	—	$	1,300

26

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At March 31, 2015

(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	$	—	$	—	$	572	$	572	$	20,447	21,019		$	—	$	572
Real estate - commercial
Owner occupied	—		—		—		—		44,241		44,241		—		—
Non-owner occupied	1,028		—				1,028		51,706		52,734		—		—
Real estate - construction
Residential	—		—		—		—		3,292		3,292		—		—
Commercial	—		—		—		—		837		837		—		—
Real estate - residential
Single family	—		—				—		7,129		7,129		—		—
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		3,480		3,480		—		—
Consumer
Installment	—		—		—		—		704		704		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	1,028	$	—	$	572	$	1,600	$	131,836	$	133,436	$	—	$	572

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At December 31, 2014

(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	$	88	$	30	$	938	$	1,056	$	327,655	328,711		$	—	$	938
Real estate - commercial
Owner occupied	—		—		—		—		304,303		304,303		—		—
Non-owner occupied	—		—		289		289		849,501		849,790		—		289
Real estate - construction
Residential	—		—		—		—		158,915		158,915		—		—
Commercial	—		—		—		—		265,830		265,830		—		—
Real estate - residential
Single family	359		—		—		359		297,530		297,889		—		—
Multi-family	—		—		—		—		96,005		96,005		—		—
Home equity lines	—		—		180		180		126,824		127,004		—		180
Consumer
Installment	—		—		—		—		3,920		3,920		—		—
Credit cards	53		—		—		53		368		421		—		—
	$	500	$	30	$	1,407	$	1,937	$	2,430,851	$	2,432,788	$	—	$	1,407

27

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At December 31, 2014

(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	$	—	$	—	$	576	$	576	$	24,634	25,210		$	—	$	576
Real estate - commercial
Owner occupied	—		—		—		—		49,173		49,173		—		—
Non-owner occupied	—		—		1,072		1,072		53,516		54,588		—		1,072
Real estate - construction
Residential	—		—		—		—		6,156		6,156		—		—
Commercial	—		—		—		—		4,007		4,007		—		—
Real estate - residential
Single family	24		—		306		330		8,454		8,784		—		306
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		3,881		3,881		—		—
Consumer
Installment	—		—		—		—		742		742		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	24	$	—	$	1,954	$	1,978	$	150,563	$	152,541	$	—	$	1,954

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of March 31, 2015 and December 31, 2014, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

28

Impaired Loans — Originated Loan Portfolio

At March 31, 2015

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	1,171	$	1,488	$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	273		2,364		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	250		250		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	51		51		—		—
Consumer	—		—		—		—
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	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	1,171	$	1,488	$	—	$	—
Real estate - commercial	273		2,364		—		—
Real estate - construction	250		250		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Consumer	—		—		—		—
Total	$	1,745	$	4,153	$	—	$	—

29

Impaired Loans — Acquired Loan Portfolio

At March 31, 2015

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	649	$	758	$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	3,478		3,449		—		12
Real estate - construction
Residential	—		—		—		—
Commercial	837		942		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
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	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	649	$	758	$	—	$	—
Real estate - commercial	3,478		3,449		—		12
Real estate - construction	837		942		—		—
Real estate - residential	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
Total	$	4,964	$	5,149	$	—	$	12

30

Impaired Loans — Originated Loan Portfolio

At December 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	1,159	$	1,472	$	—	$	64
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	289		2,364		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	250		250		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	180		180		—		4
Consumer	—		—		—		—
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	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	1,159	$	1,472	$	—	$	64
Real estate - commercial	289		2,364		—		—
Real estate - construction	250		250		—		—
Real estate - residential	—		—		—		—
Home equity lines	180		180		—		4
Consumer	—		—		—		—
Total	$	1,878	$	4,266	$	—	$	68

31

Impaired Loans — Acquired Loan Portfolio

At December 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	576	$	1,227	$	—	$	12
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,266		1,729		—		39
Real estate - construction
Residential	—		—		—		—
Commercial	839		942		—		5
Real estate - residential
Single family	306		446		—		2
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
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	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	576	$	1,227	$	—	$	12
Real estate - commercial	1,266		1,729		—		39
Real estate - construction	839		942		—		5
Real estate - residential	306		446		—		2
Home equity lines	—		—		—		—
Consumer	—		—		—		—
Total	$	2,987	$	4,344	$	—	$	58

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 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.

32

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 March 31, 2015 and December 31, 2014, the Company had TDRs totaling $273,000 and $289,000, 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 March 31, 2015 and 2014, respectively:

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2015

(In thousands)

	Commercial and Industrial		Real Estate - Commercial			Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2015	$	—	$	289		$	—	$	—	$	—	$	—	$	289
New TDRs	—		—			—		—		—		—		—
Increases to existing TDRs	—		—			—		—		—		—		—
Charge-Offs Post Modification	—		—			—		—		—		—		—
Sales, paydowns, or other decreases	—		(16		)	—		—		—		—		(16		)
Ending Balance, March 31, 2015	$	—	$	273		$	—	$	—	$	—	$	—	$	273

33

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2014

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2014	$	—	$	1,738	$	525		$	—	$	—	$	—	$	2,263
New TDRs	—		—		—			—		—		—		—
Increases to existing TDRs	—		—		—			—		—		—		—
Charge-Offs Post Modification	—		—		—			—		—		—		—
Sales, paydowns, or other decreases	—		—		(279		)	—		—		—		(279		)
Ending Balance, March 31, 2014	$	—	$	1,738	$	246		$	—	$	—	$	—	$	1,984

At March 31, 2015, TDRs make up one relationship with the Bank.  These loans are performing as expected post-modification. There are no acquired loans classified as TDRs.  For restructured loans in the portfolio, the Company had no loan loss reserves as of March 31, 2015 and December 31, 2014, 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 March 31, 2015, no loans identified as TDRs had a payment default within the last twelve months.  For the period ended March 31, 2014, one loan identified as a TDR 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, other loans especially mentioned (OLEM), substandard, doubtful and loss.  OLEM 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 OLEM, 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 March 31, 2015 and December 31, 2014.

34

Internal Risk Rating Grades - Originated Loan Portfolio

At March 31, 2015

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	300,007	$	1,376	$	1,488	$	—	$	—
Real estate - commercial
Owner occupied	295,416		—		—		—		—
Non-owner occupied	867,215		6,697		2,364		—		—
Real estate - construction
Residential	172,391		—		—		—		—
Commercial	314,015		—		250		—		—
Real estate - residential
Single family	293,696		15		—		—		—
Multi-family	105,527		—		—		—		—
Home equity lines	131,502		243		51		—		—
Consumer
Installment	3,760		—		—		—		—
Credit cards	299		6		—		—		—
	$	2,483,828	$	8,337	$	4,153	$	—	$	—

35

Internal Risk Rating Grades - Acquired Loan Portfolio

At March 31, 2015

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	18,906	$	1,464	$	649	$	—	$	—
Real estate - commercial
Owner occupied	44,241		—		—		—		—
Non-owner occupied	47,116		2,140		3,478		—		—
Real estate - construction
Residential	3,292		—		—		—		—
Commercial	—		—		837		—		—
Real estate - residential
Single family	7,129		—		—		—		—
Multi-family	—		—		—		—		—
Home equity lines	3,480		—		—		—		—
Consumer
Installment	704		—		—		—		—
Credit cards	—		—		—		—		—
	$	124,868	$	3,604	$	4,964	$	—	$	—

