Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. Financial Statements and Supplementary Data



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010oro

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                  toCommission file number: 0-24557


CARDINAL FINANCIAL CORPORATION(Exact name of registrant as specified in its charter)

Virginia

54-1874630(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer Identification No.)8270 Greensboro Drive, Suite 500
McLean, Virginia(Address of principal executive offices)

22102(Zip Code)Registrant's telephone number, including area code:(703) 584-3400


Securities
registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Stock, par value $1.00 per share

The Nasdaq Stock Market


Securities
registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (No not check if a
smaller reporting company)

Smaller reporting company o


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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold as of June 30, 2010: $255,063,335.

The
number of shares outstanding of Common Stock, as of March 7, 2011, was 28,919,639.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be
filed as part of this Form 10-K.



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Table of Contents



TABLE OF CONTENTS



PagePART IItem 1.

Business

3Item 1A.

Risk Factors

22Item 1B.

Unresolved Staff Comments

31Item 2.

Properties

31Item 3.

Legal Proceedings

31Item 4.

(Removed and Reserved)

31PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32Item 6.

Selected Financial Data

34Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

36Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

80Item 8.

Financial Statements and Supplementary Data

81Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

145Item 9A.

Controls and Procedures

145Item 9B.

Other Information

145PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

146Item 11.

Executive Compensation

146Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

146Item 13.

Certain Relationships and Related Transactions, and Director Independence

146Item 14.

Principal Accounting Fees and Services

147Part IVItem 15.

Exhibits, Financial Statement Schedules

147


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

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PART I

Item 1.    Business

Overview

Cardinal Financial Corporation, a financial holding company, was formed in late 1997 as a Virginia corporation, principally in response
to opportunities resulting from the consolidation of several Virginia-based banks. These bank consolidations were typically accompanied by the dissolution of local boards of directors and relocation
or termination of management and customer service professionals and a general deterioration of personalized customer service.

We
own Cardinal Bank, (the "Bank"), a Virginia state-chartered community bank with 26 banking offices located in Northern Virginia and the greater Washington, D.C. metropolitan area. The
Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship managers focus on attracting small and
medium sized businesses as well as government contractors, commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys.

Additionally,
we complement our core banking operations by offering a wide range of services through our various subsidiaries, including mortgage banking through George Mason
Mortgage, LLC ("George Mason") and Cardinal First Mortgage, LLC ("Cardinal First"), collectively the "mortgage banking segment," retail securities brokerage through Cardinal Wealth
Services, Inc. ("CWS"), asset management through Wilson/Bennett Capital Management, Inc. ("Wilson/Bennett") and trust, estate, custody, investment management and retirement planning
through the trust division of Cardinal Bank.

George
Mason engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis through six branches located
throughout the metropolitan Washington, D.C. region. George Mason is one of the largest residential mortgage originators in the greater Washington metropolitan area, generating originations of
approximately $3.2 billion in 2010 and $2.6 billion in 2009, excluding advances on construction loans and including loans purchased from other mortgage banking companies owned by local
home builders but managed by George Mason. George Mason sells its mortgage loans to third party investors servicing released.

Cardinal
First originates mortgage loans for new homes and refinancing in Virginia, Maryland, and Washington, D.C. principally for existing Cardinal Bank customers.

CWS
provides brokerage and investment services through a contract with Raymond James Financial Services, Inc. Under this contract, financial advisors can offer our customers an
extensive range of financial products and services, including estate planning, qualified retirement plans, mutual funds, annuities, life insurance, fixed income and equity securities and equity
research and recommendations. CWS's principal source of revenue is the net commissions it earns on the purchases and sales of investment products to its customers.

Wilson/Bennett
provides professional investment management of financial assets with asset preservation as the primary goal. Clients include individuals, pension plans and medium sized
corporations. Wilson/Bennett utilizes a value oriented investment approach and focuses on large capitalization stocks as well as cash management services. Wilson/Bennett earns fees based upon the
market value of its clients' portfolios.

Cardinal
Bank has a trust division that acts as trustee or custodian for client assets and earns fees primarily based upon balances under management. The trust division diversifies the
Bank's sources of non-interest income and allows us to provide additional services to our customers.

