**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2005**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from          to          **

**Commissionfile number: 0-24557**

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrantas specified in its charter)

| **Virginia**                                                     | **54-1874630**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
| **8270 Greensboro Drive, Suite 500**                        | ** **                            |
| **McLean,  Virginia**                                            | **22102**                             |
| (Address of  principal executive offices)                        | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:**(703) 584-3400**

Securitiesregistered pursuant to Section 12(b) of the Act: None

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, par value $1.00 per share**(Title of class)

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o   No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

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

Large acceleratedfiler o      Accelerated filer x      Non-accelerated filer o

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

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold as of June 30, 2005:$209,948,494.

The number of sharesoutstanding of Common Stock, as of February 28, 2006, was 24,364,425.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the registrant’s definitive Proxy Statementfor the 2006 Annual Meeting of Shareholders are incorporated by reference into Part IIIof this Form 10-K. With the exception of the portions of the ProxyStatement specifically incorporated herein by reference, the Proxy Statement isnot deemed to be filed as part of this Form 10-K.

 

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**TABLE OF CONTENTS**

|                   | ** ** |                                                                                                                         | ** ** | **Page** | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |
| Item 1.           |       | Business                                                                                                                |       |     | 3          |   |   |
| Item  1A.         |       | Risk  Factors                                                                                                           |       |     | 20         |   |   |
| Item 1B.          |       | Unresolved Staff Comments                                                                                               |       |     | 24         |   |   |
| Item 2.           |       | Properties                                                                                                              |       |     | 24         |   |   |
| Item  3.          |       | Legal  Proceedings                                                                                                      |       |     | 24         |   |   |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                     |       |     | 24         |   |   |
| **PART II**  |       |
| Item 5.           |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |     | 25         |   |   |
| Item  6.          |       | Selected  Financial Data                                                                                                |       |     | 26         |   |   |
| Item 7.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operation               |       |     | 27         |   |   |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                             |       |     | 58         |   |   |
| Item 8.           |       | Financial Statements and Supplementary Data                                                                             |       |     | 59         |   |   |
| Item 9.           |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       |     | 102        |   |   |
| Item 9A.          |       | Controls and Procedures                                                                                                 |       |     | 102        |   |   |
| Item  9B.         |       | Other  Information                                                                                                      |       |     | 102        |   |   |
| **PART III** |       |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                                                      |       |     | 103        |   |   |
| Item 11.          |       | Executive Compensation                                                                                                  |       |     | 103        |   |   |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |     | 103        |   |   |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                          |       |     | 103        |   |   |
| Item 14.          |       | Principal Accounting Fees and Services.                                                                                 |       |     | 103        |   |   |
| **PART IV**  |       |
| Item 15.          |       | Exhibits, Financial Statement Schedules                                                                                 |       |     | 104        |   |   |

 

This Annual Report of Form 10-K has not been reviewed,or confirmed for accuracy or relevance, by the Federal Deposit InsuranceCorporation.

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**PART I**

**Item 1.**                        Business

**Overview**

Cardinal Financial Corporation, a financial holdingcompany, was formed in late 1997 as a Virginia corporation, principally inresponse to opportunities resulting from the consolidation of severalVirginia-based banks with regional bank holding companies. In our market area,these bank consolidations had been accompanied by the dissolution of localboards of directors and relocation or termination of management and customerservice professionals.

We own Cardinal Bank, a Virginia state-charteredcommunity bank headquartered in Tysons Corner, Virginia. Cardinal Bank hasoffices in Alexandria, Annandale, Arlington, Clifton, Fairfax, Fredericksburg,Herndon, Leesburg, Manassas, McLean, Purcellville, Reston, Stafford, Sterling, SterlingPark, Tysons Corner, and Woodbridge, Virginia and Washington, D.C. We conductall of our business through Cardinal Bank (the “Bank”), our principal operatingunit, its subsidiary George Mason Mortgage, LLC (“George Mason”), CardinalWealth Services, Inc. (“CWS”), and Wilson/Bennett Capital Management, Inc.(“Wilson/Bennett”).

Cardinal Bank****offers a widerange of traditional bank loan and deposit products and services to both ourcommercial and retail customers. Our commercial relationship managers focus onattracting small and medium sized businesses as well as government contractors,commercial real estate developers and builders and professionals, such asphysicians, accountants and attorneys. We have 22 branch office locations andprovide competitive products and services.

George Mason engages primarily in the origination andacquisition of residential mortgages for sale into the secondary market on abest efforts basis through nine branches located throughout the metropolitanWashington, D.C. region. George Mason is one of the largest residentialmortgage originators in the greater Washington metropolitan area, generatingoriginations of approximately $4.3 billion in 2005, excluding advances onconstruction loans and including loans purchased from other mortgage bankingcompanies which are owned by local home builders but managed by George Mason,and $3.5 billion in 2004, which includes managed company originations and loansof $1.9 billion originated prior to our acquisition of George Mason.

CWS provides brokerage and investment services througha contract with Raymond James Financial Services, Inc. Under thiscontract, financial advisors can offer our customers an extensive range offinancial products and services, including estate planning, qualifiedretirement plans, mutual funds, annuities, life insurance, fixed income andequity securities and equity research and recommendations. CWS’s principalsource of revenue is the net commissions it earns on the purchases and sales ofinvestment products by its customers.

Wilson/Bennettprovides professional investment management of financial assets withasset preservation as the primary goal. Clients include individuals, pensionplans and medium size corporations. Wilson/Bennett utilizes a value orientedinvestment approach and focuses on large capitalization stocks. Wilson/Bennettearns fees based upon the market value of its clients’ portfolios.

**Recent Developments**

On June 9, 2005, we acquired Wilson/Bennett for atotal consideration of $6.5 million, which consisted of a payment of $1.5million in cash and the issuance of 611,111 shares of our common stock, whichwe valued at $4.9 million. We believe that the Wilson/Bennett acquisitionfurthers our strategies of enhancing fee income, and diversifying our revenuestream and the services we deliver to our customers.

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In December 2004, Cardinal Bank converted from anationally-chartered bank to a state-chartered bank.

Cardinal Bank acquired George Mason for $17.0 millionin cash on July 7, 2004. George Mason engages primarily in the originationand acquisition of residential mortgages for sale into the secondary market ona best efforts basis. George Mason conducts its business through nine brancheslocated throughout the metropolitan Washington, D.C. region. George Mason hasapproximately 200 employees and does business in eight states and the Districtof Columbia. George Mason’s primary sources of revenue include net interestincome earned on loans held for sale, gains on sales of loans and managementfees related to services provided to other mortgage companies owned by localhome builders.

George Mason also provides back-office and operationalsupport for five independent mortgage companies that are generally owned bylocal home builders.  At the time a ratelock commitment is given to a managed company’s customer, George Mason entersinto a best efforts forward sale of the loan. The loan is closed in the name ofthe managed company and immediately purchased by George Mason at the loan’sforward sale price. George Mason holds the loans which are pending sale forperiods of up to sixty days before they are sold to an investor. George Mason’sfees are based upon the managed companies’ pretax operating income.

In July 2004, weformed a wholly-owned subsidiary, Cardinal Statutory Trust I for the purpose ofissuing $20.0 million of floating rate junior subordinated deferrable interestdebentures (“trust preferred securities”). These trust preferred securities aredue in 2034 and have an interest rate of LIBOR (London Interbank Offered Rate)plus 2.40%, which adjusts quarterly.

**Growth Strategy**

We believe that the strong demographic characteristicsof our market, the ongoing bank consolidation, and the vibrant economy in themetropolitan Washington, D.C. area, particularly in Northern Virginia, providea significant opportunity to continue building a successful community-focusedbanking franchise. We intend to continue to expand our business throughinternal growth, as well as selective geographic expansion, while maintainingstrong asset quality and achieving increasing profitability. The strategy forachieving these objectives includes the following:

**Expandour footprint through branch expansion.****  **We intend to continue to expand ourfootprint by establishing new branches and potentially acquiring existingbranches or other financial institutions in communities that present attractivegrowth opportunities within Northern Virginia and other markets in the greaterWashington, D.C. metropolitan area. During 2005, we opened three branch bankingoffices, one in Sterling, Virginia in the first quarter of the year, a secondin Woodbridge, Virginia in the second quarter and the third in the headquartersof our mortgage banking subsidiary, George Mason, in Fairfax, Virginia in thefourth quarter. We opened a branch banking office in Washington, D.C. in February 2006.

As a result of the recent consolidation of banks inour market, we expect to continue to have opportunities to acquire or leaseformer branch sites from other financial institutions. As we have done in thepast, we may acquire additional sites prior to planned branch openings when webelieve the sites are attractive and are available on favorable terms. At thepresent time, we have a first right of refusal that gives us the option topurchase one branch facility if the financial institution now operating thislocation chooses to close or move its operations anytime before January 2010.We are also currently in negotiations to purchase or lease additional branchsites located in the greater Washington, D.C. metropolitan area, although therecan be no assurance that we will be successful in acquiring any of them. Ourcurrent plans, which are subject to change, contemplate that we will add asmany as six new branches by the end of 2006. Because the opening of each newbranch increases our operating expenses, we intend to stage new branch openingsin an effort to minimize the impact of these expenses on our results ofoperations.

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**Capitalizeon the continued bank consolidation in our market.****  **We anticipate that recently announced or completed bank mergerswill result in further consolidation in our target market and intend tocapitalize on the dislocation of customers resulting from this consolidation. Webelieve this consolidation creates opportunities for us to further expand ourbranch network, as discussed above, as well as to increase our market share ofbank deposits within our target market. As a local banking organization, webelieve we can compete effectively by providing a high level of personalizedservice in a service-oriented and customer-centric branch system.

Although we are not at this time engaged innegotiations with any specific bank acquisition targets, we will continue toexplore the possibility of further growth through acquisition in Virginia, themetropolitan Washington, D.C. market, or other areas if we believe that suchexpansion will strengthen the Company by diversifying its customer base andsources of revenue and be accretive to earnings within a reasonable time frame.

**Expandour lending activities.****  **We have substantially increased our legal lending limitto $19.4 million as of December 31, 2005 as a result of the completion ofour secondary common stock offering in May 2005, and earnings retained inthe business. The increase in our legal lending limit allows us to furtherexpand our commercial and real estate lending activities. It also improves ourability to serve larger residential homebuilders and allows us to seek businessfrom larger government contractors. Federal government spending in the greaterWashington region was approximately $107 billion in 2004, and we believe thereare unique growth opportunities in this sector of our regional economy. Ourgoal is to aggressively grow our loan portfolio while maintaining superiorasset quality through conservative underwriting practices. During periods ofgrowth in our loan portfolio, our earnings could be adversely impacted byprovisions to our allowance for loan losses as a result of increases in loanbalances.

**Continueto recruit experienced bankers.****  **We have been successful inrecruiting senior bankers with experience in and knowledge of our market whohave been displaced or have grown dissatisfied as a result of the previouslymentioned bank consolidation. We intend to continue our efforts to recruitexperienced bankers, particularly experienced lenders, who can immediatelygenerate additional loan volume through their existing credit relationships.

**Focuson specialized lending services.****  **We have expanded certain existingproduct lines, including government contract receivables lending, SBAguaranteed lending, and retail lending. Our commercial relationship managersfocus on attracting small and medium sized businesses, including commercialreal estate developers, builders and professionals such as physicians,accountants and attorneys. Our goal is to create a diversified,community-focused banking franchise, balanced between retail, commercial andreal estate transactions and services.

**Offeradditional financial products and services.****  **George Mason has increased our fee income and hasallowed us to offer our existing customer base a far greater array of mortgageloan products. In addition, we aggressively market our traditional banking andwealth management products to the George Mason customer base. Our focus atGeorge Mason is to build and maintain relationships with local and nationalhomebuilders in an attempt to reduce reliance on the cyclical refinancingmarket. Building relationships with larger homebuilders assists us in our effortsto increase our commercial real estate lending activities.

We plan to further developand expand the investment services we offer through our wealth managementsubsidiary and the addition of Wilson/Bennett, which has recently begun tooffer an attractive cash management product. We believe we have opportunitiesto cross-sell additional services to both our traditional banking customers andGeorge Mason’s customers. We further believe we will be able to attract newcustomers by offering a broader array of financial products and services.

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**Business Segment Operations**

In 2003 and for the first six months of 2004, weoperated and reported in two business segments, commercial banking andinvestment services. As of July 7, 2004, we began operating in a third businesssegment, mortgage banking, with the completion of our acquisition of GeorgeMason. The commercial banking segment includes both commercial and consumerlending and provides customers such products as commercial loans, real estateloans, and other business financing and consumer loans. In addition, thissegment provides customers with several choices of deposit products, includingdemand deposit accounts, savings accounts and certificates of deposit. Themortgage banking segment engages primarily in the origination and acquisitionof residential mortgages for sale into the secondary market on a best effortsbasis. The investment services segment provides advisory services to businessesand individuals, including financial planning and retirement/estate planning.

For financial informationabout the reportable segments, see “Business Segment Operations” in Item 7below and note 18 of the notes to the consolidated financial statements in Item8 below.

**Market Area**

We consider ourprimary target market to be the greater Washington metropolitan area, whichincludes the District of Columbia, the Northern Virginia counties of Arlington,Fairfax, Fauquier, Loudoun, Prince William, Spotsylvania and Stafford, theNorthern Virginia cities of Alexandria, Fairfax, Falls Church, Fredericksburg,and Manassas, and the Maryland counties of Frederick, Montgomery and PrinceGeorges. We will, however, consider expansion into other areas if we believesuch expansion will strengthen the Company by diversifying its customer baseand sources of revenue and be accretive to earnings within a reasonable timeframe.

In 2005, the population of the greater Washingtonmetropolitan area was approximately 5.8 million people, the fourth largestmarket in the country. The median annual household income for this area in 2005was approximately $76,000, the second wealthiest market in the country. Basedon estimates released by the Bureau of Labor Statistics of the U.S. Departmentof Labor for December 2005, the unemployment rate for the greaterWashington metropolitan area was approximately 2.9%, compared to a nationalunemployment rate of 5.1%. As of June 30, 2005, total deposits in thisarea were approximately $131 billion as reported by the Federal DepositInsurance Corporation (“FDIC”).

Our headquarters islocated approximately seven miles west of Washington, D.C. in Fairfax County,Virginia. The 2000 U.S. census data indicates that Fairfax County is the mostpopulous county in Virginia with a population of approximately one millionpeople. In 2005, Fairfax County had a median household income of approximately$100,800. Based on estimates released by the Bureau of Statistics of the U.S.Department of Labor for December 2005, the unemployment rate in FairfaxCounty was 2.1%.

**Competition**

The greater Washington region is dominated by branchesof large regional or national banks headquartered outside of the region. Ourmarket area is a highly competitive, highly branched, banking market. Wecompete as a financial intermediary with other commercial banks, savings andloan associations, savings banks, credit unions, mortgage banking firms,consumer finance companies, securities brokerage firms, insurance companies,mutual fund groups and other types of financial institutions. George Masonfaces significant competition from both traditional financial institutions andother national and local mortgage banking operations.

The competition to acquire deposits and to generateloans, including mortgage banking loans, is intense, and pricing is important. Manyof our competitors are larger and have substantially greater resources andlending limits than we do. In addition, many competitors offer more extensivebranch and 

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ATM networks than wecurrently have. Larger institutions operating in the greater Washington markethave access to funding sources at lower costs than are available to us sincethey have larger and more diverse fund generating capabilities. However, webelieve that we have and will continue to be successful in competing in thisenvironment due to an emphasis on a high level of personalized customerservice, localized and more responsive decision making, and communityinvolvement.

Of the $131 billionin bank deposits in the greater Washington region at June 30, 2005,approximately 77% were held by banks that are either based outside of thegreater Washington region or are operating wholesale banks that generatedeposits nationally. In just over seven years, we have grown to the seventhlargest financial institution headquartered in the greater Washington region asmeasured by total deposits. By providing competitive products and morepersonalized service and being actively involved in our local communities, webelieve we can continue to increase our share of this deposit market.

**Customers**

We believe that the recent and ongoing bankconsolidation within Northern Virginia and the greater Washington regionprovides a significant opportunity to build a successful, locally-orientedbanking franchise. We also believe that many of the larger financial institutionsin our area do not emphasize the high level of personalized service to smalland medium-sized commercial businesses, professionals or individual retailcustomers that we emphasize.

We expect to continueserving these business and professional markets with experienced commercialrelationship managers, and we have increased our retail marketing effortsthrough the expansion of our branch network and development of additionalretail products and services. We expanded our deposit market share through aggressivemarketing of our President’s Club and Monster Money Market relationshipproducts and our Totally Free Checking product.

**Banking Products and Services**

Our principal business is to accept deposits from thepublic and to make loans and other investments. The principal sources of fundsfor the bank’s loans and investments are demand, time, savings and otherdeposits, repayments of existing loans, and borrowings. Our principal source ofincome is interest collected on loans, investment securities and otherinvestments. Non-interest income, which includes among other things deposit andloan fees and service charges, gains on sales of loans and management feeincome, is the next largest component of our revenues. Our principal expensesare interest expense on deposits and borrowings, employee compensation andbenefits, occupancy-related expenses, and other overhead expenses.

The principal business of George Mason, the Bank’smortgage banking subsidiary, is to originate residential loans for sale intothe secondary market on a best efforts basis. These loans are closed andserviced by George Mason on an interim basis pending their ultimate sale to apermanent investor. The mortgage subsidiary funds these loans through a line ofcredit from Cardinal Bank, lines of credit through third party lenders and cashavailable through its own operations. George Mason’s income on these loans isgenerated from the fees it charges its customers, the gains it recognizes uponthe sales of the loans and the interest income it earns while the loans arebeing serviced. Costs associated with these loans are primarily comprised ofsalaries and commissions paid to loan originators and support personnel,interest expense incurred while the loans are held pending sale and otherexpenses associated with the origination of the loans. In addition, GeorgeMason generates management fee income by providing specific services to othermortgage banking companies owned by local home builders.

George Mason also offers a construction-to-permanentloan program. This program provides variable rate financing for customers toconstruct their residences. Once the home has been completed, the loan convertsto fixed rate financing and is sold into the secondary market. Theseconstruction-to-permanent 

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loans generate fee incomeas well as net interest income for George Mason and are classified as loansheld for sale.

George Mason’s business is both cyclical and seasonal.The cyclical nature of its business is influenced by, among other things, thelevels of and trends in mortgage interest rates, national and local economicconditions and consumer confidence in the economy. Historically, George Masonhas its lowest levels of quarterly loan closings during the first quarter ofthe year.

Both Cardinal Bank and George Mason are committed toproviding high quality products and services to their customers, and have madea significant investment in their core information technology systems. Thesesystems provide the technology that fully automates the branches, processesbank transactions, mortgage originations, other loans and electronic banking,conducts database and direct response marketing, provides cash managementsolutions, streamlined reporting and reconciliation support.

With this investment in technology, the bank offersinternet-based delivery of products for both individuals and commercialcustomers. Customers can open accounts, apply for loans, check balances, checkaccount history, transfer funds, pay bills, download account transactions intoQuickenTM and Microsoft MoneyTM, and correspond via e-mail with the bank over theinternet. The internet provides an inexpensive way for the bank to expand itsgeographic borders and branch activities while providing services offered bylarger banks.

We offer a broad array ofproducts and services to our customers. A description of products and servicesis set forth below.

*Lending*

We offer a full range of short to long-termcommercial, real estate and consumer lending products and services, which aredescribed in further detail below. We have established target percentage goalsfor each type of loan to insure adequate diversification of our loan portfolio.These goals, however, may change from time to time as a result of competition,market conditions, employee expertise, and other factors. Commercial andindustrial loans, real estate-commercial loans, real estate-construction loans,real estate-residential loans, home equity loans, and consumer loans accountfor approximately 10%, 39%, 18%, 21%, 11% and 1%, respectively of our loanportfolio at December 31, 2005. At December 31, 2005, approximately1% of our total loan portfolio is unsecured.

*Commercialand Industrial Loans.*   We make commercial loans to qualified businesses in ourmarket area. Our commercial lending portfolio consists primarily of commercialand industrial loans for the financing of accounts receivable, inventory,property, plant and equipment. Our government contract lending group providessecured lending to government contracting firms and businesses based primarilyon receivables from the federal government. We also offer Small BusinessAdministration (SBA) guaranteed loans and asset-based lending arrangements toour customers. We are certified as a preferred lender by the SBA, whichprovides us with much more flexibility in approving loans guaranteed under theSBA’s various loan guaranty programs.

*Commercial and industrial loansgenerally have a higher degree of risk than residential mortgage loans, buthave commensurately higher yields. Residential mortgage loans generally aremade on the basis of the borrower’s ability to repay the loan from his or hersalary and other income and are secured by residential real estate, the valueof which generally is readily ascertainable. In contrast, commercial loanstypically are made on the basis of the borrower’s ability to repay the loanfrom the cash flow from its business and are secured by business assets, suchas commercial real estate, accounts receivable, equipment and inventory, thevalues of which may decline over time and generally cannot be appraised with asmuch precision as residential real estate. As a result, the availability offunds for the repayment of commercial loans may be substantially dependent uponthe commercial success of the business itself.*

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To manage these risks, our policy is to secure thecommercial loans we make with both the assets of the business, which aresubject to the risks described above, and other additional collateral andguarantees that may be available. In addition, we actively monitor certainattributes of the borrower and the credit facility, including advance rate,cash flow, collateral value and other credit factors that we considerappropriate.

*CommercialMortgage Loans.*   We originate commercial mortgageloans. These loans are primarily secured by various types of commercial realestate, including office, retail, warehouse, industrial and othernon-residential types of properties and are made to the owners and/or occupiersof such property. These loans generally have maturities ranging from one to tenyears.

Commercial mortgage lending entails significantadditional risk compared with traditional residential mortgage lending. Commercialmortgage loans typically involve larger loan balances concentrated with singleborrowers or groups of related borrowers. Additionally, the repayment of loanssecured by income-producing properties is typically dependent upon thesuccessful operation of a business or real estate project and thus may besubject, to a greater extent than is the case with residential mortgage loans,to adverse conditions in the commercial real estate market or in the generaleconomy. Our commercial real estate loan underwriting criteria require anexamination of debt service coverage ratios, the borrower’s creditworthinessand prior credit history and reputation, and we generally require personalguarantees or endorsements with respect to these loans. In the loanunderwriting process, we also carefully consider the location of the propertythat will be collateral for the loan.

Loan-to-value ratios for commercial mortgage loansgenerally do not exceed 80%. We permit loan-to-value ratios of up to 80% if theborrower has appropriate liquidity, net worth and cash flow.

*ResidentialMortgage Loans.*   Residential mortgage loans areoriginated by both Cardinal Bank and George Mason. Our residential mortgageloans consist of residential first and second mortgage loans, residentialconstruction loans and home equity lines of credit and term loans secured bythe residences of borrowers. Second mortgage and home equity lines of creditare used for home improvements, education and other personal expenditures. Wemake mortgage loans with a variety of terms, including fixed, floating andvariable interest rates, with maturities ranging from three months to thirtyyears.

Residential mortgage loans generally are made on thebasis of the borrower’s ability to repay the loan from his or her salary andother income and are secured by residential real estate, the value of which isgenerally readily ascertainable. These loans are made consistent with ourappraisal and real estate lending policies, which detail maximum loan-to-valueratios and maturities. Residential mortgage loans and home equity lines ofcredit secured by owner-occupied property generally are made with aloan-to-value ratio of up to 80%. Loan-to-value ratios of up to 95% may beallowed on residential owner-occupied property if the borrower exhibitsunusually strong creditworthiness. We do not make residential loans which, atthe time of inception, have loan-to-value ratios in excess of 95%.

*ConstructionLoans.*   Our construction loan portfolio consistsof single-family residential properties, multi-family properties and commercialprojects. Construction lending entails significant additional risks comparedwith residential mortgage lending. Construction loans often involve larger loanbalances concentrated with single borrowers or groups of related borrowers. Constructionloans also involve additional risks since funds are advanced while the propertyis under construction, which property has uncertain value prior to thecompletion of construction. Thus, it is more difficult to evaluate accuratelythe total loan funds required to complete a project and related loan-to-valueratios. To reduce the risks associated with construction lending, we limitloan-to-value ratios for owner occupied residential or commercial properties to80%, and for investor-owned residential or commercial properties to 75% ofwhen-completed appraised values. We expect that these loan-to-value ratios willprovide sufficient protection against fluctuations in the real estate market tolimit the risk of loss. Maturities for construction loans generally range from 12to 24 months for residential, non-residential and multi-family properties.

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*ConsumerLoans.*   Our consumer loans consist primarily ofinstallment loans made to individuals for personal, family and householdpurposes. The specific types of consumer loans we make include home improvementloans, automobile loans, debt consolidation loans and general consumer lending.

Consumer loans may entail greater risk thanresidential mortgage loans, particularly in the case of consumer loans that areunsecured, such as lines of credit, or secured by rapidly depreciable assets,such as automobiles. In such cases, any repossessed collateral for a defaultedconsumer loan may not provide an adequate source of repayment of theoutstanding loan balance as a result of the greater likelihood of damage, lossor depreciation. The remaining deficiency often does not warrant furthersubstantial collection efforts against the borrower. In addition, consumer loancollections are dependent on the borrower’s continuing financial stability, andthus are more likely to be adversely affected by job loss, divorce, illness orpersonal bankruptcy. Furthermore, the application of various federal and statelaws, including federal and state bankruptcy and insolvency laws, may limit theamount that can be recovered on such loans. A loan may also give rise to claimsand defenses by a consumer loan borrower against an assignee of such loan, suchas the bank, and a borrower may be able to assert against such assignee claimsand defenses that it has against the seller of the underlying collateral.

Our policy for consumer loans is to accept moderaterisk while minimizing losses, primarily through a careful credit and financialanalysis of the borrower. In evaluating consumer loans, we require our lendingofficers to review the borrower’s level and stability of income, past credithistory, amount of debt currently outstanding and the impact of these factorson the ability of the borrower to repay the loan in a timely manner. Inaddition, we require our banking officers to maintain an appropriatedifferential between the loan amount and collateral value.

We also issue credit cardsto certain of our customers. In determining to whom we will issue credit cards,we evaluate the borrower’s level and stability of income, past credit historyand other factors. Finally, we make additional loans that are not classified inone of the above categories. In making such loans, we attempt to ensure thatthe borrower meets our loan underwriting standards.

*Loan Participations*

From time to time wepurchase and sell commercial loan participations to or from other banks withinour market area. All loan participations purchased have been underwritten usingthe bank’s standard and customary underwriting criteria and are in goodstanding.

*Deposits*

We offer a broad range ofinterest-bearing and non-interest-bearing deposit accounts, includingcommercial and retail checking accounts, money market accounts, individualretirement accounts, regular interest-bearing savings accounts and certificatesof deposit with a range of maturity date options. The primary sources ofdeposits are small and medium-sized businesses and individuals within ourtarget market. Senior management has the authority to set rates withinspecified parameters in order to remain competitive with other financialinstitutions in our market area. All deposits are insured by the FederalDeposit Insurance Corporation up to the maximum amount permitted by law. Wehave a service charge fee schedule, which is generally competitive with otherfinancial institutions in our market, covering such matters as maintenance feesand per item processing fees on checking accounts, returned check charges andother similar fees.

*Courier Services*

We offer courier servicesto our business customers. Courier services permit us to provide theconvenience and personalized service that our customers require by schedulingpick-ups of deposits and other banking transactions.

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*Telephone andInternet Banking*

We believe that there is astrong demand within our market for telephone banking and internet banking.These services allow both commercial and retail customers to access detailedaccount information and execute a wide variety of the banking transactions,including balance transfers and bill payment. We believe that these servicesare particularly attractive to our customers, as it enables them at any time toconduct their banking business and monitor their accounts. Telephone andinternet banking assist us in attracting and retaining customers and encouragesour existing customers to consider Cardinal for all of their banking andfinancial needs.

*Automatic TellerMachines*

We have an ATM at each ofour branch offices and we make other financial institutions’ ATMs available toour customers.

*Other Products andServices*

We offer otherbanking-related specialized products and services to our customers, such astravelers’ checks, coin counters, wire services, and safe deposit box services.We issue letters of credit and standby letters of credit for some of ourcommercial customers, most of which are related to real estate constructionloans. We have not engaged in any securitizations of loans.

**Credit Policies**

Our chief credit officer and senior lending officersare primarily responsible for maintaining both a quality loan portfolio and astrong credit culture throughout the organization. The chief credit officer isresponsible for developing and updating our credit policies and procedures,which are approved by the board of directors. Senior lending officers may makeexceptions to these credit policies and procedures as appropriate, but any suchexception must be documented and made for sound business reasons, and, if theloan is in excess of the officer’s lending limit, be approved by the chiefcredit officer.

Credit quality is controlled by the chief creditofficer through compliance with our credit policies and procedures. Ourrisk-decision process is actively managed in a disciplined fashion to maintainan acceptable risk profile characterized by soundness, diversity, quality,prudence, balance and accountability. Our credit approval process consists ofspecific authorities granted to the lending officers and combinations oflending officers. Loans exceeding a particular lending officer’s level ofauthority, or the combined limit of several officers, are reviewed andconsidered for approval by an officers’ loan committee and, when above a specifiedamount, by a committee of the bank’s board of directors. Generally, loans of$500,000 or more require committee approval. Our policy allows exceptions forvery specific conditions, such as loans secured by deposits at our bank. Thechief credit officer works closely with each lending officer at the bank levelto ensure that the business being solicited is of the quality and structurethat fits our desired risk profile.

Under our credit policies, we monitor ourconcentration of credit risk. We have established credit concentrationguideline limits for any individual or entity, any group of borrowers relatedas to the source of repayment, or any specific industry. Furthermore, the bankhas established limits on the total amount of the bank’s outstanding loans toone borrower, all of which are set below legal lending limits.

Loans closed by GeorgeMason are underwritten in accordance with guidelines established by the varioussecondary market investors to which George Mason sells its loans. George Masonmay originate non-traditional loans, such as negative amortization loans, forthese investors.

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**Brokerageand Asset Management Services**

CWS provides brokerage andinvestment services through an arrangement with Raymond James Financial Services, Inc.Under this arrangement, financial advisors can offer our customers an extensiverange of investment products and services, including estate planning, qualifiedretirement plans, mutual funds, annuities, life insurance, fixed income andequity securities and equity research and recommendations. With the addition ofWilson/Bennett in June 2005, we also offer asset management services tocustomers using a value-oriented approach that focuses on large capitalizationstocks.

**Employees**

At December 31, 2005,we had 406 full-time equivalent employees. None of our employees arerepresented by any collective bargaining unit. We believe our relations withour employees are good.

**GovernmentSupervision and Regulation**

*General*

As a financial holding company, we are subject toregulation under the Bank Holding Company Act of 1956, as amended, and theexamination and reporting requirements of the Board of Governors of the FederalReserve System. Other federal and state laws govern the activities of our banksubsidiary, including the activities in which it may engage, the investmentsthat it makes, the aggregate amount of loans that it may grant to one borrower,and the dividends it may declare and pay to us. Our bank subsidiary is alsosubject to various consumer and compliance laws. As a state-chartered bank, theBank is primarily subject to regulation, supervision and examination by theBureau of Financial Institutions of the Virginia State Corporation Commission. Ourbank subsidiary also is subject to regulation, supervision and examination bythe Federal Deposit Insurance Corporation. As part of our bank subsidiary,George Mason is subject to the same regulations as the Bank.

The following descriptionsummarizes the more significant federal and state laws applicable to us. To theextent that statutory or regulatory provisions are described, the descriptionis qualified in its entirety by reference to that particular statutory orregulatory provision.

*The Bank HoldingCompany Act*

Under the BankHolding Company Act, we are subject to periodic examination by the FederalReserve and required to file periodic reports regarding our operations and anyadditional information that the Federal Reserve may require. Our activities atthe bank holding company level are limited to:

·       banking,managing or controlling banks;

·       furnishingservices to or performing services for our subsidiaries; and

·       engagingin other activities that the Federal Reserve has determined by regulation ororder to be so closely related to banking as to be a proper incident to theseactivities.

Some of the activities that the Federal Reserve Boardhas determined by regulation to be closely related to the business of a bankholding company include making or servicing loans and specific types of leases,performing specific data processing services and acting in some circumstancesas a fiduciary or investment or financial adviser.

With some limitedexceptions, the Bank Holding Company Act requires every bank holding company toobtain the prior approval of the Federal Reserve before:

·       acquiringsubstantially all the assets of any bank; and

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·       acquiringdirect or indirect ownership or control of any voting shares of any bank ifafter such acquisition it would own or control more than 5% of the votingshares of such bank (unless it already owns or controls the majority of suchshares), or merging or consolidating with another bank holding company.

In addition, and subject to some exceptions, the BankHolding Company Act and the Change in Bank Control Act, together with theirregulations, require Federal Reserve approval prior to any person or companyacquiring “control” of a bank holding company. Control is conclusively presumedto exist if an individual or company acquires 25% or more of any class ofvoting securities of the bank holding company. Control is rebuttably presumedto exist if a person acquires 10% or more, but less than 25%, of any class ofvoting securities and if the institution has registered securities under Section 12of the Securities Exchange Act of 1934 or no other person owns a greaterpercentage of that class of voting securities immediately after the transaction.The regulations provide a procedure for challenging this rebuttable controlpresumption.

In November 1999,Congress enacted the Gramm-Leach-Bliley Act (“GLBA”), which made substantialrevisions to the statutory restrictions separating banking activities fromother financial activities. Under the GLBA, bank holding companies that arewell-capitalized and well-managed and meet other conditions can elect to become“financial holding companies.”  Asfinancial holding companies, they and their subsidiaries are permitted toacquire or engage in previously impermissible activities, such as insuranceunderwriting and securities underwriting and distribution. In addition,financial holding companies may also acquire or engage in certain activities inwhich bank holding companies are not permitted to engage in, such as travelagency activities, insurance agency activities, merchant banking and otheractivities that the Federal Reserve determines to be financial in nature orcomplementary to these activities. Financial holding companies continue to besubject to the overall oversight and supervision of the Federal Reserve, butthe GLBA applies the concept of functional regulation to the activitiesconducted by subsidiaries. For example, insurance activities would be subjectto supervision and regulation by state insurance authorities. We became afinancial holding company in 2004.

*Payment of Dividends*

We are a legal entity separate and distinct fromCardinal Bank, CWS, Wilson/Bennett, and Cardinal Statutory Trust I. Virtuallyall of our cash revenues will result from dividends paid to us by our banksubsidiary and interest earned on short term investments. Our bank subsidiaryis subject to laws and regulations that limit the amount of dividends that itcan pay. Under Virginia law, a bank may not declare a dividend in excess of itsaccumulated retained earnings. Additionally, our bank subsidiary may notdeclare a dividend if the total amount of all dividends, including the proposeddividend, declared by the bank in any calendar year exceeds the total of thebank’s retained net income of that year to date, combined with its retained netincome of the two preceding years, unless the dividend is approved by the FDIC.Our bank subsidiary may not declare or pay any dividend if, after making thedividend, the bank would be “undercapitalized,” as defined in the bankingregulations.

The FDIC and the state have the general authority tolimit the dividends paid by insured banks if the payment is deemed an unsafeand unsound practice. Both the state and the FDIC have indicated that payingdividends that deplete a bank’s capital base to an inadequate level would be anunsound and unsafe banking practice.

In addition, we aresubject to certain regulatory requirements to maintain capital at or aboveregulatory minimums. These regulatory requirements regarding capital affect ourdividend policies. Regulators have indicated that financial holding companiesshould generally pay dividends only if the organization’s net income availableto common shareholders over the past year has been sufficient to fully 

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fund thedividends, and the prospective rate of earnings retention appears consistentwith the organization’s capital needs, asset quality and overall financialcondition.

*Insurance ofAccounts, Assessments and Regulation by the FDIC*

The deposits of our bank subsidiary are insured by theFDIC up to the limits set forth under applicable law. The deposits of our banksubsidiary are subject to the deposit insurance assessments of the BankInsurance Fund, or “BIF”, of the FDIC.

The FDIC has implemented a risk-based depositinsurance assessment system under which the assessment rate for an insuredinstitution may vary according to regulatory capital levels of the institutionand other factors, including supervisory evaluations. For example, depositoryinstitutions insured by the BIF that are “well capitalized” and that presentfew or no supervisory concerns are required to pay only the statutory minimumannual assessment of $2,000 for deposit insurance, while all other banks arerequired to pay premiums ranging from 0.03% to 0.27% of domestic deposits. Theserate schedules are subject to future adjustments by the FDIC. In addition tobeing influenced by the risk profile of the particular depository institution,FDIC premiums are also influenced by the size of the FDIC insurance fund inrelation to total deposits in FDIC insured banks. The FDIC has authority toimpose special assessments.

The FDIC is authorized toprohibit any insured institution from engaging in any activity that the FDICdetermines by regulation or order to pose a serious threat to the BIF. Also,the FDIC may initiate enforcement actions against banks, after first giving theinstitution’s primary regulatory authority an opportunity to take such action. TheFDIC may terminate the deposit insurance of any depository institution if itdetermines, after a hearing, that the institution has engaged or is engaging inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations, or has violated any applicable law, regulation, order or anycondition imposed in writing by the FDIC. It also may suspend deposit insurancetemporarily during the hearing process for the permanent termination ofinsurance, if the institution has no tangible capital. If deposit insurance isterminated, the deposits at the institution at the time of termination, lesssubsequent withdrawals, shall continue to be insured for a period from sixmonths to two years, as determined by the FDIC. We are unaware of any existingcircumstances that could result in termination of any of our bank subsidiary’sdeposit insurance.

*Capital Requirements*

Each of the FDICand the Federal Reserve Board has issued risk-based and leverage capitalguidelines applicable to banking organizations that it supervises. Under therisk-based capital requirements, we and our bank subsidiary are each generallyrequired to maintain a minimum ratio of total capital to risk-weighted assets(including specific off-balance sheet activities, such as standby letters ofcredit) of 8%. At least half of the total capital must be composed of “Tier 1Capital”, which is defined as common equity, retained earnings, qualifyingperpetual preferred stock and minority interests in common equity accounts ofconsolidated subsidiaries, less certain intangibles. The remainder may consistof “Tier 2 Capital”, which is defined as specific subordinated debt, somehybrid capital instruments and other qualifying preferred stock and a limitedamount of the loan loss allowance and pretax net unrealized holding gains oncertain equity securities. In addition, each of the federal banking regulatoryagencies has established minimum leverage capital requirements for bankingorganizations. Under these requirements, banking organizations must maintain aminimum ratio of Tier 1 capital to adjusted average quarterly assets equal to3% to 5%, subject to federal bank regulatory evaluation of an organization’soverall safety and soundness. In summary, the capital measures used by thefederal banking regulators are:

·       TotalRisk-Based Capital ratio, which is the total of Tier 1 Risk-Based Capital (whichincludes common shareholders’ equity, trust preferred securities, minorityinterests and qualifying preferred 

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stock, less goodwill andother adjustments)  and Tier 2 Capital (whichincludes preferred stock not qualifying as Tier 1 capital, mandatory convertibledebt, limited amounts of subordinated debt, other qualifying term debt and theallowance for loan losses up to 1.25 percent of risk-weighted assets and otheradjustments) as a percentage of total risk-weighted assets

·       Tier1 Risk-Based Capital ratio (Tier 1 capital divided by total risk-weightedassets), and

·       theLeverage ratio (Tier 1 capital divided by adjusted average total assets)

Under theseregulations, a bank will be:

·       “wellcapitalized” if it has a Total Risk-Based Capital ratio of 10% or greater, aTier 1 Risk-Based Capital ratio of 6% or greater, a Leverage ratio of 5% orgreater, and is not subject to any written agreement, order, capital directive,or prompt corrective action directive by a federal bank regulatory agency tomeet and maintain a specific capital level for any capital measure

·       “adequatelycapitalized” if it has a Total Risk-Based Capital ratio of 8% or greater, aTier 1 Risk-Based Capital ratio of 4% or greater, and a Leverage ratio of4% or greater (or 3% in certain circumstances) and is not well capitalized

·       “undercapitalized”if it has a Total Risk-Based Capital ratio of less than 8%, a Tier 1Risk-Based Capital ratio of less than 4% (or 3% in certain circumstances), or aLeverage ratio of less than 4% (or 3% in certain circumstances)

·       “significantlyundercapitalized” if it has a Total Risk-Based Capital ratio of less than 6%, aTier 1 Risk-Based Capital ratio of less than 3%, or a Leverage ratio ofless than 3%, or

·       “criticallyundercapitalized” if its tangible equity is equal to or less than 2% oftangible assets.