36

Internal Risk Rating Grades - Originated Loan Portfolio

At December 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	326,543	$	1,009	$	1,159	$	—	$	—
Real estate - commercial
Owner occupied	304,303		—		—		—		—
Non-owner occupied	846,280		3,221		289		—		—
Real estate - construction
Residential	158,915		—		—		—		—
Commercial	265,580		—		250		—		—
Real estate - residential
Single family	297,530		359		—		—		—
Multi-family	96,005		—		—		—		—
Home equity lines	126,824		—		180		—		—
Consumer
Installment	3,920		—		—		—		—
Credit cards	421		—		—		—		—
	$	2,426,321	$	4,589	$	1,878	$	—	$	—

Internal Risk Rating Grades - Acquired Loan Portfolio

At December 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	22,277	$	2,357	$	576	$	—	$	—
Real estate - commercial
Owner occupied	49,173		—		—		—		—
Non-owner occupied	51,184		2,138		1,266		—		—
Real estate - construction
Residential	6,156		—		—		—		—
Commercial	3,168		—		839		—		—
Real estate - residential
Single family	8,454		24		306		—		—
Multi-family	—		—		—		—		—
Home equity lines	3,881		—		—		—		—
Consumer
Installment	742		—		—		—		—
Credit cards	—		—		—		—		—
	$	145,035	$	4,519	$	2,987	$	—	$	—

37

Note 8

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 March 31, 2015, accumulated other comprehensive income included an unrealized loss, net of tax, of $245,000 related to forward loan sales contracts designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within thirty days of closing and, therefore, all or substantially all of the amount recorded in accumulated other comprehensive income at March 31, 2015 which is related to the Company’s cash flow hedges will be recognized in earnings during the second quarter of 2015. At March 31, 2015, the Company recognized minimal amounts due to hedge ineffectiveness.

At March 31, 2015, the Company had $449.9 million in residential mortgage rate lock commitments and associated forward sales, and $264.5 million in forward loan sales associated with $315.0 million of loans that had closed and were presented as held for sale.

Note 9

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 March 31, 2015 and December 31, 2014.  In addition, the gains and losses related to these derivative instruments is provided for the three months ended March 31, 2015 and 2014.

38

Derivative Instruments and Hedging Activities

At March 31, 2015

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,746		Accrued Interest Payable and Other Liabilities	2,754
Total Derivatives Designated as Hedging Instruments		1,746			2,754
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	19,634		Accrued Interest Payable and Other Liabilities	2,179
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	2,179		Accrued Interest Payable and Other Liabilities	123
Total Derivatives Not Designated as Hedging Instruments		21,813			2,302
Total Derivatives		$	23,559		$	5,056

39

Derivative Instruments and Hedging Activities

At December 31, 2014

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,631		Accrued Interest Payable and Other Liabilities	2,163
Total Derivatives Designated as Hedging Instruments		1,631			2,163
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	12,857		Accrued Interest Payable and Other Liabilities	562
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	562		Accrued Interest Payable and Other Liabilities	33
Total Derivatives Not Designated as Hedging Instruments		13,419			595
Total Derivatives		$	15,050		$	2,758

40

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2015

(in thousands)

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)
Forward Loan Sales Commitments	$	(245	)	Other Income	$	706	Other Income	$	—
Total	$	(245	)		$	706		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Rate Lock Commitment	$	19,511		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(2,056		)	Other Income
Rate Lock Commitments	2,056			Other Income
Total	$	19,511

41

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2014

(in thousands)

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)
Forward Loan Sales Commitments	$	(150	)	Other Income	$	(7,227	)	Other Income	$	—
Total	$	(150	)		$	(7,227	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Rate Lock Commitments	$	13,083		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	28			Other Income
Rate Lock Commitments	(28		)	Other Income
Total	$	13,083

Note 10

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at March 31, 2015 is as follows:

	Commercial Banking				Mortgage Banking				Total
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2014	$	3,080	$	775	$	1,781	$	1,781	$	4,861	$	2,556
2015 activity:
Amortization	—		197		—		—		—		197
Balance at March 31, 2015	$	3,080	$	972	$	1,781	$	1,781	$	4,861	$	2,753

The aggregate amortization expense was $197,000 and $200,000 for three months ended March 31, 2015 and 2014, respectively.  The estimated amortization expense for the next five years and thereafter is as follows:

(In thousands)
2015 (April — December)	$	539
2016	595
2017	454
2018	313
2019	172
Thereafter	35

42

The carrying amount of goodwill at March 31, 2015 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2014	$	24,887	$	10,120	$	35,007
Activity: None	—		—		—
Balance at March 31, 2015	$	24,887	$	10,120	$	35,007

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

Note 11

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 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 March 31, 2015 are collateralized.

Commitments to extend credit of $1.3 billion primarily have floating rates as of March 31, 2015.  At March 31, 2015, standby letters of credit were $35.9 million. Commitments to extend credit of $449.9 million as of March 31, 2015 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.

43

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 $150,000 at each of March 31, 2015 and December 31, 2014, respectively.

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

Note 12

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, measured using reliable and unbiased valuations 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 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, George Mason enters 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.

44

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 March 31, 2015.  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 March 31, 2015 and December 31, 2014 are shown below:

At March 31, 2015
(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. government-sponsored agencies	$	54,605	$	$	54,605	$	—
Mortgage-backed securities	122,814		—	122,814		—
Municipal securities	134,461		—	134,461		—
Pooled trust preferred and corporate securities	2,380		—	2,380		—
Total investment securities available-for-sale	314,260		—	314,260		—
Investment securities — trading	5,453		—	5,453		—
Bank-owned life insurance	32,664		—	32,664		—
Derivative asset - rate lock and forward loan sales commitments	21,380		—	21,380		—
Derivative asset — interest rate lock commitments	2,179		—	2,179		—
Derivative liability - rate lock and forward loan sales commitments	4,933		—	4,933		—
Derivative liability — interest rate lock commitments	123		—	123		—

45

At December 31, 2014

(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. government-sponsored agencies	$	74,153	$	$	74,153	$	—
Mortgage-backed securities	125,481		—	125,481		—
Municipal securities	137,122		—	137,122		—
Pooled trust preferred and corporate securities	2,375		—	2,375		—
Total investment securities available-for-sale	339,131		—	339,131		—
Investment securities — trading	5,067		—	5,067		—
Bank-owned life insurance	32,546		—	32,546		—
Derivative asset - rate lock and forward loan sales commitments	14,488		—	14,488		—
Derivative asset — interest rate lock commitments	562		—	562		—
Derivative liability - rate lock and forward loan sales commitments	2,725		—	2,725		—
Derivative liability — interest rate lock commitments	33		—	33		—

46

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 and loans receivable — evaluated for impairment.

At March 31, 2015

(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	$	3,410	$	—	$	—	$	3,410
Loans receivable — evaluated for impairment	1,745		—		301		1,444

At December 31, 2014

(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	$	3,315	$	—	$	—	$	3,315
Loans receivable — evaluated for impairment	1,878		—		301		1,577

The Company’s held-to-maturity portfolio includes investments in two pooled trust preferred securities, totaling $4.0 million of par value at March 31, 2015.  The collateral underlying these structured securities are instruments issued by financial institutions.  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 two securities, and concluded that these securities are not other-than-temporarily impaired.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

47

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.