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Growth Strategy

We believe that the strong demographic characteristics of our market and the relative strength of the metropolitan Washington, D.C.
area, particularly Northern Virginia, provide a significant opportunity to continue building a successful community-focused banking franchise. We intend to continue to expand our business through
internal growth, as well as selective geographic expansion, while maintaining strong asset quality and achieving increasing profitability. The strategy for achieving these objectives includes the
following:

Capitalize on the current market conditions.As the banking industry continues to restrict lending based on industry-wide asset quality
limitations and capital constraints, we believe we are well positioned to take advantage of this void based on our strong balance sheet. We continue to see increased opportunities to grow our loan
portfolio because the competition is distracted by current market conditions and their credit quality issues. In addition to loan growth, we believe that our margins should be enhanced going forward
as risk-based pricing returns to the industry. We also continue to benefit from a move towards quality by well established business owners, including multi-generational businesses, seeking
the safe and consistent reliable delivery of service that we are able to provide.

Penetrate our existing markets and further improve our branch positioning.We intend to continue to
penetrate our existing markets with increased business development efforts through additional experienced bankers in communities that present attractive growth opportunities within Northern Virginia
and other markets in the greater Washington, D.C. metropolitan area. We expect to continue to have opportunities to acquire or lease former branch sites from other financial institutions. As we have
done in the past, we may acquire additional sites prior to planned branch openings when we believe the sites are attractive and are available on favorable terms. As we evaluate our branch positioning,
we have considered and will continue to consider acquiring branches or deposits in FDIC assisted transactions that occur in our market area. Because the opening of each new branch increases our
operating expenses, we intend to stage future branch openings in an effort to minimize the impact of these expenses on our results of operations.

Capitalize on the continued bank consolidation in our market.We anticipate that recently announced bank mergers as well as FDIC
assisted
transactions will result in further consolidation in our target market and we intend to capitalize on the dislocation of customers resulting from this consolidation. We believe this consolidation
creates opportunities for expanding our branch network, as discussed above, as well as to increase our market share of bank deposits within our target market. We focus on building long term
relationships with our clients and communities by providing personalized service from local management teams. We also will continue to explore the possibility of further growth through acquisition in
Virginia, the metropolitan Washington, D.C. market, or other areas if we believe that such expansion will strengthen the Company by diversifying our customer base and sources of revenue and be
accretive to earnings within a reasonable time frame.

Expand our lending activities.As of December 31, 2010, we have increased our legal lending limit to over $34.0 million as a
result of
retained earnings and our successful capital raise efforts during 2009. The increase in our legal lending limit allows us to further expand our commercial and real estate lending activities. It also
improves our ability to seek business from larger government contractors, businesses who we believe are conservatively operated and well capitalized residential homebuilders. According to George Mason
University's Center for Regional Analysis, federal government spending in the greater Washington D.C. region was approximately $130 billion in 2008, and we believe there are unique growth
opportunities in this sector of our regional economy. Our goal is to aggressively grow our loan portfolio while maintaining superior asset quality through conservative underwriting practices.

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Continue to recruit experienced bankers.Historically, we have been successful in recruiting senior bankers with experience in, and
knowledge of, our
market. We believe current market conditions and consolidation will allow us to continue to find bankers who have been displaced or have grown
dissatisfied as a result of consolidation. We intend to continue our efforts to recruit seasoned bankers, particularly experienced lenders, who we expect can immediately generate additional loan
volume through their existing credit relationships.

Business Segment Operations

We operate in three business segments, commercial banking, mortgage banking and wealth management and trust services. The commercial
banking segment includes both commercial and consumer lending and provides customers such products as commercial loans, real estate loans, and other business financing and consumer loans. In addition,
this segment provides customers with several choices of deposit products, including demand deposit accounts, savings accounts and certificates of deposit. The mortgage banking segment engages
primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis. The wealth management and trust services segment provides investment
and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, trust, estates, custody, investment management, escrows, and retirement plans.

For
financial information about the reportable segments, see "Business Segment Operations" in Item 7 below and Note 22 of the notes to the consolidated financial statements
in Item 8 below.

Market Area

We consider our primary target market to include the Virginia counties of Arlington, Fairfax, Loudoun, Prince William, and Stafford and
the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park; Washington, D.C. and Montgomery County in Maryland. In addition to our primary market, we consider the
Virginia counties of Spotsylvania, Culpeper and Fauquier and the Maryland county of Prince George's as secondary markets and the remaining Greater Washington Metropolitan area as a tertiary market. We
will, however, consider expansion into other areas if we believe such expansion will strengthen the Company by diversifying its customer base and sources of revenue and be accretive to earnings within
a reasonable time frame.

Based
on estimates released by the U.S. Census Bureau, the population of the greater Washington metropolitan area was approximately 5.5 million people in 2009, the eighth largest
statistical area in the country. The median annual household income for this area in 2009 was approximately $83,000, which makes it one of the wealthiest regions in the country. For 2010, based on
estimates released by the Bureau of Labor Statistics of the U.S. Department of Labor, the unemployment rate for the greater Washington metropolitan area was approximately 5.7%, compared to a national
unemployment rate of
9.4%. As of June 30, 2010, total deposits in this area were approximately $166 billion as reported by the Federal Deposit Insurance Corporation ("FDIC").