The risk-based capital standards of each of the FDICand the Federal Reserve Board explicitly identify concentrations of credit riskand the risk arising from non-traditional activities, as well as an institution’sability to manage these risks, as important factors to be taken into account bythe agency in assessing an institution’s overall capital adequacy. The capitalguidelines also provide that an institution’s exposure to a decline in theeconomic value of its capital due to changes in interest rates be considered bythe agency as a factor in evaluating a banking organization’s capital adequacy.

The FDIC may take variouscorrective actions against any undercapitalized bank and any bank that fails tosubmit an acceptable capital restoration plan or fails to implement a planacceptable to the FDIC. These powers include, but are not limited to, requiringthe institution to be recapitalized, prohibiting asset growth, restricting interestrates paid, requiring prior approval of capital distributions by any financialholding company that controls the institution, requiring divestiture by theinstitution of its subsidiaries or by the holding company of the institutionitself, requiring new election of directors, and requiring the dismissal ofdirectors and officers. We are considered “well-capitalized” at December 31,2005 and, in addition, our bank subsidiary maintains sufficient capital toremain in compliance with capital requirements and is considered “well-capitalized”at December 31, 2005.

*Other Safety andSoundness Regulations*

There are significantobligations and restrictions imposed on financial holding companies and theirdepository institution subsidiaries by federal law and regulatory policy thatare designed to reduce potential loss exposure to the depositors of suchdepository institutions and to the FDIC insurance fund in the event that thedepository institution is insolvent or is in danger of becoming insolvent. Theseobligations and restrictions are not for the benefit of investors. Regulatorsmay pursue an administrative action against any financial holding company orbank which violates the law, engages in an unsafe or unsound banking practice,or which is about to engage in an unsafe or unsound banking practice. The 

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administrativeaction could take the form of a cease and desist proceeding, a removal actionagainst the responsible individuals or, in the case of a violation of law orunsafe and unsound banking practice, a civil monetary penalty action. A ceaseand desist order, in addition to prohibiting certain action, could also requirethat certain actions be undertaken. Under the policies of the Federal ReserveBoard, we are required to serve as a source of financial strength to oursubsidiary depository institution and to commit resources to support the bankin circumstances where we might not do so otherwise.

*The Bank SecrecyAct*

Under the Bank Secrecy Act(“BSA”), a financial institution is required to have systems in place to detectcertain transactions, based on the size and nature of the transaction. Financialinstitutions are generally required to report cash transactions involving morethan $10,000 to the United States Treasury. In addition, financial institutionsare required to file suspicious activity reports for transactions that involvemore than $5,000 and which the financial institution knows, suspects or hasreason to suspect, involves illegal funds, is designed to evade therequirements of the BSA or has no lawful purpose. The USA PATRIOT Act of 2001,enacted in response to the September 11, 2001 terrorist attacks, requiresbank regulators to consider a financial institution’s compliance with the BSAwhen reviewing applications from a financial institution. As part of its BSAprogram, the USA PATRIOT Act of 2001 also requires a financial institution tofollow recently implemented customer identification procedures when openingaccounts for new customers and to review U.S. government-maintained lists ofindividuals and entities that are prohibited from opening accounts at financialinstitutions.

*Monetary Policy*

The commercial bankingbusiness is affected not only by general economic conditions but also by themonetary policies of the Federal Reserve Board. The instruments of monetarypolicy employed by the Federal Reserve Board include open market operations inUnited States government securities, changes in the discount rate on memberbank borrowings and changes in reserve requirements against deposits held byfederally insured banks. The Federal Reserve Board’s monetary policies have hada significant effect on the operating results of commercial banks in the pastand are expected to continue to do so in the future. In view of changingconditions in the national and international economy and in the money markets,as well as the effect of actions by monetary and fiscal authorities, includingthe Federal Reserve System, no prediction can be made as to possible futurechanges in interest rates, deposit levels, loan demand or the business andearnings of our bank subsidiary, its subsidiary, or any of our othersubsidiaries.

*Federal ReserveSystem*

In 1980, Congress enactedlegislation that imposed reserve requirements on all depository institutionsthat maintain transaction accounts or non-personal time deposits. NOW accountsand demand deposit accounts that permit payments or transfers to third partiesfall within the definition of transaction accounts and are subject to thesereserve requirements. For net transaction accounts in 2006, the first $7.8million of balances will be exempt from reserve requirements. A 3% reserveratio will be assessed on net transaction account balances over $7.8 million toand including $48.3 million. A 10% reserve ratio will be applied to amounts innet transaction account balances in excess of $48.3 million. These percentagesare subject to adjustment by the Federal Reserve Board. Because requiredreserves must be maintained in the form of vault cash or in a non-interest-bearingaccount at, or on behalf of, a Federal Reserve Bank, the effect of the reserverequirement is to reduce the amount of our interest-earning assets.

*Transactions with Affiliates*

Transactions between banksand their affiliates are governed by Sections 23A and 23B of the FederalReserve Act. An affiliate of a bank is any bank or entity that controls, iscontrolled by or is under common 

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controlwith such bank. Generally, Sections 23A and 23B (i) limit the extent towhich the bank or its subsidiaries may engage in “covered transactions” withany one affiliate to an amount equal to 10% of such institution’s capital stockand surplus, and maintain an aggregate limit on all such transactions withaffiliates to an amount equal to 20% of such capital stock and surplus, and (ii) requirethat all such transactions be on terms substantially the same as, or at leastas favorable to those that, the bank has provided to a non-affiliate. The term “coveredtransaction” includes the making of loans, purchase of assets, issuance of aguarantee and similar other types of transactions. Section 23B applies to “coveredtransactions” as well as sales of assets and payments of money to an affiliate.These transactions must also be conducted on terms substantially the same as,or at least favorable to those that, the bank has provided to non-affiliates.

*Loans to Insiders*

The Federal Reserve Actand related regulations impose specific restrictions on loans to directors,executive officers and principal shareholders of banks. Under Section 22(h) ofthe Federal Reserve Act, loans to a director, an executive officer and to aprincipal shareholder of a bank, and to entities controlled by any of theforegoing, may not exceed, together with all other outstanding loans to suchperson and entities controlled by such person, the bank’s loan-to-one borrowerlimit. Loans in the aggregate to insiders and their related interests as aclass may not exceed two times the bank’s unimpaired capital and unimpairedsurplus until the bank’s total assets equal or exceed $100,000,000, at whichtime the aggregate is limited to the bank’s unimpaired capital and unimpairedsurplus. Section 22(h) also prohibits loans above amounts prescribedby the appropriate federal banking agency to directors, executive officers andprincipal shareholders of a bank or bank holding company, and to entitiescontrolled by such persons, unless such loan is approved in advance by amajority of the board of directors of the bank with any “interested” directornot participating in the voting. The FDIC has prescribed the loan amount, whichincludes all other outstanding loans to such person, as to which such priorboard of director approval is required, as being the greater of $25,000 or 5%of capital and surplus (up to $500,000). Section 22(h) requires thatloans to directors, executive officers and principal shareholders be made onterms and underwriting standards substantially the same as offered incomparable transactions to other persons.

*Community Reinvestment Act*

Under the CommunityReinvestment Act and related regulations, depository institutions have anaffirmative obligation to assist in meeting the credit needs of their marketareas, including low and moderate-income areas, consistent with safe and soundbanking practice. The Community Reinvestment Act requires the adoption by eachinstitution of a Community Reinvestment Act statement for each of its marketareas describing the depository institution’s efforts to assist in its community’scredit needs. Depository institutions are periodically examined for compliancewith the Community Reinvestment Act and are periodically assigned ratings inthis regard. Banking regulators consider a depository institution’s CommunityReinvestment Act rating when reviewing applications to establish new branches,undertake new lines of business, and/or acquire part or all of anotherdepository institution. An unsatisfactory rating can significantly delay oreven prohibit regulatory approval of a proposed transaction by a financialholding company or its depository institution subsidiaries.

The Gramm-Leach-Bliley Actand federal bank regulators have made various changes to the CommunityReinvestment Act. Among other changes, Community Reinvestment Act agreementswith private parties must be disclosed and annual reports must be made to abank’s primary federal regulator. A financial holding company or any of itssubsidiaries will not be permitted to engage in new activities authorized underthe GLBA if any bank subsidiary received less than a “satisfactory” rating inits latest Community Reinvestment Act examination.

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*Consumer Laws Regarding Fair Lending*

In addition to theCommunity Reinvestment Act described above, other federal and state lawsregulate various lending and consumer aspects of our business. Governmentalagencies, including the Department of Housing and Urban Development, theFederal Trade Commission and the Department of Justice, have become concernedthat prospective borrowers may experience discrimination in their efforts toobtain loans from depository and other lending institutions. These agencieshave brought litigation against depository institutions alleging discriminationagainst borrowers. Many of these suits have been settled, in some cases formaterial sums of money, short of a full trial.

These governmentalagencies have clarified what they consider to be lending discrimination andhave specified various factors that they will use to determine the existence oflending discrimination under the Equal Credit Opportunity Act and the FairHousing Act, including evidence that a lender discriminated on a prohibitedbasis, evidence that a lender treated applicants differently based onprohibited factors in the absence of evidence that the treatment was the resultof prejudice or a conscious intention to discriminate, and evidence that alender applied an otherwise neutral non-discriminatory policy uniformly to allapplicants, but the practice had a discriminatory effect, unless the practice couldbe justified as a business necessity.

Banks and other depositoryinstitutions also are subject to numerous consumer-oriented laws andregulations. These laws, which include the Truth in Lending Act, the Truth inSavings Act, the Real Estate Settlement Procedures Act, the Electronic FundsTransfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act,require compliance by depository institutions with various disclosurerequirements and requirements regulating the availability of funds after depositor the making of some loans to customers.

*Gramm-Leach-Bliley Act of 1999*

***The Gramm-Leach-Bliley Act of 1999 covers a broad range ofissues, including a repeal of most of the restrictions on affiliations amongdepository institutions, securities firms and insurance companies. Thefollowing description summarizes some of its significant provisions.***

The GLBA repeals sections20 and 32 of the Glass-Steagall Act, thus permitting unrestrictedaffiliations between banks and securities firms. It also permits bank holdingcompanies to elect to become financial holding companies. A financial holdingcompany may engage in or acquire companies that engage in a broad range offinancial services, including securities activities such as underwriting,dealing, investment, merchant banking, insurance underwriting, sales andbrokerage activities. In order to become a financial holding company, the bankholding company and all of its affiliated depository institutions must bewell-capitalized, well-managed and have at least a satisfactory CommunityReinvestment Act rating. We became a financial holding company in 2004.

The GLBA provides that the states continue to have theauthority to regulate insurance activities, but prohibits the states in mostinstances from preventing or significantly interfering with the ability of abank, directly or through an affiliate, to engage in insurance sales,solicitations or cross-marketing activities. Although the states generally mustregulate bank insurance activities in a nondiscriminatory manner, the statesmay continue to adopt and enforce rules that specifically regulate bankinsurance activities in areas identified under the law. Under the law, thefederal bank regulatory agencies adopted insurance consumer protectionregulations that apply to sales practices, solicitations, advertising anddisclosures.

The GLBA adopts a system of functional regulationunder which the Federal Reserve Board is designated as the umbrella regulatorfor financial holding companies, but financial holding company affiliates areprincipally regulated by functional regulators such as the FDIC for bankaffiliates, the Securities and Exchange Commission for securities affiliates,and state insurance regulators for insurance affiliates. It repeals the broadexemption of banks from the definitions of “broker” and “dealer” for purposesof the Securities Exchange Act of 1934, as amended. It also identifies a set ofspecific activities, 

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including traditional banktrust and fiduciary activities, in which a bank may engage without being deemeda “broker,” and a set of activities in which a bank may engage without beingdeemed a “dealer.”  Additionally, GLBAmakes conforming changes in the definitions of “broker” and “dealer” forpurposes of the Investment Company Act of 1940, as amended, and the InvestmentAdvisers Act of 1940, as amended.

The GLBA contains extensive customer privacyprotection provisions. Under these provisions, a financial institution mustprovide to its customers, both at the inception of the customer relationshipand on an annual basis, the institution’s policies and procedures regarding thehandling of customers’ nonpublic personal financial information. The lawprovides that, except for specific limited exceptions, an institution may notprovide such personal information to unaffiliated third parties unless theinstitution discloses to the customer that such information may be so providedand the customer is given the opportunity to opt out of such disclosure. Aninstitution may not disclose to a non-affiliated third party, other than to aconsumer credit reporting agency, customer account numbers or other similaraccount identifiers for marketing purposes. The GLBA also provides that thestates may adopt customer privacy protections that are stricter than thosecontained in the act.

*Future RegulatoryUncertainty*

Because federal and state regulation of financialinstitutions changes regularly and is the subject of constant legislativedebate, we cannot forecast how federal and state regulation of financialinstitutions may change in the future and, as a result, impact our operations. AlthoughCongress and the state legislature in recent years have sought to reduce theregulatory burden on financial institutions with respect to the approval ofspecific transactions, we fully expect that the financial institution industrywill remain heavily regulated in the near future and that additional laws orregulations may be adopted further regulating specific banking practices.

*AdditionalInformation*

We file with or furnish to the Securities and ExchangeCommission (“SEC”) annual, quarterly and current reports, proxy statements, andvarious other documents under the Securities Exchange Act of 1934, as amended(the “Exchange Act”). The public may read and copy any materials that we filewith or furnish to the SEC at the SEC’s Public Reference Room, which is locatedat 100 F Street, NE, Washington, D.C. 20549. The public may obtain informationon the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.Also, the SEC maintains an internet website at www.sec.gov that containsreports, proxy and information statements and other information regardingregistrants, including us, that file or furnish documents electronically withthe SEC.

We also make available free of charge on or throughour internet website (www.cardinalbank.com) our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand, if applicable, amendments to those reports as filed or furnished pursuantto Section 13(a) of the Exchange Act as soon as reasonablypracticable after we electronically file such materials with, or furnish themto, the SEC.

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**Item 1A.**                RiskFactors

Our operations are subjectto many risks that could adversely affect our future financial condition andperformance and, therefore, the market value of our securities. The riskfactors applicable to us are the following:

***Our mortgage bankingrevenue is sensitive to changes in economic conditions, decreased economicactivity, a slowdown in the housing market or higher interest rates and mayadversely impact our profits.***

Our mortgage bankingsegment is a significant portion of our consolidated business and maintainingour revenue stream in this segment is dependent upon our ability to originateloans and sell them to investors. Loan production levels are sensitive tochanges in economic conditions and can suffer from decreased economic activity,a slowdown in the housing market or higher interest rates. Generally, anysustained period of decreased economic activity or higher interest rates couldadversely affect our mortgage originations and, consequently, reduce our incomefrom mortgage banking activities. As a result, these conditions may adverselyaffect our net income.

***We have goodwill and other intangibles that may becomeimpaired, and thus result in a charge against earnings.***

At December 31, 2005, we had $12.9 million and$3.6 million of goodwill related to the George Mason and Wilson/Bennettacquisitions, respectively. In addition, we have identified and recorded otherintangible assets, such as customer relationships and employment agreements, asof the acquisition dates of both George Mason and Wilson/Bennett. The carryingamounts of these intangibles at December 31, 2005 was $1.5 million atGeorge Mason and $2.4 million at Wilson/Bennett. Goodwill and other intangiblesare tested for impairment on an annual basis or when facts and circumstancesindicate that impairment may have occurred.

As noted above, our mortgage banking segment issensitive to changes in economic conditions, decreased economic activity, aslowdown in the housing market and higher interest rates. In addition to directlyimpacting our revenues and net income, these conditions, if sustained, mayresult in an impairment charge related to the goodwill and other intangibles atGeorge Mason if we determine the carrying value of the goodwill and otherintangible assets is greater than their fair value.

When we acquiredWilson/Bennett, it had approximately $225.0 million of assets under management.As of December 31, 2005, assets under management were approximately $169.0million. While we anticipated an initial decline in assets under management atthe time of the acquisition, significant further declines of the assets managedby Wilson/Bennett may result in an impairment condition, which would require animpairment charge if we determine the carrying value of the goodwill and otherintangible assets is greater than their fair value.

***We may be adversely affected by economic conditions inour market area.***

We are headquartered inNorthern Virginia, and our market is the greater Washington, D.C. metropolitanarea. Because our lending and deposit-gathering activities are concentrated inthis market, we will be affected by the general economic conditions in thegreater Washington area, which may, among other factors, be impacted by thelevel of federal government spending. Changes in the economy, and governmentspending in particular, may influence the growth rate of our loans anddeposits, the quality of the loan portfolio and loan and deposit pricing. Asignificant decline in general economic conditions caused by inflation,recession, unemployment or other factors which are beyond our control wouldimpact these local economic conditions and the demand for banking products andservices generally, and could negatively affect our financial condition andperformance.

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***We have operated at a cumulative loss since ourinception.***

We have operated at acumulative loss since our organization in 1997. While we reported net income ineach of the three years ended December 31, 2005, we cannot assure you thatwe will be able to continue to operate profitably as we continue to grow.

***We may not be ableto successfully manage our growth or implement our growth strategies, which mayadversely affect our results of operations and financial condition.***

During the lastfive years, we have experienced significant growth, and a key aspect of ourbusiness strategy is our continued growth and expansion. Our ability tocontinue to grow depends, in part, upon our ability to:

·       opennew branch offices or acquire existing branches or other financialinstitutions;

·       attractdeposits to those locations and cross-sell new and existing depositorsadditional products and services; and

·       identifyattractive loan and investment opportunities.

We may not be able to successfully implement our growthstrategy if we are unable to identify attractive markets, locations oropportunities to expand. Our ability to successfully manage our growth willalso depend upon our ability to maintain capital levels sufficient to supportthis growth, maintain effective cost controls and adequate asset quality suchthat earnings are not adversely impacted to a material degree.

As we continue toimplement our growth strategy by opening new branches or acquiring branches orother banks, we expect to incur increased personnel, occupancy and otheroperating expenses. In the case of new branches, we must absorb those higherexpenses while we begin to generate new deposits, and there is a further timelag involved in redeploying new deposits into attractively priced loans andother higher yielding earning assets. Thus, our plans to branch aggressivelycould depress our earnings in the short run, even if we efficiently execute ourbranching strategy.

***We rely heavily onour management team and the unexpected loss of any of those personnel couldadversely affect our operations; we depend on our ability to attract and retainkey personnel.***

We are a customer-focused and relationship-drivenorganization. We expect our future growth to be driven in a large part by therelationships maintained with our customers by our Chairman and Chief ExecutiveOfficer, Bernard H. Clineburg, and our other executive and senior lendingofficers. We have entered into employment agreements with Mr. Clineburgand three other executive officers. The existence of such agreements, however,does not necessarily assure us that we will be able to continue to retain theirservices. The unexpected loss of Mr. Clineburg or other key employeescould have a significant adverse effect on our business and possibly result inreduced revenues and earnings. We do not maintain key man life insurancepolicies on any of our corporate executives.

The implementation of ourbusiness strategy will also require us to continue to attract, hire, motivateand retain skilled personnel to develop new customer relationships, as well asdevelop new financial products and services. Many experienced bankingprofessionals employed by our competitors are covered by agreements not tocompete or solicit their existing customers if they were to leave their currentemployment. These agreements make the recruitment of these professionals moredifficult. While we have been recently successful in acquiring what we considerto be talented banking professionals, the market for talented people is competitiveand we may not continue to be successful in attracting, hiring, motivating orretaining experienced banking professionals.

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***We may incur losses if we are unable to successfullymanage interest rate risk.***

Our future profitabilitywill substantially depend upon our ability to maintain or increase the spreadbetween the interest rates earned on investments and loans and interest ratespaid on deposits and other interest-bearing liabilities. Changes in interestrates will affect our operating performance and financial condition. Beingasset sensitive as of December 31, 2005, the Bank’s net interest incomeshould improve in a rising rate environment while net interest income shouldfall if rates decline. The shape of the yield curve can also impact net interestincome. Changing rates will impact how fast our mortgage loans and mortgage-backedsecurities will have the principal repaid. Rate changes can also impact thebehavior of our depositors, especially depositors in non-maturity deposits suchas demand, interest checking, savings and money market accounts. While weattempt to minimize our exposure to interest rate risk, we are unable toeliminate it as it is an inherent part of our business. Our net interest spreadwill depend on many factors that are partly or entirely outside our control,including competition, federal economic, monetary and fiscal policies, andindustry-specific conditions and economic conditions generally.

***Our concentrationin loans secured by real estate may increase our future credit losses, whichwould negatively affect our financial results.***

We offer a variety ofsecured loans, including commercial lines of credit, commercial term loans,real estate, construction, home equity, consumer and other loans. Approximately93% of our loans are secured by real estate, both residential and commercial,substantially all of which are located in our market area. A major change inthe region’s real estate market, resulting in a deterioration in real estatevalues, or in the local or national economy, including changes caused byraising interest rates, could adversely affect our customers’ ability to paythese loans, which in turn could adversely impact us. Risk of loan defaults andforeclosures is inherent in the banking industry, and we try to limit ourexposure to this risk by carefully underwriting and monitoring our extensionsof credit. We cannot fully eliminate credit risk, and as a result credit lossesmay occur in the future.

***If our allowance for loan losses becomes inadequate,our results of operations may be adversely affected.***

We maintain an allowance for loan losses that webelieve is a reasonable estimate of known and inherent losses in our loanportfolio. Through a periodic review and analysis of the loan portfolio,management determines the adequacy of the allowance for loan losses byconsidering such factors as general and industry-specific market conditions,credit quality of the loan portfolio, the collateral supporting the loans andfinancial performance of our loan customers relative to their financialobligations to us. The amount of future losses is susceptible to changes ineconomic, operating and other conditions, including changes in interest rates,which may be beyond our control, and actual losses may exceed our currentestimates. Rapidly growing loan portfolios are, by their nature, unseasoned.Our net loan losses since the inception of the Company are approximately$250,000. As a result, estimating loan loss allowances is more difficult thanwith seasoned portfolios, and may be more susceptible to changes in estimatesand to losses exceeding estimates. Although we believe the allowance for loanlosses is a reasonable estimate of known and inherent losses in our loanportfolio, we cannot fully predict such losses or assert that our loan lossallowance will be adequate in the future. Future loan losses that are greaterthan current estimates could have a material impact on our future financialperformance.

Banking regulatorsperiodically review our allowance for loan losses and may require us toincrease our allowance for loan losses or recognize additional loancharge-offs, based on credit judgments different than those of our management.Any increase in the amount of our allowance or loans charged-off as required bythese regulatory agencies could have a negative effect on our operatingresults.

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***Our future successis dependent on our ability to compete effectively in the highly competitivebanking and financial services industry.***

We face vigorouscompetition from other commercial banks, savings and loan associations, savingsbanks, credit unions, mortgage banking firms, consumer finance companies,securities brokerage firms, insurance companies, money market funds and othertypes of financial institutions for deposits, loans and other financialservices in our market area. A number of these banks and other financialinstitutions are significantly larger than we are and have substantiallygreater access to capital and other resources, as well as larger lending limitsand branch systems, and offer a wider array of banking services. Many of ournonbank competitors are not subject to the same extensive regulations thatgovern us. As a result, these nonbank competitors have advantages over us inproviding certain services. This competition may reduce or limit our marginsand our market share and may adversely affect our results of operations and financialcondition.

***Our profitabilityand the value of any equity investment in us may suffer because of rapid andunpredictable changes in the highly regulated environment in which we operate.***

We are subject toextensive supervision by several governmental regulatory agencies at thefederal and state levels. Recently enacted, proposed and future banking andother legislation and regulations have had, and will continue to have, or mayhave a significant impact on the financial services industry. These regulations,which are generally intended to protect depositors and not our shareholders,and the interpretation and application of them by federal and state regulators,are beyond our control, may change rapidly and unpredictably, and can beexpected to influence our earnings and growth. Our success depends on ourcontinued ability to maintain compliance with these regulations. Many of theseregulations increase our costs and thus place other financial institutions thatmay not be subject to similar regulation in stronger, more favorablecompetitive positions.

***If we needadditional capital in the future to continue our growth, we may not be able toobtain it on terms that are favorable. This could negatively affect ourperformance and the value of our common stock.***

Our business strategycalls for continued growth. We anticipate that we will be able to support thisgrowth through the generation of additional deposits at existing and new branchlocations, as well as expanded loan and other investment opportunities. However,we may need to raise additional capital in the future to support our continuedgrowth and to maintain desired capital levels. Our ability to raise capitalthrough the sale of additional equity securities or the placement of financialinstruments that qualify as regulatory capital will depend primarily upon ourfinancial condition and the condition of financial markets at that time. We maynot be able to obtain additional capital in the amounts or on termssatisfactory to us. Our growth may be constrained if we are unable to raiseadditional capital as needed.

***We have extendedoff-balance sheet commitments to borrowers, which could expose us to credit andinterest rate risk.***

We enter into certainoff-balance sheet arrangements in the normal course of business to meet thefinancing needs of our customers. These off-balance sheet arrangements includecommitments to extend credit, standby letters of credit and guarantees that wouldimpact our liquidity and capital resources to the extent customers accept oruse these commitments. These instruments involve, to varying degrees, elementsof credit and interest rate risk in excess of the amount recognized in thebalance sheet. Our exposure to credit loss in the event of nonperformance bythe other party to the financial instrument for commitments to extend creditand standby letters of credit and guarantees written is represented by thecontractual or notional amount of those instruments. We use the same creditpolicies in making commitments and conditional obligations as we do foron-balance-sheet instruments.

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**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

Cardinal Bank, excluding its George Mason subsidiary,conducts its business from 22 branch offices. Eight of these facilities areowned and 14 are leased. Leased branch banking facilities range in size from1,000 square feet to 11,182 square feet. Our leases on these facilities expireat various dates through 2014, but all our leases have renewal options. Fourteenof our branch banking locations have drive-up banking capabilities and all haveATMs.

Cardinal Wealth Services, Inc. conducts itsbusiness from three of Cardinal Bank’s branch facilities.

George Mason conducts its business from nine leasedfacilities which range in size from 1,428 square feet to 22,056 square feet. Theleases have various expiration dates through 2010 and generally do not haverenewal options.

Wilson/Bennett conducts its business from office spaceleased in Alexandria, Virginia. Its lease expires July 15, 2006 and has arolling six month renewal option.

Our headquarters facility in Tysons Corner, Virginiacomprises 40,000 square feet of leased office space. This lease expires in January 2010but has renewal options. In addition to housing various administrativefunctions—including accounting, data processing, compliance, treasury,marketing, deposit and loan operations—our commercial and industrial andcommercial real estate lending functions and various other departments arelocated there.

We believe that all of ourproperties are maintained in good operating condition and are suitable andadequate for our operational needs.

**Item 3.**                        LegalProceedings

We are not a party to any material legal proceeding.

In the ordinary course ofour operations, we, from time to time,  become party to various legal proceedings. SeeNote 24 of the Notes to the consolidated financial statements in Item 8 below fora discussion of certain immaterial legal proceedings that are outside theordinary course of business.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

No matters were submitted to a vote of securityholders, through the solicitation of proxies or otherwise, during the fourthquarter of 2005.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Our common stock is currently listed for quotation onthe Nasdaq National Market under the symbol “CFNL.”  As of December 31, 2005, our commonstock was held by 680 shareholders of record. In addition, we estimate thatthere were 4,800 beneficial owners of our common stock who own their sharesthrough brokers or banks.

Thehigh and low sale prices per share for our common stock for each quarter of2005 and 2004 as reported on the Nasdaq National Market were as follows:

| **Periods Ended** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------|------------|------------|------------|----------|------------|---------|------------|
| 2005                   |       |       |       |     |       |
| First Quarter          |       | $          | 11.45      |     | $          | 9.01    |       |
| Second Quarter         |       | 9.50       |       | 7.75     |       |
| Third Quarter          |       | 10.60      |       | 8.81     |       |
| Fourth Quarter         |       | 11.79      |       | 8.94     |       |
| 2004                   |       |       |       |     |       |
| First Quarter          |       | $          | 9.80       |     | $          | 8.15    |       |
| Second Quarter         |       | 9.92       |       | 8.49     |       |
| Third Quarter          |       | 9.64       |       | 8.40     |       |
| Fourth Quarter         |       | 11.42      |       | 9.21     |       |

 

We declared our first cash dividend of $0.01 per shareon October 19, 2005 to the shareholders of record of our common stock on October 31,2005. These dividends were paid on November 15, 2005. We declared a secondcash dividend of $0.01 per share on January 18, 2006 to the shareholdersof record of our common stock on January 31, 2006. These dividends werepaid on February 15, 2006.

The board of directors intends to follow a policy ofretaining any earnings necessary to operate our business in accordance with allregulatory policies while maximizing the long-term return for the Company’sinvestors. Our future dividend policy is subject to the discretion of the boardof directors and future dividend payments will depend upon a number of factors,including future earnings, alternative investment opportunities, financialcondition, cash requirements, and general business conditions.

Our ability to distribute cash dividends will dependprimarily on the ability of our subsidiaries to pay dividends to us. CardinalBank is subject to legal limitations on the amount of dividends it is permittedto pay. Furthermore, neither Cardinal Bank nor we may declare or pay a cashdividend on any of our capital stock if we are insolvent or if the payment ofthe dividend would render us insolvent or unable to pay our obligations as theybecome due in the ordinary course of business. For additional information onthese limitations, see “Government Regulation and Supervision—Payment ofDividends” in Item 1 above.

We did not repurchase anyof our securities during 2005.

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**Item 6.**                        SelectedFinancial Data

**Selected Financial Data**(In thousands, except per sharedata)

| ** **                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Income Statement Data:**                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Interest income                                                       |       | $                                           | 67,374     |   | $ | 40,522 |   | $ | 24,602 |   | $ | 20,242 |   | $ | 16,577 |   |
| Interest expense                                                      |       | 29,891                                      |       | 15,969 |   | 9,429 |   | 9,586 |   | 7,500 |   |
| Net interest  income                                                  |       | 37,483                                      |       | 24,553 |   | 15,173 |   | 10,656 |   | 9,077 |   |
| Provision for loan  losses                                            |       | 2,456                                       |       | 1,626 |   | 1,001 |   | 444 |   | 1,202 |   |
| Net interest  income after provision for loan losses                  |       | 35,027                                      |       | 22,927 |   | 14,172 |   | 10,212 |   | 7,875 |   |
| Non-interest  income                                                  |       | 24,669                                      |       | 9,409 |   | 3,829 |   | 2,864 |   | 3,157 |   |
| Non-interest expense                                                  |       | 44,653                                      |       | 27,154 |   | 15,355 |   | 13,605 |   | 23,756 |   |
| Net income (loss)  before income taxes                                |       | 15,043                                      |       | 5,182 |   | 2,646 |   | (529 | ) | (12,724 | ) |
| Provision  (benefit) for income taxes                                 |       | 5,167                                       |       | 1,713 |   | (3,508 | ) | — |   | — |   |
| Net income (loss)                                                     |       | 9,876                                       |       | 3,469 |   | 6,154 |   | (529 | ) | (12,724 | ) |
| Dividends to  preferred shareholders                                  |       | —                                      |       | — |   | 495 |   | 495 |   | 503 |   |
| Net income (loss)  to common shareholders                             |       | $                                           | 9,876      |   | $ | 3,469 |   | $ | 5,659 |   | $ | (1,024 | ) | $ | (13,227 | ) |
| **Balance Sheet Data:**                                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Total assets                                                          |       | $                                           | 1,452,287  |   | $ | 1,211,576 |   | $ | 636,248 |   | $ | 486,323 |   | $ | 279,584 |   |
| Loans receivable,  net of fees                                        |       | 705,644                                     |       | 489,896 |   | 336,002 |   | 249,106 |   | 200,911 |   |
| Allowance for loan  losses                                            |       | 8,301                                       |       | 5,878 |   | 4,344 |   | 3,372 |   | 3,104 |   |
| Loans held for  sale                                                  |       | 361,668                                     |       | 365,454 |   | — |   | — |   | — |   |
| Total investment  securities                                          |       | 294,224                                     |       | 289,507 |   | 273,614 |   | 163,665 |   | 34,147 |   |
| Total deposits                                                        |       | 1,069,872                                   |       | 824,210 |   | 474,129 |   | 423,479 |   | 246,024 |   |
| Other borrowed  funds                                                 |       | 155,421                                     |       | 201,085 |   | 74,457 |   | 2,000 |   | 9,824 |   |
| Total  shareholders' equity                                           |       | 147,879                                     |       | 95,105 |   | 85,412 |   | 40,712 |   | 20,624 |   |
| Preferred shares  outstanding                                         |       | —                                      |       | — |   | 1,364 |   | 1,365 |   | 1,365 |   |
| Common shares  outstanding                                            |       | 24,363                                      |       | 18,463 |   | 16,377 |   | 10,044 |   | 4,294 |   |
| **Per  Common Share Data:**                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic net income  (loss)                                              |       | $                                           | 0.45       |   | $ | 0.19 |   | $ | 0.55 |   | $ | (0.13 | ) | $ | (3.11 | ) |
| Fully diluted net  income (loss)                                      |       | 0.44                                        |       | 0.19 |   | 0.54 |   | (0.13 | ) | (3.11 | ) |
| Book value                                                            |       | 6.07                                        |       | 5.15 |   | 4.80 |   | 3.37 |   | 3.21 |   |
| Tangible book  value                                                  |       | 5.23                                        |       | 4.36 |   | 4.80 |   | 3.31 |   | 3.06 |   |
| **Performance  Ratios:**                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| Return on average  assets                                             |       | 0.74                                        | %          | 0.37 | % | 1.18 | % | (0.14 | )% | (5.24 | )% |
| Return on average  equity                                             |       | 7.67                                        |       | 3.69 |   | 13.84 |   | (1.61 | ) | (39.14 | ) |
| Net interest  margin(1)                                               |       | 2.92                                        |       | 2.72 |   | 3.00 |   | 2.92 |   | 4.17 |   |
| Efficiency  ratio(2)                                                  |       | 71.84                                       |       | 79.95 |   | 80.81 |   | 100.63 |   | 194.18 |   |
| Non-interest  income to average assets                                |       | 1.85                                        |       | 1.00 |   | 0.73 |   | 0.74 |   | 1.30 |   |
| Non-interest  expense to average assets                               |       | 3.35                                        |       | 2.90 |   | 2.94 |   | 3.50 |   | 9.79 |   |
| Loans receivable,  net of fees to total deposits                      |       | 65.96                                       |       | 59.44 |   | 70.87 |   | 58.82 |   | 81.66 |   |
| **Asset  Quality Ratios:**                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Net charge-offs to  average loans receivable, net of fees             |       | 0.01                                        | %          | 0.02 | % | 0.01 | % | 0.05 | % | — | % |
| Non-performing  loans to loans receivable, net of fees                |       | 0.03                                        |       | 0.11 |   | 0.12 |   | 0.39 |   | 0.46 |   |
| Non-performing  loans to total assets                                 |       | 0.01                                        |       | 0.05 |   | 0.06 |   | 0.20 |   | 0.33 |   |
| Allowance for loan  losses to nonperforming loans                     |       | 3,879.00                                    |       | 1,074.60 |   | 1,102.54 |   | 345.49 |   | 334.84 |   |
| Allowance for loan  losses to loan receivable, net of fees            |       | 1.18                                        |       | 1.20 |   | 1.29 |   | 1.35 |   | 1.54 |   |
| **Capital  Ratios:**                                                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Tier 1 risk-based  capital                                            |       | 14.83                                       | %          | 12.65 | % | 19.66 | % | 12.25 | % | 9.04 | % |
| Total risk-based  capital                                             |       | 15.65                                       |       | 13.40 |   | 20.66 |   | 13.35 |   | 10.42 |   |
| Leverage capital  ratio                                               |       | 10.71                                       |       | 8.83 |   | 15.45 |   | 8.97 |   | 8.57 |   |
| **Other:**                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Average  shareholders' equity to average total assets                 |       | 9.66                                        | %          | 10.05 | % | 7.84 | % | 8.45 | % | 13.39 | % |
| Average loans  receivable, net of fees to average total deposits |       | 60.34                                       |       | 59.97 |   | 63.02 |   | 59.36 |   | 91.69 |   |
| Average common  shares outstanding:                                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                                 |       | 22,104                                      |       | 18,448 |   | 10,218 |   | 7,949 |   | 4,258 |   |
| Diluted                                                               |       | 22,454                                      |       | 18,705 |   | 11,468 |   | 7,949 |   | 4,258 |   |

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(1)             Net interest margin is calculated as netinterest income divided by total average earning assets.

(2)             Efficiency ratio is calculated as total non-interestexpense divided by the total of net interest income and non-interest income.

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**Item7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operation

The following presentsmanagement’s discussion and analysis of our consolidated financial condition atDecember 31, 2005 and 2004 and the results of our operations for the yearsended December 31, 2005, 2004 and 2003. The discussion should be read inconjunction with the consolidated financial statements and related notesincluded in this report.

**CautionAbout Forward-Looking Statements**

We make certainforward-looking statements in this Form 10-K that are subject torisks and uncertainties. These forward looking statements include statementsregarding our profitability, liquidity, allowance for loan losses, interestrate sensitivity, market risk, growth strategy, and financial and other goals. Thewords “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,”“anticipates,” “forecasts,” “intends,” or other similar words or terms areintended to identify forward-looking statements.

Theseforward-looking statements are subject to significant uncertainties becausethey are based upon or are affected by factors including:

·       theability to successfully manage our growth or implement our growth strategies ifwe are unable to identify attractive markets, locations or opportunities toexpand in the future;

·       changesin interest rates and the successful management of interest rate risk;

·       risksinherent in making loans such as repayment risks and fluctuating collateralvalues;

·       maintainingcost controls and asset quality as we open or acquire new branches;

·       maintainingcapital levels adequate to support our growth;

·       relianceon our management team, including our ability to attract and retain keypersonnel;

·       competitionwith other banks and financial institutions, and companies outside of thebanking industry, including those companies that have substantially greateraccess to capital and other resources;

·       changesin general economic and business conditions in our market area;

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

·       problemswith technology utilized by us;

·       changingtrends in customer profiles and behavior;

·       changesin banking, other laws and regulations applicable to us; and

·       otherfactors discussed in “Risk Factors” in Item 1A above.

Because of theseuncertainties, our actual future results may be materially different from theresults indicated by these forward-looking statements. In addition, our pastresults of operations do not necessarily indicate our future results.

**Overview**

We are a locally managedfinancial holding company headquartered in Tysons Corner, Virginia, committedto providing superior customer service, a diversified mix of financial productsand services, and convenient banking to our retail and business consumers. Weown Cardinal Bank (the “Bank”), a Virginia state-chartered community bank,Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary,and Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), anAlexandria, Virginia-based asset management firm acquired in June 2005. Throughthese three subsidiaries and George Mason Mortgage, LLC (“George Mason”), amortgage banking subsidiary of the Bank, we offer a wide range of traditionalbanking products and services to both our commercial and retail customers. Ourcommercial relationship managers focus on attracting small and medium sizedbusinesses as well as government 

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contractors,commercial real estate developers and builders and professionals, such asphysicians, accountants and attorneys. We have twenty-two branch officelocations, nine mortgage banking office locations and provide competitiveproducts and services. We complement our core banking operations by offering afull range of investment products and services to our customers through ourthird-party brokerage relationship with Raymond James Financial Services, Inc.and asset management services through Wilson/Bennett.

On June 9, 2005, weacquired Wilson/Bennett for a total consideration of $6.5 million, whichconsisted of a payment of $1.5 million in cash and the issuance of 611,111shares of our common stock, which we valued at $4.9 million. This transactionwas accounted for as a purchase and Wilson/Bennett’s assets and liabilitieswere recorded at fair value as of the purchase date. This transaction resultedin the recognition of $3.6 million of goodwill and $2.6 million of otherintangible assets. We believe that the Wilson/Bennett acquisition furthers ourstrategies of enhancing fee income and diversifying our revenue stream and theservices we deliver to our customers. Wilson/Bennett uses a value-orientedapproach that focuses on large capitalization stocks. Wilson/Bennett’s primarysource of revenue is management fees earned on the assets it manages for itscustomers. These management fees are generally based upon the market value ofassets under management and, accordingly, revenues from Wilson/Bennett will,assuming a consistent base, be more when appropriate indices, such as theS&P 500, are higher and lower when such indices are depressed.

When we acquiredWilson/Bennett, it had approximately $225.0 million of assets under management.At December 31, 2005, assets under management by Wilson/Bennett wereapproximately $169.0 million. While we anticipated an initial decline in theassets under management at the time of the acquisition, significant furtherdeclines in the assets managed by Wilson/Bennett may result in an impairmentcondition, which would require an impairment charge if we determine thecarrying value of the goodwill and other intangible assets is greater thantheir fair value.