Loans receivable — evaluated for impairment that are measured at fair value using Level 3 inputs on a nonrecurring basis total $1.4 million at March 31, 2015.  The total amount for each period presented represents the entire population of loans receivable — evaluated for impairment, and of this amount, $1.4 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 March 31, 2015, the Company’s Level 3 loans consisted of four relationships:  three totaling $1.2 million which were secured primarily by business assets and the cash surrender value of life insurance policies; and one relationship totaling $273,000 secured by commercial real estate.

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.

Cash and Cash Equivalents

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

48

Investment Securities Held-to-Maturity and Other Investments

Fair values for certain investment securities held-to-maturity are based on quoted market prices or prices quoted for similar financial instruments.  For the pooled trust preferred securities that are held-to-maturity, the Company estimates the fair value of these securities through the use of internal calculations and through information provided by external pricing sources.

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 March 31, 2015 and December 31, 2014:

49

	March 31, 2015
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	60,455	$	60,455	$	60,455	$	—	$	—
Investment securities held-to-maturity and other investments	19,068		18,474		—		15,064		3,410
Loans held for sale	315,014		315,014		—		315,014		—
Loans receivable, net	2,596,546		2,602,651		—		301		2,602,350
Accrued interest receivable	8,841		8,841		8,841		—		—
Financial liabilities:
Demand deposits	$	564,583	$	564,583	$	564,583	$	—	$	—
Interest checking	448,702		448,702		448,702		—		—
Money market and statement savings	636,473		636,473		636,473		—		—
Certificates of deposit	995,373		999,983		—		999,983		—
Other borrowed funds	356,322		366,666		—		366,666		—
Accrued interest payable	945		945		945		—		—

	December 31, 2014
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	38,189	$	38,189	$	38,189	$	—	$	—
Investment securities held-to-maturity and other investments	19,965		19,275		—		15,960		3,315
Loans held for sale	315,323		315,323		—		315,323		—
Loans receivable, net	2,552,839		2,545,920		—		301		2,545,619
Accrued interest receivable	8,489		8,489		8,489		—		—
Financial liabilities:
Demand deposits	$	572,071	$	572,071	$	572,071	$	—	$	—
Interest checking	422,291		422,291		422,291		—		—
Money market and statement savings	627,313		627,313		627,313		—		—
Certificates of deposit	913,655		916,142		—		916,142		—
Other borrowed funds	437,995		450,363		—		450,363		—
Accrued interest payable	999		999		999		—		—

Note 13

Subsequent Event

The Company reached an agreement to settle litigation in April 2015.  As a result, the Company will record additional pretax income during the second quarter of 2015 of approximately $2.5 million.

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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 March 31, 2015 and December 31, 2014 and the results of our operations for the three months ended March 31, 2015 and 2014. 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, 2014.

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 subsidiary 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 Consumer Protection Act (the “Financial Reform Act”) and implementation of the Volcker Rule, 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;

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·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;

·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 Securities and Exchange Commission.

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, 2014.

Overview

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

We own Cardinal Bank, or the Bank, a Virginia state-chartered community bank with 31 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.

On January 16, 2014 we completed our acquisition of United Financial Banking Companies, Inc., or UFBC, the holding company of The Business Bank, or TBB, pursuant to a definitive merger agreement.  TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014.  As a result of the acquisition, we added $329 million in total assets, $238 million in loans, and $295 million in deposits, after purchase accounting adjustments.  The transaction generated $24.7 million in goodwill and $2.7 million in core deposit intangible assets subject to amortization.

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”).

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, and gains on sales of mortgage loans.

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Critical Accounting Policies

General

U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters.  Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical.  These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates.  Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements.  Actual results, in fact, could differ from initial estimates.

The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchased credit-impaired loans, 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 our historical losses, loss emergence experience 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.

The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments.  For originated loans, 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.  For purposes of this analysis, we categorize loans into one of five categories:  commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer loans.  We also maintain an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

During the fourth quarter of 2014, we transitioned to using our historical loss experience and trends in losses for each category which were then adjusted for portfolio trends and economical and environmental factors in determining the allowance for loan losses.  The indicated loss factors resulting from this analysis are applied to each of the five categories of loans.  Prior to the fourth quarter of 2014, the allowance model used the average loss rates of similar institutions based on its custom peer group as a baseline, which was adjusted for its particular loan portfolio characteristics and environmental factors.  These changes did not have an impact to the overall allowance.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. 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 all loans classified as special mention, a 15% loss factor to all loans classified as substandard and a 50% loss factor to all loans classified as doubtful.  Loans classified as loss loans are fully reserved or charged-off.  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 within the portfolio, we are able to evaluate each impaired loan individually and therefore specific reserves for impaired loans are generally less than those recommended by the listed regulatory guidelines above.

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The general component relates to groups of homogeneous loans not designated for a specific allowance and are collectively evaluated for impairment. The general component is based on historical loss experience adjusted for qualitative factors. To arrive at the general component, the loan portfolio is grouped by loan type. A weighted average historical loss rate is computed for each group of loans over the trailing seven year period.  We selected a seven year evaluation period as a result of the limited historical loss experience we have incurred, even during the recent economic downturn.  We also believe that a seven year time horizon represents a full economic cycle.  The historical loss factors are updated at last annually, unless a more frequent review of such factors is warranted.  In addition to the use of historical loss factors, a qualitative adjustment factor is applied. This qualitative adjustment factor, which may be favorable or unfavorable, represents management’s judgment that inherent losses in a given group of loans are different from historical loss rates due to environmental factors unique to that specific group of loans. These factors may relate to growth rate factors within the particular loan group; whether the recent loss history for a particular group of loans differs from its historical loss rate; the amount of loans in a particular group that have recently been designated as impaired and that may be indicative of future trends for this group; reported or observed difficulties that other banks are having with loans in the particular group; changes in the experience, ability, and depth of lending personnel; changes in the nature and volume of the loan portfolio and in the terms of loans; and changes in the volume and severity of past due loans, nonaccrual loans, and adversely classified loans. The sum of the historical loss rate and the qualitative adjustment factor comprise the estimated annual loss rate. To adjust for inherent loss levels within the loan portfolio, a loss emergence factor is estimated based on an evaluation of the period of time it takes for a loan within each of our loan segments to deteriorate to the point an impairment loss is recorded within the allowance.  The loss emergence factor is applied to the estimated annual loss rate to determine the expected annual loss amount.

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.

Allowance for Loan Losses - Acquired Loans

Acquired loans accounted for under ASC 310-30

For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

Acquired loans accounted for under ASC 310-20

Subsequent to the acquisition date, we establish our allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

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Purchased Credit-Impaired Loans

Purchased credit-impaired (PCI) loans, which are the loans acquired in our acquisition of UFBC, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).  At March 31, 2015, there was no reserve for impairment of PCI loans within our allowance for loan losses.

We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform better than originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

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 valuations 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.

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.

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.

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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

We have 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 impairment test. We perform our annual review of goodwill 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.

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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 Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU No. 2014-04”), which clarifies when an in-substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan.  An in-substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual and interim periods beginning after December 15, 2014. Our adoption of ASU No. 2014-04 did not have a significant impact on our consolidated financial statements.

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This ASU provides a framework that replaces the existing revenue recognition guidance and is effective for annual periods and interim periods within that reporting period beginning after December 15, 2016, for public entities.  We are currently assessing the impact of the adoption of this standard on our consolidated financial statements.