Our
headquarters are located in the center of the business district of Fairfax County, Virginia. Fairfax County, with over one million people, is the most populous county in
Virginia and the most populous jurisdiction in the Washington, D.C. area. According to the latest U.S. Census Bureau estimates, Fairfax County also has the second highest median household income of
any county in the United States of $109,000, surpassed by its neighbor, Loudoun County with $116,000.

We
believe the diversity of our economy, including the stability provided by businesses serving the U.S. Government, provides us with the opportunities necessary to prudently grow our
business.

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Competition

The greater Washington region is dominated by branches of large regional or national banks headquartered outside of the region. Our
market area is a highly competitive, highly branched, banking market. We compete as a financial intermediary with other commercial banks, savings and loan 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 Mason faces significant
competition from both traditional financial institutions and other national and local mortgage banking operations.

The
competition to acquire deposits and to generate loans, including mortgage banking loans, is intense, and pricing is important. Many of our competitors are larger and have
substantially greater resources and lending limits than we do. In addition, many competitors offer more extensive branch and ATM networks than we currently have. Larger institutions operating in the
greater Washington market have access to funding sources at lower costs than are available to us since they have larger and more diverse fund generating capabilities. However, we believe that we have
and will continue to be successful in competing in this environment due to an emphasis on a high level of personalized customer service, localized and more responsive decision making, and community
involvement.

Of
the $166 billion in bank deposits in the greater Washington region at June 30, 2010, approximately 83% were held by banks that are either based outside of the greater
Washington region or are
operating wholesale banks that generate deposits nationally. Excluding institutions based outside our region, we have grown to the fifth largest financial institution headquartered in the greater
Washington region as measured by total deposits. By providing competitive products and more personalized service and being actively involved in our local communities, we believe we can continue to
increase our share of this deposit market.

Customers

We believe that the recent and ongoing bank consolidation within Northern Virginia and the greater Washington region provides a
significant opportunity to build a successful, locally-oriented banking franchise. We also believe that many of the larger financial institutions in our area do not emphasize the high level of
personalized service to small and medium-sized commercial businesses, professionals or individual retail customers that we emphasize.

We
expect to continue serving these business and professional markets with experienced commercial relationship managers, and we have increased our retail marketing efforts through the
expansion of our branch network and development of additional retail products and services. We expanded our deposit market share through aggressive marketing of our President's Club, Chairman's Club,
Simply Savings and Monster Money Market relationship products and our Totally Free Checking product.

Banking Products and Services

Our principal business is to accept deposits from the public and to make loans and other investments. The principal sources of funds
for the Bank's loans and investments are demand, time, savings and other deposits, repayments of existing loans, and borrowings. Our principal source of income is interest collected on loans,
investment securities and other investments. Non-interest income, which includes among other things deposit and loan fees and service charges, realized and unrealized gains on mortgage
banking activities, investment fee income, and management fee income, is the next largest component of our revenues. Our principal expenses are interest expense on deposits and borrowings, employee
compensation and benefits, occupancy-related expenses, and other overhead expenses.

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The
principal business of George Mason, the Bank's primary mortgage banking subsidiary, is to originate residential loans for sale into the secondary market on a best efforts basis.
These loans are closed and serviced by George Mason on an interim basis pending their ultimate sale to a permanent investor. The mortgage subsidiary funds these loans through a line of credit from
Cardinal Bank and cash available through its own operations. George Mason's income on these loans is generated from the fees it charges its customers, the gains it recognizes upon the sales of loans
and the interest income it earns prior to the delivery of the loan to the investor. Costs associated with these loans are primarily comprised of salaries and commissions paid to loan originators and
support personnel, interest expense incurred while the loans are held pending sale and other expenses associated with the origination of the loans. In addition, George Mason generates management fee
income by providing specific services to other mortgage banking companies owned by local home builders.

Cardinal
First, in addition to assisting Cardinal Bank customers in their residential mortgage needs, offers a construction-to-permanent loan program. This
program provides variable rate financing for customers to construct their residences. Once the home has been completed, the loan converts to fixed rate financing and is sold into the secondary market.
These construction-to-permanent loans generate fee income as well as net interest income and are classified as loans held for sale.

The
mortgage banking segment's business is both cyclical and seasonal. The cyclical nature of its business is influenced by, among other things, the levels of and trends in mortgage
interest rates, national and local economic conditions and consumer confidence in the economy. Historically, the mortgage banking segment has its lowest levels of quarterly loan closings during the
first quarter of the year.