On July 7, 2004, weacquired George Mason in a cash transaction for $17.0 million. This transactionresulted in the recognition of $12.9 million of goodwill and $1.7 million ofamortizable intangible assets. This transaction was accounted for as apurchase, and George Mason’s assets and liabilities were recorded at fair valueas of the purchase date, and its operating results are included in ourconsolidated results since the date of the acquisition. George Mason, based inFairfax, Virginia, engages primarily in the origination and acquisition ofresidential mortgages for sale into the secondary market on a best effortsbasis through nine branches located throughout the metropolitan Washington,D.C. region. George Mason has approximately 200 employees and does business ineight states, primarily Virginia, Maryland, and the District of Columbia. GeorgeMason is one of the largest residential mortgage originators in the greaterWashington metropolitan area, generating originations of approximately $4.3billion of loans in 2005, excluding advances on construction loans and includingloans purchased from other mortgage banking companies which are owned by localhome builders but managed by George Mason and $3.5 billion of loans in 2004,which includes managed company originations and loans originated of $1.9billion prior to our acquisition of George Mason. George Mason’s primarysources of revenue include net interest income earned on loans held for sale,gains on sales of loans and contractual management fees earned relating toservices provided to other mortgage companies owned by local home builders. Loansare made pursuant to purchase commitments and are sold servicing released.

**GeorgeMason also offers a construction-to-permanent loan program. This programprovides variable rate financing for customers to construct their residences. Oncethe home has been completed, the loan converts to fixed rate financing and issold into the secondary market. These construction-to-permanent loans generatefee income as well as net interest income for George Mason and are classified asloans held for sale.**

George Mason’s business isboth cyclical and seasonal. The cyclical nature of its business is influencedby, among other factors, the levels of and trends in mortgage interest rates,national and local economic 

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conditionsand consumer confidence in the economy. Historically, George Mason has itslowest levels of quarterly loan closings during the first quarter of the year.

In July 2004, weformed a wholly-owned subsidiary, Cardinal Statutory Trust I, for the purposeof issuing $20.0 million of floating rate junior subordinated deferrableinterest debentures (“trust preferred securities”). These trust preferredsecurities are due in 2034 and pay interest at a rate equal to LIBOR (LondonInterbank Offered Rate) plus 2.40%, which adjusts quarterly. These securitiesare redeemable at a premium through March 2008 and at par thereafter. Theinterest rate on this debt was 6.89% at December 31, 2005. We haveguaranteed payment of these securities. The $20.6 million payable by us toCardinal Statutory Trust I is included in other borrowed funds in theconsolidated statements of condition since Cardinal Statutory Trust I is anunconsolidated subsidiary as we are not the primary beneficiary of this entity.We utilized the proceeds from the issuance of the trust preferred securities tomake a capital contribution into the Bank.

Net interest income is ourprimary source of revenue. We define revenue as net interest income plusnon-interest income. As discussed further in the interest rate sensitivity section,we manage our balance sheet and interest rate risk exposure to maximize, andconcurrently stabilize, net interest income. We do this by monitoring ourliquidity position and the spread between the interest rates earned oninterest-earning assets and the interest rates paid on interest-bearingliabilities. We attempt to minimize our exposure to interest rate risk, but areunable to eliminate it entirely.  Inaddition to management of interest rate risk, we also analyze our loanportfolio for exposure to credit risk. Loan defaults and foreclosures areinherent risks in the banking industry and we attempt to limit our exposure tothese risks by carefully underwriting and then monitoring our extensions ofcredit. In addition to net interest income, non-interest income is anincreasingly important source of revenue for us and includes, among otherthings, service charges on deposits and loans, investment fee income and gainsand losses on sales of investment securities available-for-sale, gains on salesof loans and management fee income. Our acquisition of George Mason in July 2004has resulted in non-interest income becoming a larger component of our totalrevenues, and the acquisition of Wilson/Bennett in June 2005 has furthercontributed to this trend.

Netinterest income and non-interest income represented the following percentagesof total revenue for the three years ended December 31, 2005:

| ** ** | ** ** | **Net Interest  Income** | ** ** | **Non-Interest       Income     ** | ** ** |
|------------|------------|-------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| 2005       |       |                          | 60.3%      |                                                                                 |       |   | 39.7% |   |   |
| 2004       |       |                          | 72.3%      |                                                                                 |       |   | 27.7% |   |   |
| 2003       |       |                          | 79.8%      |                                                                                 |       |   | 20.2% |   |   |

 

Non-interest income is alarger percentage of our total revenue in 2005 than 2004 primarily because weowned George Mason for a full year in 2005 compared to approximately a halfyear in 2004.

Our business strategy isto grow through geographic expansion, while maintaining strong asset qualityand achieving increased profitability. We completed a secondary common stockoffering that raised $39.8 million in capital during the second quarter of 2005.This capital is being used to support our continuing expansion and balancesheet growth. As a result of this increased capital and retained earnings, weincreased our legal lending limit to $19.4 million as of December 31,2005, which allows us to expand our commercial and real estate loan portfolios.

**FinancialDevelopments**

The year ended December 31,2003 was our first full year of profitability. We had net income available tocommon shareholders of $5.7 million, or $0.54 per diluted common share in 2003,primarily as a result of an income tax benefit of $3.5 million attributable tothe recognition of deferred tax assets relating to 

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cumulativelosses since our inception, as we determined that it was more likely than notthat these assets would be realized. The pretax profit to common shareholdersin 2003 was $2.6 million.

The year ended December 31,2004 was our second year of profitability. For that year, net income was $3.5million. George Mason was included in our operating results since July 7,2004 and contributed approximately $1.4 million to consolidated net incomeduring 2004. The decrease in net income from the prior year was the result ofthe previously described tax benefit being recognized in 2003. Total assetsincreased by $575.3 million in 2004, from $636.2 million at December 31,2003, to $1.21 billion at December 31, 2004. Total loans receivable, netof deferred fees and costs, increased to $489.9 million at December 31,2004, compared to $336.0 million at December 31, 2003, an increase of$153.9 million. Total deposits increased by $350.1 million in 2004, from $474.1million at December 31, 2003, to $824.2 million at December 31, 2004.

The year ended December 31,2005 was our third consecutive year of profitability. For the year, we reportednet income of $9.9 million. George Mason was included in our operating resultsfor the full year and contributed $6.7 million to consolidated net incomeduring 2005. Wilson/Bennett is included in our operating results since June 9,2005, the date of its acquisition, and contributed $107,000 of pretax income. Totalassets increased by $240.7 million in 2005, from $1.21 billion at December 31,2004, to $1.45 billion at December 31, 2005. Total loans receivable, netof deferred fees and costs, increased to $705.6 million at December 31,2005, compared to $489.9 million at December 31, 2004, an increase of$215.7 million. Total deposits increased by $245.7 million in 2005, from $824.2million at December 31, 2004, to $1.07 billion at December 31, 2005.

**CriticalAccounting Policies**

*General*

U.S. generally acceptedaccounting principles are complex and require management to apply significantjudgment to various accounting, reporting, and disclosure matters. Managementmust use assumptions, judgments, and estimates when applying these principleswhere precise measurements are not possible or practical. These policies arecritical because they are highly dependent upon subjective or complexjudgments, assumptions and estimates. Changes in such judgments, assumptionsand estimates may have a significant impact on the consolidated financialstatements. Actual results, in fact, could differ from those estimates.

The accounting policies weview as critical are those relating to judgments, assumptions and estimatesregarding the determination of the allowance for loan losses, accounting foreconomic hedging activities, and the valuation allowance for deferred taxassets.

*Accounting for Business Combinations*

We account foracquisitions of other businesses in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 141, *Business Combinations*.This statement mandates the use of purchase accounting and, accordingly, assetsand liabilities, including previously unrecorded assets and liabilities, arerecorded at fair values as of the acquisition date. We utilize a variety ofvaluation methods to estimate fair value of acquired assets and liabilities. Thesemethodologies are often based upon assumptions and estimates which may changeat a future date and require that the carrying amount of assets and liabilitiesacquired be adjusted. To reduce the possibility of future adjustments, we haveutilized independent consultants to identify and value identifiable purchasedintangibles. The difference between the fair value of assets acquired and theliabilities assumed is recorded as goodwill. Goodwill and any other intangibleassets are accounted for in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*. In accordance withthis statement, goodwill will not be amortized but will be tested on at leastan annual basis for impairment.

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To test goodwill forimpairment, we perform an analysis to compare the fair value of the reportingunit to which the goodwill is assigned to the carrying value of the reportingunit. We make estimates of the discounted cash flows from the expected futureoperations of the reporting unit. If the analysis indicates that the fair valueof the reporting unit is less than its carrying value, we do an analysis tocompare the implied fair value of the reporting unit’s goodwill with thecarrying amount of that goodwill. The implied fair value of the goodwill isdetermined by allocating the fair value of the reporting unit to all its assetsand liabilities. If the implied fair value of the goodwill is less than thecarrying value, an impairment loss is recognized.

*Allowance for Loan Losses*

We maintain the allowancefor loan losses at a level that represents management’s best estimate of knownand inherent losses in our loan portfolio. Both the amount of the provisionexpense and the level of the allowance for loan losses are impacted by manyfactors, including general and industry-specific economic conditions, actualand expected credit losses, historical trends and specific conditions of theindividual borrowers. Unusual and infrequently occurring events, such ashurricanes and other weather-related disasters, may impact our assessment ofpossible credit losses. As a part of our analysis, we use comparative peergroup data and qualitative factors, such as levels of and trends indelinquencies and non-accrual loans, national and local economic trends andconditions and concentrations of loans exhibiting similar risk profiles tosupport our estimates.

For purposes of ouranalysis, we categorize our loans into one of five categories:  commercial and industrial, commercial realestate (including construction), home equity lines of credit, residentialmortgages, and consumer loans. In the absence of meaningful historical lossfactors, peer group loss factors are applied and are adjusted by thequalitative factors mentioned above. The indicated loss factors resulting fromthis analysis are applied to each of the five categories of loans. In addition,we individually assign loss factors to all loans that have been identified ashaving loss attributes, as indicated by deterioration in the financialcondition of the borrower or a decline in underlying collateral value if theloan is collateral dependent. Since we have limited historical data on which tobase loss factors for classified loans, we apply, in accordance with regulatoryguidelines, 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 allloans classified as doubtful. Loans classified as loss loans are fully reservedor charged off.

Credit losses are aninherent part of our business and, although we believe the methodologies fordetermining the allowance for loan losses and the current level of theallowance are adequate, it is possible that there may be unidentified losses inthe portfolio at any particular time that may become evident at a future datepursuant to additional internal analysis or regulatory comment. Additionalprovisions for such losses, if necessary, would be recorded in the commercialbanking or mortgage banking segment, as appropriate, and would negativelyimpact earnings.

*Derivative Instruments and Hedging Activities*

We account for derivativesand hedging activities in accordance with SFAS No. 133, *Accounting for Derivative Instruments and CertainHedging Activities*,**asamended, which requires that all derivative instruments be recorded on thestatement of condition at their fair values.

In the normal course ofbusiness, we enter into contractual commitments, including rate lockcommitments, to finance residential mortgage loans. These commitments, whichcontain fixed expiration dates, offer the borrower an interest rate guaranteeprovided the loan meets underwriting guidelines and closes within the timeframeestablished by us. Interest rate risk arises on these commitments andsubsequently closed loans if interest rates change between the time of theinterest rate lock and the delivery of the loan to the investor. Loan commitmentsrelated to residential mortgage loans intended to be sold are consideredderivatives.

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To mitigate the effect ofinterest rate risk inherent in providing rate lock commitments, we economicallyhedge our commitments by entering into best efforts delivery forward loan salescontracts. During the rate lock commitment period, these forward loan salescontracts are marked to market through earnings and are not designated asaccounting hedges under SFAS No. 133, as amended. Changes in the fairvalues of loan commitments and changes in the fair values of forward salescontracts generally move in opposite directions and the net impact of thechanges of these valuations on net income during the loan commitment period isgenerally inconsequential. At the closing of the loan, the loan commitmentderivative expires and we record a loan held for sale and continue to beobligated under the same forward loan sales contract. Loans held for sale areaccounted for at the lower of cost or market in accordance with SFAS No. 65,*Accounting for Certain Mortgage Banking Activities*.Prior to October 1, 2005, the changes in value of the forward loan salescontracts from the date the loan closed to the date it was sold to an investor weremarked to market through earnings.

On October 1, 2005, webegan designating our forward sales contracts as hedges to mitigate thevariability in cash flow to be received from the sale of mortgage loans. Wecontemporaneously document the hedging relationship including the riskmanagement objective and strategy for undertaking the hedge, how effectivenesswill be assessed at inception and at each reporting period and the method formeasuring ineffectiveness. We designate each forward loan sale agreement as acash flow hedge of a specific loan held for sale. For derivatives designated ascash flow hedges, the fair value adjustments are recorded as a component ofother comprehensive income except for the ineffective portion which is recordedthrough the income statement.

We discontinue hedgeaccounting prospectively when it is determined that the derivative is no longerhighly effective in offsetting changes in anticipated cash flows of the loansheld for sale.

In situations in whichhedge accounting is discontinued, we continue to carry the derivative at itsfair value on the balance sheet and recognize any subsequent changes in itsfair value in earnings. When hedge accounting is discontinued because it isprobable an anticipated loan sale will not occur, we recognize immediately inearnings any gains and losses that were accumulated in other comprehensiveincome.

*Valuation of Deferred Tax Assets*

We record a provision forincome tax expense based on the amounts of current taxes payable or refundableand the change in net deferred tax assets or liabilities during the year. Deferredtax assets and liabilities are recognized for the tax effects of differingcarrying values of assets and liabilities for tax and financial statementpurposes that will reverse in future periods. When substantial uncertaintyexists concerning the recoverability of a deferred tax asset, the carryingvalue of the asset is reduced by a valuation allowance. The amount of anyvaluation allowance established is based upon an estimate of the deferred taxasset that is more likely than not to be recovered.  Increases or decreases in the valuationallowance result in increases or decreases to the provision for income taxes.

**NewFinancial Accounting Standards**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 123R, *Share-Based Payments:  anAmendment of FASB Statements 123 and 95*(“FAS 123R”)*.*This statement requires that companies recognize in theincome statement the grant-date fair value of stock options and otherequity-based compensation. It is required to be applied by us beginning January 1,2006. This statement requires that stock awards be classified as either anequity award or a liability award. Equity classified awards are valued as ofthe grant date using either an observable market price or a valuationmethodology. Liability classified awards are valued at fair value at eachreporting date. We will adopt FAS 123R using the modified prospectiveapplication method which requires, among other things, that we recognizecompensation cost for all awards outstanding at January 1, 2006 for whichthe requisite service has not been rendered. We estimate that this new standardwill result in an increase in pretax expense of 

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approximately$200,000 in 2006 based on current stock options outstanding. Additional expensewould be recorded for any future stock option grants.

On October 19, 2005, ourboard of directors authorized that any existing outstanding options that wereor became “underwater” (i.e., their per share exercise price is greater thanthe market price) before December 31, 2005 be amended to become fullyvested. This modification resulted in the immediate vesting of 54,000 stockoptions which were held by our employees. The options that vested had exerciseprices ranging from $9.58 to $11.15. On October 19, 2005, the market valueof our common stock was $9.81. This modification did not result in therecognition of expense in 2005 because the options had no intrinsic value atthe grant date or on the date of modification. Vesting of these options wasaccelerated to eliminate the need to recognize the remaining fair valuecompensation expense associated with these options following the adoption ofSFAS No. 123R. The amount of compensation expense related to these optionsthat would have been recognized in the financial statements after ourimplementation of SFAS No. 123R, assuming no forfeitures, was $127,000.

**Financial Overview**

***2005 Compared to2004***

At December 31, 2005,total assets were $1.45 billion, an increase of 19.9%, or $240.7 million, from$1.21 billion at December 31, 2004. Total loans receivable, net ofdeferred fees and costs, increased 44.0%, or $215.7 million, to $705.6 millionat December 31, 2005, from $489.9 million at December 31, 2004. Totalinvestment securities increased by $4.7 million, or 1.6%, to $294.2 million at December 31,2005, from $289.5 million at December 31, 2004. Total deposits increased29.8%, or $245.8 million, to $1.07 billion at December 31, 2005, from$824.2 million at December 31, 2004. Other borrowed funds, which primarilyinclude repurchase agreements, FHLB advances and our payable to CardinalStatutory Trust I, decreased $45.7 million to $155.4 million at December 31,2005, from $201.1 million at December 31, 2004.

Shareholders’ equity at December 31,2005 was $147.9 million, an increase of $52.8 million from $95.1 million at December 31,2004. The increase in shareholders’ equity was primarily attributable to $39.8million of additional equity raised during our 2005 common stock offering andnet income of $9.9 million. Total shareholders’ equity to total assets at December 31,2005 and 2004 was 10.2% and 7.9%, respectively. Book value per share at December 31,2005 and 2004 was $6.07 and $5.15, respectively. Total risk-based capital torisk-weighted assets was 15.65% at December 31, 2005 compared to 13.40% atDecember 31, 2004. Accordingly, the Company was considered “wellcapitalized” for regulatory purposes at December 31, 2005. Risk-basedcapital to risk-weighted assets increased from 2004 to 2005 primarily as aresult of the additional capital raised during our 2005 common stock offering.

We recorded net income of$9.9 million, or $0.44 per diluted common share, for the year ended December 31,2005, compared to net income available to common shareholders of $3.5 million,or $0.19 per diluted common share, in 2004. As previously mentioned, GeorgeMason is included in our operating results for the full year ended December 31,2005 compared to approximately the last six months of 2004.

The return on averageassets for the years ended December 31, 2005 and 2004 was 0.74% and 0.37%,respectively. The return on average equity for the years ended December 31,2005 and 2004 was 7.67% and 3.69%, respectively.

***2004 Compared to2003***

At December 31, 2004,total assets were $1.21 billion, an increase of 90.4%, or $575.3 million,compared to $636.2 million at December 31, 2003. Total loans receivable,net of deferred fees and costs, increased 45.8%, or $153.9 million, to $489.9million at December 31, 2004, from $336.0 million at December 31,2003. Total investment securities increased by $15.9 million, or 5.8%, to$289.5 million at December 31, 2004, from $273.6 million at December 31,2003. Total deposits increased 73.8%, or $350.1 million, to $824.2 millionat December 31, 2004, from $474.1 million at December 31, 2003. Other

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borrowedfunds increased $126.6 million to $201.1 million at December 31, 2004,from $74.5 million at December 31, 2003. During 2003, we introducedrepurchase agreements to our customers, which totaled $25.5 million at December 31,2003 and $30.4 million at December 31, 2004. Advances from the FederalHome Loan Bank of Atlanta were $49.0 million at December 31, 2003, and$137.0 million at December 31, 2004.

Shareholders’ equity at December 31,2004 was $95.1 million, an increase of $9.7 million from $85.4 million at December 31,2003. The increase in shareholders’ equity was primarily attributable to $6.3million of additional equity raised as a result of the underwriters exercisingin January 2004 their over allotment option in connection with our 2003stock offering and net income of $3.5 million. Total shareholders’ equity tototal assets at December 31, 2004 and 2003 were 7.9% and 13.4%,respectively. Book value per share at December 31, 2004 and 2003 was $5.15and $4.80, respectively. Total risk-based capital to risk-weighted assets was13.40% at December 31, 2004 compared to 20.66% at December 31, 2003. Accordingly,the Company was considered “well capitalized” for regulatory purposes at December 31,2004. Risk-based capital to risk-weighted assets declined from 2003 to 2004despite our issuance of $20.0 million of trust preferred securities, which isincluded as a component of regulatory capital, because of our growth during2004 and the fact that goodwill and intangibles, which increased by $14.7million as a result of the George Mason acquisition, are excluded fromregulatory capital.

We recorded net income of$3.5 million, or $0.19 per diluted common share, for the year ended December 31,2004, compared to net income available to common shareholders of $5.7 millionor $0.54 per diluted common share, in 2003. Net income for 2003 included anincome tax benefit of $3.5 million attributable to the recognition of priorperiods’ net operating loss carryforwards. The 2003 earnings per common shareincluded the effect of preferred stock dividends of $495,000. All outstandingshares of the preferred stock were converted into shares of our common stock inMarch 2004.

The return on averageassets for the years ended December 31, 2004 and 2003 was 0.37% and 1.18%,respectively. The return on average equity for the years ended December 31,2004 and 2003 was 3.69% and 13.84%, respectively.

**Statements ofOperations**

***Net InterestIncome/Margin***

Net interest income is ourprimary source of revenue, representing the difference between interest andfees earned on interest-bearing assets and the interest paid on deposits andother interest-bearing liabilities. The level of net interest income isaffected primarily by variations in the volume and mix of these assets andliabilities, as well as changes in interest rates. At the end of 2003, theprime lending rate was at 4.00%, its lowest level in over forty years. During2004, as economic activity increased, the Federal Reserve raised the keyfederal funds rate six times to 2.50% by year end. The Federal Reservecontinued this policy in 2005, increasing the federal funds rate seven times to4.25% by year end. The prime lending rate increased from 4.00% at the end of2003 to 5.50% at the end of 2004 to 7.25% at the end of 2005. See “InterestRate Sensitivity” for further information.

Net interest income forthe year ended December 31, 2005 was $37.5 million, compared to $24.6million for the year ended December 31, 2004, an increase of $12.9million, or 52.7%. The increase in net interest income was primarily a resultof increases in the average volume of loans held for sale and loans receivable,net of the impact of increased funding costs during 2005, compared with 2004.The increase in funding costs was primarily attributable to an increase inrates paid on average interest-bearing liabilities. Net increases in loans heldfor sale and loans receivable were funded through the increases in totaldeposits and other borrowed funds.

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Our net interest margin for the years ended December 31,2005 and 2004 was 2.92% and 2.72%, respectively, primarily as a result of a 75basis point increase in the rate earned on average interest-earning assetspartially offset by an increased cost of average interest-bearing liabilitiesof 63 basis points. The average yield on interest-earning assets increased to5.24% in 2005 from 4.49% in 2004, and our cost of interest-bearing liabilitiesincreased to 2.90% in 2005 from 2.17% in 2004. The cost of other borrowedfunds, which generally are shorter term fundings and which we utilized in 2005to help fund our balance sheet growth, increased 83 basis points to 3.01% in2005 from 2.18% in 2004. The cost of deposit liabilities increased 65 basispoints to 2.90% in 2005 from 2.25% for 2004.

Total earning assets increased by 19.6% to $1.39billion at December 31, 2005, compared to $1.16 billion at December 31,2004. This resulted primarily from a $215.7 million increase in loansreceivable, net of deferred fees and costs. This increase was funded by depositgrowth of $245.7 million, or 29.8%. Other borrowed funds decreased by $45.7million during 2005 to $155.4 million at December 31, 2005, from $201.1million at December 31, 2004.

Average loans receivable increased $196.1 million to$587.5 million during 2005 from $391.4 million in 2004. Average balances ofnonperforming assets, which consist of non-accrual loans, are included in thenet interest margin calculation and did not have a material impact on our netinterest margin in 2005 and 2004. Additional interest income of approximately$18,000 for 2005 and $25,000 for 2004 would have been realized had allnonperforming assets performed as originally expected. Nonperforming assetsexclude loans that are both past due 90 days or more and still accruinginterest due to an assessment of collectibility.

Average total deposits increased $321.0 million to$973.7 million in 2005 from $652.7 million in 2004. The largest increase inaverage deposit balances was experienced in certificates of deposit, whichincreased $192.9 million compared to 2004, a result of our branch expansion andincreased advertising of our rates. During 2004, to assist in the funding ofGeorge Mason’s loans held for sale, we began using the brokered certificates ofdeposit market. At December 31, 2004, we had $86.7 million of brokeredcertificates of deposit. At December 31, 2005, our brokered certificatesof deposit decreased $76.9 million to $9.8 million. As maturities in ourbrokered certificates of deposit portfolio occurred, we were able to replacethat funding with increases in our core deposit products. Our utilization ofthe brokered certificates of deposit market averaged $38.9 million in 2005, adecrease of $13.4 million from an average of $52.3 million in 2004.

Net interest income was $24.6 million for the yearended December 31, 2004, up $9.4 million or 61.8% from 2003. The increasewas due primarily to an increase in average volumes of investment securities,loans held for sale and loans receivable, net of the impact of decreased yieldsduring 2004 compared to 2003. These increases were funded through the increasesin total deposits and other borrowed funds.

Our net interest margin for the years ended December 31,2004 and 2003 was 2.72% and 3.00%, respectively. The decrease in the netinterest margin was a result of earning asset yields declining more quicklythan the cost of interest-bearing liabilities in 2004. The average yield oninterest-earning assets decreased to 4.49% in 2004 from 4.89% in 2003, and ourcost of interest-bearing liabilities decreased to 2.17% in 2004 from 2.31% in2003. The yield on other borrowed funds, which are generally shorter termfundings and which we utilized to a greater extent in 2004 than 2003 as aresult of the George Mason acquisition, increased 50 basis points to 2.18% in December 31,2004 compared to 1.68% for 2003.

Total earning assets increased by 88.3% to $1.16billion at December 31, 2004, compared to $616.7 million at December 31,2003. This resulted primarily from a $365.5 million increase in loans held forsale as a result of our George Mason acquisition and a $153.9 million increasein loans receivable. These increases were funded by deposit growth of $350.1million, or 73.8%, and other borrowed funds and warehouse financing growth of$156.9 million over December 31, 2003 balances. In addition, other 

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borrowed funds increasedby $126.6 million during 2004 to $201.1 million at December 31, 2004,compared to $74.5 million at December 31, 2003.

Average loans receivable increased $118.7 million to$391.4 million in 2004 from $272.8 million in 2003. Average balances ofnonperforming assets are included in the net interest margin calculation anddid not have a material impact on our net interest margin in 2004 and 2003. Additionalinterest income of approximately $25,000 in 2004 and $39,000 in 2003 would havebeen realized had all nonperforming assets performed as originally expected. Nonperformingassets exclude loans that are both past due 90 days or more and still accruinginterest due to an assessment of collectibility.

Average total deposits increased $219.9 million to$652.7 million in 2004 from $432.8 million in 2003. The largest increase inaverage deposit balances was experienced in certificates of deposit, whichincreased $194.8 million compared to 2003, as a result of our branch expansionand increased advertising of our rates on certificates of deposit. In addition,to assist in the funding of George Mason’s loans held for sale, we began usingthe brokered certificates of deposit market during 2004. At December 31,2004, we had $86.7 million of brokered certificates of deposit. Our utilizationof the brokered certificates of deposit market averaged $52.3 million in 2004. Wehad no brokered certificates of deposit at December 31, 2003.

The following is a summaryof our average earning and non-earning assets and interest-bearing andnon-interest-bearing liabilities for the three years ended December 31,2005 and the resulting yields and cost of funding for those years.

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**Average Balance Sheets and Interest Rates onInterest-Earning Assets and Interest-Bearing Liabilities**YearsEnded December 31, 2005, 2004 and 2003(In thousands)

| ** **                | ** ** | **2005**    | ** ** | **2004**     | ** ** | **2003**   | ** ** |
|---------------------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                | ** ** | ** **  | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Average** | ** ** | **Income/**  | ** ** | ** ** | ** ** | **Average** | ** ** | **Income/** | ** ** | ** ** | ** ** | **Average** | ** ** | **Income/** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets: |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1):                 |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Commercial and industrial                                |   | $         | 66,414    |   |   | $      | 4,030  |   |   |   | 6.07   | %       |   | $       | 58,293  |   |   | $      | 3,046  |   |   |    | 5.23   | %      |    | $      | 50,188  |   |   | $      | 3,101  |   |   |   | 6.18 | % |   |
|----------------------------------------------------------|--------|-----------|-----------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|---------|---------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|---------|--------|--------|--------|--------|--------|--------|--------|------|---|--------|
| Real estate—commercial                              |   | 255,505   |      |   | 16,199 |   |   |   | 6.34   |   |   | 170,730 |   |    | 10,617  |   |   |   | 6.22   |   |   | 121,345 |   |   | 8,422   |   |    |   | 6.94   |   |   |
| Real estate—construction                            |   | 77,634    |      |   | 5,468  |   |   |   | 7.04   |   |   | 52,459  |   |    | 3,024   |   |   |   | 5.76   |   |   | 20,427  |   |   | 1,131   |   |    |   | 5.54   |   |   |
| Real estate—residential                             |   | 115,829   |      |   | 5,936  |   |   |   | 5.12   |   |   | 49,057  |   |    | 2,780   |   |   |   | 5.67   |   |   | 38,059  |   |   | 2,414   |   |    |   | 6.34   |   |   |
| Home equity lines                                        |   | 67,086    |      |   | 3,458  |   |   |   | 5.15   |   |   | 52,221  |   |    | 1,856   |   |   |   | 3.55   |   |   | 33,720  |   |   | 1,121   |   |    |   | 3.32   |   |   |
| Consumer                                                 |   | 5,046     |      |   | 359    |   |   |   | 7.11   |   |   | 8,665   |   |    | 552     |   |   |   | 6.37   |   |   | 9,026   |   |   | 662     |   |    |   | 7.33   |   |   |
| Total loans                                              |   | 587,514   |      |   | 35,450 |   |   |   | 6.03   |   |   | 391,425 |   |    | 21,875  |   |   |   | 5.59   |   |   | 272,765 |   |   | 16,851  |   |    |   | 6.18   |   |   |
| Loans held for sale, net                                 |   | 372,866   |      |   | 19,379 |   |   |   | 5.20   |   |   | 181,700 |   |    | 6,814   |   |   |   | 3.75   |   |   | —  |   |   | —  |   |    |   | 0.00   |   |   |
| Investment securities available-for-sale                 |   | 159,720   |      |   | 6,195  |   |   |   | 3.88   |   |   | 161,741 |   |    | 5,830   |   |   |   | 3.60   |   |   | 152,915 |   |   | 5,026   |   |    |   | 3.29   |   |   |
| Investment securities held-to-maturity                   |   | 127,407   |      |   | 4,914  |   |   |   | 3.86   |   |   | 151,286 |   |    | 5,622   |   |   |   | 3.72   |   |   | 67,685  |   |   | 2,483   |   |    |   | 3.67   |   |   |
| Other investments                                        |   | 6,269     |      |   | 261    |   |   |   | 4.16   |   |   | 6,139   |   |    | 251     |   |   |   | 4.09   |   |   | 2,906   |   |   | 135     |   |    |   | 4.65   |   |   |
| Federal funds sold                                       |   | 31,981    |      |   | 1,175  |   |   |   | 3.67   |   |   | 10,473  |   |    | 130     |   |   |   | 1.24   |   |   | 9,753   |   |   | 107     |   |    |   | 1.10   |   |   |
| Total interest-earning assets and interest income        |   | 1,285,757 |      |   | 67,374 |   |   |   | 5.24   |   |   | 902,764 |   |    | 40,522  |   |   |   | 4.49   |   |   | 506,024 |   |   | 24,602  |   |    |   | 4.86   |   |   |
| Noninterest-earning  assets:                             |   |      |      |   |   |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |    |   |   |    |   |    |   |   |   |   |
| Cash and due from banks                                  |   | 6,657     |      |   |   |   |   |   |   |   |   | 11,015  |   |    |    |   |   |   |   |   |   | 10,291  |   |   |    |   |    |   |   |   |   |
| Premises and equipment, net                              |   | 17,446    |      |   |   |   |   |   |   |   |   | 11,229  |   |    |    |   |   |   |   |   |   | 5,249   |   |   |    |   |    |   |   |   |   |
| Goodwill and other intangibles, net                      |   | 18,363    |      |   |   |   |   |   |   |   |   | 7,515   |   |    |    |   |   |   |   |   |   | 646     |   |   |    |   |    |   |   |   |   |
| Accrued interest and other assets                   |   | 10,919    |      |   |   |   |   |   |   |   |   | 8,533   |   |    |    |   |   |   |   |   |   | 3,265   |   |   |    |   |    |   |   |   |   |
| Allowance for loan losses                                |   | (6,974    | )         |   |   |   |   |   |   |   |   | (4,759  | )      |    |    |   |   |   |   |   |   | (3,652  | )      |   |    |   |    |   |   |   |   |
| Total assets                                             |   | $         | 1,332,168 |   |   |   |   |   |   |   |   |    | $      | 936,297 |    |   |   |   |   |   |   |    |   | $      | 521,823 |   |    |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |   |      |      |   |   |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |    |   |   |    |   |    |   |   |   |   |
| Interest-bearing  liabilities:                           |   |      |      |   |   |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |    |   |   |    |   |    |   |   |   |   |
| Interest-bearing  deposits:                              |   |      |      |   |   |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |    |   |   |    |   |    |   |   |   |   |
| Interest checking                                        |   | $         | 113,628   |   |   | $      | 1,366  |   |   |   | 1.20   | %       |   | $       | 151,727 |   |   | $      | 2,016  |   |   |    | 1.33   | %      |    | $      | 147,746 |   |   | $      | 2,375  |   |   |   | 1.61 | % |   |
| Money markets                                            |   | 166,301   |      |   | 4,397  |   |   |   | 2.64   |   |   | 26,304  |   |    | 155     |   |   |   | 0.59   |   |   | 26,722  |   |   | 208     |   |    |   | 0.78   |   |   |
| Statement savings                                        |   | 9,302     |      |   | 106    |   |   |   | 1.13   |   |   | 7,806   |   |    | 58      |   |   |   | 0.74   |   |   | 5,389   |   |   | 35      |   |    |   | 0.65   |   |   |
| Certificates of deposit                                  |   | 570,669   |      |   | 19,030 |   |   |   | 3.33   |   |   | 377,770 |   |    | 10,465  |   |   |   | 2.77   |   |   | 182,922 |   |   | 6,038   |   |    |   | 3.30   |   |   |
| Total interest-bearing deposits                     |   | 859,900   |      |   | 24,899 |   |   |   | 2.90   |   |   | 563,607 |   |    | 12,694  |   |   |   | 2.25   |   |   | 362,779 |   |   | 8,656   |   |    |   | 2.39   |   |   |
| Other borrowed funds                                     |   | 162,176   |      |   | 4,883  |   |   |   | 3.01   |   |   | 139,637 |   |    | 3,047   |   |   |   | 2.18   |   |   | 46,069  |   |   | 773     |   |    |   | 1.68   |   |   |
| Warehouse financing                                      |   | 45,571    |      |   | 109    |   |   |   | 0.24   |   |   | 31,981  |   |    | 228     |   |   |   | 0.71   |   |   | —  |   |   | —  |   |    |   | 0.00   |   |   |
| Total interest-bearing liabilities and interest  expense |   | 1,067,647 |      |   | 29,891 |   |   |   | 2.80   |   |   | 735,225 |   |    | 15,969  |   |   |   | 2.17   |   |   | 408,848 |   |   | 9,429   |   |    |   | 2.31   |   |   |
| Noninterest-bearing  liabilities:                        |   |      |      |   |   |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |    |   |   |    |   |    |   |   |   |   |
| Demand deposits                                          |   | 113,813   |      |   |   |   |   |   |   |   |   | 89,114  |   |    |    |   |   |   |   |   |   | 70,030  |   |   |    |   |    |   |   |   |   |
| Other liabilities                                        |   | 21,980    |      |   |   |   |   |   |   |   |   | 17,847  |   |    |    |   |   |   |   |   |   | 2,043   |   |   |    |   |    |   |   |   |   |
| Preferred shareholders’ equity                      |   | —    |      |   |   |   |   |   |   |   |   | 1,589   |   |    |    |   |   |   |   |   |   | 6,824   |   |   |    |   |    |   |   |   |   |
| Common shareholders’ equity                         |   | 128,728   |      |   |   |   |   |   |   |   |   | 92,522  |   |    |    |   |   |   |   |   |   | 34,078  |   |   |    |   |    |   |   |   |   |
| Total liabilities and  shareholders’ equity         |   | $         | 1,332,168 |   |   |   |   |   |   |   |   |    | $      | 936,297 |    |   |   |   |   |   |   |    |   | $      | 521,823 |   |    |   |   |   |   |   |   |   |
| Net interest  income and net interest margin(2)     |   |      |      |   | $      | 37,483 |   |   |   | 2.92   | %      |    |   |    |    | $      | 24,553 |   |   |   | 2.72   | %       |   |   |    |   | $       | 15,173 |   |   |   | 3.00   | %      |   |

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(1)             Non-accrual loans are included in averagebalances and do not have a material effect on the average yield. Interestincome on non-accruing loans was not material for years presented.

(2)             We do not have investments that have tax benefitattributes; therefore, there are no tax equivalent adjustments to our netinterest income.

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**Rateand Volume Analysis**YearsEnded December 31, 2005, 2004 and 2003(In thousands)

| ** **                               | ** ** | **2005 Compared to 2004** | ** ** | **2004 Compared to 2003** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **Average**                              | ** ** | **Average**                              | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                               | ** ** | **Volume**                               | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest income:**                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1):                                |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and industrial                |       | $                                        | 424        |                                     |       | $ | 560 |   |   |   | $ | 984 |   |   | $ | 501 |   | $ | (556 | ) |   | $ | (55 | ) |   |
| Real estate—commercial              |       | 5,272                                    |       |                                     | 310        |   |   |   | 5,582 |   |   | 3,428 |   | (1,233 | ) |   | 2,195 |   |   |
| Real estate—construction            |       | 1,451                                    |       |                                     | 993        |   |   |   | 2,444 |   |   | 1,774 |   | 119 |   |   | 1,893 |   |   |
| Real estate—residential             |       | 3,784                                    |       |                                     | (628       | ) |   |   | 3,156 |   |   | 698 |   | (332 | ) |   | 366 |   |   |
| Home equity lines                        |       | 528                                      |       |                                     | 1,074      |   |   |   | 1,602 |   |   | 615 |   | 120 |   |   | 735 |   |   |
| Consumer                                 |       | (231                                     | )          |                                     | 38         |   |   |   | (193 | ) |   | (26 | ) | (84 | ) |   | (110 | ) |   |
| Total loans                              |       | 11,228                                   |       |                                     | 2,347      |   |   |   | 13,575 |   |   | 6,990 |   | (1,966 | ) |   | 5,024 |   |   |
| Loans held for sale, net                 |       | 7,169                                    |       |                                     | 5,396      |   |   |   | 12,565 |   |   | 6,814 |   | — |   |   | 6,814 |   |   |
| Investment securities available-for-sale |       | (73                                      | )          |                                     | 438        |   |   |   | 365 |   |   | 290 |   | 514 |   |   | 804 |   |   |
| Investment securities held-to-maturity   |       | (887                                     | )          |                                     | 179        |   |   |   | (708 | ) |   | 3,067 |   | 72 |   |   | 3,139 |   |   |
| Other investments                        |       | 5                                        |       |                                     | 5          |   |   |   | 10 |   |   | 150 |   | (34 | ) |   | 116 |   |   |
| Federal funds sold                       |       | 267                                      |       |                                     | 778        |   |   |   | 1,045 |   |   | 8 |   | 15 |   |   | 23 |   |   |
| Total interest income                    |       | 17,709                                   |       |                                     | 9,143      |   |   |   | 26,852 |   |   | 17,319 |   | (1,399 | ) |   | 15,920 |   |   |
| **Interest  expense:**                   |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:              |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                        |       | (506                                     | )          |                                     | (144       | ) |   |   | (650 | ) |   | 64 |   | (423 | ) |   | (359 | ) |   |
| Money markets                            |       | 825                                      |       |                                     | 3,417      |   |   |   | 4,242 |   |   | (3 | ) | (50 | ) |   | (53 | ) |   |
| Statement savings                        |       | 12                                       |       |                                     | 36         |   |   |   | 48 |   |   | 16 |   | 7 |   |   | 23 |   |   |
| Certificates of deposit                  |       | 5,344                                    |       |                                     | 3,221      |   |   |   | 8,565 |   |   | 6,432 |   | (2,005 | ) |   | 4,427 |   |   |
| Total interest-bearing deposits          |       | 5,675                                    |       |                                     | 6,530      |   |   |   | 12,205 |   |   | 6,509 |   | (2,471 | ) |   | 4,038 |   |   |
| Other borrowed funds                     |       | 492                                      |       |                                     | 1,344      |   |   |   | 1,836 |   |   | 1,570 |   | 704 |   |   | 2,274 |   |   |
| Warehouse financing                      |       | 97                                       |       |                                     | (216       | ) |   |   | (119 | ) |   | 228 |   | — |   |   | 228 |   |   |
| Total interest expense                   |       | 6,264                                    |       |                                     | 7,658      |   |   |   | 13,922 |   |   | 8,307 |   | (1,767 | ) |   | 6,540 |   |   |
| Net interest  income(2)                  |       | $                                        | 11,445     |                                     |       | $ | 1,485 |   |   |   | $ | 12,930 |   |   | $ | 9,012 |   | $ | 368 |   |   | $ | 9,380 |   |   |

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

(2)           We do not have investments that have tax benefitattributes; therefore, there are no tax equivalent adjustments to our netinterest income.