The FASB issued ASU No, 2014-11, Transfers and Servicing (Topic 860) Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  This ASU changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  Additionally, for repurchase financing arrangements, the amendments of this ASU require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  The requirements are effective for public entities for the first interim or annual period beginning after December 15, 2014.  The disclosure of certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as securities borrowings is required to be presented for annual periods beginning after December 15, 2014.  Our adoption of ASU No. 2014-01did not have a significant impact on our consolidated financial statements.

2015 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 global economic conditions remain unsettled, the metropolitan Washington, D.C. area, the region we operate in, continues to perform relatively well, compared to other regions.  As we believe that our region has weathered the recession better than most over the past several years, continued weakness in employment, a protracted low interest rate environment, and the burden of regulatory requirements enacted in response to the recent financial crisis make for a challenging operating environment.  Progress in the near future for employment and the housing industry is uncertain given the prospect for higher long-term interest rates.  We continue to consider future economic events and their impact on our performance.

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Our credit quality continues to remain strong despite the challenging economic environment.  At March 31, 2015, we had nonaccrual loans totaling $1.9 million and no loans contractually past due 90 days or more as to principal or interest and still accruing.  We recorded annualized net recoveries of 0.07% of our average loans receivable for the quarter ended March 31, 2015.

Market illiquidity and concerns over credit risk continue to impact the ratings of our pooled trust preferred securities. We hold investments of $6.0 million in par value of pooled trust preferred securities, which are significantly below book value as of March 31, 2015 due to the lack of liquidity in the market, deferrals and defaults of issuers, and continued investor apprehension for investing in these types of investments.  As a result of the issuance of the Final Rules required by the Financial Reform Act which were released by federal banking agencies in late 2013, one of these investments is considered to be “covered funds” and is required to be divested by us before July 2017.  This investment has a par value of $2.0 million at March 31, 2015.  We recorded an other-than-temporary-impairment of $300,000 during 2013 as a result of this new regulatory requirement.

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 2015. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions and the nature of new banking regulations.

While our loan growth has continued to be strong, continued uncertainty and sluggish economic growth 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 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 March 31, 2015 and 2014, we reported net income of $13.7 million and $4.3 million, respectively, an increase of $9.4 million, or 219%.  Net interest income after the provision for loan losses increased $3.6 million to $27.3 million for the three months ended March 31, 2015 compared to $23.7 million for the three months ended March 31, 2014.  Provision for loan losses recorded for the three months ended March 31, 2015 was $130,000, compared to provision expense of $1.9 million for the same period of 2014.  Noninterest income for the three months ended March 31, 2015 and 2014 was $17.6 million and $8.7 million, respectively, an increase of $8.9 million.  This increase was primarily due to an increase in gains on mortgage banking activities earned at our mortgage banking subsidiary.  For the three months ended March 31, 2015, noninterest expense decreased to $24.1 million, compared to $25.8 million for the same period of 2014.  The decrease in noninterest expense is primarily attributable to expenses related to our acquisition of UFBC of $3.2 million during the first quarter of 2014 which were partially offset by increases during 2015 in salaries and benefits expense of $915,000 for the variable components of our compensation and professional fees of $589,000.

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For the three months ended March 31, 2015, basic and diluted earnings per common share were each $0.42.  Basic and diluted earnings per common share for the three months ended March 31, 2014 were each $0.13.  Weighted average fully diluted shares outstanding for the three months ended March 31, 2015 and 2014 were 33,071,317 and 32,608,599, respectively.

Return on average assets for the three months ended March 31, 2015 and 2014 was 1.62% and 0.57%, respectively. Return on average equity for the three months ended March 31, 2015 and 2014 was 14.13% and 4.79%, respectively.

General —Business Segments

We operate in three business segments: commercial banking, mortgage banking, and wealth management services.

Net income attributable to the commercial banking segment for the three months ended March 31, 2015 was $8.9 million compared to net income of $5.5 million for the three months ended March 31, 2014.  Net interest income increased $1.9 million to $27.1 million for the three months ended March 31, 2015, compared to $25.2 million for the same period of 2014.  Provision for loan losses of $130,000 was recorded for the three months ended March 31, 2015 compared to a provision of $1.9 million for the same period of 2014.  Noninterest income increased to $1.3 million for the three months ended March 31, 2015 compared to $932,000 for the three months ended March 31, 2014.  Noninterest expense was $15.1 million for the three months ended March 31, 2015, compared to $15.8 million for the same period of 2014.  The decrease in noninterest expense was primarily attributable to the UFBC acquisition which occurred during 2014.  Offsetting a portion of this decrease were increases in marketing and advertising expense and an increase in the variable component of our salary and benefits expense due to better than expected results at the Bank.

The mortgage banking segment reported net income of $6.0 million for the three months ended March 31, 2015 compared to a net loss of $167,000 for the three months ended March 31, 2014.  Realized and unrealized gains associated with the fair value of commitments and loans held for sale increased to $16.2 million for the three months ended March 31, 2015 compared to $7.4 for the same period of 2014.  Noninterest expense decreased $974,000 to $7.3 million for the three months ended March 31, 2015 compared to $8.3 million for the same period of 2014.  The decrease in noninterest expense is a direct result of reductions in staffing levels and consolidation of certain mortgage offices over the past year.

The wealth management services segment, which includes CWS, recorded net income of $1,000 for the three months ended March 31, 2015, compared to net income of $36,000 for the three months ended March 31, 2014.

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 the three months ended March 31, 2015 and 2014, net interest income was $27.4 million and $25.7 million, respectively.  The yields on our loans receivable portfolio decreased 18 basis points for the three months ended March 31, 2015 compared to the same period of 2014 as a result of the low interest rate environment.  The yield on our loans held for sale portfolio decreased 73 basis points, which is again due to the low interest rate environment as long-term rates decreased further in anticipation of an increase by the Federal Reserve in the discount rate during 2015.  The yields of our interest-bearing deposits increased 4 basis points as we have increased rates on certain savings and certificates of deposit products to remain competitive in our market.  However, to offset this slight increase, we have reduced our wholesale funding costs related to other borrowed funds by 5 basis points as we restructured a portion of our fixed rate FHLB advance portfolio during February 2015.  This restructuring will reduce our FHLB advance funding costs from 3.33% to 2.80% which translates into a 0.03% benefit to our net interest margin for the first quarter of 2015.

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Our net interest margin, on a tax-equivalent basis, which is calculated as net interest income divided by average interest earning assets, was 3.45% and 3.64% for the three months ended March 31, 2015 and 2014, respectively.  Our net interest margin decreased as a result of the decrease in yield on our interest-earning assets due to the low interest rate environment.

Interest income on loans receivable increased $2.6 million to $27.5 million for the three months ended March 31, 2015 compared to $24.9 million for the same three month period of 2014.  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 $2.5 million for each of the three months ended March 31, 2015 and 2014, respectively.

Interest income on investment securities decreased $388,000 for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014. The decrease in interest income in our investment securities portfolio is attributable to the decrease in balances within our portfolio as a result of calls, maturities, principal repayments, and sales that have occurred within the investment securities portfolio totaling over the past year.

Total interest expense increased $468,000 to $5.5 million for the three months ended March 31, 2015 as compared to $5.0 million for the same period of 2014.  The increase is primarily attributable to the increase in deposits, specifically certificates of deposit including brokered CDs over the past year.  Certificates of deposit increased $90.6 million year over year, as a result of our branch acquisition in late 2014 and organic growth.  Brokered certificates of deposit increased $96.9 million year over year as a result of the increase in loans held for sale as wholesale funding is used to support this segment of our loan portfolio.