Both
Cardinal Bank and George Mason are committed to providing high quality products and services to their customers, and have made a significant investment in their core information
technology systems. These systems provide the technology that fully automates the branches, processes bank transactions, mortgage originations, other loans and electronic banking, conducts database
and direct response marketing, provides cash management solutions, streamlined reporting and reconciliation support.

With
this investment in technology, the Bank offers internet-based delivery of products for both individuals and commercial customers. Customers can open accounts, apply for loans, check
balances, check account history, transfer funds, pay bills, download account transactions into Quicken and Microsoft Money, and correspond via e-mail with the
Bank over the internet. The internet provides an inexpensive way for the Bank to expand its geographic borders and branch activities while providing services offered by larger banks.

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

Lending

We offer a full range of short to long-term commercial, real estate and consumer lending products and services, which are
described in further detail below. We have established target percentage goals for 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 and industrial loans, real estate-commercial loans, real estate-construction loans, real
estate-residential loans, home equity loans, and consumer loans account for approximately 14%, 45%, 17%, 15%, 8% and 1%, respectively of our loan portfolio at December 31, 2010.

Commercial and Industrial Loans.We make commercial loans to qualified businesses in our market area. Our commercial lending portfolio
consists
primarily of commercial and industrial loans for the financing of accounts receivable, property, plant and equipment. Our government contract lending

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group
provides secured lending to government contracting firms and businesses based primarily on receivables from the federal government. We also offer Small Business Administration (SBA) guaranteed
loans and asset-based lending arrangements to our customers. We are certified as a preferred lender by the SBA, which provides us with much more flexibility in approving loans guaranteed under the
SBA's various loan guaranty programs.

Historically,
commercial and industrial loans generally have a higher degree of risk than residential mortgage loans. Residential mortgage loans generally are made on the basis of the
borrower's ability to repay the loan from his or her salary and other income and are secured by residential real estate, the value of which generally is readily ascertainable. In contrast, commercial
loans typically are made on the basis of the borrower's ability to repay the loan from the cash flow from its business and are secured by business assets, such as commercial real estate, accounts
receivable, equipment and inventory, the values of which may fluctuate over time and generally cannot be appraised with as much precision as residential real estate. As a result, the availability of
funds for the repayment of commercial loans may be substantially dependent upon the commercial success of the business itself.

To
manage these risks, our policy is to secure the commercial loans we make with both the assets of the business, which are subject to the risks described above, and other additional
collateral and guarantees that may be available. In addition, for larger relationships, we actively monitor certain attributes of the borrower and the credit facility, including advance rate, cash
flow, collateral value and other credit factors that we consider appropriate.

Commercial Mortgage Loans.We originate commercial mortgage loans. These loans are primarily secured by various types of commercial real
estate,
including office, retail, warehouse, industrial and other non-residential types of properties and are made to the owners and/or occupiers of such property. These loans generally have
maturities ranging from one to ten years.

Historically,
commercial mortgage lending entails additional risk compared with traditional residential mortgage lending. Commercial mortgage loans typically involve larger loan balances
concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income-producing properties is typically dependent upon the successful operation of a
business or real estate project and thus may be subject, to a greater extent than has historically been the case with residential mortgage loans, to adverse conditions in the commercial real estate
market or in the general economy. Our commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower's creditworthiness and prior credit
history, and we generally require personal guarantees or endorsements with respect to these loans. In the loan underwriting process, we also carefully consider the location of the property that will
be collateral for the loan.

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

Residential Mortgage Loans.Residential mortgage loans are originated by Cardinal Bank, Cardinal First and George Mason. Our residential
mortgage
loans consist of residential first and second mortgage loans, residential construction loans and home equity lines of credit and term loans secured by the residences of borrowers. Second mortgage and
home equity lines of credit are used for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed, floating and variable interest
rates, with maturities ranging from three months to thirty years.

Residential
mortgage loans generally are made on the basis of the borrower's ability to repay the loan from his or her salary and other income and are secured by residential real estate,
the value of which is generally readily ascertainable. These loans are made consistent with our appraisal and real estate lending policies, which detail maximum loan-to-value
ratios and maturities. Residential mortgage

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loans
and home equity lines of credit secured by owner-occupied property generally are made with a loan-to-value ratio of up to 80%. Loan-to-value
ratios of up to 90% may be allowed on residential
owner-occupied property if the borrower exhibits unusually strong creditworthiness. We generally do not make residential loans which, at the time of inception, have
loan-to-value ratios in excess of 90%.