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**Interest Rate Sensitivity**

We are exposed to various business risks includinginterest rate risk. Our goal is to maximize net interest income withoutincurring excessive interest rate risk. Management of net interest income andinterest rate risk must be consistent with the level of capital and liquiditythat we maintain. We manage interest rate risk through an asset and liabilitycommittee (“ALCO”). ALCO is responsible for managing the interest rate risk forthe Company in conjunction with liquidity and capital management.

In managing interest rate sensitivity, the ALCOcommittee until the third quarter of 2004 primarily used gap analysis. Gapanalysis attempts to determine the volume of interest sensitive assets lessinterest sensitive liabilities in various time intervals. The difference is theinterest sensitivity gap which indicates how future changes in interest ratesmay affect net interest income. A negative gap, or liability sensitiveposition, exists when we have more interest sensitive liabilities maturingwithin a certain time frame than interest sensitive assets.

Beginning with the interest rate sensitivity analysisfor the third quarter of 2004, and continuing through 2005, we hired anindependent consulting firm to model the interest rate sensitivity of theCompany. Instead of gap analysis, we began using a net interest incomesimulation model as our primary tool to measure interest rate sensitivity. Manyassumptions are developed based on expected activity in the balance sheet. Formaturing assets, assumptions are created for the redeployment of these assets. Formaturing liabilities, assumptions are developed for the replacement of thesefunding sources. Assumptions are also developed for assets and liabilities thatcould reprice during the modeled time period. These assumptions also cover howwe expect rates to change on non-maturity deposits such as NOW, Money Market,savings accounts and no-penalty certificates of deposit. Based on inputs thatinclude the current balance sheet, the current level of interest rates and thedeveloped assumptions, the model then produces an expected level of netinterest income assuming that market rates remain unchanged. This is consideredthe base case. Next, the model determines what net interest income would be basedon specific changes in interest rates. The rate simulations are performed for atwo year period and include ramped rate changes of down 200 basis points and up200 basis points. In the ramped down rate change, the model moves ratesgradually down 200 basis points over the first year and then rates remain flatin the second year. For the up 200 basis point scenario, rates are graduallymoved up 200 basis points in the first year and then rates remain flat in thesecond year. In both the up and down scenarios, the model assumes a parallelshift in the yield curve. The results of these simulations are then compared tothe base case.

At December 31, 2005, we were asset sensitive. Assetsensitive means that we had more assets maturing and repricing than liabilities.We have a significant portion of our assets as floating rate assets and we havetaken a significant amount of term funding through fixed rate, fixed term,certificates of deposit. In a rising rate environment, net interest incomeshould grow for an asset sensitive bank. In the up 200 basis point scenario,net interest income improves by not more than 7% for the one year periodcompared to the base case and by not more than 9% over the two year timehorizon. Being asset sensitive, net interest income declines compared to thebase case in the down 200 basis point scenario. At December 31, 2005, netinterest income has a negative variance to the base case of less than 4% forthe one year period and a negative variance of less than 6% over the cumulativetwo year period.

**Provision Expense and Allowance for Loan Losses**

Our policy is to maintain the allowance for loanlosses at a level that represents our best estimate of known and inherentlosses in the loan portfolio. Both the amount of the provision and the level ofthe allowance for loan losses are impacted by many factors, including generaland industry-specific economic conditions, actual and expected credit losses,historical trends and specific conditions of individual borrowers.

The provision for loan losses was $2.5 million and$1.6 million for the years ended December 31, 2005 and 2004, respectively.The allowance for loan losses at December 31, 2005 was $8.3 millioncompared to $5.9 million at December 31, 2004. Our allowance for loan lossratio at December 31, 2005 was 1.18% compared to 1.20% at December 31,2004. The decrease in the allowance for loan loss ratio is primarily reflectiveof a shift in the loan mix in our portfolio with a greater percentage of theoverall loan portfolio 

39

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comprised of lower riskresidential real estate loans and an improvement in overall loan quality. Wecontinued to experience strong loan quality with annualized net charged-offloans equal to 0.01% to average loans receivable for the year ended December 31,2005, and non-performing loans equal to 0.03% of total loans as of December 31,2005.

In 1999 and 2001, the Company purchased loanparticipations of approximately $12.3 million from a bank in New Orleans,Louisiana, which represented approximately 950 loans. At December 31,2005, the total remaining balances on these participations were approximately$1.8 million and represented approximately 270 loans secured by various typesof recreational vehicles. The borrowers are located in several southern statesincluding Louisiana. Hurricane and other weather-related problems havedisrupted the operations of the New Orleans bank, temporarily curtailed maildelivery and other communications in the area and caused widespread destructionin the gulf coast region. The Company has established an approximately $90,000allowance for loan losses on these loans as of December 31, 2005. Thisallowance is based upon the best information that the Company was able toobtain from the New Orleans bank and included an analysis of the locations ofthe borrowers, with particular emphasis on areas known to be severely impactedby the weather, and the borrowers’ recent payment histories and estimate oflikely insurance recoveries, where applicable. Changes to the allowance forloan losses for these loan participations may be required as additionalinformation becomes known.

The provision for loan losses was $1.0 million for2003. The growth in loans during 2003 was comprised primarily of increases inour residential and commercial real estate loan portfolios and our home equityloan portfolio, which require lower allowances than the remainder of the loanportfolio.

See “Critical Accounting Policies” above for moreinformation on our allowance for loan losses methodology.

The following tables present additional informationpertaining to the activity in and allocation of the allowance for loan lossesby loan type and the percentage of the loan type to the total loan portfolio.

**Allowance for Loan Losses**YearsEnded December 31, 2005, 2004, 2003, 2002 and 2001(In thousands)

| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1             |       | $        | 5,878      |     | $          | 4,344    |       | $        | 3,372      |     | $          | 3,104 |   | $ | 1,900 |   |
| Provision for loan  losses                     |       | 2,456    |       | 1,626    |       | 1,001    |       | 444      |       | 1,202    |       |
| Transfer to liability on  unfunded commitments |       | —   |       | —   |       | —   |       | (74      | )          | —   |       |
| Loans charged off:                             |       |     |       |     |       |     |       |     |       |     |       |
| Commercial and  industrial                     |       | (120     | )          | (100     | )          | (74      | )          | (63      | )          | —   |       |
| Consumer                                       |       | (9       | )          | (8       | )          | (6       | )          | (54      | )          | —   |       |
| Total loans charged off                        |       | (129     | )          | (108     | )          | (80      | )          | (117     | )          | —   |       |
| Recoveries:                                    |       |     |       |     |       |     |       |     |       |     |       |
| Commercial and  industrial                     |       | 82       |       | 14       |       | 43       |       | 12       |       | 2        |       |
| Consumer                                       |       | 14       |       | 2        |       | 8        |       | 3        |       | —   |       |
| Total recoveries                               |       | 96       |       | 16       |       | 51       |       | 15       |       | 2        |       |
| Net (charge offs)  recoveries                  |       | (33      | )          | (92      | )          | (29      | )          | (102     | )          | 2        |       |
| Ending balance, December 31,              |       | $        | 8,301      |     | $          | 5,878    |       | $        | 4,344      |     | $          | 3,372 |   | $ | 3,104 |   |

 

| ** **                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Loans:                                                      |       |     |       |     |       |     |       |     |       |     |       |
| Balance at year end                                         |       | $        | 705,644    |     | $          | 489,896  |       | $        | 336,002    |     | $          | 249,106 |   | $ | 200,911 |   |
| Allowance for loan  losses to loans receivable, net of fees |       | 1.18     | %          | 1.20     | %          | 1.29     | %          | 1.35     | %          | 1.54     | %          |
| Net charge-offs to average loans receivable            |       | 0.01     | %          | 0.02     | %          | 0.01     | %          | 0.05     | %          | 0.00     | %          |
|                                                             |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

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**Allocationof the Allowance for Loan Losses**AtDecember 31, 2005, 2004, 2003, 2002 and 2001(In thousands)

| ** **                       | ** ** | **2005**       | ** ** | **2004**                  | ** ** | **2003**       | ** ** |
|----------------------------------|------------|----------------|------------|---------------------------|------------|----------------|------------|
| ** **                       | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and  industrial       |       |           | $          | 1,153                     |       |           |       | 9.83 | % |   |   | $ | 963 |   |   |   | 11.53 | % |   |   | $ | 1,046 |   |   |   | 17.21 | % |   |
| Real estate—commercial      |       |           | 3,338      |                      |       |           | 39.01      |   |   |   | 2,732 |   |   |   | 44.88 |   |   |   | 1,662 |   |   |   | 41.56 |   |   |
| Real estate—construction    |       |           | 1,432      |                      |       |           | 18.13      |   |   |   | 768 |   |   |   | 14.18 |   |   |   | 497 |   |   |   | 12.57 |   |   |
| Real estate—residential     |       |           | 1,490      |                      |       |           | 21.65      |   |   |   | 692 |   |   |   | 15.69 |   |   |   | 418 |   |   |   | 12.64 |   |   |
| Home equity lines                |       |           | 721        |                      |       |           | 10.63      |   |   |   | 612 |   |   |   | 12.32 |   |   |   | 486 |   |   |   | 12.84 |   |   |
| Consumer                         |       |           | 167        |                      |       |           | 0.75       |   |   |   | 111 |   |   |   | 1.40 |   |   |   | 235 |   |   |   | 3.18 |   |   |
| Total allowance for loan  losses |       |           | $          | 8,301                     |       |           |       | 100.00 | % |   |   | $ | 5,878 |   |   |   | 100.00 | % |   |   | $ | 4,344 |   |   |   | 100.00 | % |   |

 

| ** **                       | ** ** | **2002**       | ** ** | **2001**                  | ** ** |
|----------------------------------|------------|----------------|------------|---------------------------|------------|
| ** **                       | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and  industrial       |       |           | $          | 1,301                     |       |   |   | 23.40 | % |   |   | $ | 1,149 |   |   |   | 28.71 | % |   |
| Real estate—commercial      |       |           | 1,386      |                      |       |   | 46.63 |   |   |   | 1,270 |   |   |   | 43.37 |   |   |
| Real estate—construction    |       |           | 19         |                      |       |   | 2.32 |   |   |   | 34 |   |   |   | 3.18 |   |   |
| Real estate—residential     |       |           | 241        |                      |       |   | 12.77 |   |   |   | 98 |   |   |   | 7.20 |   |   |
| Home equity lines                |       |           | 201        |                      |       |   | 10.77 |   |   |   | 176 |   |   |   | 10.60 |   |   |
| Consumer                         |       |           | 224        |                      |       |   | 4.11 |   |   |   | 377 |   |   |   | 6.94 |   |   |
| Total allowance  for loan losses |       |           | $          | 3,372                     |       |   |   | 100.00 | % |   |   | $ | 3,104 |   |   |   | 100.00 | % |   |

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*                    Percentageof loan type to the total loan portfolio.

***Non-Interest Income***

Non-interest income includes service charges ondeposits and loans, gains on sales of loans held for sale, investment feeincome, management fee income and gains on sales of investment securitiesavailable-for-sale, and continues to be an important factor in our operatingresults. Non-interest income for the years ended December 31, 2005 and2004 was $24.7 million and $9.4 million, respectively. The increase innon-interest income for the year ended December 31, 2005, compared to thesame period of 2004, is primarily the result of increased gains on sales ofloans held for sale of $16.0 million, compared to $4.7 million the year ended December 31,2004, an increase of $11.3 million. This increase is a result of including theoperations of George Mason in our operating results for the full year of 2005compared to slightly less than six months in 2004. Also contributing to theincrease in non-interest income, and also as a direct result of the GeorgeMason acquisition, management fee income rose by $1.3 million in 2005 comparedto 2004. Management fees represent the income earned for services George Masonprovides to other mortgage companies owned by local home builders.

Service charges on deposit accounts increased $245,000to $1.3 million for the year ended December 31, 2005, compared to $1.1million for the year ended December 31, 2004. Deposit service chargesincreased primarily as a result of an increased number of transaction accountsin 2005 compared to 2004. Loan service charges increased $1.7 million to $2.7million for the year ended December 31, 2005, compared to $958,000 in2004. Loan service charges increased due to increased loan volume at the Bankand including the operations of George Mason for the full year of 2005.Investment fee income increased $760,000 to $1.4 million for the year endedDecember 31, 2005, compared to $657,000 for the year endedDecember 31, 2004. Investment fee income increased due to increases inassets under management for Cardinal Wealth Services, Inc. and theaddition of $582,000 in fee income from Wilson/Bennett since its acquisition inJune 2005.

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Non-interest income for the years ended December 31,2004 and 2003 was $9.4 million and $3.8 million, respectively, an increase of$5.6 million. The increase in non-interest income for the year ended December 31,2004, compared to the same period of 2003, is primarily the result of increasedgains on the sale of loans held for sale of $4.7 million as a result of ouracquisition of George Mason in July 2004. Also contributing to theincrease in non-interest income, and also as a direct result of the George Masonacquisition, management fee income rose by $1.7 million from 2003 to 2004. Offsettingthese increases was a $1.1 million decrease in gains on sales of investmentsecurities available-for-sale from 2003 to 2004. As noted above, managementfees represent the income earned for services George Mason provides to othermortgage companies owned by local home builders. The 2003 gains on the sale ofinvestment securities available-for-sale were recorded on sales ofmortgage-backed securities with accelerated prepayment speeds, a result of thelower interest rate environment experienced during 2003. Service charges ondeposit accounts increased and investment fees decreased slightly from 2003levels. Deposit service charges increased primarily as a result of an increasednumber of transaction accounts and investment fees decreased primarily as aresult of reduced finder’s fees earned by Cardinal Wealth Services in 2003. Loanservice charges increased by $576,000 from 2003 to 2004, primarily a result ofthe addition of George Mason’s operations for the partial year of 2004.

The following tableprovides additional detail on non-interest income for the years ended December 31,2005, 2004, and 2003.

**Non-InterestIncome**YearsEnded December 31, 2005, 2004 and 2003(In thousands)

| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Insufficient  funds fee income                                 |       | $        | 637        |     | $          | 540      |       | $ | 400 |   |
| Service charges  on deposit accounts                           |       | 167      |       | 202      |       | 231      |       |
| Other fee income  on deposit accounts                          |       | 123      |       | 101      |       | 134      |       |
| ATM transaction  fees                                          |       | 356      |       | 205      |       | 107      |       |
| Loan service  charges                                          |       | 2,701    |       | 958      |       | 382      |       |
| Investment fee  income                                         |       | 1,417    |       | 657      |       | 785      |       |
| Net gain on sales  of loans                                    |       | 15,975   |       | 4,696    |       | 282      |       |
| Management fee  income                                         |       | 3,032    |       | 1,749    |       | —   |       |
| Net realized gain  on investment securities available-for-sale |       | 33       |       | 245      |       | 1,364    |       |
| Net gain (loss)  on sales of assets                            |       | (13      | )          | (1       | )          | —   |       |
| Credit card fees                                               |       | 51       |       | 41       |       | 46       |       |
| Other income                                                   |       | 190      |       | 16       |       | 98       |       |
| Total  non-interest income                                     |       | $        | 24,669     |     | $          | 9,409    |       | $ | 3,829 |   |

 

***Non-Interest Expense***

Non-interest expense includes, among other things,salaries and benefits, occupancy costs, professional fees, depreciation, dataprocessing, telecommunications and miscellaneous expenses. Non-interest expensewas $44.7 million and $27.2 million for the years ended December 31, 2005and 2004, respectively, an increase in 2005 of $17.5 million, or 64.4%. Theincrease in non-interest expense for the year ended December 31, 2005,compared to 2004, was primarily the result of a full year of operations ofGeorge Mason and the branch expansion that has occurred over the past two years.Expenses related to the branch expansion are represented in the increases inour salaries and benefits expense, occupancy expense and depreciation. Professionalfees, marketing and advertising, and telecommunications have also increased tosupport our branch openings and strong asset growth over the past year. Weexpect non-

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interest expense tocontinue to increase going forward as we continue our branch expansion in 2006.The acquisition of Wilson/Bennett in June 2005 has also resulted inincreased non-interest expense.

Non-interest expense was $27.2 million and $15.4million for the years ended December 31, 2004 and 2003, respectively, anincrease of $11.8 million, or 76.8%. The increase in non-interest expense forthe year ended December 31, 2004, compared to 2003, is primarily theresult of our George Mason acquisition and the branch expansion that occurredduring 2004.

The following tablereflects the components of non-interest expense for the years ended December 31,2005, 2004 and 2003.

**Non-InterestExpense**YearsEnded December 31, 2005, 2004 and 2003(In thousands)

| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Salary and  benefits         |       | $        | 22,480     |     | $          | 13,354   |       | $ | 6,797 |   |
| Occupancy                    |       | 4,293    |       | 2,897    |       | 1,559    |       |
| Professional fees            |       | 2,212    |       | 1,610    |       | 1,113    |       |
| Depreciation                 |       | 2,822    |       | 1,838    |       | 1,030    |       |
| Amortization of  intangibles |       | 409      |       | 49       |       | —   |       |
| Data processing              |       | 1,559    |       | 969      |       | 835      |       |
| Stationary and  supplies     |       | 1,551    |       | 965      |       | 387      |       |
| Advertising and  marketing   |       | 1,993    |       | 1,613    |       | 913      |       |
| Telecommunications           |       | 1,189    |       | 611      |       | 396      |       |
| Other taxes                  |       | 1,422    |       | 548      |       | 390      |       |
| Travel and  entertainment    |       | 763      |       | 427      |       | 138      |       |
| Bank operations              |       | 860      |       | 676      |       | 635      |       |
| Premises and  equipment      |       | 1,400    |       | 800      |       | 351      |       |
| Miscellaneous                |       | 1,700    |       | 797      |       | 811      |       |
| Total non-interest  expense  |       | $        | 44,653     |     | $          | 27,154   |       | $ | 15,355 |   |

 

**Income Taxes**

We recorded a provision for income tax expense of $5.2million for the year ended December 31, 2005, an increase of $3.5 millioncompared to 2004. Our effective tax rates for the years ended December 31,2005 and 2004 were 34.3% and 33.0%, respectively. The increase in the effectivetax rate from 2004 to 2005 is primarily the result of our marginal tax rateincreasing from 34% in 2004 to 35% in 2005.

We recorded an income taxbenefit of $3.5 million in the fourth quarter of 2003 primarily attributable tothe recognition of deferred tax assets related to our net operating losscarryforwards. The benefit of our deferred tax asset was recognized based on anassessment indicating that it is more likely than not that the benefit of thesenet operating losses  and other deferredtax assets would be realized. Factors that were considered in our decision torecord our income tax benefit were 2003 profitability, future projections ofcontinued profitability and the completion of our common stock offering in December 2003.For more information, see “Critical Accounting Policies” above. In addition,Note 11 to the Notes to Consolidated Financial Statements provides additionalinformation with respect to the deferred tax accounts and the net operatingloss carryforward.

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**Statements ofCondition**

**Loans Receivable, Net**

Total loans receivable, net of deferred fees andcosts, were $705.6 million at December 31, 2005, an increase of $215.7million, or 44.0%, compared to $489.9 million at December 31, 2004. Weachieved growth in all our loan categories with the exception of our consumerloans. Consumer loans declined $1.6 million, or 22.9%, from December 31,2004 to December 31, 2005, primarily as a result of repayments ofrecreational vehicle loan participations that were purchased in 1999. Loansheld for sale, net decreased $3.8 million to $361.7 million atDecember 31, 2005 compared to $365.5 million at December 31, 2004.

Loans receivable accounted for on a non-accrual basisat December 31, 2005 and December 31, 2004 were $214,000 and$547,000, respectively. Accruing loans, which are contractually past due 90days or more as to principal or interest payments, at December 31, 2005were $33,000. There were no such loans at December 31, 2004. There were noloans at December 31, 2005 and December 31, 2004 that were “troubleddebt restructurings” as defined in SFAS No. 15, *Accounting by Debtors and Creditors for Troubled Debt Restructurings.*

Interest income on non-accrual loans, if recognized,is recorded using the cash basis method of accounting. When a loan is placed onnon-accrual, unpaid interest is reversed against interest income if it wasaccrued in the current year and is charged to the allowance for loan losses ifit was accrued in prior years. While on non-accrual, the collection of interestis recorded as interest income only after all past-due principal has beencollected. When all past contractual obligations are collected and, in ouropinion, the borrower has demonstrated the ability to remain current, the loanis returned to an accruing status.  Gross interest income that would have been recorded if the non-accrualloans had been current with their original terms and had been outstandingthroughout the period or since origination if held for part of the period forthe years ended December 31, 2005 and 2004 were $18,000 and $25,000,respectively. The interest income realized prior to the loans being placed onnon-accrual status for the year ended December 31, 2004 was $21,000. Nointerest income was realized prior to loans being placed on non-accrual statusfor the year ended December 31, 2005.

Total loans receivable, net of deferred fees andcosts, increased $153.9 million to $489.9 million at December 31, 2004, ascompared to December 31, 2003. The strongest growth was in commercial realestate loans, residential real estate loans, real estate construction loans andhome equity loans.

Loans receivable accounted for on a non-accrual basisat December 31, 2003 was $390,000. Accruing loans, which are contractuallypast due 90 days or more as to principal or interest payments at December 31,2003 was $4,000. There were no loans at December 31, 2003 that were “troubleddebt restructurings” as defined in SFAS No. 15. Gross interest income thatwould have been recorded if the non-accrual loans had been current with theiroriginal terms and had been outstanding throughout the period, or sinceorigination if held for part of the period for 2003 was $39,000.

The ratio of non-performing loans to total loans was0.03%, 0.11% and 0.12% at December 31, 2005, 2004 and 2003, respectively.

The following tablespresent the composition of our loans receivable portfolio at the end of each ofthe five years ended December 31, 2005 and additional information onnon-performing loans receivable.

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**LoansReceivable**AtDecember 31, 2005, 2004, 2003, 2002 and 2001(In thousands)

| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Commercial and  industrial       |       | $        | 69,392     |     | 9.83       | %        | $          | 56,512 |   | 11.53 | % | $ | 57,854 |   | 17.21 | % |
| Real  estate—commercial     |       | 275,381  |       | 39.01    |       | 220,012  |       | 44.88 |   | 139,725 |   | 41.56 |   |
| Real  estate—construction   |       | 128,009  |       | 18.13    |       | 69,535   |       | 14.18 |   | 42,243 |   | 12.57 |   |
| Real  estate—residential    |       | 152,818  |       | 21.65    |       | 76,932   |       | 15.69 |   | 42,495 |   | 12.64 |   |
| Home equity lines                |       | 75,048   |       | 10.63    |       | 60,408   |       | 12.32 |   | 43,176 |   | 12.84 |   |
| Consumer                         |       | 5,255    |       | 0.75     |       | 6,816    |       | 1.40 |   | 10,690 |   | 3.18 |   |
| Gross loans                      |       | 705,903  |       | 100.00   | %          | 490,215  |       | 100.00 | % | 336,183 |   | 100.00 | % |
| Net deferred  (fees) costs       |       | (259     | )          |     |       | (319     | )          |   |   | (181 | ) |   |   |
| Less: allowance  for loan losses |       | (8,301   | )          |     |       | (5,878   | )          |   |   | (4,344 | ) |   |   |
| Loans receivable, net            |       | $        | 697,343    |     |       |     | $          | 484,018 |   |   |   | $ | 331,658 |   |   |   |

 

| ** **                       | ** ** | **2002** | ** ** | **2001** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Commercial and  industrial       |       | $        | 58,292     |     | 23.40      | % | $ | 57,665 |   | 28.71 | % |
| Real  estate—commercial     |       | 116,135  |       | 46.63    |       | 87,116 |   | 43.37 |   |
| Real  estate—construction   |       | 5,781    |       | 2.32     |       | 6,397 |   | 3.18 |   |
| Real  estate—residential    |       | 31,808   |       | 12.77    |       | 14,469 |   | 7.20 |   |
| Home equity lines                |       | 26,831   |       | 10.77    |       | 21,299 |   | 10.60 |   |
| Consumer                         |       | 10,235   |       | 4.11     |       | 13,941 |   | 6.94 |   |
| Gross loans                      |       | 249,082  |       | 100.00   | %          | 200,887 |   | 100.00 | % |
| Net deferred  (fees) costs       |       | 24       |       |     |       | 24 |   |   |   |
| Less: allowance  for loan losses |       | (3,372   | )          |     |       | (3,104 | ) |   |   |
| Loans receivable, net            |       | $        | 245,734    |     |       |   | $ | 197,807 |   |   |   |

 

**NonperformingLoans Receivable**AtDecember 31, 2005, 2004, 2003, 2002 and 2001(In thousands)

| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Non-accruing  loans                                 |       | $        | 214        |     | $          | 547      |       | $        | 390        |     | $          | 917 |   | $ | 361 |   |
| Loans contractually  past-due 90 days or more  |       | 33       |       | —   |       | 4        |       | 59       |       | 566      |       |
| Troubled debt  restructurings                       |       | —   |       | —   |       | —   |       | —   |       | —   |       |
| Total nonperforming  loans receivable               |       | $        | 247        |     | $          | 547      |       | $        | 394        |     | $          | 976 |   | $ | 927 |   |

 

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Thefollowing table presents information on loan maturities and interest ratesensitivity.

**LoanMaturities and Interest Rate Sensitivity**AtDecember 31, 2005(In thousands)

| ** **                    | ** ** | ** **        | ** ** | **Between**         | ** ** | ** **          | ** ** | ** ** | ** ** |
|-------------------------------|------------|-------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                    | ** ** | **One Year** | ** ** | **One and**    | ** ** | **After**           | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **or Less**  | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| Commercial and  industrial    |       | $                 | 50,480     |                | $          | 15,582              |       |       | $          | 3,330 |   |   | $ | 69,392 |   |
| Real estate—commercial   |       | 75,306            |       | 158,498             |       |                | 41,577     |       |       | 275,381 |   |
| Real estate—construction |       | 124,311           |       | 3,698               |       |                | —     |       |       | 128,009 |   |
| Real estate—residential  |       | 27,716            |       | 113,927             |       |                | 11,175     |       |       | 152,818 |   |
| Home equity lines             |       | 75,048            |       | —              |       |                | —     |       |       | 75,048 |   |
| Consumer                      |       | 2,545             |       | 1,417               |       |                | 1,293      |       |       | 5,255 |   |
| **Total  loans receivable**   |       | $                 | 355,406    |                | $          | 293,122             |       |       | $          | 57,375 |   |   | $ | 705,903 |   |
| Fixed-rate loans              |       |              |       | $                   | 49,286     |                |       | $          | 48,335     |   |   | $ | 97,621 |   |
| Floating-rate  loans          |       |              |       | 243,836             |       |                | 9,040      |       |       | 252,876 |   |
| **Total loans receivable**    |       |              |       | $                   | 293,122    |                |       | $          | 57,375     |   |   | $ | 350,497 |   |

 

**InvestmentSecurities**

Ourinvestment securities portfolio is used as a source of income and liquidity. Investmentsecurities were $294.2 million at December 31, 2005, an increase of $4.7million or 1.6%, from $289.5 million in investment securities at December 31,2004.

Ofthe $294.2 million in the investment portfolio at December 31, 2005,$115.3 million were classified as held-to-maturity, and $179.0 million wereclassified as available-for-sale. At December 31, 2005, the yield on theavailable-for-sale investment portfolio was 4.38% and the yield on theheld-to-maturity portfolio was 4.19%.

Investment securities increased to $289.5 million atDecember 31, 2004, from $273.6 million at December 31, 2003. AtDecember 31, 2004, $138.0 million were classified as held-to-maturity, and$151.6 million were classified as available-for-sale. The yield on theavailable-for-sale investment portfolio was 3.94%, and the yield on theheld-to-maturity portfolio was 4.03% at December 31, 2004.

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The following tablereflects the composition of the investment portfolio at December 31, 2005,2004, and 2003.

**InvestmentSecurities**AtDecember 31, 2005, 2004 and 2003(In thousands)

**Available-for-sale at December 31, 2005**

| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies             |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | $             | 43,784     |      | $          | 43,264      |       |   | 4.79 | % |   |
| Five to ten years                               |       | 15,175        |       | 15,147    |       |        | 5.42       |   |   |
| Total U.S. government-sponsored agencies        |       | 58,959        |       | 58,411    |       |        | 4.88       |   |   |
| Mortgage-backed  securities*                    |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | 5,441         |       | 5,269     |       |        | 4.02       |   |   |
| Five to ten years                               |       | 8,980         |       | 8,678     |       |        | 3.88       |   |   |
| After ten years                                 |       | 108,309       |       | 104,613   |       |        | 4.21       |   |   |
| Total mortgage-backed securities                |       | 122,730       |       | 118,560   |       |        | 4.17       |   |   |
| U.S. treasury  securities                       |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | 2,015         |       | 1,984     |       |        | 2.63       |   |   |
| Total U.S. treasury securities                  |       | 2,015         |       | 1,984     |       |        | 2.63       |   |   |
| Total investment  securities available-for-sale |       | $             | 183,704    |      | $          | 178,955     |       |   | 4.38 | % |   |

 

**Held-to-maturity at December 31, 2005**

| ** **                                   | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                   | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies          |       |          |       |      |       |        |       |   |   |
| One to five years                            |       | $             | 9,500      |      | $          | 9,172       |       |   | 3.52 | % |   |
| Five to ten years                            |       | 13,020        |       | 12,698    |       |        | 4.37       |   |   |
| After ten years                              |       | 3,000         |       | 2,936     |       |        | 4.22       |   |   |
| Total U.S. government-sponsored agencies     |       | 25,520        |       | 24,806    |       |        | 4.03       |   |   |
| Mortgage-backed  securities*                 |       |          |       |      |       |        |       |   |   |
| Five to ten years                            |       | 7,662         |       | 7,470     |       |        | 4.21       |   |   |
| After ten years                              |       | 74,082        |       | 71,937    |       |        | 4.24       |   |   |
| Total mortgage-backed securities             |       | 81,744        |       | 79,407    |       |        | 4.23       |   |   |
| Corporate bonds                              |       |          |       |      |       |        |       |   |   |
| After ten years                              |       | 8,005         |       | 7,812     |       |        | 4.21       |   |   |
| Total corporate bonds                        |       | 8,005         |       | 7,812     |       |        | 4.21       |   |   |
| Total investment securities held-to-maturity |       | 115,269       |       | 112,025   |       |        | 4.19       |   |   |
| Total investment securities                  |       | $             | 298,973    |      | $          | 290,980     |       |   | 4.31 | % |   |

 

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**Available-for-sale at December 31, 2004**

| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies             |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | $             | 3,000      |      | $          | 2,947       |       |   | 3.33 | % |   |
| Five to ten years                               |       | 3,000         |       | 3,009     |       |        | 4.46       |   |   |
| Total U.S. government-sponsored agencies        |       | 6,000         |       | 5,956     |       |        | 3.89       |   |   |
| Mortgage-backed securities*                     |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | 2,161         |       | 2,131     |       |        | 3.59       |   |   |
| Five to ten years                               |       | 14,662        |       | 14,603    |       |        | 3.96       |   |   |
| After ten years                                 |       | 128,477       |       | 126,846   |       |        | 3.97       |   |   |
| Total mortgage-backed securities                |       | 145,300       |       | 143,580   |       |        | 3.96       |   |   |
| U.S. treasury securities                        |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | 2,031         |       | 2,018     |       |        | 2.63       |   |   |
| Total U.S. treasury securities                  |       | 2,031         |       | 2,018     |       |        | 2.63       |   |   |
| Total investment  securities available-for-sale |       | $             | 153,331    |      | $          | 151,554     |       |   | 3.94 | % |   |

 

**Held-to-maturity at December 31, 2004**

| ** **                                   | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                   | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies          |       |          |       |      |       |        |       |   |   |
| One to five years                            |       | $             | 6,500      |      | $          | 6,427       |       |   | 3.36 | % |   |
| Five to ten years                            |       | 16,018        |       | 15,901    |       |        | 4.28       |   |   |
| After ten years                              |       | 2,999         |       | 2,962     |       |        | 4.22       |   |   |
| Total U.S. government-sponsored agencies     |       | 25,517        |       | 25,290    |       |        | 4.03       |   |   |
| Mortgage-backed securities*                  |       |          |       |      |       |        |       |   |   |
| Five to ten years                            |       | 10,392        |       | 10,406    |       |        | 3.83       |   |   |
| After ten years                              |       | 94,039        |       | 92,990    |       |        | 4.04       |   |   |
| Total mortgage-backed securities             |       | 104,431       |       | 103,396   |       |        | 4.02       |   |   |
| Corporate bonds                              |       |          |       |      |       |        |       |   |   |
| After ten years                              |       | 8,005         |       | 7,923     |       |        | 4.21       |   |   |
| Total corporate bonds                        |       | 8,005         |       | 7,923     |       |        | 4.21       |   |   |
| Total investment securities held-to-maturity |       | 137,953       |       | 136,609   |       |        | 4.03       |   |   |
| Total investment  securities                 |       | $             | 291,284    |      | $          | 288,163     |       |   | 3.98 | % |   |

 

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**Available-for-sale at December 31, 2003**

| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies             |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | $             | 3,000      |      | $          | 3,016       |       |   | 3.92 | % |   |
| Five to ten years                               |       | 2,000         |       | 1,986     |       |        | 4.23       |   |   |
| After ten years                                 |       | 1,000         |       | 1,027     |       |        | 5.79       |   |   |
| Total U.S. government-sponsored agencies        |       | 6,000         |       | 6,029     |       |        | 4.33       |   |   |
| Mortgage-backed  securities*                    |       |          |       |      |       |        |       |   |   |
| Five to ten years                               |       | 15,615        |       | 15,630    |       |        | 3.92       |   |   |
| After ten years                                 |       | 97,865        |       | 97,041    |       |        | 4.02       |   |   |
| Total mortgage-backed securities                |       | 113,480       |       | 112,671   |       |        | 4.00       |   |   |
| Corporate bonds                                 |       |          |       |      |       |        |       |   |   |
| After ten years                                 |       | 10,000        |       | 9,995     |       |        | 2.41       |   |   |
| Total corporate bonds                           |       | 10,000        |       | 9,995     |       |        | 2.41       |   |   |
| U.S. Treasury  securities                       |       |          |       |      |       |        |       |   |   |
| One to five years                               |       | 2,047         |       | 2,067     |       |        | 2.64       |   |   |
| Total U.S. treasury securities                  |       | 2,047         |       | 2,067     |       |        | 2.64       |   |   |
| Total investment  securities available-for-sale |       | $             | 131,527    |      | $          | 130,762     |       |   | 3.87 | % |   |

 

**Held-to-maturity at December 31, 2003**

| ** **                                   | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                   | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies          |       |          |       |      |       |        |       |   |   |
| One to five years                            |       | $             | 4,000      |      | $          | 3,951       |       |   | 3.39 | % |   |
| Five to ten years                            |       | 9,993         |       | 9,884     |       |        | 4.65       |   |   |
| After ten years                              |       | 2,999         |       | 2,950     |       |        | 4.20       |   |   |
| Total U.S. government-sponsored agencies     |       | 16,992        |       | 16,785    |       |        | 4.27       |   |   |
| Mortgage-backed securities*                  |       |          |       |      |       |        |       |   |   |
| Five to ten years                            |       | 9,476         |       | 9,450     |       |        | 3.70       |   |   |
| After ten years                              |       | 108,384       |       | 107,547   |       |        | 4.01       |   |   |
| Total mortgage-backed securities             |       | 117,860       |       | 116,997   |       |        | 3.98       |   |   |
| Corporate bonds                              |       |          |       |      |       |        |       |   |   |
| After ten years                              |       | 8,000         |       | 7,848     |       |        | 4.21       |   |   |
| Total corporate bonds                        |       | 8,000         |       | 7,848     |       |        | 4.21       |   |   |
| Total investment securities held-to-maturity |       | 142,852       |       | 141,630   |       |        | 4.03       |   |   |
| Total investment  securities                 |       | $             | 274,379    |      | $          | 272,392     |       |   | 3.96 | % |   |

----

*                    Basedon contractual maturities.

**Deposits and Other Borrowed Funds**

Total deposits were $1.07 billion at December 31,2005, an increase of $245.7 million, or 29.8%, from $824.2 million at December 31,2004. This growth is primarily attributable to the opening of three branchoffices during 2005 and our promotional efforts.  At December 31, 2005, we had $9.8 millionof brokered certificates of deposit, compared to $86.7 million at December 31,2004. Our utilization of the brokered certificates of deposit market averaged$13.4 million in 2005 compared to $52.3 million in 2004.

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Otherborrowed funds, which primarily include repurchase agreements, FHLB advancesand our payable to Cardinal Statutory Trust I, were $155.4 million at December 31,2005, a decrease of $45.7 million, from $201.1 million at December 31,2004.

The primary reasonfor the decrease in other borrowed funds at December 31, 2005 was payoffsof advances from the Federal Home Loan Bank of Atlanta. Advances from theFederal Home Loan Bank of Atlanta were $88.5 million at December 31, 2005,compared to $137.0 million at December 31, 2004.  Advances taken during 2004 were utilizedprimarily to leverage some of our larger commercial real estate fundings and toassist in financing the George Mason inventory of loans held for sale. During2005, we replaced funding from FHLB advances with customer deposits.

Otherborrowed funds at each of December 31, 2005 and 2004, included $20.6million payable to Cardinal Statutory Trust I, the issuer of our trustpreferred securities. This debt had an interest rate of 6.89% and 4.89% at December 31,2005 and 2004, respectively. In accordance with FIN 46, *Consolidationof Variable Interest Entities,*Cardinal Statutory Trust I is anunconsolidated entity as we are not the primary beneficiary of the trust.

At December 31,2005, other borrowed funds also included $41.2 million in customer repurchaseagreements and $5.2 million borrowed under the Federal Reserve Treasury, Tax &Loan note option.

The following table reflects the short-term borrowingsand other borrowed funds outstanding at December 31, 2005.

**Short-Term Borrowings and Other Borrowed Funds**AtDecember 31, 2005(In thousands)

**Short-term FHLB advances:**

| ** **                                                    | **Advance Date** | ** ** | ** ** | **Term of Advance** | ** ** | **Date Due** | ** ** | **Interest Rate** | ** ** | **Amount  Outstanding** | ** ** |   |
|---------------------------------------------------------------|-----------------------|------------|------------|-------------------------------|------------|-------------------|------------|------------------------|------------|-------------------------|------------|--------|
| Mar-03                                                        |                  |       | 3 years    |                          |       |              | Mar-06     |                   |       |                    | 2.33       | %      |   |   | $ |     1,000 |   |   |
| Apr-04                                                        |                  |       | 2 years    |                          |       |              | May-06     |                   |       |                    | 2.58       |   |   |   | 2,000 |   |   |
| Jul-03                                                        |                  |       | 3 years    |                          |       |              | Jul-06     |                   |       |                    | 2.07       |   |   |   | 6,250 |   |   |
| **Total  short-term FHLB advances and weighted average rate** |                  | **2.21**   | %          |                          |       | **$**             | **9,250**  |                   |       |

 

| **Other  short-term borrowed funds:**                                | ** ** |     |   |   |   |        |
|----------------------------------------------------------------------|------------|----------|--------|--------|--------|-------------|
| TT&L Note  option                                                |       | 2.98     | %      |   | $      | 5,174       |   |
| Customer  repurchase agreements                                      |       | 1.24     |   |   | 41,170 |        |
| **Total  other short-term borrowed funds and weighted average rate** |       | **1.43** | %      |   | **$**  | **46,344**  |   |
| **Other  borrowed funds:**                                           |       |     |   |   |   |        |
| Trust preferred                                                      |       | 5.79     | %      |   | $      | 20,619      |   |
| FHLB advances—long  term                                        |       | 3.40     |   |   | 79,208 |        |
| **Other  borrowed funds and weighted average rate**                  |       | **3.89** | %      |   | **$**  | **99,827**  |   |
| **Total other borrowed funds and  weighted average rate**            |       | **3.06** | %      |   | **$**  | **155,421** |   |

 

Totaldeposits at December 31, 2004 were $824.2 million compared to $474.1million at December 31, 2003, an increase of $350.1 million, or 73.8%. Thisgrowth is primarily attributable to the opening of seven branch offices during2004. In addition, to assist in the funding of George Mason’s loans held for sale,we began using the brokered certificates of deposit market during 2004. At December 31,2004, we had $86.7 million of brokered certificates of deposit at an averagerate of 2.16%. Our utilization of the brokered certificates of deposit marketaveraged $52.3 million in 2004. Other borrowed funds increased $126.6 millionto $201.1 million at December 31, 2004, from $74.5 million at December 31,2003. This increase was a result of the additional funding sources required forGeorge Mason’s operations.