The following tables present an analysis of average earning assets and interest-bearing liabilities with related components of interest income and interest expense on a tax equivalent basis.

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

Three Months Ended March 31, 2015, 2014 and 2013

(In thousands)

	2015							2014							2013
				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	$	349,942		$	3,183	3.64	%	$	259,650		$	3,218	4.96	%	$	218,584		$	2,192	4.00	%
Real estate - commercial	1,258,988			14,257		4.53	%	1,159,091			12,623		4.36	%	825,509			10,212		4.91	%
Real estate - construction	445,913			5,246		4.70	%	397,199			4,829		4.86	%	374,301			4,799		5.12	%
Real estate - residential	391,070			3,717		3.80	%	304,546			3,109		4.08	%	234,630			2,702		4.60	%
Home equity lines	133,737			1,092		3.31	%	114,720			1,060		3.70	%	116,539			1,068		3.72	%
Consumer	4,807			66		5.56	%	6,465			83		5.21	%	3,725			48		5.14	%
Total loans	2,584,457			27,561		4.27	%	2,241,671			24,922		4.45	%	1,773,288			21,021		4.74	%
Loans held for sale	260,524			2,484		3.81	%	218,094			2,477		4.54	%	496,038			4,555		3.67	%
Investment securities available-for-sale	315,532			3,054		3.87	%	342,127			3,408		3.98	%	244,297			2,624		4.30	%
Investment securities held-to-maturity	4,021			21		2.09	%	8,306			39		1.87	%	11,121			56		2.01	%
Other investments	13,248			156		4.66	%	15,521			133		3.40	%	13,539			79		6.88	%
Federal funds sold	52,022			28		0.22	%	31,790			31		0.40	%	185,174			114		0.25	%
Total interest-earning assets and interest income (2)	3,229,804			33,304		4.07	%	2,857,509			31,010		4.34	%	2,723,457			28,449		4.18	%
Noninterest-earning assets:
Cash and due from banks	20,232							35,831							14,166
Premises and equipment, net	25,208							24,849							19,425
Goodwill and other intangibles, net	37,235							32,849							10,267
Accrued interest and other assets	98,009							100,878							106,841
Allowance for loan losses	(28,828		)					(30,043		)					(27,384		)
Total assets	$	3,381,660						$	3,021,873						$	2,846,772
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	424,284			519		0.50	%	420,285			534		0.52	%	345,087			536		0.63	%
Money markets	367,485			289		0.31	%	312,656			238		0.30	%	277,927			211		0.30	%
Statement savings	263,938			197		0.30	%	247,568			167		0.27	%	209,820			139		0.27	%
Certificates of deposit	974,901			2,481		1.03	%	754,081			1,882		1.01	%	992,907			2,537		1.03	%
Total interest - bearing deposits	2,030,608			3,486		0.70	%	1,734,590			2,821		0.66	%	1,825,741			3,423		0.76	%
Other borrowed funds	350,331			1,975		2.29	%	375,775			2,173		2.34	%	287,645			2,182		3.08	%
Total interest-bearing liabilities and interest expense	2,380,939			5,461		0.93	%	2,110,365			4,994		0.96	%	2,113,386			5,605		1.08	%
Noninterest-bearing liabilities:
Demand deposits	579,059							519,016							377,518
Other liabilities	32,926							34,529							40,925
Common shareholders’ equity	388,736							357,963							314,943
Total liabilities and shareholders’ equity	$	3,381,660						$	3,021,873						$	2,846,772
Net interest income and net interest margin (2)				$	27,843	3.45	%				$	26,016	3.64	%				$	22,844	3.35	%

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

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 33% for all periods presented.

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Rate and Volume Analysis

Three Months Ended March 31, 2015, 2014 and 2013

(In thousands)

	2015 Compared to 2014									2014 Compared to 2013
	Change Due to									Change Due to
	Average			Average			Increase			Average			Average			Increase
	Volume (3)			Rate			(Decrease)			Volume (3)			Rate			(Decrease)
Interest income:
Loans (1):
Commercial and industrial	$	1,119		$	(1,154	)	$	(35	)	$	406		$	620		$	1,026
Real estate - commercial	1,088			546			1,634			4,010			(1,599		)	2,411
Real estate - construction	603			(186		)	417			284			(254		)	30
Real estate - residential	883			(275		)	608			797			(390		)	407
Home equity lines	162			(130		)	32			(3		)	(5		)	(8		)
Consumer	(21		)	4			(17		)	34			1			35
Total loans	3,834			(1,195		)	2,639			5,528			(1,627		)	3,901
Loans held for sale	482			(475		)	7			(2,552		)	474			(2,078		)
Investment securities available-for-sale	(265		)	(89		)	(354		)	1,051			(267		)	784
Investment securities held-to-maturity	(20		)	2			(18		)	(14		)	(3		)	(17		)
Other investments	(19		)	42			23			189			(135		)	54
Federal funds sold	21			(24		)	(3		)	(95		)	12			(83		)
Total interest income (2)	4,033			(1,739		)	2,294			4,107			(1,546		)	2,561
Interest expense:
Interest - bearing deposits:
Interest checking	5			(20		)	(15		)	115			(117		)	(2		)
Money markets	42			9			51			26			1			27
Statement savings	11			19			30			31			(3		)	28
Certificates of deposit	552			47			599			(611		)	(44		)	(655		)
Total interest - bearing deposits	610			55			665			(439		)	(163		)	(602		)
Other borrowed funds	(148		)	(50		)	(198		)	678			(687		)	(9		)
Total interest expense	462			5			467			239			(850		)	(611		)
Net interest income (2)	$	3,571		$	(1,744	)	$	1,827		$	3,868		$	(696	)	$	3,172

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

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 33% for all periods presented.

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

Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2015 and 2014 was $130,000 and $1.9 million, respectively.  The decrease in our provision expense during 2015 compared to 2014 is primarily a result of improved credit quality during 2015 as compared to 2014.

During 2015, we recorded charge-offs of $19,000 primarily related to consumer loans.  Recoveries from previously charged-off loans totaled $498,000 for the three months ended March 31, 2015.  During the first quarter of 2015, we received a recoveries on two commercial relationships totaling $485,000.  All other recoveries were primarily related to previously charged off residential real estate loans and home equity loans.  Nonperforming loans at March 31, 2015 and December 31, 2014, were $1.9 million and $3.4 million, respectively. The decrease in nonperforming loans is a result of one nonperforming loan paying off in total and selling three nonperforming loan relationships during the first quarter of 2015.

The allowance for loan losses was $28.9 million at March 31, 2015 and $28.3 million at December 31, 2014. Our allowance for loan losses ratio as a percent of total loans was 1.10% at each of March 31, 2015 and December 31, 2014, respectively.

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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 March 31, 2015, our commercial real estate (including construction lending) portfolio was 67% of our total loan portfolio.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries may not function as we have anticipated.