Construction Loans.Our construction loan portfolio consists of single-family residential properties, multi-family properties and
commercial
projects. Construction lending entails significant additional risks compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers
or groups of related borrowers. Construction loans also involve additional risks since funds are advanced while the property is under construction, which property has uncertain value prior to the
completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan-to-value ratios. To reduce
the risks associated with construction lending, we limit loan-to-value ratios to 80% of when-completed appraised values for owner-occupied residential or commercial
properties and for investor-owned residential or commercial properties. We expect that these loan-to-value ratios will provide sufficient protection against fluctuations in the
real estate market to limit the risk of loss. Maturities for construction loans generally range from 12 to 24 months for non-complex residential, non-residential and
multi-family properties.

Consumer Loans.Our consumer loans consist primarily of installment loans made to individuals for personal, family and household
purposes. The
specific types of consumer loans we make include home improvement loans, automobile loans, debt consolidation loans and other general consumer lending.

Consumer
loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore,
the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. A loan may also give rise to
claims and defenses by a consumer loan borrower against an assignee of such loan, such as the bank, and a borrower may be able to assert against such assignee claims and defenses that it has against
the seller of the underlying collateral.

Our
policy for consumer loans is to accept moderate risk while minimizing losses, primarily through a careful credit and financial analysis of the borrower. In evaluating consumer loans,
we require our lending officers to review the borrower's level and stability of income, past credit history, amount of debt currently outstanding and the impact of these factors on the ability of the
borrower to repay the
loan in a timely manner. In addition, we require our banking officers to maintain an appropriate differential between the loan amount and collateral value.

We
also issue credit cards to 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 history
and other factors. Finally, we make additional loans that are not classified in one of the above categories. In making such loans, we attempt to ensure that the borrower meets our loan underwriting
standards.

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Loan Participations

From time to time we purchase and sell commercial loan participations to or from other banks within our market area. All loan
participations purchased have been underwritten using the Bank's standard and customary underwriting criteria and are in good standing.

Deposits

We offer a broad range of interest-bearing and non-interest-bearing deposit accounts, including commercial and retail
checking accounts, money market accounts, individual retirement accounts, regular interest-bearing savings accounts and certificates of deposit with a range of maturity date options. The primary
sources of deposits are small and medium-sized businesses and individuals within our target market. Senior management has the authority to set rates within specified parameters in order to remain
competitive with other financial institutions in our market area. All deposits are insured by the FDIC up to the
maximum amount permitted by law. We have a service charge fee schedule, which is generally competitive with other financial institutions in our market, covering such matters as maintenance fees and
per item processing fees on checking accounts, returned check charges and other similar fees.

Courier Services

We offer courier services to our business customers. Courier services permit us to provide the convenience and personalized service
that our customers require by scheduling pick-ups of deposits and other banking transactions.

Deposit on Demand

We provide our commercial banking customers electronic deposit capability through our Deposit on Demand product. Business customers who
sign up for this service can scan their deposits and send electronic batches of their deposits to the Bank. This product reduces or eliminates the need for businesses with daily deposits and high
check volume to visit the Bank and provides the benefit of viewing images of deposited checks.

Telephone and Internet Banking

We believe that there is a strong demand within our market for telephone banking and internet banking. These services allow both
commercial and retail customers to access detailed account information and execute a wide variety of the banking transactions, including balance transfers and bill payment. We believe that these
services are particularly attractive to our customers, as it enables them at any time to conduct their banking business and monitor their accounts. Telephone and internet banking assists us in
attracting and retaining customers and encourages our existing customers to consider Cardinal for all of their banking and financial needs.

During
2007, we introduced Cardinal Mobile Banking to our customers. Customers who sign up for this service can access their accounts from any internet-enabled cell phone, PDA or mobile
device. Customers can check their balance, view account activity, transfer funds between deposit accounts, and may pay their bill online. Cardinal Mobile Banking is encrypted using the Wireless
Transport Layer Security (WTLS) protocol, which provides the highest level of security available today. As part of our
Mobile Banking service, customers can also receive text messages about their account balances and recent transaction activity.

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Automatic Teller Machines

We have an ATM at each of our branch offices and we make other financial institutions' ATMs available to our customers.

Other Products and Services

We offer other banking-related specialized products and services to our customers, such as travelers' checks, coin counters, wire
services, and safe deposit box services. We issue letters of credit for some of our commercial customers, most of which are related to real estate construction loans. We have not engaged in any
securitizations of loans.