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The following tablereflects the maturities of the certificates of deposit of $100,000 or more asof December 31, 2005, 2004 and 2003.

**Certificatesof Deposit of $100,000 or More**AtDecember 31, 2005, 2004 and 2003(In thousands)

| ** **                             | ** ** | **2005**            | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
| **Maturities:**                        |       |                |       |   |   |   |   |
| Three months or  less                  |       | $                   | 15,025     |   | $ | 3,530 |   | $ | 18,555 |   |
| Over three months  through six months  |       | 21,637              |       | 34,937 |   | 56,574 |   |
| Over six months  through twelve months |       | 56,231              |       | 59,536 |   | 115,767 |   |
| Over twelve  months                    |       | 58,390              |       | 34,341 |   | 92,731 |   |
|                                   |       | $                   | 151,283    |   | $ | 132,344 |   | $ | 283,627 |   |

 

| ** **                             | ** ** | **2004**            | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
| **Maturities:**                        |       |                |       |   |   |   |   |
| Three months or  less                  |       | $                   | 3,821      |   | $ | 3,462 |   | $ | 7,283 |   |
| Over three months  through six months  |       | 7,801               |       | 572 |   | 8,373 |   |
| Over six months  through twelve months |       | 6,979               |       | 27,171 |   | 34,150 |   |
| Over twelve  months                    |       | 40,847              |       | 134,649 |   | 175,496 |   |
|                                   |       | $                   | 59,448     |   | $ | 165,854 |   | $ | 225,302 |   |

 

| ** **                             | ** ** | **2003**            | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
| **Maturities:**                        |       |                |       |   |   |   |   |
| Three months or  less                  |       | $                   | 3,092      |   | $ | 16,375 |   | $ | 19,467 |   |
| Over three months  through six months  |       | 4,374               |       | 7,089 |   | 11,463 |   |
| Over six months  through twelve months |       | 9,415               |       | 28,692 |   | 38,107 |   |
| Over twelve  months                    |       | 22,185              |       | 12,378 |   | 34,563 |   |
|                                   |       | $                   | 39,066     |   | $ | 64,534 |   | $ | 103,600 |   |

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*                    No-Penaltycertificates of deposit can be redeemed at anytime at the request of thedepositor.

**Business SegmentOperations**

In 2003, we operated and reported in two businesssegments, commercial banking and investment services. As of July 7, 2004,we began operating in a third business segment, mortgage banking, with the completionof its acquisition of George Mason.

The commercial banking segment includes bothcommercial and consumer lending and provides customers such products ascommercial loans, real estate loans, and other business financing and consumerloans. In addition, this segment also provides customers with various depositproducts including demand deposit accounts, savings accounts and certificatesof deposit. The mortgage banking segment engages primarily in the originationand acquisition of residential mortgages for sale into the secondary market ona best efforts basis. The investment services segment provides advisoryservices to businesses and individuals, including financial planning andretirement/estate planning. Wilson/Bennett is included in the investmentservices segment since the date of its acquisition on June 9, 2005.

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Information about thereportable segments, and reconciliation of this information to the consolidatedfinancial statements at December 31, 2005, 2004 and 2003 follows.

**Segment Reporting**December 31,2005, 2004 and 2003(In thousands)

**Atand for the Year Ended December 31, 2005:**

| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 32,171     |         | $          | 6,203          |       |             | $          | —     |       |             |       | $ | — |   |   | $ | (891 | ) |   | $ | 37,483 |   |   |
| Provision for  loan losses  |       | 2,456          |       | —       |       |           | —     |             |       |       | —     |             |       | — |   |   | 2,456 |   |   |
| Non-interest  income        |       | 1,964          |       | 21,255       |       |           | 1,367      |             |       |       | —     |             |       | 83 |   |   | 24,669 |   |   |
| Non-interest  expense       |       | 23,802         |       | 17,332       |       |           | 1,422      |             |       |       | —     |             |       | 2,097 |   |   | 44,653 |   |   |
| Provision for  income taxes |       | 2,764          |       | 3,413        |       |           | (56        | )                |       |       | —     |             |       | (954 | ) |   | 5,167 |   |   |
| Net income (loss)           |       | $              | 5,113      |         | $          | 6,713          |       |             | $          | 1          |       |             |       | $ | — |   |   | $ | (1,951 | ) |   | $ | 9,876 |   |   |
| Total Assets                |       | $              | 1,387,504  |         | $          | 376,618        |       |             | $          | 6,882      |       |             |       | $ | (479,573 | ) |   | $ | 160,856 |   |   | $ | 1,452,287 |   |   |

 

**Atand for the Year Ended December 31, 2004:**

| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 21,753     |         | $          | 3,057          |       |             | $          | —     |       |             |       | $ | — |   |   | $ | (257 | ) |   | $ | 24,553 |   |   |
| Provision for  loan losses  |       | 1,626          |       | —       |       |           | —     |             |       |       | —     |             |       | — |   |   | 1,626 |   |   |
| Non-interest  income        |       | 1,804          |       | 6,953        |       |           | 645        |             |       |       | —     |             |       | 7 |   |   | 9,409 |   |   |
| Non-interest  expense       |       | 17,065         |       | 7,889        |       |           | 800        |             |       |       | —     |             |       | 1,400 |   |   | 27,154 |   |   |
| Provision for  income taxes |       | 1,628          |       | 698          |       |           | (52        | )                |       |       | —     |             |       | (561 | ) |   | 1,713 |   |   |
| Net income (loss)           |       | $              | 3,238      |         | $          | 1,423          |       |             | $          | (103       | )          |             |       | $ | — |   |   | $ | (1,089 | ) |   | $ | 3,469 |   |   |
| Total Assets                |       | $              | 1,123,868  |         | $          | 392,241        |       |             | $          | 685        |       |             |       | $ | (421,203 | ) |   | $ | 115,985 |   |   | $ | 1,211,576 |   |   |

 

**Atand for the Year Ended December 31, 2003:**

| ** **                  | ** ** | **Commercial** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       |           | $          | 15,077         |       |             |       | $          | —     |             |       |   | $ |   — |   |   | $ |   96 |   |   | $ |     15,173 |   |   |
| Provision for  loan losses  |       |           | 1,001      |           |       |             | —     |       |       |             | —     |   |   | — |   |   | 1,001 |   |   |
| Non-interest  income        |       |           | 2,954      |           |       |             | 843        |       |       |             | —     |   |   | 32 |   |   | 3,829 |   |   |
| Non-interest  expense       |       |           | 13,265     |           |       |             | 820        |       |       |             | —     |   |   | 1,270 |   |   | 15,355 |   |   |
| Provision for  income taxes |       |           | (464       | )              |       |             | (443       | )          |       |             | —     |   |   | (2,601 | ) |   | (3,508 | ) |   |
| Net income                  |       |           | $          | 4,229          |       |             |       | $          | 466        |             |       |   | $ |   — |   |   | $ |   1,459 |   |   | $ |     6,154 |   |   |
| Total Assets                |       |           | $          | 630,415        |       |             |       | $          | 776        |             |       |   | $ |   (80,903 | ) |   | $ |   85,960 |   |   | $ |    636,248 |   |   |

 

**Capital Resources**

Capital adequacy is an important measure of financialstability and performance. Our objectives are to maintain a level ofcapitalization that is sufficient to sustain asset growth and promote depositorand investor confidence.

Regulatory agencies measure capital adequacy utilizinga formula that takes into account the individual risk profile of a financialinstitution. The guidelines define capital as both Tier 1 (which includes commonshareholders’ equity, defined to include certain debt obligations) and Tier 2(to include certain other debt obligations and a portion of the allowance forloan losses and 45% of unrealized gains in equity securities).

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Shareholders’ equity at December 31, 2005 was$147.9 million, an increase of $52.8 million, compared to $95.1 millionat December 31, 2004. The increase in shareholders’ equity was primarilyattributable to $39.8 million of additional equity raised during our 2005common stock offering and net income of $9.9 million. Total shareholders’equity to total assets at December 31, 2005 and 2004 were 10.2% and 7.9%,respectively. Book value per share at December 31, 2005 and 2004 was $6.07and $5.15, respectively. Total risk-based capital to risk-weighted assets was15.65% at December 31, 2005 compared to 13.40% at December 31, 2004. Accordingly,we were considered “well capitalized” for regulatory purposes at December 31,2005, as we were at December 31, 2004.

At December 31, 2004, shareholders’ equity was$95.1 million compared to $85.4 million at December 31, 2003, an increaseof $9.7 million. The increase in shareholders’ equity was primarilyattributable to $6.3 million of additional equity raised as a result of theunderwriters exercising in January 2004 their over allotment option inconnection with our 2003 stock offering and net income of $3.5 million. Totalshareholders’ equity to total assets at December 31, 2004 and 2003 were7.9% and 13.4%, respectively. Book value per share at December 31, 2004and 2003 was $5.15 and $4.80, respectively. Total risk-based capital torisk-weighted assets was 13.40% at December 31, 2004 compared to 20.66% atDecember 31, 2003.

As noted above, regulatory capital levels for the bankand bank holding company meet those established for well-capitalizedinstitutions. While we are currently considered well-capitalized, we may fromtime-to-time find it necessary to access the capital markets to meet our growthobjectives or capitalize on specific business opportunities.

The following table showsthe minimum capital requirement and our capital position at December 31,2005, 2004, and 2003.

**CapitalComponents**AtDecember 31, 2005, 2004 and 2003(In thousands)

 

| ** **                                                           | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **To Be Well  Capitalized Under  Prompt Corrective** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                           | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                                                                | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **At December 31, 2005**                                        |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |   |   |
| Total risk-based capital/ Total capital to risk-weighted assets |       | $          | 159,155    |                       | 15.65      | %                          | $          | 81,334                                                                   | 3     |   | 8.00 | % |   | $ | 101,668 | 3 | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets              |       | 150,742    |       | 14.83                      |       | 40,667                     | 3     |                                                                     | 4.00       |   |   | 61,001 | 3 | 6.00 |   |
| Tier I capital/ Total capital to average assets                      |       | 150,742    |       | 10.71                      |       | 56,308                     | 3     |                                                                     | 4.00       |   |   | 70,386 | 3 | 5.00 |   |
| **At  December 31, 2004**                                       |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |   |   |
| Total risk-based capital/ Total capital to risk-weighted assets |       | $          | 107,660    |                       | 13.40      | %                          | $          | 64,294                                                                   | 3     |   | 8.00 | % |   | $ | 80,368 | 3 | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets              |       | 101,670    |       | 12.65                      |       | 32,147                     | 3     |                                                                     | 4.00       |   |   | 48,221 | 3 | 6.00 |   |
| Tier I capital/ Total capital to average assets                      |       | 101,670    |       | 8.83                       |       | 46,075                     | 3     |                                                                     | 4.00       |   |   | 57,594 | 3 | 5.00 |   |
| **At  December 31, 2003**                                       |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |   |   |
| Total risk-based capital/ Total capital to risk-weighted assets |       | $          | 90,239     |                       | 20.66      | %                          | $          | 34,951                                                                   | 3     |   | 8.00 | % |   | $ | 43,688 | 3 | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets              |       | 85,896     |       | 19.66                      |       | 17,475                     | 3     |                                                                     | 4.00       |   |   | 26,213 | 3 | 6.00 |   |
| Tier I capital/  Total capital to average assets                     |       | 85,896     |       | 15.45                      |       | 23,365                     | 3     |                                                                     | 4.00       |   |   | 29,206 | 3 | 5.00 |   |

 

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**Liquidity**

Liquidity in the banking industry is defined as theability to meet the demand for funds of both depositors and borrowers. We mustbe able to meet these needs by obtaining funding from depositors or otherlenders or by converting non-cash items to cash. The objective of our liquiditymanagement program is to ensure that we always have sufficient liquid resourcesto meet the demands of our depositors and borrowers. Stable core deposits and astrong capital position provide the base for our liquidity position. We believewe have demonstrated our ability to attract deposits because of our convenientbranch locations, personal service and pricing.

In addition to deposits, we have access to thedifferent wholesale funding markets. These markets include the brokered CDmarket, the repurchase agreement market and the federal funds market. Wemaintain secured lines of credit with the Federal Reserve Bank of Richmond andthe Federal Home Loan Bank of Atlanta. Having diverse funding alternativesreduces our reliance on any one source for funding.

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

We have established a formal liquidity contingencyplan which establishes a liquidity management team and provides guidelines forliquidity management. For our liquidity management program, we first determineour current liquidity position and then forecast liquidity based on anticipatedchanges in the balance sheet. In this forecast, we expect to maintain aliquidity cushion. We also stress test our liquidity position under severaldifferent stress scenarios. Guidelines for the forecasted liquidity cushion andfor liquidity cushions for each stress scenario have been established. Inaddition, one stress test combines all other stress tests to see how liquiditywould react to several negative scenarios occurring at the same time. Webelieve that we have sufficient resources to meet our liquidity needs.

George Mason and the Bank have a $150 million floatingrate revolving credit and security agreement with a third party. The purpose ofthis credit facility is to fund residential mortgage loans made by George Masonprior to their sale into the secondary market. The credit facility requires,among other things, that George Mason and the Bank have positive quarterly netincome and maintain specified minimum tangible and regulatory net worth levels.The Company has guaranteed repayment of this debt. The interest rate on thiscredit facility is LIBOR plus between 1.50% and 1.875%. At December 31,2005, none of this line was utilized.

In addition to this facility, this same lender hasalso provided a $100 million facility that is utilized by George Mason towarehouse residential mortgage loans held for sale to this lender. The terms ofthis facility are substantially the same as the above-referenced revolvingcredit and security agreement and the cost of this facility is netted againstinterest earned on the loans pending settlement with the lender. Loans underthis credit facility are considered sold when financed.

Liquid assets, whichinclude cash and due from banks, federal funds sold and investment securitiesavailable-for-sale totaled $215.5 million at December 31, 2005, or 14.8%of total assets. We held investments that are classified as held-to-maturity inthe amount of $115.3 million at December 31, 2005. To maintain readyaccess to the bank’s secured lines of credit, the bank has pledged the majorityof its securities to the Federal Home Loan Bank of Atlanta with additional securitiespledged to the Federal Reserve Bank of Richmond. Additional borrowing capacityat the Federal Home Loan Bank of Atlanta at December 31, 2005 wasapproximately $214.1 million. Borrowing capacity with the Federal Reserve Bankof Richmond was approximately $19.4 million at December 31, 2005. GeorgeMason has $650 million of lines of credit available. We anticipate maintainingliquidity at a level sufficient to protect depositors, provide for reasonablegrowth and fully comply with all regulatory requirements.

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**Contractual Obligations**

We have entered into anumber of long-term contractual obligations to support our ongoing activities. Thesecontractual obligations will be funded through operating revenues and liquiditysources held or available to us. The required payments under such obligationswere as follows:

**ContractualObligations**AtDecember 31, 2005(In thousands)

| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 – 2 Years** | ** ** | **3 – 5 Years** | ** ** | **More than  5 Years** | ** ** |
| Certificates of  deposit                             |       | $                                         | 628,810    |   | $ | 414,791 |   |   | $ | 114,019 |   |   |   | $ | 96,555 |   |   |   | $ | 3,445 |   |   |
| Brokered  certificates of deposit                    |       | 9,784                                     |       | 9,784 |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Advances from the  Federal Home Loan Bank of Atlanta |       | 88,458                                    |       | 9,250 |   |   | 22,750 |   |   |   | 36,458 |   |   |   | 20,000 |   |   |
| Trust preferred  securities                          |       | 20,619                                    |       | — |   |   | — |   |   |   | — |   |   |   | 20,619 |   |   |
| Operating lease  obligations                         |       | 12,389                                    |       | 3,904 |   |   | 3,164 |   |   |   | 4,320 |   |   |   | 1,001 |   |   |
| Total                                                |       | $                                         | 760,060    |   | $ | 437,729 |   |   | $ | 139,933 |   |   |   | $ | 137,333 |   |   |   | $ | 45,065 |   |   |

 

**FinancialInstruments with Off-Balance-Sheet Risk and Credit Risk**

We are a party to financial instruments with off-balance-sheetrisk in the normal course of business to meet the financing needs of ourcustomers. These financial instruments include commitments to extend credit andstandby letters of credit. Those instruments involve, to varying degrees,elements of credit risk in excess of the amount recognized in the balancesheet.

The Bank’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit and standby letters of credit is represented by thecontractual amount of those instruments. The Bank uses the same credit policiesin making commitments and conditional obligations as it does for on-balance-sheetinstruments.

Asummary of the contract amount of the Bank’s exposure to off-balance-sheetrisk as of December 31, 2005 and 2004, is as follows:

| ** **                                                                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                     | ** ** | **(In thousands)** | ** ** |
| Financial instruments  whose contract amounts represent potential credit risk: |       |                    |       |     |       |
| Commitments to extend credit                                                   |       | $                       | 325,571    |     | $          | 324,786 |   |
| Standby letters  of credit                                                     |       | 7,012                   |       | 5,159    |       |
|                                                                                |            |                         |            |          |            |  |  |

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements. We evaluate each customer’screditworthiness on a case-by-case basis. The amount of collateralobtained is based on management’s credit evaluation of the counterparty. Collateralheld varies but may include accounts receivable, inventory, property andequipment, and income-producing commercial properties.

Unfunded commitments under lines of credit arecommitments for possible future extensions of credit to existing customers. Thoselines of credit may not be drawn upon to the total extent to which we havecommitted.

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Standby letters of creditare conditional commitments we issued to guarantee the performance of acustomer to a third party. Those guarantees are primarily issued to supportpublic and private borrowing arrangements, including commercial paper, bondfinancing, and similar transactions. The credit risk involved in issuingletters of credit is essentially the same as that involved in extending loanfacilities to customers. We hold certificates of deposit, deposit accounts, andreal estate as collateral supporting those commitments for which collateral isdeemed necessary.

**Quarterly Data**

The following tableprovides quarterly data for the years ended December 31, 2005 and 2004. Quarterlyper share results may not calculate to the year-end per share results due torounding.

**QuarterlyData**Yearsended December 31, 2005 and 2004(In thousands, except per share data)

| ** **                                           | ** ** | **2005**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|
| ** **                                           | ** ** | **Fourth**  | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                           | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Interest income                                      |       | $           | 19,616     |   | $ | 18,341 |   | $ | 15,926 |   | $ | 13,491 |   |
| Interest expense                                     |       | 9,191       |       | 8,230 |   | 6,802 |   | 5,669 |   |
| Net interest  income                                 |       | 10,425      |       | 10,111 |   | 9,124 |   | 7,822 |   |
| Provision for  loan losses                           |       | (587        | )          | (500 | ) | (820 | ) | (549 | ) |
| Net interest  income after provision for loan losses |       | 9,838       |       | 9,611 |   | 8,304 |   | 7,273 |   |
| Non-interest  income                                 |       | 5,863       |       | 7,349 |   | 6,275 |   | 5,183 |   |
| Non-interest  expense                                |       | 11,032      |       | 12,405 |   | 11,121 |   | 10,095 |   |
| Net income before  income taxes                      |       | 4,669       |       | 4,555 |   | 3,458 |   | 2,361 |   |
| Provision for  income taxes                          |       | 1,682       |       | 1,570 |   | 1,166 |   | 749 |   |
| Net income                                           |       | $           | 2,987      |   | $ | 2,985 |   | $ | 2,292 |   | $ | 1,612 |   |
| Earnings per  share—basic                       |       | $           | 0.12       |   | $ | 0.12 |   | $ | 0.11 |   | $ | 0.09 |   |
| Earnings per share—diluted                      |       | $           | 0.12       |   | $ | 0.12 |   | $ | 0.11 |   | $ | 0.09 |   |

 

| ** **                                           | ** ** | **2004**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|
| ** **                                           | ** ** | **Fourth**  | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                           | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Interest income                                      |       | $           | 12,952     |   | $ | 12,189 |   | $ | 7,967 |   | $ | 7,414 |   |
| Interest expense                                     |       | 5,424       |       | 4,995 |   | 2,969 |   | 2,581 |   |
| Net interest  income                                 |       | 7,528       |       | 7,194 |   | 4,998 |   | 4,833 |   |
| Provision for  loan losses                           |       | (709        | )          | (529 | ) | (314 | ) | (74 | ) |
| Net interest  income after provision for loan losses |       | 6,819       |       | 6,665 |   | 4,684 |   | 4,759 |   |
| Non-interest  income                                 |       | 5,097       |       | 2,784 |   | 564 |   | 964 |   |
| Non-interest  expense                                |       | 9,321       |       | 8,893 |   | 4,298 |   | 4,642 |   |
| Net income before  income taxes                      |       | 2,595       |       | 556 |   | 950 |   | 1,081 |   |
| Provision for  income taxes                          |       | 863         |       | 172 |   | 316 |   | 362 |   |
| Net income                                           |       | $           | 1,732      |   | $ | 384 |   | $ | 634 |   | $ | 719 |   |
| Earnings per  share—basic                       |       | $           | 0.09       |   | $ | 0.02 |   | $ | 0.03 |   | $ | 0.04 |   |
| Earnings per  share—diluted                     |       | $           | 0.09       |   | $ | 0.02 |   | $ | 0.03 |   | $ | 0.04 |   |

 

In connection withits year-end financial reporting process for 2005, errors in the classificationof certain items relating to the acquisition of George Mason and its subsequentoperations in the statement of 

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cashflows for the nine months ended September 30, 2004, were identified. Theseerrors related primarily to the following:

·       Loansheld for sale by George Mason at the date of acquisition were reported as a useof cash (loans acquired) in operating activities, rather than as a noncashinvesting activity;

·       Cashpaid to acquire the membership interests in George Mason was reported as a useof cash in operating activities (increase in goodwill) rather than as a use ofcash in investing activities; and

·       Post-acquisitionrepayments of the warehouse line of credit financing of George Mason that wereassumed by the Company at the date of acquisition were not reported infinancing activities.

The consolidated statementof cash flows for the nine months ended September 30, 2004 has beenrestated to reclassify these items. The reclassifications had no effect on theCompany’s consolidated statements of condition or income for 2004. The effectsof the reclassifications are summarized as follows:

| ** **                                                                                | ** ** | **As Reported** | ** ** | **As Restated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Cash flows from  operating activities:                                                    |       |                 |       |                 |       |
| Loans held for sale originated                                                            |       | $                    | (1,247,010 | )                    | $          | (905,076 | ) |
| (Increase) decrease in accrued interest receivable,  other assets, and deferred tax asset |       | (19,351              | )          | 3,266                |       |
| Decrease in accrued interest payable, escrow  liabilities and other liabilities           |       | (13,335              | )          | (29,674              | )          |
| Net cash used in operating activities                                                     |       | (374,975             | )          | (26,763              | )          |
| Cash flows from  investing activities:                                                    |       |                 |       |                 |       |
| Purchase of premises and equipment                                                        |       | (9,425               | )          | (7,136               | )          |
| Net cash (paid) acquired in acquisition                                                   |       | 27,599               |       | (15,365              | )          |
| Net increase in loans receivable, net of deferred  fees and costs                         |       | (103,592             | )          | (103,163             | )          |
| Net cash used in investing activities                                                     |       | (124,432             | )          | (164,678             | )          |
| Cash flows from  financing activities:                                                    |       |                 |       |                 |       |
| Repayments of warehouse financing assumed in  acquisition                                 |       | —               |       | (307,966             | )          |
| Net cash provided  by financing activities                                                |       | 525,630              |       | 217,664              |       |
|                                                                                           |            |                      |            |                      |            |  |  |

 

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**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

Our Asset/Liability Committee is responsible forreviewing our liquidity requirements and maximizing our net interest incomeconsistent with capital requirements, liquidity, interest rate and economicoutlooks, competitive factors and customer needs. Interest rate risk arisesbecause the assets of the Bank and the liabilities of the Bank have differentmaturities and characteristics. In order to measure this interest rate risk, weuse a simulation process that measures the impact of changing interest rates onnet interest income. This model is run for the Bank by an independentconsulting firm that was hired by the Bank in the fourth quarter of 2004. Thesimulations incorporate assumptions related to expected activity in the balancesheet. For maturing assets, assumptions are developed for the redeployment ofthese assets. For maturing liabilities, assumptions are developed for thereplacement of these funding sources. Assumptions are also developed for assetsand liabilities that reprice during the modeled time period. These assumptionsalso cover how we expect rates to change on non-maturity deposits such as NOW,Money Market, savings accounts and no-penalty certificates of deposit. Based oninputs that include the most recent period end balance sheet, the current levelof interest rates and the developed assumptions, the model then produces anexpected level of net interest income assuming that interest rates remainunchanged. This becomes the base case. Next, the model determines the impact onnet interest income given specified changes in interest rates. The ratesimulations are performed for a two year period and include ramped rate changesof down 200 basis points and up 200 basis points. In the ramped down ratechange, the model moves rates gradually down 200 basis points over the firstyear and then rates remain flat in the second year. For the up 200 basis pointscenario, rates are gradually increased by 200 basis points in the first yearand remain flat in the second year. In both the up and down scenarios, themodel assumes a parallel shift in the yield curve. The results of thesesimulations are then compared to the base case.

At December 31, 2005, we were asset sensitive. Assetsensitive means that we had more assets maturing or repricing than liabilities.We have a significant portion of our assets as floating rate assets and we havealso taken a significant amount of term funding through fixed rate, fixed term,certificates of deposit. In a rising rate environment, net interest incomeshould grow for an asset sensitive bank. In the up 200 basis point scenario,net interest income improves by not more than 7% for one year compared to thebase case and by not more than 9% over the two year cumulative time horizon.

Being an asset sensitive bank, net interest incomedeclines compared to the base case in the down 200 basis point simulation byless than 4% for one year and by 6% over the cumulative two year period.

See also “Interest Rate Sensitivity” in Item 7 abovefor a discussion of our interest rate risk.

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**Item8.**                        FinancialStatements and Supplementary Data

|                                                                  | ** ** | Page   | ** ** |
|------------------------------------------------------------------|------------|--------|------------|
| Reports of Independent Registered Public Accounting  Firm        |       |   | 60         |   |   |
| Consolidated Statements of Condition                             |       |   | 62         |   |   |
| Consolidated Statements of Income                                |       |   | 63         |   |   |
| Consolidated Statements of Comprehensive Income                  |       |   | 64         |   |   |
| Consolidated Statements of Changes in Shareholders’  Equity |       |   | 65         |   |   |
| Consolidated Statements of Cash Flows                            |       |   | 66         |   |   |
| Notes to  Consolidated Financial Statements                      |       |   | 67         |   |   |

 

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersCardinal Financial Corporation:

**We have audited the accompanyingconsolidated statements of condition of Cardinal Financial Corporation andsubsidiaries (the Company) as of December 31, 2005 and 2004, and the relatedconsolidated statements of income, comprehensive income, changes inshareholders’ equity and cash flows for each of the years in the three-yearperiod ended December 31, 2005. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.**

**We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.**

**In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of the Company as of December 31, 2005 and2004, and the results of their operations and their cash flows for each of theyears in the three-year period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles.**

**We also have audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the effectiveness of the Company’s internal control over financialreporting as of December 31, 2005, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 6, 2006 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.**

**Asdiscussed in the George Mason Mortgage, LLC section of note 3 to theconsolidated financial statements, the Company restated the consolidatedstatement of cash flows for the year ended December 31, 2004, toreclassify certain items relating to the acquisition of George Mason Mortgage,LLC and its subsequent operations.**

/s/ KPMG LLP

McLean, VirginiaMarch 6, 2006

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and ShareholdersCardinal Financial Corporation:

**We have audited management’s assessment, included in theaccompanying *Management’s Report on Internal Control OverFinancial Reporting*, that Cardinal Financial Corporation andsubsidiaries (the Company) maintained effective internal control over financialreporting as of December 31, 2005, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.**

**We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding ofinternal control over financial reporting, evaluating management’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.**

**A company’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.**

**Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.**

**In our opinion, management’s assessment that the Companymaintained effective internal control over financial reporting as of December31, 2005, is fairly stated, in all material respects, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Also, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2005,based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).**

**We also have audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), the consolidatedstatements of condition of the Company as of December 31, 2005 and 2004, andthe related consolidated statements of income, comprehensive income, changes inshareholders’ equity and cash flows for each of the years in the three-yearperiod ended December 31, 2005, and our report dated March 6, 2006, expressedan unqualified opinion on those consolidated financial statements.**

/s/ KPMG LLP

McLean, VirginiaMarch 6, 2006

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CONDITIONDecember 31, 2005 and 2004(In thousands, except share data)

| ** **                                                                                                                                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                |       |       |       |       |       |
| Cash and due from  banks                                                                                                                                  |       | $          | 16,514     |       | $          | 15,205 |   |
| Federal funds  sold                                                                                                                                       |       | 20,075     |       | 8,203      |       |
| Total cash and cash equivalents                                                                                                                           |       | 36,589     |       | 23,408     |       |
| Investment securities available-for-sale                                                                                                                  |       | 178,955    |       | 151,554    |       |
| Investment  securities held-to-maturity (market value of $112,025 and $136,609 at December 31,  2005 and December 31, 2004, respectively)  |       | 115,269    |       | 137,953    |       |
| Total investment securities                                                                                                                               |       | 294,224    |       | 289,507    |       |
| Other investments                                                                                                                                         |       | 7,092      |       | 8,110      |       |
| Loans held for  sale, net                                                                                                                                 |       | 361,668    |       | 365,454    |       |
| Loans receivable,  net of deferred fees and costs                                                                                                         |       | 705,644    |       | 489,896    |       |
| Allowance for  loan losses                                                                                                                                |       | (8,301     | )          | (5,878     | )          |
| Loans receivable, net                                                                                                                                     |       | 697,343    |       | 484,018    |       |
| Premises and equipment, net                                                                                                                               |       | 18,201     |       | 15,531     |       |
| Deferred tax  asset                                                                                                                                       |       | 4,399      |       | 3,238      |       |
| Goodwill and  intangibles, net                                                                                                                            |       | 20,502     |       | 14,694     |       |
| Accrued interest  receivable and other assets                                                                                                             |       | 12,269     |       | 7,616      |       |
| Total assets                                                                                                                                              |       | $          | 1,452,287  |       | $          | 1,211,576 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                            |       |       |       |       |       |
| Non-interest  bearing deposits                                                                                                                            |       | $          | 114,915    |       | $          | 105,424 |   |
| Interest bearing  deposits                                                                                                                                |       | 954,957    |       | 718,786    |       |
| Other borrowed funds                                                                                                                                      |       | 155,421    |       | 201,085    |       |
| Warehouse  financing                                                                                                                                      |       | —     |       | 30,245     |       |
| Mortgage funding  checks                                                                                                                                  |       | 41,635     |       | 46,392     |       |
| Escrow  liabilities                                                                                                                                       |       | 11,013     |       | 3,020      |       |
| Accrued interest  payable and other liabilities                                                                                                           |       | 26,467     |       | 11,519     |       |
| Total liabilities                                                                                                                                         |       | 1,304,408  |       | 1,116,471  |       |
| **Common stock, $1 par value**                                                                                                                            | ** ** | **2005**   | ** ** | **2004**   | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Shares authorized                                                                                                                                         |       | 50,000,000 |       | 50,000,000 |       |   |   |   |   |   |
| Shares issued and outstanding                                                                                                                             |       | 24,362,685 |       | 18,462,597 |       | 24,363 |   | 18,463 |   |   |
| Additional  paid-in capital                                                                                                                               |       | 132,150    |       | 92,868     |       |
| Accumulated  deficit                                                                                                                                      |       | (5,269     | )          | (15,145    | )          |
| Accumulated other  comprehensive loss                                                                                                                     |       | (3,365     | )          | (1,081     | )          |
| Total shareholders’ equity                                                                                                                           |       | 147,879    |       | 95,105     |       |
| Total liabilities  and shareholders’ equity                                                                                                          |       | $          | 1,452,287  |       | $          | 1,211,576 |   |
|                                                                                                                                                           |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to consolidated financial statements.

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF INCOMEYears ended December 31, 2005, 2004 and 2003(In thousands, except per share data)

| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income:                                               |       |     |       |     |       |     |       |
| Loans receivable                                               |       | $        | 35,450     |     | $          | 21,875   |       | $ | 16,851 |   |
| Loans held for  sale                                           |       | 19,379   |       | 6,814    |       | —   |       |
| Federal funds sold                                             |       | 1,175    |       | 130      |       | 107      |       |
| Investment  securities available-for-sale                      |       | 6,195    |       | 5,830    |       | 5,026    |       |
| Investment  securities held-to-maturity                        |       | 4,914    |       | 5,622    |       | 2,483    |       |
| Other investments                                              |       | 261      |       | 251      |       | 135      |       |
| Total interest  income                                         |       | 67,374   |       | 40,522   |       | 24,602   |       |
| Interest expense:                                              |       |     |       |     |       |     |       |
| Deposits                                                       |       | 24,899   |       | 12,694   |       | 8,656    |       |
| Other borrowed  funds                                          |       | 4,883    |       | 3,047    |       | 773      |       |
| Warehouse  financing                                           |       | 109      |       | 228      |       | —   |       |
| Total interest  expense                                        |       | 29,891   |       | 15,969   |       | 9,429    |       |
| Net interest  income                                           |       | 37,483   |       | 24,553   |       | 15,173   |       |
| Provision for loan  losses                                     |       | 2,456    |       | 1,626    |       | 1,001    |       |
| Net interest  income after provision for loan losses           |       | 35,027   |       | 22,927   |       | 14,172   |       |
| Non-interest income:                                           |       |     |       |     |       |     |       |
| Service charges on  deposit accounts                           |       | 1,334    |       | 1,089    |       | 918      |       |
| Loan service charges                                           |       | 2,701    |       | 958      |       | 382      |       |
| Investment fee  income                                         |       | 1,417    |       | 657      |       | 785      |       |
| Net gain on sales  of loans                                    |       | 15,975   |       | 4,696    |       | 282      |       |
| Net realized gain  on investment securities available-for-sale |       | 33       |       | 245      |       | 1,364    |       |
| Management fee  income                                         |       | 3,032    |       | 1,749    |       | —   |       |
| Other income                                                   |       | 177      |       | 15       |       | 98       |       |
| Total non-interest  income                                     |       | 24,669   |       | 9,409    |       | 3,829    |       |
| Non-interest expense:                                          |       |     |       |     |       |     |       |
| Salary and  benefits                                           |       | 22,480   |       | 13,354   |       | 6,797    |       |
| Occupancy                                                      |       | 4,293    |       | 2,897    |       | 1,559    |       |
| Professional fees                                              |       | 2,212    |       | 1,610    |       | 1,113    |       |
| Depreciation                                                   |       | 2,822    |       | 1,838    |       | 1,030    |       |
| Data processing                                                |       | 1,559    |       | 969      |       | 835      |       |
| Telecommunications                                             |       | 1,189    |       | 611      |       | 396      |       |
| Amortization of  intangibles                                   |       | 409      |       | 49       |       | —   |       |
| Other operating  expenses                                      |       | 9,689    |       | 5,826    |       | 3,625    |       |
| Total non-interest  expense                                    |       | 44,653   |       | 27,154   |       | 15,355   |       |
| Net income before  income taxes                                |       | 15,043   |       | 5,182    |       | 2,646    |       |
| Provision  (benefit) for income taxes                          |       | 5,167    |       | 1,713    |       | (3,508   | )          |
| Net income                                                     |       | $        | 9,876      |     | $          | 3,469    |       | $ | 6,154 |   |
| Dividends to  preferred shareholders                           |       | —   |       | —   |       | 495      |       |
| Net income  available to common shareholders                   |       | $        | 9,876      |     | $          | 3,469    |       | $ | 5,659 |   |
| Earnings per  common share—basic                          |       | $        | 0.45       |     | $          | 0.19     |       | $ | 0.55 |   |
| Earnings per  common share—diluted                        |       | $        | 0.44       |     | $          | 0.19     |       | $ | 0.54 |   |
| Weighted-average  common shares outstanding—basic         |       | 22,104   |       | 18,448   |       | 10,218   |       |
| Weighted-average  common shares outstanding—diluted       |       | 22,454   |       | 18,705   |       | 11,468   |       |

 

See accompanying notes to consolidated financial statements.

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYears ended December 31, 2005, 2004 and 2003(In thousands)

| ** **                                                                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                                                                                              |       | $        | 9,876      |     | $          | 3,469    |       | $ | 6,154 |   |
| Other comprehensive  income:                                                                                                            |       |     |       |     |       |     |       |
| Unrealized loss  on available-for-sale investment securities:                                                                           |       |     |       |     |       |     |       |
| Unrealized holding loss arising during the year, net  of tax benefit of $1,023 in 2005, $344 in 2004 and tax expense of $1,057 in  2003 |       | (1,974   | )          | (412     | )          | (1,950   | )          |
| Less: reclassification adjustment for gains included  in net income, net of tax of $11 in 2005, $85 in 2004 and $464 in 2003            |       | (22      | )          | (164     | )          | (900     | )          |
|                                                                                                                                    |       | (1,996   | )          | (576     | )          | (2,850   | )          |
| Unrealized loss on derivative instruments designated  as cash flow hedges, net of tax of $149 in 2005                                   |       | (288     | )          | —   |       | —   |       |
| Comprehensive income                                                                                                                    |       | $        | 7,592      |     | $          | 2,893    |       | $ | 3,304 |   |

 

See accompanying notes to consolidated financial statements.

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITYYears ended December 31, 2005, 2004 and 2003(In thousands)

| ** **                                     | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                     | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Shares**    | ** ** | **Stock**     | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance, December 31, 2002                |       |          | 1,365      |          |       |       | $          | 1,365      |       |           |       | 10,044          |       |                   |       | $          | 10,044     |   |   |   | $ | 51,231 |   |   |   | $ | (24,273 | ) |   |   | $ | 2,345 |   |   | $ | 40,712 |   |
| Stock options exercised                        |       |          | —     |          |       |       | —     |       |       |           | 32         |            |       |                   | 32         |       |       |   | 112 |   |   |   | — |   |   |   | — |   |   | 144 |   |
| Preferred stock converted to common stock      |       |          | (1         | )             |       |       | (1         | )          |       |           | 1          |            |       |                   | 1          |       |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Public offering shares issued                  |       |          | —     |          |       |       | —     |       |       |           | 6,300      |            |       |                   | 6,300      |       |       |   | 35,447 |   |   |   | — |   |   |   | — |   |   | 41,747 |   |
| Dividends on preferred stock                   |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | (495 | ) |   |   | — |   |   | (495 | ) |
| Change in accumulated other comprehensive loss |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | (2,850 | ) |   | (2,850 | ) |
| Net income                                     |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | 6,154 |   |   |   | — |   |   | 6,154 |   |
| Balance, December 31, 2003                |       |          | 1,364      |          |       |       | 1,364      |       |       |           | 16,377     |            |       |                   | 16,377     |       |       |   | 86,790 |   |   |   | (18,614 | ) |   |   | (505 | ) |   | 85,412 |   |
| Stock options exercised                        |       |          | —     |          |       |       | —     |       |       |           | 115        |            |       |                   | 115        |       |       |   | 383 |   |   |   | — |   |   |   | — |   |   | 498 |   |
| Public offering shares issued                  |       |          | —     |          |       |       | —     |       |       |           | 945        |            |       |                   | 945        |       |       |   | 5,357 |   |   |   | — |   |   |   | — |   |   | 6,302 |   |
| Preferred stock converted to common stock      |       |          | (1,364     | )             |       |       | (1,364     | )          |       |           | 1,026      |            |       |                   | 1,026      |       |       |   | 338 |   |   |   | — |   |   |   | — |   |   | — |   |
| Change in accumulated other comprehensive loss |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | (576 | ) |   | (576 | ) |
| Net income                                     |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | 3,469 |   |   |   | — |   |   | 3,469 |   |
| Balance, December 31, 2004                |       |          | —     |          |       |       | —     |       |       |           | 18,463     |            |       |                   | 18,463     |       |       |   | 92,868 |   |   |   | (15,145 | ) |   |   | (1,081 | ) |   | 95,105 |   |
| Stock options exercised                        |       |          | —     |          |       |       | —     |       |       |           | 114        |            |       |                   | 114        |       |       |   | 683 |   |   |   | — |   |   |   | — |   |   | 797 |   |
| Public offering shares issued                  |       |          | —     |          |       |       | —     |       |       |           | 5,175      |            |       |                   | 5,175      |       |       |   | 34,592 |   |   |   | — |   |   |   | — |   |   | 39,767 |   |
| Shares issued in acquisition                   |       |          | —     |          |       |       | —     |       |       |           | 611        |            |       |                   | 611        |       |       |   | 4,251 |   |   |   | — |   |   |   | — |   |   | 4,862 |   |
| Dividends on common stock of $0.01 per share   |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | (244 | ) |   |   | — |   |   |   | — |   |   | (244 | ) |
| Change in accumulated other comprehensive loss |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | — |   |   |   | (2,284 | ) |   | (2,284 | ) |
| Net income                                     |       |          | —     |          |       |       | —     |       |       |           | —     |            |       |                   | —     |       |       |   | — |   |   |   | 9,876 |   |   |   | — |   |   | 9,876 |   |
| Balance,  December 31, 2005               |       |          | —     |          |       |       | $          | —     |       |           |       | 24,363          |       |                   |       | $          | 24,363     |   |   |   | $ | 132,150 |   |   |   | $ | (5,269 | ) |   |   | $ | (3,365 | ) |   | $ | 147,879 |   |

 

See accompanying notes to consolidated financial statements.