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

Allowance for Loan Losses

Three Months Ended March 31, 2015 and 2014

(In thousands)

	2015			2014
Beginning balance, January 1	$	28,275		$	27,864
Provision for loan losses	130			1,926
Loans charged off:
Commercial and industrial	(3		)	(783		)
Residential	—			—
Consumer	(16		)	(2		)
Total loans charged off	(19		)	(785		)
Recoveries:
Commercial and industrial	485			7
Residential	10			81
Consumer	3			—
Total recoveries	498			88
Net (charge offs) recoveries	479			(697		)
Ending balance, March 31,	$	28,884		$	29,093

	March 31,			March 31,
	2015			2014
Loans:
Balance at period end	$	2,625,430		$	2,345,702
Allowance for loan losses to loans receivable net of fees	1.10		%	1.24		%
Annualized net charge-offs to average loans receivable	-0.07		%	0.12		%

Allocation of the Allowance for Loan Losses

At March 31, 2015 and December 31, 2014

(In thousands)

	March 31,				December 31,
	2015				2014
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	2,125	12.32	%	$	2,061	13.69	%
Real estate - commercial	17,715		48.24	%	17,820		48.65	%
Real estate - construction	6,723		18.66	%	6,105		16.82	%
Real estate - residential	1,961		15.45	%	1,954		15.58	%
Home equity lines	326		5.14	%	301		5.06	%
Consumer	34		0.19	%	34		0.20	%
Total allowance for loan losses	$	28,884	100.00	%	$	28,275	100.00	%

* Percentage of loan type to the total loan portfolio.

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Nonperforming Loans

At March 31, 2015 and December 31, 2014

(In thousands)

	March 31,		December 31,
	2015		2014
Nonaccruing loans	$	1,873	$	3,361
Loans contractually past-due 90 days or more and still accruing	—		—
Total nonperforming loans	$	1,873	$	3,361

Noninterest Income

Noninterest income includes service charges on deposits and loans, realized and unrealized gains on mortgage banking activities, investment fee income, and gains on sales of investment securities available-for-sale, and continues to be an important factor in our operating results.

Noninterest income for the three months ended March 31, 2015 and 2014 was $17.6 million and $8.7 million, respectively.  Realized and unrealized gains on mortgage banking activities, which are reported net of commission & incentive expense, totaled $16.2 million for the three months ended March 31, 2015 compared to $7.4 million for the same period of 2014.

The change 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 first quarter of 2015, the unrealized gain increased $6.7 million as compared to the year ago quarter.  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 and becomes designated as a hedge, which, under GAAP, are recognized by us 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 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.

For the three months ended March 31, 2015 and 2014, we closed $843.7 million and $551.4 million in mortgage originations, respectively.  The increase in mortgage originations is a result of the decreased interest rate environment which has increased existing home borrowers’ interest in refinancing their current mortgage.  As a result, refinance activity has increased to 51% of our total loan origination volume for the 2015 compared to 18% for the same period of 2014.

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Investment fee income decreased $107,000 to $115,000 for the three months ended March 31, 2015 compared to $222,000 for the same period of 2014.

The increase in the cash surrender value of our bank-owned life insurance for the three months ended March 31, 2015 and 2014 was $118,000 and $119,000, respectively.

Noninterest income represented 39% and 25% of our total revenues for the three months ended March 31, 2015 and 2014, 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 March 31, 2015 was $24.1 million, compared to $25.8 million for the same period of 2014, a decrease of $1.6 million, or 6%.  The decrease is primarily attributable to our recording merger and acquisition expenses during 2014 as a result of our acquisition of UFBC.

For the quarter ended March 31, 2015, salaries and benefits expense increased to $12.1 million from $11.4 million for the quarter ended March 31, 2014.  The increase in salaries and benefits expense during 2015 compared to 2014 is primarily a result of the increase in the variable component of compensation of $915,000 due to better than anticipated results for 2015 compared to the same period of 2014.

Occupancy expense was $2.5 million for the three months ended March 31, 2015, a decrease of $146,000 when compared to the same period of 2014.  The decrease in occupancy expense during 2015 as compared to 2014 is primarily attributable to the closing of several branch office locations during 2014.  As a result of our UFBC acquisition, we had five branch offices that overlapped existing markets. The decreases in depreciation expense and data processing & communications for 2015 compared to 2014 can be attributed to the cost savings we received post UFBC acquisition.

Professional fees were $1.6 million and $818,000 for the three months ended March 31, 2015 and 2014, respectively.  The increase in professional fees for 2015 was a result of increased legal fees as a result of litigation which was settled subsequent to the end of the first quarter of 2015.  This settlement will result in additional pretax income during the second quarter of 2015 of approximately $2.5 million for us.

Income Taxes

For the three months ended March 31, 2015, we recorded a provision for income taxes of $7.0 million, compared to $2.3 million for the same period of 2014.  Our effective tax rate for the three months ended March 31, 2015 and 2014 was 33.9% and 35.2%, respectively.  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 $3.45 billion and $3.40 billion at March 31, 2015 and December 31, 2014, respectively.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $323.7 million at March 31, 2015, compared to $348.2 million at December 31, 2014, a decrease of $24.5 million.  The decrease in investment securities was a result of maturities, sales, calls and scheduled principal payments that occurred during 2015.  The investment securities portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and trading securities. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management.  Investment securities held-to-maturity are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. Investment securities-trading are securities we purchase to economically hedge against fair value changes in our nonqualified deferred compensation plan liability.  These securities include cash equivalents, equities and mutual funds.  See the following table for additional information on our investment securities portfolio.

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Investment Securities

At March 31, 2015 and December 31, 2014

(In thousands)

	Amortized		Fair		Average
Available-for-sale at March 31, 2015	Cost		Value		Yield
U.S. government-sponsored agencies
Within one year	$	999	$	1,001	0.48	%
One to five years	35,548		37,691		3.28	%
Five to ten years	9,826		10,970		3.84	%
After ten years	4,842		4,943		3.15	%
Total U.S. government-sponsored agencies	51,215		54,605		3.32	%
Mortgage-backed securities (1)
One to five years	4,544		4,638		2.74	%
Five to ten years	33,942		36,148		3.40	%
After ten years	76,959		82,028		3.58	%
Total mortgage-backed securities	115,445		122,814		3.50	%
Tax exempt municipal securities (2)
Within one year	6,042		6,138		4.45	%
One to five years	14,585		15,480		3.18	%
Five to ten years	26,651		28,285		3.55	%
After ten years	75,134		78,757		3.36	%
Taxable municipal securities
One to five years	499		560		4.55	%
Five to ten years	3,755		4,175		5.05	%
After ten years	996		1,066		5.33	%
Total municipal securities	127,662		134,461		3.50	%
Pooled trust preferred & corporate securities
Within one year	501		501		0.35	%
After ten years	1,822		1,879		1.51	%
Total pooled trust preferred & corporate securities	2,323		2,380		1.26	%
Total investment securities available-for-sale	$	296,645	$	314,260	3.45	%
	Amortized		Fair		Average
Held-to-maturity at March 31, 2015	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	15	$	15	8.11	%
Total mortgage-backed securities	15		15		8.11	%
Pooled trust preferred securities
After ten years	4,004		3,410		1.11	%
Total pooled trust preferred securities	4,004		3,410		1.11	%
Total investment securities held-to-maturity	4,019		3,425		1.14	%
Total investment securities	$	300,664	$	317,685	3.42	%