Credit Policies

Our chief credit officer and senior lending officers are primarily responsible for maintaining both a quality loan portfolio and a
strong credit culture throughout the organization. The chief credit officer is responsible for developing and updating our credit policies and procedures, which are approved by the board of directors.
The chief credit officer and senior lending officers may make exceptions to these credit policies and procedures as appropriate, but any such exception must be documented and made for sound business
reasons.

Credit
quality is controlled by the chief credit officer through compliance with our credit policies and procedures. Our risk-decision process is actively managed in a
disciplined fashion to maintain an acceptable risk profile characterized by soundness, diversity, quality, prudence, balance and
accountability. Our credit approval process consists of specific authorities granted to the lending officers and combinations of lending officers. Loans exceeding a particular lending officer's level
of authority, or the combined limit of several officers, are reviewed and considered for approval by an officers' loan committee and, when above a specified amount, by a committee of the Bank's board
of directors. Generally, loans of $1,500,000 or more require committee approval. Our policy allows exceptions for very specific conditions, such as loans secured by deposits at our Bank. The chief
credit officer works closely with each lending officer at the Bank level to ensure that the business being solicited is of the quality and structure that fits our desired risk profile.

Under
our credit policies, we monitor our concentration of credit risk. We have established credit concentration guideline limits for commercial and industrial loans, real
estate-commercial loans, real estate-residential loans and consumer purpose loans, which include home equity loans. Furthermore, the Bank has established limits on the total amount of the Bank's
outstanding loans to one borrower, all of which are set below legal lending limits.

Loans
closed by George Mason are underwritten in accordance with guidelines established by the various secondary market investors to which George Mason sells its loans.

Brokerage and Asset Management Services

CWS provides brokerage and investment services through an arrangement with Raymond James Financial Services, Inc. Under this
arrangement, financial advisors can offer our customers an extensive range of investment products and services, including estate planning, qualified retirement plans, mutual funds, annuities, life
insurance, fixed income and equity securities and equity research and recommendations. Through Wilson/Bennett, we also offer asset management services to customers using a value-oriented approach that
focuses on large capitalization stocks.

The
Bank has a trust division, and services provided by our trust division include trust, estates, custody, investment management, escrows, and retirement plans. The addition of trust
services diversifies the Bank's sources of non-interest income and allows us to provide additional services to our customers.

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Employees

At December 31, 2010, we had 417 full-time equivalent employees. None of our employees are represented by any
collective bargaining unit. We believe our relations with our employees are good.

Government Supervision and Regulation

General

As a financial holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended, and the
examination and reporting requirements of the Board of Governors of the Federal Reserve System. Other federal and state laws govern the activities of our bank subsidiary, including the activities in
which it may engage, the investments that 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 also subject
to various consumer and compliance laws. As a state-chartered bank, the Bank is primarily subject to regulation, supervision and examination by the Bureau of Financial Institutions of the Virginia
State Corporation Commission. Our bank subsidiary also is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation. As part of our bank subsidiary, George Mason
and Cardinal First are subject to the same regulations as the Bank.

The
following description summarizes the more significant federal and state laws applicable to us. To the extent that statutory or regulatory provisions are described, the description is
qualified in its entirety by reference to that particular statutory or regulatory provision.

The Bank Holding Company Act

Under the Bank Holding Company Act, we are subject to periodic examination by the Federal Reserve and required to file periodic reports
regarding our operations and any additional information that the Federal Reserve may require. Our activities at the bank holding company level are limited to:



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

With
some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:



In
addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with their regulations, require Federal Reserve approval prior to
any person or company acquiring "control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the
bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less

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than
25%, of any class of voting securities and if the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenging this rebuttable control presumption.

In
November 1999, Congress enacted the Gramm-Leach-Bliley Act ("GLBA"), which made substantial revisions to the statutory restrictions separating banking activities from other
financial activities. Under the GLBA, bank holding companies that are well-capitalized and well-managed and meet other conditions can elect to become "financial holding
companies." As financial holding companies, they and their subsidiaries are permitted to acquire or engage in previously impermissible activities, such as insurance underwriting and securities
underwriting and distribution. In addition, financial holding companies may also acquire or engage in certain activities in which bank holding companies are not permitted to engage in, such as travel
agency activities, insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary to these activities. Financial
holding companies continue to be subject to the overall oversight and supervision of the Federal Reserve, but the GLBA applies the concept of functional regulation to the activities conducted by
subsidiaries. For example, insurance activities would be subject to supervision and regulation by state insurance authorities. We became a financial holding company in 2004.