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF CASH FLOWSYears ended December 31, 2005, 2004 and 2003(In thousands)

| ** **                                                                                                                                                                                                                                           | ** ** | **2005**                             | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|----------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **    Restated** | ** ** |
| Cash flows from operating activities:                                                                                                                                                                                                                |       |                                 |       |       |       |     |       |
| Net income                                                                                                                                                                                                                                           |       | $                                    | 9,876      |       | $          | 3,469    |       | $ | 6,154 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities:                                                                                                                                                         |       |                                 |       |       |       |     |       |
| Depreciation                                                                                                                                                                                                                                         |       | 2,822                                |       | 1,838      |       | 1,030    |       |
| Amortization of  premiums, discounts and intangibles                                                                                                                                                                                                 |       | 1,757                                |       | 2,075      |       | 2,137    |       |
| Provision for loan  losses                                                                                                                                                                                                                           |       | 2,456                                |       | 1,626      |       | 1,001    |       |
| Loans held for  sale originated                                                                                                                                                                                                                      |       | (4,520,954                           | )          | (1,839,721 | )          | (32,697  | )          |
| Proceeds from the  sale of loans held for sale                                                                                                                                                                                                       |       | 4,540,715                            |       | 1,820,897  |       | 32,979   |       |
| Gain on sales of  loans held for sale                                                                                                                                                                                                                |       | (15,975                              | )          | (4,696     | )          | (282     | )          |
| Gain on sale of  investment securities available-for-sale                                                                                                                                                                                            |       | (33                                  | )          | (245       | )          | (1,364   | )          |
| (Gain) loss on  sale of other assets                                                                                                                                                                                                                 |       | 13                                   |       | (1         | )          | —   |       |
| (Increase)  decrease in accrued interest receivable, other assets, and deferred tax asset                                                                                                                                                            |       | (3,653                               | )          | 6,485      |       | (673     | )          |
| Increase  (decrease) in accrued interest payable, escrow liabilities and other  liabilities                                                                                                                                                          |       | 12,743                               |       | (4,050     | )          | (17,882  | )          |
| Net cash provided  by (used in) operating activities                                                                                                                                                                                                 |       | 29,767                               |       | (12,323    | )          | (9,597   | )          |
| Cash flows from investing activities:                                                                                                                                                                                                                |       |                                 |       |       |       |     |       |
| Purchase of  premises and equipment                                                                                                                                                                                                                  |       | (5,514                               | )          | (8,377     | )          | (2,795   | )          |
| Proceeds from  sale, maturity and call of investment securities available-for-sale                                                                                                                                                                   |       | 6,000                                |       | 14,000     |       | 50,666   |       |
| Proceeds from  sale, maturity and call of mortgage-backed securities available-for-sale                                                                                                                                                              |       | 4,896                                |       | 9,719      |       | 46,948   |       |
| Proceeds from  maturity and call of investment securities held-to-maturity                                                                                                                                                                           |       | —                               |       | 9,985      |       | —   |       |
| Proceeds from sale  of other investments                                                                                                                                                                                                             |       | 8,626                                |       | 9,558      |       | 1,831    |       |
| Purchase of investment  securities available-for-sale                                                                                                                                                                                                |       | (50,776                              | )          | (6,000     | )          | (43,066  | )          |
| Purchase of  mortgage-backed securities available-for-sale                                                                                                                                                                                           |       | (12,715                              | )          | (72,959    | )          | (223,505 | )          |
| Purchase of  investment securities held-to-maturity                                                                                                                                                                                                  |       | —                               |       | (16,472    | )          | (2,998   | )          |
| Purchase of mortgage-backed  securities held-to-maturity                                                                                                                                                                                             |       | —                               |       | (14,042    | )          | (5,023   | )          |
| Purchase of other  investments                                                                                                                                                                                                                       |       | (7,608                               | )          | (13,528    | )          | (3,733   | )          |
| Redemptions of  investment securities available-for-sale                                                                                                                                                                                             |       | 29,721                               |       | 30,525     |       | 41,805   |       |
| Redemptions of  investment securities held-to-maturity                                                                                                                                                                                               |       | 21,975                               |       | 26,452     |       | 21,340   |       |
| Net cash paid in  acquisition                                                                                                                                                                                                                        |       | (1,379                               | )          | (15,365    | )          | —   |       |
| Net increase in  loans receivable, net of deferred fees and costs                                                                                                                                                                                    |       | (215,128                             | )          | (154,790   | )          | (86,664  | )          |
| Net cash used in  investing activities                                                                                                                                                                                                               |       | (221,902                             | )          | (201,294   | )          | (205,194 | )          |
| Cash flows from financing activities:                                                                                                                                                                                                                |       |                                 |       |       |       |     |       |
| Net increase in  deposits                                                                                                                                                                                                                            |       | 245,662                              |       | 350,081    |       | 50,650   |       |
| Repayments of  warehouse financing assumed in acquisition                                                                                                                                                                                            |       | —                               |       | (335,584   | )          | —   |       |
| Net increase  (decrease) in other borrowed funds—short term                                                                                                                                                                                     |       | (57,164                              | )          | 62,008     |       | 25,499   |       |
| Net increase  (decrease) in warehouse financing                                                                                                                                                                                                      |       | (30,245                              | )          | 30,245     |       | —   |       |
| Net increase  (decrease) in mortgage funding checks                                                                                                                                                                                                  |       | (4,757                               | )          | 46,392     |       | —   |       |
| Proceeds from FHLB  advances—long term                                                                                                                                                                                                          |       | 25,000                               |       | 52,500     |       | 59,000   |       |
| Repayments of FHLB  advances—long term                                                                                                                                                                                                          |       | (13,500                              | )          | (8,500     | )          | (12,042  | )          |
| Proceeds from  public offering                                                                                                                                                                                                                       |       | 39,767                               |       | 6,302      |       | 41,747   |       |
| Proceeds from  trust preferred issuance                                                                                                                                                                                                              |       | —                               |       | 20,000     |       | —   |       |
| Stock options  exercised                                                                                                                                                                                                                             |       | 797                                  |       | 498        |       | 144      |       |
| Dividends on common  stock                                                                                                                                                                                                                           |       | (244                                 | )          | —     |       | —   |       |
| Dividends on  preferred stock                                                                                                                                                                                                                        |       | —                               |       | —     |       | (495     | )          |
| Net cash provided  by financing activities                                                                                                                                                                                                           |       | 205,316                              |       | 223,942    |       | 164,503  |       |
| Net increase  (decrease) in cash and cash equivalents                                                                                                                                                                                                |       | 13,181                               |       | 10,325     |       | (50,288  | )          |
| Cash and cash  equivalents at beginning of year                                                                                                                                                                                                      |       | 23,408                               |       | 13,083     |       | 63,371   |       |
| Cash and cash  equivalents at end of year                                                                                                                                                                                                            |       | $                                    | 36,589     |       | $          | 23,408   |       | $ | 13,083 |   |
| **Supplemental disclosure of cash flow  information:**                                                                                                                                                                                               |       |                                 |       |       |       |     |       |
| Cash paid during  the period for interest                                                                                                                                                                                                            |       | $                                    | 30,096     |       | $          | 15,124   |       | $ | 9,380 |   |
| Cash paid for  income taxes                                                                                                                                                                                                                          |       | 3,456                                |       | 135        |       | 80       |       |
| **Supplemental schedule of noncash investing and  financing activities:**                                                                                                                                                                            |       |                                 |       |       |       |     |       |
| Unsettled purchases of investment securities  available-for-sale                                                                                                                                                                                     |       | $                                    | 8,175      |       |       |     |       |   |
| On June 9, 2005, the  Company acquired all of the issued and outstanding common stock of Wilson/Bennett  Capital Management, Inc. In conjunction with the acquisition, the  following noncash changes to our financial condition occurred: |       |                                 |       |       |       |     |       |
| Fair value of  non-cash assets acquired, primarily goodwill and intangibles                                                                                                                                                                          |       | $                                    | 6,296      |       |       |     |       |   |
| Fair value of  liabilities assumed                                                                                                                                                                                                                   |       | 33                                   |       |       |       |     |       |
| Common shares  issued in acquisition                                                                                                                                                                                                                 |       | 4,862                                |       |       |       |     |       |
| On July 7, 2004, the  Company acquired all of the issued and outstanding membership interests of  George Mason Mortgage, LLC. In conjunction with the acquisition, the  following noncash changes to our financial condition occurred:          |       |                                 |       |       |       |     |       |
| Fair value of  non-cash assets acquired                                                                                                                                                                                                              |       |                                 |       | $          | 367,288    |     |       |   |
| Fair value of  liabilities assumed                                                                                                                                                                                                                   |       |                                 |       | 351,923    |       |     |       |

 

See accompanying notes to consolidated financial statements.

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements

**(1) Organization**

Cardinal FinancialCorporation (the ”Company”) is incorporated under the laws of theCommonwealth of Virginia as a financial holding company whose activitiesconsist of investment in its wholly-owned subsidiaries. The principal operatingsubsidiary of the Company is Cardinal Bank (the “Bank”), a state charteredinstitution, which acquired George Mason Mortgage, LLC (“George Mason”), amortgage banking company based in Fairfax, Virginia, on July 7, 2004. On June 9,2005, the Company acquired Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”),an asset management firm based in Alexandria, Virginia. These acquisitions aredescribed in Note 3, Business Combinations. The Company also owns CardinalWealth Services, Inc., an investment services subsidiary.

**(2) Summaryof Significant Accounting Policies**

***(a) Use ofEstimates***

U.S. generally acceptedaccounting principles are complex and require management to make estimates,judgments and assumptions that affect the reported amounts of assets andliabilities, and disclosures of contingent assets and contingent liabilities,at the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period. Significant estimatesaffecting the Company’s financial statements relate to accounting for businesscombinations, the allowance for loan losses, derivative investments and hedgingactivities and the valuation of deferred tax assets. Actual results coulddiffer from those estimates.

***(b) Principles ofConsolidation***

The consolidated financialstatements include the accounts of the Company and its subsidiaries. Allsignificant intercompany transactions and balances have been eliminated inconsolidation.

***(c) Accounting forBusiness Combinations***

The acquisitions ofWilson/Bennett and George Mason were accounted for as purchases as required byStatement of Financial Accounting Standards (“SFAS”) No. 141, *Business Combinations*. The purchase method requires that thecost of an acquired entity be allocated to the assets acquired and liabilitiesassumed, based on their estimated fair values at the date of acquisition. Theexcess of the cost of an acquired entity over the net of the amounts assignedto assets acquired and liabilities assumed is recorded as goodwill.

***(d) Cash and CashEquivalents***

For the consolidatedstatements of cash flows, the Company has defined cash and cash equivalents as cashand due from banks and federal funds sold.

***(e) InvestmentSecurities***

The Company classifies itsinvestment securities in one of two categories: available-for-saleor held-to-maturity. Held-to-maturity securities arethose securities for which the Company has the ability and intent to hold untilmaturity. All other securities are classified as available-for-sale.

Held-to-maturitysecurities are carried at amortized cost. Available-for-salesecurities are carried at estimated fair value. Unrealized gains and losses,net of applicable tax, on available-for-sale securities arereported in other comprehensive income (loss).

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Gains and losses on thesale of securities are determined using the specific identification method. Declinesin the fair value of individual securities below their cost that are deemedother than temporary are treated as realized losses, resulting in theestablishment of a new cost basis for the security.

Premiums and discounts arerecognized in interest income using the effective interest method. Prepaymentsof the mortgages securing mortgage-backed securities may affect the anticipatedmaturity date and, therefore, the yield to maturity. The Company uses actualprincipal prepayment experience and estimates of future principal prepayments incalculating the yield necessary to apply the effective interest method.

***(f) Loans Held forSale***

Loans originated andintended for sale into the secondary market are carried at the lower of cost orestimated fair value, determined on an aggregate loan basis. Estimated fairvalue is determined by outstanding commitments from investors. Net unrealizedlosses, if any, are recognized through a valuation allowance by charges tooperations. The carrying amount of loans held for sale includes principalbalances, valuation allowances, origination premiums or discounts and fees anddirect costs that are deferred at the time of origination.

***(g) LoansReceivable and Allowance for Loan Losses***

Loans receivable thatmanagement has the intent and ability to hold for the foreseeable future oruntil maturity or pay-off are reported at their outstanding principal balanceadjusted for any charge-offs, and net of the allowance for loan lossesand deferred fees and costs. Loan origination fees and certain directorigination costs are deferred and amortized as an adjustment of the yieldusing the payment terms required by the loan contract.

Loans are generally placedinto non-accrual status when they are past-due 90 days as to eitherprincipal or interest or when, in the opinion of management, the collection ofprincipal and/or interest is in doubt. A loan remains in non-accrual statusuntil the loan is current as to payment of both principal and interest orpast-due less than 90 days and the borrower demonstrates the ability to payand remain current. Loans are charged-off when a loan or a portion thereof isconsidered uncollectible. When cash payments are received, they are applied toprincipal first, then to accrued interest. It is the Company’s policy not torecord interest income on non-accrual loans until principal has become current.

The Company determines andrecognizes impairment of certain loans when, based on current information andevents, it is probable that the Company will be unable to collect all amountsdue according to the loan agreement. A loan is not considered impaired during aperiod of delay in payment if the Company expects to collect all amounts due,including past-due interest. An impaired loan is measured at the presentvalue 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 theloan is collateral dependent.

The allowance for loanlosses is increased by provisions for loan losses and recoveries of previouslycharged-off loans, and decreased by loan charge-offs.

The Company maintains theallowance for loan losses at a level that represents management’s best estimateof known and inherent losses in the loan portfolio. Both the amount of theprovision expense and the level of the allowance for loan losses are impactedby many factors, including general and industry-specific economic conditions,actual and expected credit losses, historical trends and specific conditions ofthe individual borrowers. Unusual and infrequently occurring events, such ashurricanes and other 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

weather-relateddisasters, may impact the assessment of possible credit losses. As a part ofthis analysis, the Company uses comparative peer group data and qualitativefactors, such as levels of and trends in delinquencies and non-accrual loans,national and local economic trends and conditions and concentrations of loansexhibiting similar risk profiles to support estimates.

For purposes of this analysis,the Company categorizes loans into one of five categories: commercial andindustrial, commercial real estate (including construction), home equity linesof credit, residential mortgages, and consumer loans. In the absence ofmeaningful historical loss factors, peer group loss factors are applied and areadjusted by the qualitative factors mentioned above. The indicated loss factorsresulting from this analysis are applied to each of the five categories ofloans. In addition, the Company individually assigns loss factors to all loansthat have been identified as having loss attributes, as indicated bydeterioration in the financial condition of the borrower or a decline inunderlying collateral value if the loan is collateral dependent. Since the Companyhas limited historical data on which to base loss factors for classified loans,the Company applies, in accordance with regulatory guidelines, a 5% loss factorto all loans classified as special mention, a 15% loss factor to all loansclassified as substandard and a 50% loss factor to all loans classified asdoubtful. Loans classified as loss loans are fully reserved or charged off.

In addition, variousregulatory agencies, as part of their examination process, periodically reviewthe Company’s allowance for loan losses. These agencies may require the Companyto recognize additions to the allowance based on their risk evaluation andcredit judgment. Management believes that the allowance for loan losses at December 31,2005 and 2004 is a reasonable estimate of known and inherent losses in the loanportfolio at these dates.

***(h) Premises andEquipment***

Land is carried at cost. Premises,furniture, equipment, and leasehold improvements are carried at cost, lessaccumulated depreciation and amortization. Depreciation of premises, furnitureand equipment is computed using the straight-line method over estimated usefullives from 3 to 25 years. Amortization of leasehold improvements is computedusing the straight-line method over the useful lives of the improvementsor the lease term, whichever is shorter. Purchased computer software which iscapitalized is amortized over estimated useful lives of one to three years. Internallydeveloped software is expensed.

***(i) Goodwill andOther Intangibles***

Goodwill, which representsthe excess of the purchase price over fair value of net assets acquired, is notamortized but is evaluated at least annually for impairment by comparing itsfair value with its recorded amount. An impairment loss is recognized to theextent that the carrying amount exceeds fair value.

The Company performs anannual impairment evaluation of the goodwill associated with George Mason andWilson/Bennett reporting units in the quarter that the purchase occurred, ormore frequently as circumstances warrant. No impairment was indicated in 2005or 2004. The Company also has amortizable intangible assets. These intangibleassets are being amortized on a straight-line basis over their estimated usefullives from three to ten years. These assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable.

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

***(j) Gain on Sale ofLoans***

Gains or losses on thesale of loans are recognized at the date of settlement and are based on thedifference between the selling price and the carrying amounts of the loanssold, which include deferred fees and direct origination costs.

***(k) Management FeeIncome***

Management fee income represents income earned for themanagement and operational support provided by George Mason to other mortgagebanking companies (the “managed companies”) which are generally owned by localhomebuilders. The relationship of George Mason to these managed companies issolely as service provider and there is no fiduciary relationship. Fees earnedby George Mason are accrued based on contractual arrangements with each of themanaged companies and are generally determined as a percentage of the managedcompany’s net income before income taxes.

***(l) Investment Fee Income***

Investment fee income representscommissions paid by customers of Cardinal Wealth Services, Inc. and assetmanagement fees paid by the customers of Wilson/Bennett for investment services.Fees are recognized in income as they are earned.

***(m) Income Taxes***

Deferred tax assets and liabilities are recognized forthe tax effects of differing carrying values of assets and liabilities for taxand financial statement purposes that will reverse in future periods. Deferredtax assets and liabilities are reflected at currently enacted income tax ratesapplicable to the period in which the deferred tax assets or liabilities areexpected to be realized or settled. As changes in tax laws or rates areenacted, deferred tax assets and liabilities are adjusted through the provisionfor income taxes.

When uncertainty exists concerning the recoverabilityof a deferred tax asset, the carrying value of the asset is reduced by avaluation allowance. The amount of any valuation allowance established is basedupon an estimate of the deferred tax asset that is more likely than not to berecovered. Increases or decreases in the valuation allowance result inincreases or decreases to the provision for income taxes.

***(n) Earnings Per Common Share***

Basic earnings per common share is computed bydividing net income available to common shareholders by the weighted-averagenumber of shares of common stock outstanding during the periods, includingshares which will be issued to settle liabilities of the deferred compensationplans. Diluted earnings per share reflects the impact of dilutive potentialcommon shares that would have been outstanding if common stock equivalents hadbeen issued, as well as any adjustment to income that would result from theassumed issuance. Common stock equivalents that may be issued by the Companyrelate primarily to outstanding stock options, and the dilutive potentialcommon shares resulting from outstanding stock options are determined using thetreasury stock method. Common stock equivalents for diluted earnings per sharepurposes also includes common shares which may be issued, but are not requiredto be issued, to settle the Company’s obligations under its deferredcompensation plans.

***(o) Derivative Instruments and Hedging Activities***

The Company accounts for derivatives and hedgingactivities in accordance with SFAS No. 133, *Accounting for Derivative Instruments and Certain Hedging Activities*,**as amended, which requires that allderivative instruments be recorded on the statement of condition at their fairvalues.

70

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

In the normal course of business, the Company entersinto contractual commitments, including rate lock commitments, to financeresidential mortgage loans. These commitments, which contain fixed expirationdates, offer the borrower an interest rate guarantee provided the loan meetsunderwriting guidelines and closes within the timeframe established by theCompany. Interest rate risk arises on these commitments and subsequently closedloans if interest rates change between the time of the interest rate lock andthe delivery of the loan to the investor. Loan commitments related toresidential mortgage loans intended to be sold are considered derivatives and aremarked to market through earnings.

To mitigate the effect of interest rate risk inherentin providing rate lock commitments, the Company economically hedges itscommitments by entering into best efforts delivery forward loan salescontracts. During the rate lock commitment period, these forward loan salescontracts are marked to market through earnings and are not designated asaccounting hedges under SFAS No. 133, as amended. Changes in the fairvalues of loan commitments and changes in the fair values of forward salescontracts generally move in opposite directions and the net impact of thechanges in these valuations on net income during the loan commitment period isgenerally inconsequential. At the closing of the loan, the loan commitmentderivative expires and the Company records a loan held for sale and continuesto be obligated under the same forward loan sales contract. Loans held for saleare accounted for at the lower of cost or market in accordance with SFAS No. 65,*Accounting for Certain Mortgage Banking Activities*.Prior to October 1, 2005, the changes in value of the forward loan salescontracts from the date the loan closed to the date it was sold to an investorwere marked to market through earnings.

On October 1, 2005, the Company began designatingits forward sales contracts as hedges to mitigate the variability in cash flowto be received from the sale of mortgage loans. We contemporaneously documentthe hedging relationship including the risk management objective and strategyfor undertaking the hedge, how effectiveness will be assessed at inception andat each reporting period and the method for measuring ineffectiveness. Wedesignate each forward loan sale agreement as a cash flow hedge of a specificloan held for sale. For derivatives designated as cash flow hedges, the fairvalue adjustments are recorded as a component of other comprehensive incomeexcept for the ineffective portion which is recorded through the incomestatement.

The Company discontinues hedge accountingprospectively when it is determined that the derivative is no longer highlyeffective in offsetting changes in anticipated cash flows of the loans held forsale.

In situations in which hedge accounting isdiscontinued, we continue to carry the derivative at its fair value on thebalance sheet and recognize any subsequent changes in its fair value inearnings. When hedge accounting is discontinued because it is probable ananticipated loan sale will not occur, the Company recognizes immediately inearnings any gains and losses that were accumulated in other comprehensiveincome.

***(p) Stock-Based Compensation***

The Company applies the intrinsic value-based methodof accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations, in accounting for its fixed plan stock options. Underthis method, compensation expense is recorded only if the current market priceof the underlying stock exceeds the exercise price on the date of grant.

71

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

At December 31,2005, the Company had two stock-based employee compensation plans, which aredescribed more fully in Note 16. As permitted under SFAS No. 148, *Accounting for Stock-Based Compensation—Transition and Disclosure*,which amended SFAS No. 123, *Accounting for Stock-BasedCompensation*, the Company has elected to continue to follow theintrinsic value method in accounting for its stock-based employee compensationplans. The following table illustrates the effect on net income and earningsper common share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 to its stock-based employee compensation plans.

| ** **                                                                                                             | ** ** | **Years ended December 31,**                                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                             | ** ** | **(Dollars in thousands,  except per share data)** | ** ** |
| Net income available  to common shareholders as reported                                                               |       | $                                                                           | 9,876      |   | $ | 3,469 |   | $ | 5,659 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method, net of related tax |       | (4,066                                                                      | )          | (1,427 | ) | (547 | ) |
| Pro forma net  income                                                                                                  |       | $                                                                           | 5,810      |   | $ | 2,042 |   | $ | 5,112 |   |
| Earnings per common  share:                                                                                            |       |                                                                        |       |   |   |   |   |
| Basic—as reported                                                                                                 |       | $                                                                           | 0.45       |   | $ | 0.19 |   | $ | 0.55 |   |
| Basic—pro forma                                                                                                   |       | 0.26                                                                        |       | 0.11 |   | 0.50 |   |
| Diluted—as reported                                                                                               |       | 0.44                                                                        |       | 0.19 |   | 0.54 |   |
| Diluted—pro forma                                                                                                 |       | 0.26                                                                        |       | 0.11 |   | 0.45 |   |

 

Total stock-based compensation expense for 2005 reflectsthe immediate vesting attributes of the stock options that were granted during2005.

Theweighted average per share fair values of grants made in 2005, 2004 and 2003were $4.73, $3.11 and $2.13, respectively. The fair values of the optionsgranted were estimated on the grant date using the Black-Scholes option-pricingmodel based on the following weighted-average assumptions:

| ** **               | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|----------|------------|
| Estimated option  life   |       | 5.75 years |       | 10 years |       | 10 years |       |
| Risk free  interest rate |       | 4.30%      |       | 4.07%    |       | 3.98%    |       |
| Expected  volatility     |       | 43.1%      |       | 11.8%    |       | 11.8%    |       |
| Expected dividend yield  |       | 0.00%      |       | 0.00%    |       | 0.00%    |       |

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, *Share-BasedPayments: An Amendment of FASB Statements 123 and 95.*This statementrequires that companies recognize in the income statement the fair value ofstock options and other equity based compensation. It is required to be appliedby the Company beginning January 1, 2006. This statement requires that stockawards be classified as either an equity award or a liability award. Equityclassified awards are valued as of the grant date using either an observablemarket price or a valuation methodology. Liability classified awards are valuedat fair value as of each reporting date. The Company will adopt SFAS No. 123Rusing the modified prospective application method which requires, among otherthings, recognition of compensation costs for all awards outstanding at January 1,2006 for which the requisite service has not been rendered. The Companyestimates that this new standard will result in an increase in pretax expenseof approximately $200,000 in 2006 based on the current stock optionsoutstanding. 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Additional expense wouldbe recorded for any future stock option grants and will be reduced by futureoption forfeitures.

On October 19, 2005,the Company’s board of directors authorized that any outstanding, unvested optionsthat were or became “underwater” (i.e., their per share exercise price isgreater than the market price) before December 31, 2005 be amended tobecome fully vested. This modification resulted in the immediate vesting of54,000 stock options which were held by employees of the Company. The optionsthat vested had exercise prices ranging from $9.58 to $11.15. On October 19,2005, the market value of the Company’s common stock was $9.81. Thismodification did not result in the recognition of expense in 2005 because theoptions had no intrinsic value at the grant date or on the date of modification.Vesting of these options was accelerated to eliminate the need to recognize theremaining fair value compensation expense associated with these options followingthe adoption of SFAS No. 123R. The amount of compensation expense relatedto these options that would have been recognized in the financial statementsafter the Company’s implementation of SFAS No. 123R, assuming noforfeitures, was $127,000.

***(q) Deferred Compensation Plans***

In January 2005, theCompany began deferred compensation plans for its directors and certainemployees. Under the directors’ plan, a director may elect to defer all or aportion of any director-related fees including fees for serving on boardcommittees. Under the employees’ plan, certain employees may defer all or aportion of their compensation including any bonus or commission compensation. Directorand employee deferrals, other than employees of George Mason, are matched 50%by the Company. Deferrals made by employees of George Mason are not eligiblefor the Company match. The amount of the Company match is deemed invested in Companycommon stock which vests immediately for the directors and after four years foremployees. The maximum Company match per employee is $50,000 per year and$10,000 per year per director. Expense relating to the plans was $52,000 in2005 and is included in salaries and benefits expense in the consolidatedstatements of income.

***(r) Reclassifications***

Certain amounts for 2004and 2003 have been reclassified to conform to the presentation for 2005.

**(3) Business Combinations**

**Wilson/Bennett**

On June 9, 2005, the Company acquiredWilson/Bennett Capital Management, Inc. for $1.5 million in cash and611,111 shares of its common stock. The primary shareholder of Wilson/Bennettat the time of its acquisition by the Company was, and continues to be, amember of the Company’s board of directors. The Company has entered into anemployment agreement with this person which ends on April 30, 2008, withautomatic one-year renewals beginning on that date and each April 30thereafter unless notice of non-renewal is provided by either party.

The common stock utilized to complete this transactionis newly issued by the Company, is not registered with the Securities andExchange Commission (the “SEC”), and therefore cannot be sold until soregistered unless it is sold pursuant to an exemption from such registration.The owners of the shares will be permitted to resell them under Rule 144of the Securities Act after holding them for one year. The trading restrictionwill completely lapse after two years. Because of this trading restriction, theCompany 

73

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

has valued for purchaseaccounting purposes the 611,111 restricted shares at 89% of the fair marketvalue of its unrestricted shares, or $4.9 million.

Theoperating results of Wilson/Bennett are included in the Company’s consolidatedoperating results and the investment services segment information since thedate of acquisition and are not material to consolidated operating results and,therefore, no pro forma information relating to this acquisition is presented.The acquisition resulted in the recognition of the following intangible assetswhich are being amortized on a straight-line basis over the periods indicated:

| Employment/non-compete  agreement—$698,000 (4 years)    |   |
|--------------------------------------------------------------|--------|
| Trade name  intangible—$46,000 (3 years)                |   |
| Purchased  customer relationships—$1,858,000 (10 years) |   |

 

The transaction also resulted in the recognition ofgoodwill of $3.5 million. The Company used the assistance of an independentvaluation consultant to determine the value assigned to identifiableamortizable intangibles.

Due to the trading restriction described above, theCompany has agreed to provide certain demand registration rights with respectto the 611,111 common shares issued. The owners of these shares have the rightto make one written request to the Company for the registration of one-third ofthe shares under the Securities Act of 1933, as amended, to permit the resaleof the shares. In the event that a change of control of the Company  occurs, or the Company’s employment of itscurrent chief executive officer terminates, both as described in theregistration rights agreement, then the registration rights would cover all theshares. The Company has the option to repurchase any such shares following thereceipt of a written request for registration from the shareholders. The purchaseprice has been decreased by the estimated cost to register these shares withthe SEC.

For federal income taxpurposes, the Wilson/Bennett goodwill and intangibles are deductible over a 15year period.

**George Mason Mortgage, LLC**

On July 7, 2004, the Bank acquired George Mason,in a cash transaction for $17.0 million. George Mason engages primarily in the originationand acquisition of residential mortgages for sale into the secondary market ona best efforts basis through nine branches located throughout the metropolitanWashington, D.C. region. This transaction was also accounted for as a purchaseand George Mason’s assets and liabilities were recorded at fair value as of thepurchase date. George Mason’s operating results are included in theconsolidated operating results and mortgage banking segment information sincethe date of acquisition. This transaction resulted in the recognition of $12.9million of goodwill and $1.7 million of other intangible assets. George Mason’sprimary sources of revenue include net interest income earned on loans held forsale, gain on sales of loans and management fees earned. Loans are madepursuant to purchase commitments and are sold servicing released. The Bankpurchased George Mason primarily to diversify its sources of income andincrease non-interest income and be a source of residential loans for its loansreceivable portfolio.

74

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

The following summarizesthe fair values of the assets acquired and liabilities assumed at the date ofacquisition:

**(Inthousands)**

| **Assets  Acquired**            |   |    |   |
|---------------------------------|--------|---------|--------|
| Cash and cash  equivalents      |   | $       | 1,778  |   |
| Loans held for  sale, net       |   | 341,934 |   |
| Loans receivable,  net          |   | 429     |   |
| Premises and  equipment, net    |   | 2,289   |   |
| Goodwill                        |   | 12,941  |   |
| Identifiable  intangible assets |   | 1,781   |   |
| Other assets                    |   | 7,914   |   |
| Total assets acquired           |   | 369,066 |   |
| **Liabilities  Assumed**        |   |    |   |
| Warehouse  financing            |   | 335,584 |   |
| Other liabilities               |   | 16,339  |   |
| Total liabilities assumed       |   | 351,923 |   |
| Net assets acquired             |   | $       | 17,143 |   |

 

Thefollowing unaudited pro forma condensed financial information presents theresults of operations of the Company as if George Mason had been acquired on January 1,2003.

| ** **                                               | ** ** | **For the Years Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **December 31,**                  | ** ** |
| ** **                                               | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                | ** ** |
| Net interest  income                                     |       | $                                      | 28,674     |   | $ | 27,501 |   |
| Non-interest  income                                     |       | 28,254                                 |       | 33,275 |   |
| Provision for  loan losses                               |       | 1,627                                  |       | 1,000 |   |
| Non-interest  expense                                    |       | 45,019                                 |       | 36,701 |   |
| Net income before  income taxes                          |       | 10,282                                 |       | 23,075 |   |
| Provision for  income taxes                              |       | 3,228                                  |       | 2,237 |   |
| Net income                                               |       | $                                      | 7,054      |   | $ | 20,838 |   |
| Earnings per  common share—basic                    |       | $                                      | 0.38       |   | $ | 2.04 |   |
| Earnings per  common share—diluted                  |       | $                                      | 0.38       |   | $ | 1.82 |   |
| Weighted-average  common shares outstanding—basic   |       | 18,448                                 |       | 10,218 |   |
| Weighted-average  common shares outstanding—diluted |       | 18,705                                 |       | 11,468 |   |

 

The 2003 proforma tax expense of $2.2 million includesthe impact of a $3.5 million tax benefit associated with the Company’srecognition of deferred tax assets since the Company determined that it wasmore likely than not that these assets would be realized. See Note 11 foradditional information.

The unaudited pro forma results of operationssummarized above are not necessarily indicative of the results that would haveoccurred if the acquisition had been consummated on January 1, 2003.

 

75

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

For federal income taxpurposes, the George Mason goodwill and intangibles are deductible over a15 year period.

In connection with theyear-end financial reporting process for 2005, errors in the classification ofcertain items relating to the acquisition of George Mason and its subsequentoperations in the statement of cash flows for the year ended December 31, 2004,were identified.  These errors relatedprimarily to the following:

·       Loansheld for sale by George Mason at the date of acquisition were reported as a useof cash (loans acquired) in operating activities, rather than as a noncashinvesting activity;

·       Cashpaid to acquire the membership interests in George Mason was reported as a useof cash in operating activities (increase in goodwill and intangibles, net)rather than as a use of cash in investing activities; and 

·       Post-acquisitionrepayments of the warehouse line of credit financing of George Mason that was assumedby the Company at the date of acquisition were not reported in financingactivities.  

Theconsolidated statement of cash flows for the year ended December 31, 2004 hasbeen restated to reclassify these items. The reclassifications had no effect onthe Company's consolidated statements of condition or income for 2004. The effects of the reclassifications are summarizedas follows: 

| ** **                                                                                 | ** ** | **As Reported** | ** ** | **As Restated** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Cash flows from  operating activities:                                                     |       |                 |       |                 |       |
| Amortization of premises, discounts and intangibles                                        |       | $                    | 2,025      |                 | $          | 2,075 |   |
| Loans held for sale originated                                                             |       | (2,181,655           | )          | (1,839,721           | )          |
| Increase in goodwill and intangibles, net                                                  |       | (14,672              | )          | —               |       |
| (Increase) decrease in accrued interest receivable,  other assets, and deferred tax asset  |       | (3,207               | )          | 6,485                |       |
| Increase (decrease) in accrued interest payable,  escrow liabilities and other liabilities |       | 12,289               |       | (4,050               | )          |
| Net cash used in operating activities                                                      |       | (362,332             | )          | (12,323              | )          |
| Cash flows from  investing activities:                                                     |       |                 |       |                 |       |
| Purchase of premises and equipment                                                         |       | (10,666              | )          | (8,377               | )          |
| Net cash (paid) acquired in acquisition                                                    |       | 1,778                |       | (15,365              | )          |
| Net increase in loans receivable, net of deferred  fees and costs                          |       | (155,219             | )          | (154,790             | )          |
| Net cash used in investing activities                                                      |       | (186,869             | )          | (201,294             | )          |
| Cash flows from  financing activities:                                                     |       |                 |       |                 |       |
| Repayments of warehouse financing assumed in  acquisition                                  |       | —               |       | (335,584             | )          |
| Net cash provided  by financing activities                                                 |       | 559,526              |       | 223,942              |       |
|                                                                                            |            |                      |            |                      |            |  |  |

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**(4)Investment Securities and Other Investments**

The fair value and amortized cost of investmentsecurities at December 31, 2005 and 2004 are shown below.

| ** **                                  | ** ** | **2005**                | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | ** **              | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                  | ** ** | **Cost**                | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| *Investment Securities  Available-for-Sale* | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| U.S.  government-sponsored agencies         |       | $                       | 58,959     |   |   | $ | 2 | ** ** |   |   | $ | (550 | ) |   | $ | 58,411 |   |
| Mortgage-backed  securities                 |       | 122,730                 |       |   | 28 | ** ** |   |   | (4,198 | ) |   | 118,560 |   |
| U.S. treasury securities                    |       | 2,015                   |       |   | — | ** ** |   |   | (31 | ) |   | 1,984 |   |
| Total                                       |       | $                       | 183,704    |   |   | $ | 30 | ** ** |   |   | $ | (4,779 | ) |   | $ | 178,955 |   |
| *Investment Securities  Held-to-Maturity*   | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| U.S.  government-sponsored agencies         |       | $                       | 25,520     |   |   | $ | — | ** ** |   |   | $ | (714 | ) |   | $ | 24,806 |   |
| Mortgage-backed  securities                 |       | 81,744                  |       |   | 12 | ** ** |   |   | (2,349 | ) |   | 79,407 |   |
| Corporate bonds                             |       | 8,005                   |       |   | — | ** ** |   |   | (193 | ) |   | 7,812 |   |
| Total                                       |       | $                       | 115,269    |   |   | $ | 12 | ** ** |   |   | $ | (3,256 | ) |   | $ | 112,025 |   |

 

| ** **                                  | ** ** | **2004**                | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | ** **              | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                  | ** ** | **Cost**                | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| *Investment Securities  Available-for-Sale* | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| U.S.  government-sponsored agencies         |       | $                       | 6,000      |   |   | $ | 9 | ** ** |   |   | $ | (53 | ) |   | $ | 5,956 |   |
| Mortgage-backed  securities                 |       | 145,300                 |       |   | 121 | ** ** |   |   | (1,841 | ) |   | 143,580 |   |
| U.S. treasury securities                    |       | 2,031                   |       |   | — | ** ** |   |   | (13 | ) |   | 2,018 |   |
| Total                                       |       | $                       | 153,331    |   |   | $ | 130 | ** ** |   |   | $ | (1,907 | ) |   | $ | 151,554 |   |
| *Investment Securities  Held-to-Maturity*   | ** ** | ** **              | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| U.S.  government-sponsored agencies         |       | $                       | 25,517     |   |   | $ | 21 | ** ** |   |   | $ | (248 | ) |   | $ | 25,290 |   |
| Mortgage-backed  securities                 |       | 104,431                 |       |   | 222 | ** ** |   |   | (1,256 | ) |   | 103,397 |   |
| Corporate bonds                             |       | 8,005                   |       |   | 5 | ** ** |   |   | (88 | ) |   | 7,922 |   |
| Total                                       |       | $                       | 137,953    |   |   | $ | 248 | ** ** |   |   | $ | (1,592 | ) |   | $ | 136,609 |   |

 

Thefair value and amortized cost of investment securities by contractual maturityat December 31, 2005 are shown below. Expected maturities may differ fromcontractual maturities because many issuers have the right to call or prepayobligations with or without call or prepayment penalties.

| ** **                         | ** ** | **Available-for-Sale**  | ** ** | **Held-to-Maturity** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Amortized**           | ** ** | **Fair**             | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                         | ** ** | **Cost**                | ** ** | **Value**            | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** |
| After 1 year but  within 5 years   |       | $                       | 45,799     |                 | $          | 45,248 |   | $ | 9,500 |   | $ | 9,172 |   |
| After 5 years but  within 10 years |       | 15,175                  |       | 15,147               |       | 13,020 |   | 12,698 |   |
| After 10 years                     |       | —                  |       | —               |       | 11,005 |   | 10,748 |   |
| Mortgage-backed  securities        |       | 122,730                 |       | 118,560              |       | 81,744 |   | 79,407 |   |
| Total                              |       | $                       | 183,704    |                 | $          | 178,955 |   | $ | 115,269 |   | $ | 112,025 |   |

 

77

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

For the years ended December 31, 2005, 2004, and2003, proceeds from sales of investment securities available-for-sale amountedto $4.9 million, $23.7 million, and $68.9 million, respectively. Gross realizedgains in 2005, 2004, and 2003 amounted to $33,000, $250,000 and $1.4 million,respectively. Gross realized losses in 2004 were $5,000. There were no realizedlosses in 2005 or 2003.