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	Amortized		Fair		Average
Available-for-sale at December 31, 2014	Cost		Value		Yield
U.S. government-sponsored agencies
Within one year	$	499	$	500	0.42	%
One to five years	25,922		26,954		3.02	%
Five to ten years	19,996		21,905		3.82	%
After ten years	24,618		24,794		3.21	%
Total U.S. government-sponsored agencies	71,035		74,153		3.29	%
Mortgage-backed securities (1)
One to five years	4,761		4,857		2.79	%
Five to ten years	32,846		34,595		3.39	%
After ten years	81,201		86,029		3.59	%
Total mortgage-backed securities	118,808		125,481		3.50	%
Tax exempt municipal securities (2)
Within one year	4,178		4,270		4.19	%
One to five years	9,123		9,601		3.15	%
Five to ten years	32,080		33,834		3.57	%
After ten years	79,770		83,639		3.38	%
Taxable municipal securities
Five to ten years	4,258		4,712		4.99	%
After ten years	996		1,066		5.33	%
Total municipal securities	130,405		137,122		3.50	%
Pooled trust preferred & corporate securities
Within one year	502		502		0.35	%
After ten years	1,821		1,873		1.48	%
Total pooled trust preferred & corporate securities	2,323		2,375		1.24	%
Total investment securities available-for-sale	$	322,571	$	339,131	3.44	%

	Amortized		Fair		Average
Held-to-maturity at December 31, 2014	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	19	$	19	8.10	%
Total mortgage-backed securities	19		19		8.10	%
Pooled trust preferred securities
After ten years	4,005		3,315		1.09	%
Total pooled trust preferred securities	4,005		3,315		1.09	%
Total investment securities held-to-maturity	4,024		3,334		1.13	%
Total investment securities	$	326,595	$	342,465	3.41	%

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We complete reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2015, 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 March 31, 2015, 99% 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 $1.5 million in non-government non-agency mortgage-related securities.  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 March 31, 2015, 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.

We own three pooled trust preferred securities which were all previously classified as held-to-maturity within the investment securities portfolio.  As a result of the issuance of the Final Rule, one of the three investments is exempt from the covered fund definition.  For the one investment that is not exempt as a result of the Final Rule, we will be required to divest our investment in this particular pooled trust preferred security prior to the effectiveness of the Final Rule on July 21, 2017.  As a result of this new regulation, this investment which has a par value of $2.0 million and a carrying value of $1.8 million at March 31, 2015, was reclassified to the available-for-sale investment securities portfolio.  We recorded an other-than-temporary impairment of $300,000 for the year ended December 31, 2013, which was determined based on the market bid price of these investments.  No further impairment has been recorded.

The par value of the two pooled trust preferred securities still classified as held-to-maturity totaled $4.0 million at March 31, 2015.  The collateral underlying these structured securities are instruments issued by financial institutions.  We own the A-3 tranches in each issuance.  Each of the bonds are rated by more than one rating agency.  One security has a composite rating of A-, one security has a composite rating of 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 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.

In one of the pooled trust preferred securities issues, 71% 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 $185 million of the remaining $217 million, or 85% of the performing collateral defaulted or deferred payment.  In the other pooled trust preferred security, 63% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $157 million of the remaining $219 million, or 72% of the performing collateral defaulted or deferred payment.  Significant judgment is involved in the evaluation of other-than-temporary impairment.  We do not intend to sell nor do we believe it is probable we will be required to sell these pooled trust preferred securities prior to the recovery of our investment.

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No other-than-temporary impairment has been recognized on the securities in our investment portfolio as of March 31, 2015.

We hold $12.8 million in FHLB stock at March 31, 2015, which is included in other investments on the statement of condition.

Loans Receivable

Total loans receivable, net of deferred fees and costs, were $2.63 billion at March 31, 2015 and $2.58 billion at December 31, 2014.  See the following table for details on the loans receivable portfolio.

Loans held for sale at March 31, 2015 were $314.3 million compared to $339.1 million at December 31, 2014.  Loans closed at our mortgage subsidiary totaled $843.7 million for the three months ended March 31, 2015 compared to $551.4 million for the quarter ended March 31, 2014.  Loans held for sale are valued at the lower of cost or fair value.

Loans Receivable

At March 31, 2015 and December 31, 2014

(In thousands)

	March 31, 2015					December 31, 2014
Commercial and industrial	$	323,890		12.32	%	$	353,921		13.69	%
Real estate - commercial	1,268,667			48.24	%	1,257,854			48.65	%
Real estate - construction	490,785			18.66	%	434,908			16.82	%
Real estate - residential	406,367			15.45	%	402,678			15.58	%
Home equity lines	135,276			5.14	%	130,885			5.06	%
Consumer	4,769			0.19	%	5,083			0.20	%
Gross loans	$	2,629,754		100.00	%	2,585,329			100.00	%
Net deferred (fees) costs	(4,324		)			(4,215		)
Less: allowance for loan losses	(28,884		)			(28,275		)
Loans receivable, net	$	2,596,546				$	2,552,839

Deposits

Total deposits were $2.65 billion at March 31, 2015 compared to $2.54 billion at December 31, 2014.  See the following table for details on certificates of deposit with balances of $100,000 or more.

Certificates of Deposit of $100,000 or More

At March 31, 2015

(In thousands)

	Fixed Term		No-Penalty*		Total
Maturities:
Three months or less	$	86,391	$	3,626	$	90,017
Over three months through six months	50,013		12,078		62,091
Over six months through twelve months	98,055		14,515		112,570
Over twelve months	160,005		26,629		186,634
	$	394,464	$	56,848	$	451,312

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

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We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At March 31, 2015 and December 31, 2014, we had $64.9 million and $32.3 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $320.1 million and $278.1 million at March 31, 2015 and December 31, 2014, respectively. We use this type of funding to lock in low cost term funding to support mortgage loans we originate and intend to sell.

Borrowings

Other borrowed funds were $356.3 million at March 31, 2015 compared to $438.0 million at December 31, 2014.  FHLB advances at March 31, 2015 and December 31, 2014 were $230.0 million and $240.0 million, respectively.  Customer repurchase agreements decreased $11.7 million to $92.0 million at March 31, 2015 compared to $103.7 million at December 31, 2014.  We had federal funds purchased of $10.0 million outstanding at March 31, 2015 compared to $70.0 million at December 31, 2014.  Fed funds purchased decreased during 2015 as we replaced this type of funding with brokered CDs.  The following table provides information on our borrowings.

Short-Term Borrowings and Other Borrowed Funds

At March 31, 2015

(In thousands)

			Amount
	Interest Rate		Outstanding
Other short-term borrowed funds:
Customer repurchase agreements	0.11	%	$	91,972
Federal Funds Purchased	0.59	%	10,000
Total other short-term borrowed funds and weighted average rate	0.16	%	$	101,972
Other borrowed funds:
Trust preferred	2.96	%	$	24,350
FHLB advances - long term	2.81	%	230,000
Other borrowed funds and weighted average rate	2.82	%	$	254,350
Total other borrowed funds and weighted average rate	2.06	%	$	356,322

Shareholders’ Equity

Shareholders’ equity at March 31, 2015 was $389.3 million compared to $377.3 million at December 31, 2014, an increase of $12.0 million, or 3%. The increase in shareholders’ equity at March 31, 2015 compared to December 31, 2014 is primarily attributable to net income of $13.7 million recorded for the three months ended March 31, 2015 less dividends of $3.5 million that were declared during 2015.  In addition, accumulated other comprehensive income increased $435,000 for the three months ended March 31, 2015.