Payment of Dividends

We are a legal entity separate and distinct from Cardinal Bank, CWS, Wilson/Bennett, and Cardinal Statutory Trust I. Virtually
all of our cash revenues will result from dividends paid to us by our bank subsidiary and interest earned on short term investments. Our bank subsidiary is subject to laws and regulations that limit
the amount of dividends that it can pay. Under Virginia law, a bank may not declare a dividend in excess of its accumulated retained earnings. Additionally, our bank subsidiary may not declare a
dividend if the total amount of all dividends,
including the proposed dividend, declared by the bank in any calendar year exceeds the total of the bank's retained net income of that year to date, combined with its retained net income 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 the dividend, the bank would be "undercapitalized," as defined in
the banking regulations.

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

In
addition, we are subject to certain regulatory requirements to maintain capital at or above regulatory minimums. These regulatory requirements regarding capital affect our dividend
policies. Regulators have indicated that financial holding companies should generally pay dividends only if the organization's net income available to common shareholders is sufficient to fully fund
the dividends, and the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition.

Insurance of Accounts, Assessments and Regulation by the FDIC

The deposits of our bank subsidiary are insured by the FDIC up to the limits set forth under applicable law. The deposits of our bank
subsidiary are subject to the deposit insurance assessments of the Deposit Insurance Fund, or "DIF", of the FDIC.

The
FDIC has implemented a risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to regulatory capital
levels of the institution and other factors, including supervisory evaluations. In addition to being influenced by the

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risk
profile of the particular depository institution, FDIC premiums are also influenced by the size of the FDIC insurance fund in relation to total deposits in FDIC insured banks. The FDIC has
authority to impose special assessments.

The
FDIC is required to maintain a designated minimum ratio of the DIF to insured deposits in the United States. In July 2010, the Dodd Frank Wall Street Reform and Consumer
Protection Act (the "Financial Reform Act") was signed into law. The Financial Reform Act requires the FDIC to assess
insured depository institutions to achieve a DIF ratio of at least 1.35 percent by September 30, 2020. The FDIC has recently adopted new regulations that establish a
long-term target DIF ratio of greater than two percent. As a result of the ongoing instability in the economy and the failure of other U.S. depository institutions, the DIF ratio is
currently below the required targets and the FDIC has adopted a restoration plan that will result in substantially higher deposit insurance assessments for all depository institutions over the coming
years. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole.

Pursuant
to the Financial Reform Act, FDIC insurance coverage limits were permanently increased to $250,000 per customer. The Financial Reform Act also provides for unlimited FDIC
insurance coverage for noninterest-bearing demand deposit accounts for a two year period beginning on December 31, 2010 and ending on December 31, 2012.

The
Financial Reform Act also changed the methodology for calculating deposit insurance assessments by changing the assessment base from the amount of an insured depository institution's
domestic deposits to its total assets minus tangible equity. On February 7, 2011, the FDIC issued a new regulation implementing revisions to the assessment system mandated by the Financial
Reform Act. The new regulation will be effective April 1, 2011 and will be reflected in the June 30, 2011 FDIC fund balance and the invoices for assessments due September 30,
2011. As a result of the new regulations, we expect to incur annual deposit insurance assessments that are higher than before the financial crisis. While the burden on replenishing the DIF will be
placed primarily on institutions with assets of greater than $10 billion, any future increases in required deposit insurance premiums or other bank industry fees could have a significant
adverse impact on our financial condition and results of operations.

The
FDIC is authorized to prohibit any insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the DIF. Also, the
FDIC may initiate enforcement actions against banks, after first giving the institution's primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance
of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. We are unaware of any existing circumstances that could result in termination of any of
our bank subsidiary's deposit insurance.

Capital Requirements

Each of the FDIC and the Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to banking
organizations that it supervises. Under the risk-based capital requirements, we and our bank subsidiary are each generally required to maintain a minimum ratio of total capital to
risk-weighted assets (including specific off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of
"Tier 1 Capital," which is defined as common equity, retained earnings, qualifying perpetual preferred stock and minority interests in common equity accounts of consolidated subsidiaries, less
certain intangibles. The

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remainder
may consist of "Tier 2 Capital", which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan
loss allowance and pretax net unrealized holding gains on certain equity securities. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements
for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to
federal bank regulatory evaluation of an organization's overall safety and soundness. In summary, the capital measures used by the federal banking regulators are:



Under
these regulations, a bank will be:



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

The
FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan
acceptable to the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval
of capital distributions by any financial holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of directors and officers. We are considered "well-capitalized" at December 31, 2010 and, in addition, our
bank subsidiary maintains sufficient capital to remain in compliance with capital requirements and is considered "well-capitalized" at December 31, 2010.