Thetable below shows the Company’s investment securities’ gross unrealized lossesand their fair value, aggregated by investment category and length of time thatindividual securities have been in a continuous unrealized loss position, at December 31,2005. 

| ** **                                             | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**            | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **Investment Securities Available-for-Sale** | ** ** | ** **                             | ** ** | **Fair  Value**                      | ** ** | **Unrealized  loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  loss** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                | ** ** |
| U.S.  government-sponsored agencies                    |       | $                                      | 42,370     |                                 |       | $                    | (414       | ) |   | $ | 2,865 |   |   | $ | (136 | ) |   | $ | 45,235 |   |   | $ | (550 | ) |   |
| Mortgage-backed  securities                            |       | 23,444                                 |       |                                 | (621       | )                    |       | 92,677 |   |   | (3,577 | ) |   | 116,121 |   |   | (4,198 | ) |   |
| U.S. treasury  securities                              |       | —                                 |       |                                 | —     |                 |       | 1,984 |   |   | (31 | ) |   | 1,984 |   |   | (31 | ) |   |
| Total temporarily  impaired securities                 |       | $                                      | 65,814     |                                 |       | $                    | (1,035     | ) |   | $ | 97,526 |   |   | $ | (3,744 | ) |   | $ | 163,340 |   |   | $ | (4,779 | ) |   |
|                                                        |            |                                        |            |                                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                           | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**            | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| **Investment Securities Held-to-Maturity** | ** ** | ** **                             | ** ** | **Fair  Value**                      | ** ** | **Unrealized  loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  loss** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                | ** ** |
| U.S.  government-sponsored agencies                  |       | $                                      | 7,376      |                                 |       | $                    | (112       | ) |   | $ | 17,398 |   |   | $ | (602 | ) |   | $ | 24,774 |   |   | $ | (714 | ) |   |
| Mortgage-backed  securities                          |       | 26,858                                 |       |                                 | (483       | )                    |       | 51,527 |   |   | (1,863 | ) |   | 78,385 |   |   | (2,346 | ) |   |
| Corporate bonds                                      |       | 1,993                                  |       |                                 | (8         | )                    |       | 5,815 |   |   | (188 | ) |   | 7,808 |   |   | (196 | ) |   |
| Total temporarily  impaired securities               |       | $                                      | 36,227     |                                 |       | $                    | (603       | ) |   | $ | 74,740 |   |   | $ | (2,653 | ) |   | $ | 110,967 |   |   | $ | (3,256 | ) |   |
|                                                      |            |                                        |            |                                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Investment securities with unrealized losses areinvestment grade securities. Investment securities with unrealized losses haveinterest rates that are less than current market interest rates and, therefore,the indicated temporary losses are not a result of permanent credit impairment.Mortgage-backed investment securities, which are the primary component of theunrealized losses in the investment securities portfolio, are primarilycomprised of bonds issued by the Federal National Mortgage Association (FNMA),Federal Home Loan Mortgage Corporation (FHLMC) and Government National MortgageAssociation (GNMA). The Company has the ability and intent to hold theseinvestment securities to the point where their values recover or maturity.

Investmentsecurities that were pledged to secure borrowed funds and other balances asrequired at December 31, 2005 and 2004 had carrying values of $224.9million and $277.2 million, respectively.

| ** **                                                            | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                            | ** ** | **(In thousands)** | ** ** |
| FHLB advances                                                         |       | $                       | 121,274    |     | $          | 169,133 |   |
| Repurchase  agreements                                                |       | 66,991                  |       | 42,099   |       |
| Debtor in  possession and public deposits and TT&L payments  |       | 17,258                  |       | 18,953   |       |
| FRB discount  window and TT&L note option                         |       | 19,410                  |       | 47,063   |       |
| Total pledged investment securities                                   |       | $                       | 224,933    |     | $          | 277,248 |   |

 

Other investments at December 31,2005 include $6.4 million of Federal Home Loan Bank stock, and $63,000 ofCommunity Bankers’ Bank stock.  At December 31,2004, other investments included $7.4 

78

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

millionof Federal Home Loan Bank stock and $63,000 of Community Bankers’ Bank stock. Asa member of the Federal Home Loan Bank of Atlanta, the Company’s bankingsubsidiary is required to hold stock in this entity. Stock membership inCommunity Bankers’ Bank allows the Company to participate in loan purchases andsales. In addition, included in other investments at December 31, 2005 and2004 is the Company’s $619,000 investment in Cardinal Statutory Trust I. Theseinvestments are carried at cost since no active trading markets exist.

**(5) Loans Receivable**

The loan portfolio at December 31,2005 and 2004 consists of the following:

| ** **                    | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Commercial and  industrial    |       | $                       | 69,392     |     | $          | 56,512 |   |
| Real estate—commercial   |       | 275,381                 |       | 220,012  |       |
| Real estate—construction |       | 128,009                 |       | 69,535   |       |
| Real estate—residential  |       | 152,818                 |       | 76,932   |       |
| Home equity lines             |       | 75,048                  |       | 60,408   |       |
| Consumer                      |       | 5,255                   |       | 6,816    |       |
|                          |       | 705,903                 |       | 490,215  |       |
| Net deferred fees             |       | (259                    | )          | (319     | )          |
| Loans receivable, net of fees |       | 705,644                 |       | 489,896  |       |
| Allowance for  loan losses    |       | (8,301                  | )          | (5,878   | )          |
| Loans receivable,  net        |       | $                       | 697,343    |     | $          | 484,018 |   |

 

Substantially all of the Company’s loans, commitmentsand standby letters of credit have been granted to customers located in theWashington, D.C. metropolitan area. As a matter of regulatory restriction, theCompany’s banking subsidiary limits the amount of credit extended to any singleborrower or group of related borrowers. Loans in process at December 31,2005 and 2004 were $440,000 and $423,000, respectively.

Ananalysis of the change in the allowance for loan losses follows:

| ** **                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Balance,  beginning of year |       | $                       | 5,878      |     | $          | 4,344    |       | $ | 3,372 |   |
| Provision for  loan losses  |       | 2,456                   |       | 1,626    |       | 1,001    |       |
| Loans charged-off           |       | (129                    | )          | (108     | )          | (80      | )          |
| Recoveries                  |       | 96                      |       | 16       |       | 51       |       |
| Balance, end of  year       |       | $                       | 8,301      |     | $          | 5,878    |       | $ | 4,344 |   |

 

At December 31, 2005and 2004, the Company had impaired loans of $214,000 and $547,000,respectively, which were on non-accrual status. These impairments had valuationallowances of $48,000 and $207,000 as of December 31, 2005 and 2004,respectively. The average balance of impaired loans was $329,000, $298,000 and$654,000 for 2005, 2004 and 2003, respectively. Additional interest income thatwould have been recorded had these loans been performing would have been$18,000 for 2005, $25,000 for 2004 and $39,000 for 2003. The interest incomerealized prior to these loans being placed on non-accrual 

79

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

statusfor the years ended December 31, 2004 and 2003 was $21,000, and $1,000,respectively. No interest income was realized prior to these loans being placedon non-accrual status in 2005.

**(6) Loans Held for Sale, Net**

Theloans held for sale portfolio at December 31, 2005 and 2004, consisted ofthe following:

| ** **                | ** ** | **2005**                | ** ** | **2004** | ** ** |
|---------------------------|------------|-------------------------|------------|----------|------------|
| ** **                | ** ** | **(In thousands)** | ** ** |
| Residential               |       | $                       | 295,813    |     | $          | 293,739 |   |
| Construction-to-permanent |       | 64,202                  |       | 69,507   |       |
|                      |       | 360,015                 |       | 363,246  |       |
| Net deferred  costs       |       | 1,653                   |       | 2,208    |       |
| Loans held for  sale, net |       | $                       | 361,668    |     | $          | 365,454 |   |

 

Loans that are classified as construction-to-permanentare those loans that provide variable rate financing for customers to constructtheir residence. Once the home has been completed, the loan converts to fixedrate financing and is sold into the secondary market.

At December 31, 2005 and 2004, George Masonmaintained a reserve of $116,000 and $75,000, respectively, for loans sold thatpaid off within a contractually agreed upon period, thereby requiring thatGeorge Mason refund part of the purchase price.

**(7) Premises and Equipment**

Componentsof premises and equipment at December 31, 2005 and 2004 were as follows:

| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| Land                                            |       | $                       | 3,450      |     | $          | 2,748 |   |
| Building                                        |       | 5,706                   |       | 4,725    |       |
| Furniture and  equipment                        |       | 12,622                  |       | 9,648    |       |
| Leasehold  improvements                         |       | 4,649                   |       | 3,908    |       |
| Total cost                                      |       | 26,427                  |       | 21,029   |       |
| Less accumulated  depreciation and amortization |       | 8,226                   |       | 5,498    |       |
| Premises and  equipment, net                    |       | $                       | 18,201     |     | $          | 15,531 |   |

 

Depreciation expense for the years ended December 31,2005, 2004 and 2003 was $2.8 million, $1.8 million, and $1.0 million,respectively.

The Company has entered into operating leases foroffice space over various terms. The leases generally have options to renew andare subject to annual increases as well as allocations of real estate taxes andcertain operating expenses.

80

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Minimumfuture rental payments under the noncancelable operating leases, as of December 31,2005 were as follows:

| **Year ending December 31,** | ** ** | ** **              | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| 2006                                        |       |                    | $          | 3,904      |       |   |
| 2007                                        |       |                    | 3,164      |       |       |
| 2008                                        |       |                    | 2,201      |       |       |
| 2009                                        |       |                    | 1,654      |       |       |
| 2010                                        |       |                    | 465        |       |       |
| Thereafter                                  |       |                    | 1,001      |       |       |
|                                        |       |                    | $          | 12,389     |       |   |

 

The total rent expense was $4.5 million, $3.2 millionand $1.9 million in 2005, 2004 and 2003, respectively, and is recorded inoccupancy expense in the consolidated statements of income.

TheCompany subleased excess office space. Future minimum lease payments undernoncancellable subleasing arrangements as of December 31, 2005 were as follows:

| **Year ending December 31,** | ** ** | ** **              | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| 2006                                        |       |                    | $          | 357        |       |   |
| 2007                                        |       |                    | 181        |       |       |
| 2008                                        |       |                    | 142        |       |       |
| 2009                                        |       |                    | 94         |       |       |
| 2010                                        |       |                    | 97         |       |       |
| Thereafter                                  |       |                    | 380        |       |       |
|                                        |       |                    | $          | 1,251      |       |   |

 

The total rent income was$602,000, $573,000 and $453,000 in 2005, 2004 and 2003, respectively, and isrecorded as a reduction of occupancy expense in the consolidated statements ofincome.

**(8) Deposits**

Depositsconsist of the following at December 31, 2005 and 2004:

| ** **                                  | ** ** | **2005**                | ** ** | **2004**   | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| Non-interest-bearing  demand deposits:      | ** ** | ** **              | ** ** | ** ** | ** ** |
| Demand deposits                             |       | $                       | 114,915    |       | $          | 105,424 |   |
| Total  non-interest-bearing demand deposits |       | 114,915                 |       | 105,424    |       |
| Interest-bearing  deposits:                 |       |                    |       |       |       |
| Interest checking                           |       | 84,481                  |       | 150,112    |       |
| Money market and statement savings          |       | 231,882                 |       | 29,790     |       |
| Certificates of deposit                     |       | 638,594                 |       | 538,884    |       |
| Total  interest-bearing deposits            |       | 954,957                 |       | 718,786    |       |
| Total deposits                              |       | $                       | 1,069,872  |       | $          | 824,210 |   |

 

81

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Interestexpense by deposit categories is as follows:

| ** **                          | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Interest checking                   |       | $                       | 1,366      |     | $          | 2,016    |       | $ | 2,375 |   |
| Money market and  statement savings |       | 4,503                   |       | 213      |       | 243      |       |
| Certificates of  deposit            |       | 19,030                  |       | 10,465   |       | 6,038    |       |
| Total interest  expense             |       | $                       | 24,899     |     | $          | 12,694   |       | $ | 8,656 |   |

 

The aggregate amount of time deposits, each with aminimum denomination of $100,000 was $283.6 million and $225.3 million at December 31,2005 and 2004, respectively.

Brokered certificates of deposits at December 31,2005 and 2004 were $9.8 million and $86.7 million, respectively.

At December 31,2005, the scheduled maturities of certificates of deposit were as follows:

| ** **           | ** ** | **(In thousands)** | ** ** |
|----------------------|------------|-------------------------|------------|
| 2006                 |       |                    | $          | 424,575 |   |   |
| 2007                 |       |                    | 114,019    |   |   |
| 2008                 |       |                    | 83,017     |   |   |
| 2009                 |       |                    | 10,081     |   |   |
| 2010 and  thereafter |       |                    | 6,902      |   |   |
|                 |       |                    | $638,594   |   |   |

 

**(9) Other Borrowed Funds**

At December 31,2005 and 2004, other borrowed funds consisted of the following:

| ** **                                 | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(In thousands)** | ** ** |
| Fixed rate FHLB  advances                  |       | $                       | 88,458     |     | $          | 81,958 |   |
| Variable rate  FHLB advances               |       | —                  |       | 55,000   |       |
| Repurchase  agreements                     |       | 41,170                  |       | 30,357   |       |
| Payable to Cardinal  Statutory Trust I     |       | 20,619                  |       | 20,619   |       |
| Federal funds  purchased                   |       | —                  |       | 7,000    |       |
| Treasury,  Tax & Loan note option |       | 5,174                   |       | 6,151    |       |
| Total other  borrowed funds                |       | $                       | 155,421    |     | $          | 201,085 |   |

 

The Company had fixed rate advances from the FederalHome Loan Bank of Atlanta (“FHLB”) of $88.5 million at December 31, 2005. Theseadvances mature through 2014 and have interest rates ranging from 2.07% to4.31%. At December 31, 2004, the Company had $82.0 million in fixed rateadvances from the Federal Home Loan Bank of Atlanta with maturities through2014 and interest rates ranging from 1.56% to 3.59%. The Company also had avariable rate advance from the FHLB of $55.0 million at December 31, 2004,which matured in 2005. The variable rate was based on the federal fundspurchased rate and repriced daily. At December 31, 2004, the interest rateon this advance was 2.44%.

82

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Thecontractual maturities of the fixed and variable rate advances at December 31,2005 and 2004 were as follows:

| **At December 31, 2005** | ** ** |
|-----------------------------------------|------------|
| **Type of Advance**           | ** ** | **Interest Rate** | ** ** | **Advance Term** | ** ** | **Maturity Date** | ** ** | **Balance** | ** ** |
| **(In thousands)**                 | ** ** |
| Fixed Rate Credit                       |       | 2.07%–2.58% |   | 24–36 months |   |   | 2006 |   |   | $ | 9,250 |   |
| Expandable                              |       | 4.12% |   | 24 months |   |   | 2007 |   |   | 5,000 |   |
| Fixed Rate Credit                       |       | 2.63%–3.59% |   | 36–48 months |   |   | 2007 |   |   | 17,750 |   |
| Fixed Rate Credit                       |       | 4.08%–4.31% |   | 36 months |   |   | 2008 |   |   | 10,000 |   |
| Principal  Reducing Credit         |       | 2.29% |   | 60 months |   |   | 2008 |   |   | 6,458 |   |
| Convertible                             |       | 2.91%–3.50% |   | 60 months |   |   | 2009 |   |   | 15,000 |   |
| Convertible                             |       | 3.72% |   | 60 months |   |   | 2010 |   |   | 5,000 |   |
| Convertible                             |       | 3.33%–3.47% |   | 10 years |   |   | 2014 |   |   | 20,000 |   |
| **Total FHLB Advances**                 | ** ** | **3.27%** | ** ** | ** ** |   |   |   |   | ** ** | **$** | **88,458** | ** ** |

 

| **At December 31, 2004** | ** ** |
|-----------------------------------------|------------|
| **Type of Advance**           | ** ** | **Interest Rate** | ** ** | **Advance Term** | ** ** | **Maturity Date** | ** ** | **Balance** | ** ** |
| **(In thousands)**                 | ** ** |
| Fixed Rate Credit                       |       | 1.56%–1.83% |   | 12–24 months |   |   | 2005 |   |   | $ | 11,000 |   |
| Daily Rate Credit                       |       | 2.44% |   | 12 months |   |   | 2005 |   |   | 55,000 |   |
| Fixed Rate Credit                       |       | 2.07%–2.58% |   | 24–36 months |   |   | 2006 |   |   | 9,250 |   |
| Fixed Rate Credit                       |       | 2.63%–3.59% |   | 36–48 months |   |   | 2007 |   |   | 17,750 |   |
| Principal  Reducing Credit         |       | 2.29% |   | 60 months |   |   | 2008 |   |   | 8,958 |   |
| Convertible                             |       | 2.91%–3.50% |   | 60 months |   |   | 2009 |   |   | 15,000 |   |
| Convertible                             |       | 3.33%–3.47% |   | 10 years |   |   | 2014 |   |   | 20,000 |   |
| **Total  FHLB Advances**                | ** ** | **2.68%** | ** ** | ** ** | ** ** |   |   |   | ** ** | **$** | **136,958** | ** ** |

 

The average balances of FHLB advances for the yearsended December 31, 2005 and 2004 were $91.4 million and $94.8 million,respectively. The maximum amount outstanding at any month-end during the yearsended December 31, 2005 and 2004 was $100.3 million and $137.0 million,respectively. Total interest expense on FHLB advances for the years ended December 31,2005, 2004 and 2003 was $2.9 million, $2.3 million, and $654,000, respectively.

Securities sold under agreements to repurchasegenerally mature within one to four days, are reflected in the consolidatedstatements of financial condition at the amount of cash received, which isbased on the fair value of the underlying securities. At December 31, 2005and 2004 the Company had repurchase agreements of $41.2 million and $30.4million, respectively. The weighted-average interest rate of these repurchaseagreements was 1.41% and 0.75% at December 31, 2005 and 2004, respectively.The average balances of the repurchase agreements during 2005 and 2004 were$34.7 million and $27.3 million, respectively, and the maximum amountoutstanding at any month-end during 2005 and 2004 was $41.2 million and $45.1million, respectively.  Interest expenseon repurchase agreements for 2005, 2004 and 2003 was $429,000, $180,000, and$72,000, respectively.

At December 31, 2004, the Company had outstandingfederal funds purchased of $7.0 million. Interest expense on federal fundspurchased in 2005, 2004 and 2003 was $216,000, $114,000 and $47,000, respectively.The Company also has a Treasury, Tax, & Loan (“TT&L”) note optionwith the Federal Reserve. At December 31, 2005 and 2004, the outstandingbalance in the TT&L note option was $5.2 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

million and $6.2 million,respectively. Interest expense related to the TT&L note option in 2005 and2004 was $91,000 and $23,000, respectively. There was no interest expense forthe TT&L note option in 2003. The Company had a line of credit at theFederal Reserve discount window in the amount of $19.4 million at December 31,2005, which was not utilized as of that date. Interest expense related to thediscount window for 2004 was $28,000. There was no interest expense related tothe discount window in 2005 or 2003.

In July 2004, the Company formed a newwholly-owned subsidiary, Cardinal Statutory Trust I (the “Trust”), for thepurpose of issuing $20.0 million of floating rate junior subordinateddeferrable interest debentures (“trust preferred securities”). These trustpreferred securities are due in 2034 and have an interest rate of LIBOR (LondonInterbank Offering Rate) plus 2.40%, which adjusts quarterly. AtDecember 31, 2005, the interest rate on trust preferred securities was6.89%. These securities are redeemable at a premium through March 2008 andat par thereafter. The Company has guaranteed payment of these securities. The$20.6 million payable by the Company to the Trust is included in other borrowedfunds. The Trust is an unconsolidated subsidiary since the Company is not theprimary beneficiary of this entity under FASB Interpretation No. 46R*Consolidation of Variable Interest Entities*.The additional $619,000 that is payable by the Company to the Trust representsthe Company’s capital investment in the Trust. The Company utilized theproceeds from the issuance of the trust preferred securities to make a capitalcontribution into the Bank. Interest expense on the trust preferred securitiesin 2005 and 2004 was $1.2 million and $382,000, respectively.

Thescheduled maturities of other borrowed funds at December 31, 2005 were asfollows:

| *** ***                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|
| *** ***                  | ** ** | **(In thousands)** | ** ** |
| FHLB advances                 |       | $                       | 9,250      |     | $          | 22,750   |       | $        | 16,458     |                          | $          | 15,000 |   |   | $ | 25,000 |   |   |
| Repurchase  agreements        |       | 41,170                  |       | —   |       | —   |       | —   |       |                          | —     |   |   |
| Payable to  Statutory Trust I |       | —                  |       | —   |       | —   |       | —   |       |                          | 20,619     |   |   |
| TT&L note  option         |       | 5,174                   |       | —   |       | —   |       | —   |       |                          | —     |   |   |
|                          |       | $                       | 55,594     |     | $          | 22,750   |       | $        | 16,458     |                          | $          | 15,000 |   |   | $ | 45,619 |   |   |

 

**(10) Loans Held for Sale Financing**

George Mason and the Bank have a $150 million floatingrate revolving credit and security agreement with a third party. The purpose ofthis credit facility is to fund residential mortgage loans at George Masonprior to their sale into the secondary market. The credit facility requires,among other things, that George Mason and the Bank have positive quarterly netincome and maintain specified minimum tangible and regulatory net worthrequirements. The Company has guaranteed repayment of this debt. The interestrate on this credit facility is LIBOR plus between 1.50% and 1.875%. At December 31,2005 and 2004, none of this line was utilized.

The same lender has also provided a $100 millionfacility that is utilized by George Mason to fund residential mortgage loansheld for sale to this lender. The terms of this facility are substantially thesame as the above-referenced revolving credit and security agreement and thecost of this facility is netted against interest earned on the loans pendingsettlement with the lender. Loans under this credit facility are consideredsold when financed.

84

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Interestexpense related to George Mason’s warehouse financing was $109,000 and $228,000for the years ended December 31, 2005 and 2004, respectively.

**(11) Income Taxes**

The Company and its subsidiaries file consolidatedfederal tax returns on a calendar-year basis. The Company recorded incometax expense of $5.2 million and $1.7 million for the years ended December 31,2005 and 2004, respectively, and a benefit of $3.5 million during the yearended December 31, 2003.

Theprovision for income tax expense (benefit) is reconciled to the amount computedby applying the federal corporate tax rate to income before taxes and is asfollows:

| *** ***                          | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(In thousands)** | ** ** |
| Income tax at  federal corporate rate |       | $                       | 5,115      |     | $          | 1,762    |       | $ | 900 |   |
| Change in  valuation allowance        |       | (30                     | )          | 97       |       | (4,415   | )          |
| Expected state tax  benefit           |       | —                  |       | (97      | )          | —   |       |
| Nondeductible  expenses               |       | 15                      |       | 17       |       | 7        |       |
| Other                                 |       | 67                      |       | (66      | )          | —   |       |
|                                  |       | $                       | 5,167      |     | $          | 1,713    |       | $ | (3,508 | ) |

 

Thecomponents of income tax expense are as follows:

| *** ***                                                                                                                        | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                          | ** ** | **(In thousands)** | ** ** |
| Included in net  income:                                                                                                            |       |                    |       |     |       |     |       |
| Current                                                                                                                             |       |                    |       |     |       |     |       |
| Federal                                                                                                                             |       | $                       | 5,178      |     | $          | 134      |       | $ | — |   |
| Total current                                                                                                                       |       | 5,178                   |       | 134      |       | —   |       |
| Deferred                                                                                                                            |       |                    |       |     |       |     |       |
| Federal                                                                                                                             |       | (11                     | )          | 1,579    |       | (3,508   | )          |
| Total deferred                                                                                                                      |       | (11                     | )          | 1,579    |       | (3,508   | )          |
| Total included in net income                                                                                                        |       | $                       | 5,167      |     | $          | 1,713    |       | $ | (3,508 | ) |
| Included in  shareholders’ equity:                                                                                             |       |                    |       |     |       |     |       |
| Deferred tax expense (benefit) related to the change  in the net unrealized gain (loss) on investment securities available for sale |       | $                       | (1,023     | )        | $          | (344     | )          | $ | 1,057 |   |
| Deferred tax benefit related to the change in the  net unrealized loss on derivative instruments designated as cash flow hedges     |       | (149                    | )          | —   |       | —   |       |
| Total included in shareholders’ equity                                                                                         |       | $                       | (1,172     | )        | $          | (344     | )          | $ | 1,057 |   |

 

85

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Thetax effects of temporary differences between the financial reporting basis andincome tax basis of assets and liabilities relate to the following:

| *** ***                                            | ** ** | **2005**                | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(In thousands)** | ** ** |
| Deferred tax  assets:                                   |       |                    |       |     |       |
| Allowance for loan losses                               |       | $                       | 2,800      |     | $          | 1,944 |   |
| Net operating loss carryforwards                        |       | 735                     |       | 2,166    |       |
| Unrealized losses on investment securities              |       |                    |       |     |       |
| available-for-sale                                      |       | 1,627                   |       | 604      |       |
| Unrealized losses on derivative instruments  designated |       |                    |       |     |       |
| as cash flow hedges                                     |       | 149                     |       | —   |       |
| Deferred compensation                                   |       | 943                     |       | —   |       |
| Other                                                   |       | 84                      |       | 233      |       |
| Total gross deferred tax assets                         |       | 6,338                   |       | 4,947    |       |
| Less valuation  allowance                               |       | (735                    | )          | (765     | )          |
| Net deferred tax assets                                 |       | 5,603                   |       | 4,182    |       |
| Deferred tax  liabilities:                              |       |                    |       |     |       |
| Prepaid expenses                                        |       | (90                     | )          | (86      | )          |
| Depreciation                                            |       | (207                    | )          | (650     | )          |
| Loan origination costs                                  |       | (331                    | )          | (208     | )          |
| Goodwill and intangibles                                |       | (576                    | )          | —   |       |
| Total gross deferred tax liabilities                    |       | (1,204                  | )          | (944     | )          |
| Net deferred tax asset                                  |       | $                       | 4,399      |     | $          | 3,238 |   |

 

Deferred tax assets and liabilities are recognized forthe tax effects of differing carrying values of assets and liabilities for taxand financial statement purposes that will reverse in future periods. Whensubstantial uncertainty exists concerning the recoverability of a deferred taxasset, the carrying value of the asset is reduced by a valuation allowance. Valuation allowances of $735,000 and $765,000at December 31, 2005 and 2004, respectively, have been established fordeferred tax assets. The valuation allowances relate primarily to the stateportion of the net operating losses of the parent company and Cardinal WealthServices, Inc. as realization is dependent upon generating future taxableincome within those entities. Management believes that future operations of theCompany will generate sufficient taxable income to realize the net deferred taxassets at December 31, 2005 and 2004.

TheCompany has used all of its federal net operating loss carryforwards as of December 31,2005.

**(12) DerivativeInstruments and Hedging Activities**

The Company is a party to forward loan sales contractswhich are utilized to mitigate exposure to fluctuations in interest ratesrelated to closed loans which are held for sale.

Beginning on October 1, 2005, the Company hasdesignated these derivatives as cash flow hedges in accordance with SFAS No. 133,as amended. These hedges are recorded at fair value in the statement ofcondition as an other asset or other liability with a corresponding offset toaccumulated other comprehensive income in shareholders’ equity. Amounts arereclassified from accumulated other 

86

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

comprehensive income to theincome statement in the period or periods that the related loan sale isreflected in income.

At December 31, 2005, accumulated othercomprehensive income included an after tax unrealized loss of $288,000 relatedto forward loan sales contracts. Loans held for sale are generally sold withinsixty days of closing and, therefore, substantially all of the amount recordedin accumulated other comprehensive income at December 31, 2005 which isrelated to the Company’s cash flow hedges will be recognized in earnings duringthe first quarter of 2006. In 2005, the Company recorded a charge to earningsof $1,000 due to hedge ineffectiveness. 

At December 31, 2005, the Company had $109.9 millionin loan commitments and associated forward loan sales and had $279.0 million inforward loan sales and $279.0 million in loans held for sales contracts. AtDecember 31, 2005, the derivative asset was $1.4 million and thederivative liability was $1.8 million. 

As of December 31,2004, the fair value of interest rate lock commitments was $(63,000), and the fairvalue of forward sale commitments was $587,000. These derivatives are recordedin other assets and other liabilities on the consolidated statement ofcondition at their fair values. At December 31, 2004, a basis adjustmentof $(351,000) was recorded related to the closed loans held for sale andis included in loans held for sale, net in the consolidated statement ofcondition.

**(13) Regulatory Matters**

The Bank, as a state-chartered bank, is subject to thedividend restrictions established by the State Corporation Commission of theCommonwealth of Virginia. Under such restrictions, the Bank may not, withoutthe prior approval of the Bank’s primary regulator, declare dividends in excessof the sum of the current year’s earnings (as defined) plus the retainedearnings (as defined) from the prior two years. At December 31, 2005,there were approximately $10.3 million of accumulated earnings at the Bankwhich could be paid as dividends to the Company.

The Bank isrequired to maintain a minimum non-interest earning average reserve balancewith the Federal Reserve Bank. The average amount of the required reserve was$100,000 for 2005.

The Federal DepositInsurance Corporation Improvement Act of 1991 (“FDICIA”) requires bankingregulators to stratify banks into five quality tiers based upon their relativecapital strengths and increase the regulation of the weaker institutions. Thekey measures of capital are: (1) total capital (Tier I capital plus theallowance for loan losses up to certain limitations) as a percent of total risk-weightedassets, (2) Tier I capital (as defined) as a percent of total risk-weightedassets (as defined), and (3) Tier I capital (as defined) as a percent oftotal average assets (as defined).

87

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Theregulatory capital of the Company at December 31, 2005 and 2004 is as follows:

| **At December 31, 2005**                | ** ** | **Actual**              | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Amount**              | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** ** |
| Total capital to risk-weighted  assets  |       | $                       | 159,155    |                                         | 15.65      | %                                                                                           | $          | 81,334 | 3 |   | 8.00 | % |   | $ | 101,668 | 3 | 10.00 | % |
| Tier I capital to risk-weighted  assets |       | 150,742                 |       | 14.83                                        | %          | 40,667                                                                                      | 3     |   | 4.00 | % |   | 61,001 | 3 | 6.00 | % |
| Tier I capital to  average assets       |       | 150,742                 |       | 10.71                                        | %          | 56,308                                                                                      | 3     |   | 4.00 | % |   | 70,386 | 3 | 5.00 | % |
|                                         |            |                         |            |                                              |            |                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| **At December 31, 2004** | ** ** | **Actual**              | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |      |
|-----------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|-----------|
| ** **                              | ** ** | **Amount**              | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                       | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |   |
| ** **                              | ** ** | **(In thousands)** | ** ** |                                         |
| Total capital to  risk-weighted assets  |       | $                       | 107,660    |                                         | 13.40      | %                                                                                                | $          | 64,294    | 3 |   | 8.00 | % |   | $ | 80,368 | 3 | 10.00 | % |
| Tier I capital to  risk-weighted assets |       | 101,670                 |       | 12.65                                        | %          | 32,147                                                                                           | 3     |      | 4.00 | % |   | 48,221 | 3 | 6.00 | % |
| Tier I capital to  average assets       |       | 101,670                 |       | 8.83                                         | %          | 46,075                                                                                           | 3     |      | 4.00 | % |   | 57,594 | 3 | 5.00 | % |
|                                         |            |                         |            |                                              |            |                                                                                                  |            |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2005 and 2004, the Company andthe Bank met all regulatory capital requirements and are considered “well-capitalized”from a regulatory perspective.

George Mason is also required to maintain definedcapital levels under Department of Housing and Urban Development guidelines. AtDecember 31, 2005 and 2004, George Mason maintained capital in excess ofthese required guidelines.

**(14) Related-Party Transactions**

Certain officers, directors, employees and/or their relatedbusiness interests are loan customers in the ordinary course of business. Theseloans have been made on substantially the same terms as those prevailing at thetime for comparable loans with non-related parties and do not involve more thannormal risk of collectibility or present other unfavorable features.

Analysisof activity for loans to related parties follows:

| ** **                   | ** ** | **2005**                | ** ** | **2004** | ** ** |
|------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Balance,  beginning of year  |       | $                       | 22,076     |     | $          | 4,491 |   |
| New loans                    |       | 17,587                  |       | 20,000   |       |
| Loans paid off or  paid down |       | (4,665                  | )          | (2,415   | )          |
| Balance, end of year         |       | $                       | 34,998     |     | $          | 22,076 |   |

 

88

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**(15) Earnings Per Common Share**

Thefollowing is the calculation of basic and diluted earnings per common share.

| ** **                           | ** ** | **2005**                                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                           | ** ** | **(In thousands,  except per share data)** | ** ** |
| Net income                           |       | $                                                              | 9,876      |     | $          | 3,469    |       | $ | 6,154 |   |
| Dividends to  preferred shareholders |       | —                                                         |       | —   |       | 495      |       |
| Net income to  common shareholders   |       | $                                                              | 9,876      |     | $          | 3,469    |       | $ | 5,659 |   |
| Weighted average  shares for basic   |       | 22,104                                                         |       | 18,448   |       | 10,218   |       |
| Weighted average  shares for diluted |       | 22,454                                                         |       | 18,705   |       | 11,468   |       |
| Basic earnings  per common share     |       | $                                                              | 0.45       |     | $          | 0.19     |       | $ | 0.55 |   |
| Diluted earnings per  common share   |       | $                                                              | 0.44       |     | $          | 0.19     |       | $ | 0.54 |   |

 

For 2005, 2004 and 2003, the dilutive potential commonshares resulting from outstanding stock options added to the weighted averageshares for the diluted earnings per common share calculation were 273,000,257,000 and 227,000, respectively. Outstanding stock options excluded from theweighted average shares outstanding for the diluted earnings per sharecalculation were 22,998, and 9,000 at December 31, 2005 and 2003,respectively. There were no outstanding stock options excluded from theweighted average shares outstanding for the diluted earnings per sharecalculation at December 31, 2004. These stock options have exercise pricesthat were greater than the average market price of the Company’s common stockfor the years indicated.

For 2003, incrementalshares from the assumed conversion of the Company’s convertible preferred stockincluded in the weighted average shares for the diluted earnings per commonshare calculation was 1,023,000 shares. There were no convertiblepreferred shares included in the weighted average shares for the dilutedearnings per common share calculations for 2005 and 2004.

Basic earnings per shareis impacted by the number of shares required to be issued under the Company’svarious deferred compensation plans and diluted earnings per share is impactedby those common shares which may be, but are not required to, be issued underthese plans. As a result of these deferred compensation plans, which wereestablished in January 2005, 8,861 shares and 76,401 shares areincluded in weighted average shares for the basic and diluted earnings pershare calculations, respectively, at December 31, 2005.

**(16) 401(k) Plan**

Employees who work twenty(20) hours or more a week and have been employed by the Company for a month canelect to participate in and make contributions into a 401(k) Plan. TheCompany contributes $0.50 for $1.00 of employee contributions up to a maximumof 3% of the employee’s contributions. Expense related to the Company’s matchin 2005, 2004 and 2003 were $521,000, $286,000, and $106,000, respectively. Employeesare immediately vested in the Company’s matching contribution.

89

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**(17) Directorand Employee Stock Compensation Plans**

In 1998, the Company adopted a stock option plan(the ”Plan”) pursuant to which the Company may grant up to 625,000 stockoptions to employees and members of the Company’s and its’ subsidiaries’ boardsof directors.

In 2004, the shareholders approved the Company’s Amendedand Restated 2002 Equity Compensation Plan (the “Equity Plan”). The Equity Planauthorizes the granting of options, which may either be incentive stockoptions, non-qualified stock options, stock appreciation rights, restrictedstock awards, phantom stock awards and performance share awards to directors,eligible officers and key employees of the Company. In 2005, the shareholdersapproved an amendment to the Equity Plan to increase the number of shares ofcommon stock reserved for issuance under this plan from 1,450,000 to 1,970,000.

Stock options are granted with an exercise price equalto the stock’s fair market value at the date of grant. Director stock optionshave ten year terms and vest and become fully exercisable immediately. Certain employeestock options have ten year terms and vest and become fully exercisable after 3years. Other employee stock options have ten year terms and vest and becomefully exercisable in 20% increments beginning as of the grant date. Inaddition, the Company has granted stock options to employees of the Companythat have ten year terms and vest and become fully exercisable in 20%increments beginning after their first year of vesting. During 2005, certainstock options granted to employees have ten year terms and vest and becomefully exercisable immediately.

Stockoption activity during the three years ended December 31, 2005 was asfollows:

| ** **                         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| Balance at  December 31, 2002 |       | 542,893                    |       |                                   | $          | 4.22 |   |   |
| Granted                            |       | 376,000                    |       |                                   | 5.07       |   |   |
| Exercised                          |       | (32,523                    | )          |                                   | 4.44       |   |   |
| Forfeited                          |       | (38,933                    | )          |                                   | 4.90       |   |   |
| Balance at  December 31, 2003 |       | 847,437                    |       |                                   | $          | 4.57 |   |   |
| Granted                            |       | 537,018                    |       |                                   | 8.71       |   |   |
| Exercised                          |       | (114,063                   | )          |                                   | 4.36       |   |   |
| Forfeited                          |       | (39,904                    | )          |                                   | 6.29       |   |   |
| Balance at  December 31, 2004 |       | 1,230,488                  |       |                                   | $          | 6.34 |   |   |
| Granted                            |       | 1,210,245                  |       |                                   | 10.06      |   |   |
| Exercised                          |       | (113,977                   | )          |                                   | 6.08       |   |   |
| Forfeited                          |       | (57,535                    | )          |                                   | 8.24       |   |   |
| Balance at  December 31, 2005 |       | 2,269,221                  |       |                                   | $          | 8.29 |   |   |

 

90

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Informationpertaining to stock options outstanding at December 31, 2005 and 2004 isas follows:

| ** **                            | ** **                              | **At December 31, 2005** | ** ** |
|---------------------------------------|-----------------------------------------|-----------------------------------------|------------|
| ** **                            | ** **                              | **Options Outstanding**            | ** ** | **Options Exercisable** | ** ** |
| ** **                            | ** **                              | ** **                              | ** ** | **Weighted  Average** | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** |
| ** **                            | **Range of  Exercise Prices** | ** **                              | ** ** | **Number  Outstanding** | ** ** | **Remaining  Contractual Life** | ** ** | **Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Exercise  Price** | ** ** |
| $2.41 - $3.56                         |                                    |                                    | 230,506    |   |   |   | 6.1 years |   |   |   | $ | 3.26 |   |   | 168,094 |   |   | $ | 3.26 |   |   |
| $3.95 - $5.50                         |                                    |                                    | 325,588    |   |   |   | 6.9 years |   |   |   | 4.93 |   |   | 213,514 |   |   | 4.90 |   |   |
| $6.38 - $8.28     |                                    |                                    | 274,382    |   |   |   | 7.7 years |   |   |   | 8.05 |   |   | 214,861 |   |   | 8.05 |   |   |
| $8.50 - $9.59                         |                                    |                                    | 663,176    |   |   |   | 9.1 years |   |   |   | 8.97 |   |   | 657,076 |   |   | 8.97 |   |   |
| $9.78 - $11.15                        |                                    |                                    | 775,569    |   |   |   | 9.4 years |   |   |   | 10.69 |   |   | 775,569 |   |   | 10.69 |   |   |
| Outstanding at year end               |                                    |                                    | 2,269,221  |   |   |   | 8.4 years |   |   |   | $ | 8.29 |   |   | 2,029,114 |   |   | $ | 8.63 |   |   |
|                                       |                                         |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **              | ** **                              | **At December 31, 2004** | ** ** |
|-------------------------|-----------------------------------------|-----------------------------------------|------------|
| ** **              | ** **                              | **Options Outstanding**            | ** ** | **Options Exercisable** | ** ** |
| ** **              | ** **                              | ** **                              | ** ** | **Weighted  Average** | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** |
| ** **              | **Range of  Exercise Prices** | ** **                              | ** ** | **Number  Outstanding** | ** ** | **Remaining  Contractual Life** | ** ** | **Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Exercise  Price** | ** ** |
| $2.41 - $3.56           |                                    |                                    | 247,756    |   |   |   | 7.1 years |   |   |   | $ | 3.26 |   |   | 143,888 |   |   | $ | 3.27 |   |   |
| $3.95 - $5.50           |                                    |                                    | 362,748    |   |   |   | 7.8 years |   |   |   | 4.91 |   |   | 178,562 |   |   | 4.88 |   |   |
| $6.38 - $7.25           |                                    |                                    | 100,857    |   |   |   | 2.5 years |   |   |   | 6.84 |   |   | 87,657 |   |   | 6.84 |   |   |
| $8.28 - $11.15          |                                    |                                    | 519,127    |   |   |   | 9.3 years |   |   |   | 8.72 |   |   | 303,556 |   |   | 8.63 |   |   |
| Outstanding at year end |                                    |                                    | 1,230,488  |   |   |   | 7.9 years |   |   |   | $ | 6.34 |   |   | 713,663 |   |   | $ | 6.39 |   |   |
|                         |                                         |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2005and 2004, additional shares available for stock option grants under both stockoption plans were 55,148 and 687,858, respectively.