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Book value per share at March 31, 2015 was $12.11 compared to $11.76 at December 31, 2014. Tangible book value per share (which is book value per share less goodwill and other intangible assets) at March 31, 2015 was $10.95 compared to $10.60 at December 31, 2014.

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.

Commercial Banking

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

For the three months ended March 31, 2015, the commercial banking segment recorded net income of $8.9 million compared to $5.5 million for the same period of 2014.  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 March 31, 2015, total assets for this segment were $3.37 billion, loans receivable, net of deferred fees and costs, were $2.63 billion and total deposits were $2.65 billion. At March 31, 2014, total assets for this segment were $3.10 billion, loans receivable, net of deferred fees and costs, were $2.35 billion and total deposits were $2.38 billion.

Mortgage Banking

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

For the three months ended March 31, 2015 and 2014, the mortgage banking segment recorded net income of $6.0 million and a net loss of $167,000, 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 March 31, 2015, total assets for this segment were $358.0 million; loans held for sale were $314.3 million and mortgage funding checks were $23.0 million. At March 31, 2014, total assets for this segment were $322.0 million; loans held for sale were $265.3 million and mortgage funding checks were $6.5 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.

For the three months ended March 31, 2015 and 2014, the wealth management services segment recorded net income of $1,000 and $36,000, respectively.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for this business segment for the periods presented.  At March 31, 2015, total assets were $2.4 million and managed and custodial assets were $282 million. At March 31, 2014, total assets were $2.3 million and managed and custodial assets were $179 million.

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

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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. On January 1, 2015, the new Basel III regulatory risk-based capital rules became effective.  Basel III includes new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the current rules; and (iv) a Tier 1 leverage ratio of 4%.

This new regulatory standard also provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, deferred tax assets related to temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Basel III prescribes a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

Total risk-based capital to risk-weighted assets under the new regulatory standard was 11.48% at March 31, 2015 compared to 11.78% at December 31, 2014 (which was calculated under the previous regulatory capital rules).  Our Tier 1 risk-based capital ratios under the new regulatory standard was 10.63% at March 31, 2015 compared to 10.89% at December 31, 2014 (which was calculated under the previous regulatory capital rules.  Common equity Tier 1 capital was 9.91% at March 31, 2015, the first reporting period this capital ratio was required to be calculated.

Accordingly, our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions at both March 31, 2015 and December 31, 2014.

The following table shows the minimum capital requirements and our capital position at March 31, 2015 and December 31, 2014 for the Company and for the Bank.

Capital Components

At March 31, 2015 and December 31, 2014

(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 March 31, 2015
Total risk-based capital	$	397,883	11.48	%	$	277,283	>	8.00	%	$	346,604	>	10.00	%
Tier I risk-based capital	368,414		10.63	%	207,962		>	6.00	%	277,283		>	8.00	%
Common Equity Tier 1 risk-based capital	343,414		9.91	%	155,972		>	4.50	%	225,292		>	6.50	%
Leverage capital ratio	368,414		11.02	%	133,782		>	4.00	%	167,227		>	5.00	%
At December 31, 2014
Total risk-based capital	$	383,704	11.78	%	$	260,653	>	8.00	%	$	325,816	>	10.00	%
Tier I risk-based capital	354,843		10.89	%	130,326		>	4.00	%	195,490		>	6.00	%
Leverage capital ratio	354,843		10.81	%	131,273		>	4.00	%	164,091		>	5.00	%

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										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
Cardinal Bank:
At March 31, 2015
Total risk-based capital	$	394,035	11.43	%	$	275,789	>	8.00	%	$	344,737	>	10.00	%
Tier I risk-based capital	364,565		10.58	%	206,842		>	6.00	%	275,789		>	8.00	%
Common Equity Tier 1 risk-based capital	364,565		10.58	%	155,131		>	4.50	%	224,079		>	6.50	%
Leverage capital ratio	364,565		10.96	%	133,062		>	4.00	%	166,327		>	5.00	%
At December 31, 2014
Total risk-based capital	$	379,979	11.73	%	$	259,221	>	8.00	%	$	324,026	>	10.00	%
Tier I risk-based capital	351,118		10.84	%	129,610		>	4.00	%	194,416		>	6.00	%
Leverage capital ratio	351,118		10.75	%	130,613		>	4.00	%	163,266		>	5.00	%

Liquidity

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

In addition to deposits, we have access to different wholesale funding markets. These markets include the brokered CD market, the repurchase agreement market and the federal funds market. We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At March 31, 2015 and December 31, 2014, we had $64.9 million and $32.3 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $320.1 million and $278.1 million at March 31, 2015 and December 31, 2014, respectively.

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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 $374.7 million at March 31, 2015 or 10.9% of total assets. We held investments that are classified as held-to-maturity in the amount of $4.0 million at March 31, 2015. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion 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 (“FHLB”) 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 March 31, 2015 was $643.6 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $174.4 million at March 31, 2015. 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 March 31, 2015

(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	$	610,358	$	306,275	$	237,667	$	49,839	$	16,577
Brokered certificates of deposit	385,015		229,869		149,642		5,504		—
Advances from the Federal Home Loan Bank of Atlanta	230,000		25,000		110,000		30,000		65,000
Trust preferred securities	24,350		—		—		—		24,350
Operating lease obligations	34,123		7,830		11,614		7,940		6,739
Total	$	1,283,846	$	568,974	$	508,923	$	93,283	$	112,666

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.

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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 March 31, 2015 and December 31, 2014, commitments to extend credit were $1.30 billion and $1.52 billion, respectively.  Standby letters of credit were $35.9 million and $33.9 million at March 31, 2015 and December 31, 2014, respectively. Commitments to extend credit of $449.9 million at March 31, 2015 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature, compared to $194.9 million as of December 31, 2014.  The increase in mortgage loan funding commitments is related to the increased origination production at George Mason during the first quarter of 2015 as compared to the fourth quarter of 2014.

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.  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 March 31, 2015, the reserve for loan repurchases had a balance of $150,000.

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.

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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, and 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 March 31, 2015, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 0.6% in a down 100 basis point scenario and would increase by less than 1.0% 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 1.9% in a down 100 basis point scenario and would increase less than 3.0% 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, and 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 March 31, 2015, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 0.6% in a down 100 basis point scenario and would increase by less than 1.0% 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 1.9% in a down 100 basis point scenario and would increase less than 3.0% 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.  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, because of the material weakness in internal control over financial reporting as described in our 2014 Form 10-K, the aforementioned officers concluded that the Company’s disclosure controls and procedures were  not effective. The Company’s remediation efforts related to this material weakness are ongoing.

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.

Remediation Plan for Material Weakness in Internal Control Over Financial Reporting

In response to the material weakness identified above, the Company is in the process of implementing changes to its internal control over financial reporting, including hiring a qualified and highly experienced Credit Administrator and a Quality Control Supervisor, and creating a step-by-step checklist of the key elements related to the recording of new or modified loans into the loan sub-ledger system to ensure completeness and accuracy of all inputs.

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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, 2014.  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 March 31, 2015, 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

10.1Form of Restricted Stock Award Agreement (attached as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 23, 2015 and incorporated herein by reference).

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

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

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

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

101The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, 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: May 8, 2015	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: May 8, 2015	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)
Date: May 8, 2015	/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
10.1	Form of Restricted Stock Award Agreement (attached as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 23, 2015 and incorporated herein by reference).
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 March 31, 2015, 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).

80