**(18) Segment Reporting**

In 2003, the Company operated and reported in twobusiness segments, commercial banking and investment services. As of July 7,2004, the Company began operating in a third business segment, mortgagebanking, with the completion of its acquisition of George Mason.

The commercial banking segment includes bothcommercial and consumer lending and provides customers such products ascommercial loans, real estate loans, and other business financing and consumerloans. In addition, this segment provides customers with various depositproducts including demand deposit accounts, savings accounts and certificatesof deposit. The mortgage banking segment engages primarily in the originationand acquisition of residential mortgages for sale into the secondary market ona best efforts basis. The investment services segment provides investment servicesto businesses and individuals including financial planning andretirement/estate planning. Wilson/Bennett is included in the investmentservices segment since the date of its acquisition, June 9, 2005.

91

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Informationabout the reportable segments and reconciliation of this information to theconsolidated financial statements as of and for the years ended December 31,2005, 2004 and 2003 follows:

**At and for the Year Ended December 31, 2005:**

| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Investment  Services** | ** ** | **Intersegment  Elimination** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** | ** **            |
| Net interest  income        |       | $                       | 32,171     |                  | $          | 6,203                    |       |                          | $          | —    |       |             |       | $ | — |   |   | $ | (891 | ) |   | $ | 37,483 |   |   |
| Provision for  loan losses  |       | 2,456                   |       | —                |       |                     | —     |                          |       |      | —     |             |       | — |   |   | 2,456 |   |   |
| Non-interest  income        |       | 1,964                   |       | 21,255                |       |                     | 1,367      |                          |       |      | —     |             |       | 83 |   |   | 24,669 |   |   |
| Non-interest  expense       |       | 23,802                  |       | 17,332                |       |                     | 1,422      |                          |       |      | —     |             |       | 2,097 |   |   | 44,653 |   |   |
| Provision for  income taxes |       | 2,764                   |       | 3,413                 |       |                     | (56        | )                             |       |      | —     |             |       | (954 | ) |   | 5,167 |   |   |
| Net income (loss)           |       | $                       | 5,113      |                  | $          | 6,713                    |       |                          | $          | 1         |       |             |       | $ | — |   |   | $ | (1,951 | ) |   | $ | 9,876 |   |   |
| Total Assets                |       | $                       | 1,387,504  |                  | $          | 376,618                  |       |                          | $          | 6,882     |       |             |       | $ | (479,573 | ) |   | $ | 160,856 |   |   | $ | 1,452,287 |   |   |

 

**Atand for the Year Ended December 31, 2004:**

| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Investment  Services** | ** ** | **Intersegment  Elimination** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** | ** **            |
| Net interest  income        |       | $                       | 21,753     |                  | $          | 3,057                    |       |                          | $          | —    |       |             |       | $ | — |   |   | $ | (257 | ) |   | $ | 24,553 |   |   |
| Provision for  loan losses  |       | 1,626                   |       | —                |       |                     | —     |                          |       |      | —     |             |       | — |   |   | 1,626 |   |   |
| Non-interest  income        |       | 1,804                   |       | 6,953                 |       |                     | 645        |                          |       |      | —     |             |       | 7 |   |   | 9,409 |   |   |
| Non-interest expense        |       | 17,065                  |       | 7,889                 |       |                     | 800        |                          |       |      | —     |             |       | 1,400 |   |   | 27,154 |   |   |
| Provision for  income taxes |       | 1,628                   |       | 698                   |       |                     | (52        | )                             |       |      | —     |             |       | (561 | ) |   | 1,713 |   |   |
| Net income (loss)           |       | $                       | 3,238      |                  | $          | 1,423                    |       |                          | $          | (103      | )          |             |       | $ | — |   |   | $ | (1,089 | ) |   | $ | 3,469 |   |   |
| Total Assets                |       | $                       | 1,123,868  |                  | $          | 392,241                  |       |                          | $          | 685       |       |             |       | $ | (421,203 | ) |   | $ | 115,985 |   |   | $ | 1,211,576 |   |   |

 

**Atand for the Year Ended December 31, 2003:**

| ** **                  | ** ** | **Commercial  Banking** | ** **              | **Investment  Services** | ** ** | **Intersegment  Elimination** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|-------------------------|--------------------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|
| ** **                  | ** ** | ** **              | **(In thousands)** | ** **               |
| Net interest  income        |       |                    | $                       | 15,077                   |       |                          |       | $         | —     |             |       |   | $ | — |   |   | $ | 96 |   |   | $ | 15,173 |   |   |
| Provision for  loan losses  |       |                    | 1,001                   |                     |       |                          | —     |      |       |             | —     |   |   | — |   |   | 1,001 |   |   |
| Non-interest  income        |       |                    | 2,954                   |                     |       |                          | 843        |      |       |             | —     |   |   | 32 |   |   | 3,829 |   |   |
| Non-interest  expense       |       |                    | 13,265                  |                     |       |                          | 820        |      |       |             | —     |   |   | 1,270 |   |   | 15,355 |   |   |
| Provision for  income taxes |       |                    | (464                    | )                        |       |                          | (443       | )         |       |             | —     |   |   | (2,601 | ) |   | (3,508 | ) |   |
| Net income                  |       |                    | $                       | 4,229                    |       |                          |       | $         | 466        |             |       |   | $ | — |   |   | $ | 1,459 |   |   | $ | 6,154 |   |   |
| Total Assets                |       |                    | $                       | 630,415                  |       |                          |       | $         | 776        |             |       |   | $ | (80,903 | ) |   | $ | 85,960 |   |   | $ | 636,248 |   |   |

 

The Company does not haveoperating segments other than those reported. Parent company financialinformation is included in the “Other” category and represents an overheadfunction rather than an operating segment. The parent company’s mostsignificant assets are its net investments in its operating subsidiaries. Theparent company’s net interest income (loss) is comprised of interest incomefrom short-term investments and interest expense on trust preferred securities.

92

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**(19) FinancialInstruments with Off-Balance-Sheet Risk**

The Company is a party to financial instruments withoff-balance-sheet risk in the normal course of business to meet thefinancing needs of its customers. These financial instruments includecommitments to extend credit and standby letters of credit and financialguarantees. Commitments to extend credit are agreements to lend to a customerso long as there is no violation of any condition established in the contract. Commitmentsusually have fixed expiration dates up to one year or other termination clausesand may require payment of a fee. Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements.

Standby letters of credit are conditional commitmentsissued by the Company to guarantee the performance of the contractualobligations by a customer to a third party. The majority of these guaranteesextend until satisfactory completion of the customer’s contractual obligations.All standby letters of credit outstanding at December 31, 2005 arecollateralized.

These instruments represent obligations of the Companyto extend credit or guarantee borrowings and are not recorded on theconsolidated statements of financial condition. The rates and terms of theseinstruments are competitive with others in the market in which the Companyoperates. Commitments to extend credit of $109.9 million as of December 31,2005 are related to George Mason’s pipeline and are of a short term nature. Commitmentsto extend credit of $215.7 million primarily have floating rates as of December 31,2005.

Thoseinstruments may involve, to varying degrees, elements of credit and interestrate risk in excess of the amount recognized in the consolidated statements offinancial condition. Credit risk is defined as the possibility of sustaining aloss because the other parties to a financial instrument fail to perform inaccordance with the terms of the contract. The Company’s maximum exposure tocredit loss under standby letters of credit and commitments to extend credit isrepresented by the contractual amounts of those instruments.

| ** **                                                                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                     | ** ** | **(In thousands)** | ** ** |
| Financial  instruments whose contract amounts represent potential credit risk: |       |                    |       |     |       |
| Commitments to extend credit                                                   |       | $                       | 325,571    |     | $          | 324,786 |   |
| Standby letters  of credit                                                     |       | 7,012                   |       | 5,159    |       |
|                                                                                |            |                         |            |          |            |  |  |

 

The Company has not recorded a liability associatedwith standby letters of credit at December 31, 2005 and 2004 as suchamounts were immaterial.

George Mason maintains a reserve for loans sold thatpay off earlier than the contractual agreed upon period, thereby requiring thatGeorge Mason refund part of the purchase price. The reserves as of December 31,2005 and 2004 were $116,000 and $75,000, respectively.

The Company uses the same credit policies in makingcommitments and conditional obligations as it does for on-balance-sheetinstruments. The Company evaluates each customer’s creditworthiness on a case-by-casebasis and requires collateral to support financial instruments when deemednecessary. The amount of collateral obtained upon extension of credit is basedon management’s evaluation of the counterparty. Collateral held varies but mayinclude deposits held by the Company, marketable securities, 

93

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

accounts receivable,inventory, property, plant and equipment, and income-producing commercialproperties.

The Company has guaranteedpayment of the $20.0 million debt of Statutory Trust I and has also guaranteedrepayment of any borrowing under George Mason’s $150 million line of credit.

**(20) Disclosuresof Fair Value of Financial Instruments**

The assumptions used and the estimates disclosedrepresent management’s best judgment of appropriate valuation methods. Theseestimates are based on pertinent information available to management at thevaluation date. In certain cases, fair values are not subject to precisequantification or verification and may change as economic and market factorsand management’s evaluation of those factors change.

Although management usesits best judgment in estimating the fair value of financial instruments, thereare inherent limitations in any estimation technique. Therefore, these fairvalue estimates are not necessarily indicative of the amounts the Company wouldrealize in a market transaction. Because of the wide range of valuationtechniques and the numerous estimates and assumptions which must be made, itmay be difficult to make reasonable comparisons between the Company’s fairvalue information and that of other banking institutions. It is important thatthe many uncertainties be considered when using the estimated fair valuedisclosures and that, because of these uncertainties, the aggregate fair valueamount should not be construed as representative of the underlying value of theCompany.

*Fair Value of FinancialInstruments*

The following summarizesthe significant methodologies and assumptions used in estimating the fairvalues presented in the accompanying table.

*Cash and Cash Equivalents*

*Thecarrying amount of cash and cash equivalents is used as a reasonable estimateof fair value.*

*Investment Securities and Other Investments*

Fair values for investmentsecurities are based on quoted market prices or prices quoted for similarfinancial instruments. Fair value for other investments is estimated at theircost since no active trading markets exist.

*Loans Held for Sale, Net*

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

*Loans Receivable, Net*

In order to determine thefair market value for loans receivable, the loan portfolio was segmented basedon loan type, credit quality and maturities. For certain variable rate loanswith no significant credit concerns and frequent repricings, estimated fairvalues are based on current carrying amounts. The fair values of other loansare estimated using discounted cash flow analyses, at interest rates currentlybeing offered for loans with similar terms to borrowers of similar creditquality.

94

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

*Deposits*

The fair values for demanddeposits are equal to the carrying amount since they are payable on demand atthe reporting date. The carrying amounts of variable rate, fixed-term moneymarket accounts and certificates of deposit (CDs) approximate their fair valueat the reporting date. Fair values for fixed-rate CDs are estimated usinga discounted cash flow calculation that applies interest rates currently beingoffered on CDs to a schedule of aggregated expected monthly maturities on timedeposits.

*Other Borrowed Funds*

The fair value of otherborrowed funds is estimated using a discounted cash flow calculation thatapplies interest rates currently available for loans with similar terms.

*Derivative Instruments Related to Loans Held for Sale*

Derivative instrumentsrelated to loans held for sale are carried at fair value.  Fair value is determined through quotesobtained from activity traded mortgage markets and, for rate lock commitments,is based upon the change in market interest rates between making the rate lockcommitment and the loan closing and, for forward loan sales commitments, isbased upon the change in market interest rates from entering into the forwardloan sales contract and the sale of the loan to the investor.  

*Other Commitments to Extend Credit*

The fair value of thesefinancial instruments is based on the credit quality and relationship, fees,interest rates, probability of funding, compensating balance and othercovenants or requirements. These commitments have expiration dates andgenerally expire within one year. Many commitments are expected to, andtypically do, expire without being drawn upon. The rates and terms of theseinstruments are competitive with others in the market in which the Companyoperates. The carrying amounts are reasonable estimates of the fair value ofthese financial instruments and are zero at December 31, 2005 and 2004.

*Accrued Interest Receivable*

The carrying amount of accrued interest receivableapproximates its fair value.

95

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

Thefair values of financial instruments as of December 31, 2005 and 2004 aresummarized as follows:

| ** **                                   | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **Carrying  Amount**            | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                   | ** ** | **(In thousands)**         | ** ** |
| Financial assets:                            |       |                            |       |   |   |
| Cash and cash  equivalents                   |       | $                               | 36,589     |   | $ | 36,589 |   |
| Investment securities  and other investments |       | 301,316                         |       | 298,072 |   |
| Loans held for sale, net                     |       | 361,668                         |       | 362,750 |   |
| Loans receivable, net                        |       | 705,644                         |       | 698,149 |   |
| Accrued interest  receivable                 |       | 4,185                           |       | 4,185 |   |
| Derivative asset                             |       | 1,395                           |       | 1,395 |   |
| Financial liabilities:                       |       |                            |       |   |   |
| Demand deposits                              |       | $                               | 114,915    |   | $ | 114,915 |   |
| Interest checking                            |       | 84,481                          |       | 84,481 |   |
| Money market and  statement savings          |       | 231,883                         |       | 231,883 |   |
| Certificates of deposit                      |       | 638,594                         |       | 633,834 |   |
| Other borrowed funds                         |       | 155,421                         |       | 152,915 |   |
| Mortgage funding checks                      |       | 41,635                          |       | 41,635 |   |
| Accrued interest payable                     |       | 803                             |       | 803 |   |
| Derivative liability                         |       | 1,789                           |       | 1,789 |   |
| Other:                                       |       |                            |       |   |   |
| Commitments to extend credit                 |       | $                               | —     |   | $ | — |   |

 

| ** **                                   | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **Carrying  Amount**            | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                   | ** ** | **(In thousands)**         | ** ** |
| Financial assets:                            |       |                            |       |   |   |
| Cash and cash equivalents                    |       | $                               | 23,408     |   | $ | 23,408 |   |
| Investment securities  and other investments |       | 297,617                         |       | 296,273 |   |
| Loans held for sale, net                     |       | 365,454                         |       | 367,824 |   |
| Loans receivable, net                        |       | 489,896                         |       | 491,868 |   |
| Accrued interest  receivable                 |       | 2,542                           |       | 2,542 |   |
| Derivative asset                             |       | 587                             |       | 587 |   |
| Financial liabilities:                       |       |                            |       |   |   |
| Demand deposits                              |       | $                               | 105,424    |   | $ | 105,424 |   |
| Interest checking                            |       | 150,112                         |       | 150,112 |   |
| Money market and  statement savings          |       | 29,790                          |       | 29,790 |   |
| Certificates of deposit                      |       | 538,884                         |       | 534,090 |   |
| Other borrowed funds                         |       | 201,085                         |       | 197,532 |   |
| Warehouse financing                          |       | 30,245                          |       | 30,245 |   |
| Mortgage funding checks                      |       | 46,392                          |       | 46,392 |   |
| Accrued interest payable                     |       | 1,038                           |       | 1,038 |   |
| Derivative liability                         |       | 64                              |       | 64 |   |
| Other:                                       |       |                            |       |   |   |
| Commitments to extend credit                 |       | $                               | —     |   | $ | — |   |

 

96

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

 

**(21) ParentCompany Only Financial Statements**

TheCardinal Financial Corporation (Parent Company only) condensed financialstatements are as follows:

**PARENTCOMPANY ONLY CONDENSED STATEMENTS OF CONDITIONDecember 31, 2005 and 2004(In thousands)**

| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                       |       |     |       |     |       |
| Cash and cash  equivalents                       |       | $        | 20,864     |     | $          | 10,557 |   |
| Other investments                                |       | 63       |       | 63       |       |
| Investment in  subsidiaries                      |       | 137,973  |       | 99,905   |       |
| Premises and  equipment, net                     |       | 1,185    |       | 1,308    |       |
| Goodwill                                         |       | 134      |       | 22       |       |
| Other assets                                     |       | 637      |       | 4,130    |       |
| Total assets                                     |       | $        | 160,856    |     | $          | 115,985 |   |
| **Liabilities and Shareholders’  Equity**   |       |     |       |     |       |
| Debt to Cardinal  Statutory Trust I              |       | $        | 20,619     |     | $          | 20,619 |   |
| Other liabilities                                |       | (7,642   | )          | 261      |       |
| Total liabilities                                |       | 12,977   |       | 20,880   |       |
| Total  shareholders’ equity                 |       | $        | 147,879    |     | $          | 95,105 |   |
| Total liabilities  and shareholders’ equity |       | $        | 160,856    |     | $          | 115,985 |   |

 

97

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**PARENTCOMPANY ONLY CONDENSED STATEMENTS OF OPERATIONSYears ended December 31, 2005, 2004 and 2003(In thousands)**

| ** **                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income:                                                                            |       |     |       |     |       |     |       |
| Net interest  income (expense)                                                     |       | $        | (891       | )        | $          | (257     | )          | $ | 96 |   |
| Other income                                                                       |       | 83       |       | 7        |       | 32       |       |
| Total income                                                                       |       | (808     | )          | (250     | )          | 128      |       |
| Expense - general  and administrative                                              |       | 2,097    |       | 1,400    |       | 1,270    |       |
| Net loss before income taxes and equity in  undistributed earnings of subsidiaries |       | (2,905   | )          | (1,650   | )          | (1,142   | )          |
| Income tax  benefit                                                                |       | (954     | )          | (561     | )          | (2,601   | )          |
| Equity in  undistributed earnings of subsidiaries                                  |       | 11,827   |       | 4,558    |       | 4,695    |       |
| Net income                                                                         |       | $        | 9,876      |     | $          | 3,469    |       | $ | 6,154 |   |

 

98

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**PARENTCOMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWSYears ended December 31, 2005, 2004 and 2003(In thousands)**

| ** **                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                         |       |     |       |     |       |     |       |
| Net income                                                                     |       | $        | 9,876      |     | $          | 3,469    |       | $ | 6,154 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |     |       |     |       |     |       |
| Equity in undistributed earnings of subsidiaries                               |       | (11,827  | )          | (4,558   | )          | (4,695   | )          |
| Depreciation                                                                   |       | 123      |       | 240      |       | 261      |       |
| Increase in other assets and liabilities                                       |       | (4,806   | )          | (914     | )          | (2,600   | )          |
| Net cash used in operating activities                                          |       | (6,634   | )          | (1,763   | )          | (880     | )          |
| Cash flows from  investing activities:                                         |       |     |       |     |       |     |       |
| Capital investments in subsidiaries                                            |       | (22,000  | )          | (60,000  | )          | (1,000   | )          |
| Net change in premises and equipment                                           |       | —   |       | 4        |       | 11       |       |
| Net cash paid in acquisition                                                   |       | (1,379   | )          | —   |       | —   |       |
| Net cash used in investing activities                                          |       | (23,379  | )          | (59,996  | )          | (989     | )          |
| Cash flows from  financing activities:                                         |       |     |       |     |       |     |       |
| Proceeds from public stock offerings                                           |       | 39,767   |       | 6,302    |       | 41,747   |       |
| Proceeds from issuance of debt to Cardinal Statutory  Trust I                  |       | —   |       | 20,000   |       | —   |       |
| Dividends on preferred stock                                                   |       | —   |       | —   |       | (495     | )          |
| Dividends on common stock                                                      |       | (244     | )          | —   |       | —   |       |
| Stock options exercised                                                        |       | 797      |       | 498      |       | 144      |       |
| Net cash provided by financing activities                                      |       | 40,320   |       | 26,800   |       | 41,396   |       |
| Net increase  (decrease) in cash and cash equivalents                          |       | 10,307   |       | (34,959  | )          | 39,527   |       |
| Cash and cash  equivalents at beginning of year                                |       | 10,557   |       | 45,516   |       | 5,989    |       |
| Cash and cash  equivalents at end of year                                      |       | $        | 20,864     |     | $          | 10,557   |       | $ | 45,516 |   |
| Supplemental  schedule of noncash investing and financing activities:          |       |     |       |     |       |     |       |
| Common shares issued in  acqusition of Wilson/Bennett                          |       | $        | 4,862      |     | $          | —   |       | $ | — |   |

 

99

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**(22) Goodwilland Other Intangible Assets**

See Note 3 for adescription of recent acquisitions.

Informationconcerning amortizable intangibles at December 31, 2005 is as follows:

| ** **                              | ** ** | **Mortgage Banking**   | ** ** | **Investment Services**  | ** ** | **Total**                   | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                              | ** ** | **(In thousands)**     | ** ** |
| Balances at  December 31, 2003     |       |                        | $          | —                        |       |                        |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| 2004 additions:                         |       |                        |       |                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer relationship intangibles       |       |                        | 1,781      |                          |       |                        | 49         |   |   |   | — |   |   |   | — |   |   |   | 1,781 |   |   |   | 49 |   |   |
| Balances at  December 31, 2004     |       |                        | 1,781      |                          |       |                        | 49         |   |   |   | — |   |   |   | — |   |   |   | 1,781 |   |   |   | 49 |   |   |
| 2005 additions:                         |       |                        |       |                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer relationship intangibles       |       |                        | —     |                          |       |                        | 198        |   |   |   | 1,858 |   |   |   | 104 |   |   |   | 1,858 |   |   |   | 302 |   |   |
| Employment/non-compete  agreement  |       |                        | —     |                          |       |                        | —     |   |   |   | 698 |   |   |   | 98 |   |   |   | 698 |   |   |   | 98 |   |   |
| Trade name                              |       |                        | —     |                          |       |                        | —     |   |   |   | 46 |   |   |   | 9 |   |   |   | 46 |   |   |   | 9 |   |   |
| Balances at  December 31, 2005     |       |                        | $          | 1,781                         |       |                        |       | $ | 247 |   |   |   | $ | 2,602 |   |   |   | $ | 211 |   |   |   | $ | 4,383 |   |   |   | $ | 458 |   |   |

 

Theaggregate amortization expense for 2005 and 2004 was $409,000 and $49,000,respectively. The estimated amortization expense for the next five years is asfollows:

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2006       |       |                    | $          | 574 |   |   |
| 2007       |       |                    | 574        |   |   |
| 2008       |       |                    | 565        |   |   |
| 2009       |       |                    | 460        |   |   |
| 2010       |       |                    | 384        |   |   |

 

Thechanges in the carrying amount of goodwill for the years ended December 31,2005 and 2004 were as follows:

| ** **                                          | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Investment  Services** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| Balance at  December 31, 2003                  |       |                    | $          | 22                    |       |                     |       | $         | —     |   |   |   | $ | — |   |   | $ | 22 |   |
| 2004 additions:                                     |       |                    |       |                  |       |                     |       |      |       |   |   |   |   |   |   |
| Goodwill attributable to George Mason acquisition   |       |                    | —     |                  |       |                     | 12,941     |      |       |   | — |   |   | 12,941 |   |
| Balance at  December 31, 2004                  |       |                    | 22         |                  |       |                     | 12,941     |      |       |   | — |   |   | 12,963 |   |
| 2005 additions:                                     |       |                    |       |                  |       |                     |       |      |       |   |   |   |   |   |   |
| Goodwill attributable to Wilson/Bennett acquisition |       |                    | —     |                  |       |                     | —     |      |       |   | 3,614 |   |   | 3,614 |   |
| Balance at  December 31, 2005                  |       |                    | $          | 22                    |       |                     |       | $         | 12,941     |   |   |   | $ | 3,614 |   |   | $ | 16,577 |   |

 

The Company evaluatesimpairment of goodwill annually. The evaluation of goodwill did not result inimpairment losses in 2005 and 2004.

100

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial Statements (Continued)

**(23) Other Operating Expenses**

Thefollowing shows the composition of other operating expenses for the years endedDecember 31, 2005, 2004 and 2003:

| ** **                  | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Stationary and  supplies    |       | 1,551              |       | 965      |       | 387      |       |
| Advertising and  marketing  |       | 1,993              |       | 1,613    |       | 913      |       |
| Other taxes                 |       | 1,422              |       | 548      |       | 390      |       |
| Travel and  entertainment   |       | 763                |       | 427      |       | 138      |       |
| Bank operations             |       | 860                |       | 676      |       | 635      |       |
| Premises and  equipment     |       | 1,400              |       | 800      |       | 351      |       |
| Miscellaneous               |       | 1,700              |       | 797      |       | 811      |       |
| Total non-interest  expense |       | $                  | 9,689      |     | $          | 5,826    |       | $ | 3,625 |   |
|                             |            |                    |            |          |            |          |            |  |  |  |

 

**(24) Subsequent Events**

On February 9, 2006, the Company completed itsthe acquisition of certain fiduciary and other assets and assumption of thedeposit liabilities of FBR National Trust Company, a subsidiary of Friedman,Billings, Ramsey Group, Inc. The Company will act as trustee or custodianfor assets under management in excess of $5 billion as a result of thistransaction.

In the ordinary course of operations, the Company,from time to time, becomes party to various legal proceedings. The following isa discussion of certain immaterial legal proceedings that are outside thenormal course of business.

On February 1, 2006, the Bank was served asubpoena by the Commonwealth of Virginia Prince William County Circuit Court inthe matter of Green Village Concrete, Inc. versus Jorge Rafael Vasquez *et al.*The Bank is one of several named defendants and theplaintiff alleges that, among other things, the Bank was negligent in cashingforged and unsigned checks and allowing unauthorized automated clearing house(ACH) transactions from the plaintiff’s checking account at the Bank.

On February 3, 2006, a commission-based formerloan officer of George Mason filed suit in the United States District Court forthe District of Maryland, alleging improper compensation for overtime hours workedand failure to pay the minimum hourly wage in weeks when no commissions wereearned.

The Company has retainedlegal counsel to advise it on both of these matters. Both of these matters arestill in the factual discovery phase. Based upon information currentlyavailable to the Company, management believes that losses related to thesesuits, if any, will not be significant. It is the Company’s intention tovigorously defend itself against these claims.

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

No changes in the Company’s independent accountants ordisagreements on accounting and financial disclosure required to be reportedhereunder have taken place.

**Item9A.**                Controls andProcedures

**Disclosure Controls and Procedures**

The Company maintains disclosure controls andprocedures that are designed to provide assurance that information required tobe disclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods required by the Securities and Exchange Commission. Anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport was carried out under the supervision and with the participation ofmanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer. Based on the evaluation, the aforementioned officers concluded thatthe Company’s disclosure controls and procedures were effective as of the endof such period.

**Management’s Report on Internal Control over FinancialReporting**

Managementof the Company is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of the Company’s financial reporting and the preparation ofpublished financial statements in accordance with generally accepted accountingprinciples.

Becauseof its inherent limitations, internal control over financial reporting may not preventor detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2005. In making this assessment, managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *InternalControl-Integrated Framework*.  Based on management’s assessment, managementbelieves that as of December 31, 2005, the Company’s internal control overfinancial reporting was effective based on criteria set forth by COSO in *Internal Control-Integrated Framework*.

Management’s assessment of the effectiveness ofinternal control over financial reporting as of December 31, 2005, hasbeen audited by KPMG LLP, the independent registered public accounting firmthat also audited the Company’s consolidated financial statements. KPMG LLP’sattestation report on management’s assessment of the Company’s internal controlover financial reporting appears on page 61 hereof.

**Changes in Internal Control Over Financial Reporting**

There was no change in the Company’s internal controlover financial reporting identified in connection with the evaluation ofinternal controls that occurred during the fourth quarter of 2005 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

**Item9B.**               Other Information

None.

102

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**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

Pursuant to GeneralInstruction G(3) of Form 10-K, the information contained in the“Election of Directors” section and under the headings “Executive Officers and SignificantOfficers” and “The Committees of the Board of Directors—Audit Committee,” “Codeof Ethics” and “Section 16(a) Beneficial Ownership ReportingCompliance” in the Company’s Proxy Statement for the 2006 Annual Meeting ofShareholders is incorporated herein by reference.

**Item 11.**                 ExecutiveCompensation

Pursuant to GeneralInstruction G(3) of Form 10-K, the information contained underthe headings “Director Compensation,” “Compensation Committee Interlocks andInsider Participation,” “Executive Officer Compensation,” “Stock Options” and “EmploymentAgreements” in the Company’s Proxy Statement for the 2006 Annual Meeting ofShareholders is incorporated herein by reference.

**Item12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

*SecurityOwnership of Certain Beneficial Owners and Management.**  *Pursuant to General Instruction G(3) ofForm 10-K, the information contained under the headings “SecurityOwnership of Directors and Executive Officers” and “Security Ownership ofCertain Beneficial Owners” in the Company’s Proxy Statement for the 2006 AnnualMeeting of Shareholders is incorporated herein by reference.

*Equity Compensation PlanInformation.**  *Thefollowing table sets forth information as of December 31, 2005, withrespect to compensation plans under which shares of our Common Stock areauthorized for issuance.

| **Plan Category**                                     | ** ** | ** ** | ** ** | **Number of Securities to be  Issued upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted Average Exercise  Price of Outstanding  Options, Warrants  and Rights** | ** ** | **Number of Securities  Remaining Available for  Future Issuance  Under Equity  Compensation Plans(1)** | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by Shareholders    |       |       |       |                                                                                                                                                 |       |                                                                                                             |       |                                                                                                                                       |       |   |   |   |   |
| 1999 Stock Plan                                            |       |       | 372,207    |                                                                                                                                                 |       |                                                                                                             | $          | 4.60                                                                                                                                       |       |   |   | 14,838 |   |   |
| 2002 Equity  Compensation Plan                             |       |       | 1,897,014  |                                                                                                                                                 |       |                                                                                                             | $          | 9.01                                                                                                                                       |       |   |   | 44,499 |   |   |
| Equity  Compensation Plans Not Approved by Shareholders(2) |       |       | —     |                                                                                                                                                 |       |                                                                                                             | —     |                                                                                                                                       |       |   | — |   |   |
| **Total**                                                  |       |       | 2,269,221  |                                                                                                                                                 |       |                                                                                                             | $          | 8.29                                                                                                                                       |       |   |   | 59,337 |   |   |

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(1)           Amounts exclude any securities to be issued uponexercise of outstanding options, warrants and rights.

(2)           The Company does not have any equitycompensation plans that have not been approved by shareholders.

**Item 13.**                 CertainRelationships and Related Transactions

Pursuant to GeneralInstruction G(3) of Form 10-K, the information contained under theheading “Certain Relationships and Related Transactions” in the Company’s ProxyStatement for the 2006 Annual Meeting of Shareholders is incorporated herein byreference.

**Item 14.**                 PrincipalAccounting Fees and Services

Pursuant to General Instruction G(3) of Form 10-K,the information contained under the headings “Fees of Independent PublicAccountants” and “Audit Committee Pre-Approval Policies and Procedures” in theCompany’s Proxy Statement for the 2006 Annual Meeting of Shareholders isincorporated herein by reference.

103

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**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

(a)           (1) and(2) The response to this portion of Item 15 is included in Item 8.

(3)   Exhibits

|        | 2.1  |   |   | Membership  Interest Purchase Agreement dated as of June 8, 2004 by and among Cardinal  Bank, N.A. and United Bank (incorporated by reference to Exhibit 2.1 to the  Current Report on Form 8-K dated July 7, 2004).                                                                                   |
|--------|------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2.2  |   |   | Amendment to Membership Interest Purchase Agreement  dated as of July 7, 2004 by and between Cardinal Bank, N.A. and United Bank  (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K  dated July 7, 2004).                                                                    |
|   | 2.3  |   |   | Agreement and Plan of Share Exchange between  Wilson/Bennett Capital Management, Inc. and Cardinal Financial  Corporation, dated as of April 29, 2005 (incorporated by reference to  Exhibit 10.1 to the Quarterly Report on Form 10-Q for the  period ended March 31, 2005). |
|   | 3.1  |   |   | Articles of Incorporation of Cardinal Financial  Corporation (incorporated by reference to Exhibit 3.1 to the Registration  Statement on Form SB-2, Registration No. 333-82946 (the  “Form SB-2”)).                                                                      |
|   | 3.2  |   |   | Articles of Amendment to the Articles of  Incorporation of Cardinal Financial Corporation, setting forth the  designation for the Series A Preferred Stock (incorporated by reference  to Exhibit 3.2 to the Form SB-2).                                                                |
|   | 3.3  |   |   | Bylaws of Cardinal Financial Corporation (restated  in electronic format to reflect all amendments through April 21, 2004)  (incorporated by reference to Exhibit 3.1 to the Quarterly Report on  Form 10-Q for the period ended March 31, 2004).                                  |
|   | 4.1  |   |   | Form of Common Stock Certificate (incorporated  by reference to Exhibit 4.1 to the Form SB-2).                                                                                                                                                                                          |
|   | 10.1 |   |   | Employment Agreement, dated as of February 12,  2002, between Cardinal Financial Corporation and Bernard H. Clineburg  (incorporated by reference to Exhibit 10.1 to the Form SB-2).                                                                                                    |
|   | 10.2 |   |   | Executive Employment Agreement, dated as of  February 12, 2002, between Cardinal Financial Corporation and F. Kevin  Reynolds (incorporated by reference to Exhibit 10.4 to the Form SB-2).                                                                                             |
|   | 10.3 |   |   | Executive Employment Agreement, dated as of  February 12, 2002, between Cardinal Financial Corporation and  Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to  the Form SB-2).                                                                                     |
|   | 10.4 |   |   | Cardinal Financial Corporation 1999 Stock Option  Plan, as amended (incorporated by reference to Exhibit 10.7 to the  Form SB-2).                                                                                                                                                            |
|   | 10.5 |   |   | Cardinal Financial Corporation 2002 Equity  Compensation Plan, as amended and restated as of April 22, 2005  (incorporated by reference to Exhibit 10.6 to the Registration Statement  on Form S-1, Registration No. 333-123511).                                                  |
|   | 10.6 |   |   | Employment Agreement, dated as of June 8, 2005,  between Cardinal Financial Corporation and John W. Fisher.                                                                                                                                                                                            |
|   | 10.7 |   |   | Registration Rights Agreement, dated as of June 8,  2005, between Cardinal Financial Corporation, John W. Fisher and James B.  Moloney.                                                                                                                                                                |
|   | 21   |   |   | Subsidiaries of Cardinal Financial Corporation.                                                                                                                                                                                                                                                        |
|   | 23   |   |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                   |

104

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

 

(b)          Exhibits

See Item 15(a)(3) above.

(c)           Financial Statement Schedules

See Item 15(a)(2) above.

105

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**SIGNATURES**

Pursuantto the requirements of Section 13 and 15 (d) of the SecuritiesExchange Act of 1934, as amended, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

|                     | CARDINAL FINANCIAL CORPORATION |
|---------------------|--------------------------------|
| March 6,  2006 | By:                            |   | /s/ BERNARD H. CLINEBURG |
|                | Name:                          |   | Bernard H. Clineburg |
|                | Title:                         |   | Chairman, President and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities indicated on March 6, 2006.

|                             | **Signatures** | ** **                                            | ** ** |  | **Titles** | ** ** |
|-----------------------------|----------------|-------------------------------------------------------|------------|--|------------|------------|
| /s/ BERNARD H. CLINEBURG    |           | Chairman, President and  Chief Executive Officer      |
| Name: Bernard H.  Clineburg |           | (Principal Executive Officer)                         |
| /s/ ROBERT A. CERN          |           | Executive Vice President  and Chief Financial Officer |
| Name: Robert A.  Cern       |           | (Principal Financial Officer)                         |
| /s/ JENNIFER L. DEACON      |           | Senior Vice President  and Controller                 |
| Name: Jennifer L.  Deacon   |           | (Principal Accounting Officer)                        |
| /s/ B.G. BECK               |           | Director                                              |
| Name: B. G. Beck            | ** **     | ** **                                            |
| /s/ WAYNE W. BROADWATER     |           | Director                                              |
| Name: Wayne W.  Broadwater  | ** **     | ** **                                            |
| /s/ WILLIAM G. BUCK         |           | Director                                              |
| Name: William G.  Buck      | ** **     | ** **                                            |
| /s/ SIDNEY O. DEWBERRY      |           | Director                                              |
| Name: Sidney O.  Dewberry   | ** **     | ** **                                            |
| /s/ JOHN W. FISHER          |           | Director                                              |
| Name: John W.  Fisher       | ** **     | ** **                                            |
| /s/ MICHAEL A. GARCIA       |           | Director                                              |
| Name: Michael A.  Garcia    | ** **     | ** **                                            |
| /s/ J. HAMILTON LAMBERT     |           | Director                                              |
| Name: J. Hamilton  Lambert  | ** **     | ** **                                            |
| /s/ WILLIAM E. PETERSON     |           | Director                                              |
| Name: William E.  Peterson  | ** **     | ** **                                            |
| /s/ JAMES D. RUSSO          |           | Director                                              |
| Name: James D.  Russo       | ** **     | ** **                                            |

106

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| /s/ JOHN H. RUST, JR.    |       | Director   |
|-------------------------------|------------|------------|
| Name: John H.  Rust, Jr. | ** ** | ** ** |
| /s/ GEORGE P. SHAFRAN         |       | Director   |
| Name: George P. Shafran       | ** ** | ** ** |
| /s/ ALICE M. STARR            |       | Director   |
| Name: Alice M. Starr          | ** ** | ** ** |

 

 

107

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**EXHIBIT INDEX**

| **Number** | ** ** | Description | ** ** | ** **                                                                                                                                                                                                                                                                                             |
|------------|------------|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | 2.1        |        |       | Membership Interest  Purchase Agreement dated as of June 8, 2004 by and among Cardinal Bank, N.A.  and United Bank (incorporated by reference to Exhibit 2.1 to the Current  Report on Form 8-K dated July 7, 2004).                                                                                   |
|       | 2.2        |        |       | Amendment to  Membership Interest Purchase Agreement dated as of July 7, 2004 by and  between Cardinal Bank, N.A. and United Bank (incorporated by reference to  Exhibit 2.2 to the Current Report on Form 8-K dated July 7, 2004).                                                                    |
|       | 2.3        |        |       | Agreement and  Plan of Share Exchange between Wilson/Bennett Capital Management, Inc.  and Cardinal Financial Corporation, dated as of April 29, 2005  (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q  for the period ended March 31, 2005). |
|       | 3.1        |        |       | Articles of  Incorporation of Cardinal Financial Corporation (incorporated by reference to  Exhibit 3.1 to the Registration Statement on Form SB-2,  Registration No. 333-82946 (the “Form SB-2”)).                                                                      |
|       | 3.2        |        |       | Articles of  Amendment to the Articles of Incorporation of Cardinal Financial Corporation,  setting forth the designation for the Series A Preferred Stock  (incorporated by reference to Exhibit 3.2 to the Form SB-2).                                                                |
|       | 3.3        |        |       | Bylaws of  Cardinal Financial Corporation (restated in electronic format to reflect all  amendments through April 21, 2004) (incorporated by reference to  Exhibit 3.1 to the Quarterly Report on Form 10-Q for the  period ended March 31, 2004).                                 |
|       | 4.1        |        |       | Form of  Common Stock Certificate (incorporated by reference to Exhibit 4.1 to  the Form SB-2).                                                                                                                                                                                         |
|       | 10.1       |        |       | Employment  Agreement, dated as of February 12, 2002, between Cardinal Financial  Corporation and Bernard H. Clineburg (incorporated by reference to  Exhibit 10.1 to the Form SB-2).                                                                                                   |
|       | 10.2       |        |       | Executive  Employment Agreement, dated as of February 12, 2002, between Cardinal  Financial Corporation and F. Kevin Reynolds (incorporated by reference to  Exhibit 10.4 to the Form SB-2).                                                                                            |
|       | 10.3       |        |       | Executive  Employment Agreement, dated as of February 12, 2002, between Cardinal  Financial Corporation and Christopher W. Bergstrom (incorporated by reference  to Exhibit 10.5 to the Form SB-2).                                                                                     |
|       | 10.4       |        |       | Cardinal  Financial Corporation 1999 Stock Option Plan, as amended (incorporated by  reference to Exhibit 10.7 to the Form SB-2).                                                                                                                                                            |
|       | 10.5       |        |       | Cardinal  Financial Corporation 2002 Equity Compensation Plan, as amended and restated  as of April 22, 2005 (incorporated by reference to Exhibit 10.6 to  the Registration Statement on Form S-1, Registration No. 333-123511).                                                  |
|       | 10.6       |        |       | Employment  Agreement, dated as of June 8, 2005, between Cardinal Financial Corporation  and John W. Fisher.                                                                                                                                                                                           |
|       | 10.7       |        |       | Registration  Rights Agreement, dated as of June 8, 2005, between Cardinal Financial  Corporation, John W. Fisher and James B. Moloney.                                                                                                                                                                |
|       | 21         |        |       | Subsidiaries of  Cardinal Financial Corporation.                                                                                                                                                                                                                                                       |
|       | 23         |        |       | Consent of KPMG  LLP.                                                                                                                                                                                                                                                                                  |

108

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

 

 

109

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