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The Financial Reform Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding companies, which may
result in more stringent capital requirements. Under the Collins Amendment to the Financial Reform Act, federal regulators have been directed to establish minimum leverage and risk-based
capital requirements for, among other entities, banks and bank holding companies on a consolidated basis. These minimum requirements can't be less than the generally applicable leverage and
risk-based capital requirements established for insured depository institutions nor quantitatively lower than the leverage and risk-based capital requirements established for
insured depository institutions that were in effect as of July 21, 2010. These requirements in effect create capital level floors for bank holding companies similar to those in place currently
for insured depository institutions. The Collins Amendment also excludes trust preferred securities issued after May 19, 2010 from being included in Tier 1 capital unless the issuing
company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank
holding companies with less than $15 billion in total assets, and such securities will be phased out of Tier 1 capital treatment for bank holding companies with over $15 billion
in total assets over a three-year period beginning in 2013. Accordingly, our trust preferred securities will continue to qualify as Tier 1 capital.

Other Safety and Soundness Regulations

There are significant obligations and restrictions imposed on financial holding companies and their depository institution subsidiaries
by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event that the
depository institution is insolvent or is in danger of becoming insolvent. These obligations and restrictions are not for the benefit of investors. Regulators may pursue an administrative action
against any financial holding company or bank 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
administrative action could take the form of a cease and desist proceeding, a removal action against the responsible individuals or, in the case of a violation of law or unsafe and unsound banking
practice, a civil monetary penalty action. A cease and desist order, in addition to prohibiting certain action, could also require that certain actions be undertaken. Under the Financial Reform Act
and longstanding policies of the Federal Reserve Board, we are required to serve as a source of financial strength to our subsidiary depository institution and to commit resources to support the Bank
in circumstances where we might not do so otherwise.

The Bank Secrecy Act

Under the Bank Secrecy Act ("BSA"), a financial institution is required to have systems in place to detect certain transactions, based
on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial
institutions are required to file Suspicious Activity Reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect, involves
illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The USA PATRIOT Act of 2001, enacted in response to the September 11, 2001 terrorist attacks, requires
bank regulators to consider a financial institution's compliance with the BSA when reviewing applications from a financial institution. As part of its BSA program, the USA PATRIOT Act of 2001 also
requires a financial institution to follow recently implemented customer identification procedures when opening accounts for new customers and to review U.S. government-maintained lists of individuals
and entities that are prohibited from opening accounts at financial institutions.

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Monetary Policy

The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal
Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in United States government securities, changes in the discount rate on member
bank borrowings and changes in reserve requirements against deposits held by federally insured banks. The Federal Reserve Board's monetary policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economy and in the money markets, as well
as the effect of actions by monetary and fiscal authorities, including the Federal Reserve System, no prediction can be made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of our bank subsidiary, its subsidiary, or any of our other subsidiaries.

Federal Reserve System

In 1980, Congress enacted legislation that imposed reserve requirements on all depository institutions that maintain transaction
accounts or non-personal time deposits. NOW accounts and demand deposit accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and
are subject to these reserve requirements. For net transaction accounts in 2011, the first $10.7 million of balances will be exempt from reserve requirements. A 3% reserve ratio will be
assessed on net transaction account balances over $10.7 million to and including $58.8 million. A 10% reserve ratio will be applied to amounts in net transaction account balances in
excess of $58.8 million. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a
noninterest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of our interest-earning assets. Beginning October 2008,
the Federal Reserve Banks pay financial institutions interest on their required reserve balances and excess funds deposited with the Federal Reserve. The interest rate paid is the targeted federal
funds rate.

Transactions with Affiliates

Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of
a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Sections 23A and 23B (i) limit the extent to which the bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and maintain an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital stock
and surplus, and (ii) require that all such transactions be on terms substantially the same as, or at least as favorable to those that, the bank has provided to a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. Section 23B applies to "covered transactions" 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.

The
Financial Reform Act also provides that banks may not "purchase an asset from, or sell an asset to" a bank insider (or their related interests) unless (i) the transaction is
conducted on market terms between the parties, and (ii) if the proposed transaction represents more than 10 percent of the capital stock and surplus of the bank, it has been approved in
advance by a majority of the bank's non-interested directors.

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Loans to Insiders

The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal
shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a principal shareholder of a bank, and to entities controlled by any of
the foregoing, may not exceed, together with all other outstanding loans to such person and entities controlled by such person, the bank's loan-to-one borrower limit. Loans in
the aggregate to insiders and their related interests as a class may not exceed two times the bank's unimpaired capital and unimpaired surplus until the bank's total assets equal or exceed
$100,000,000, at which time the aggregate is limited to the bank's unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and principal shareholders of a bank or bank holding company, and to entities controlled by such persons, unless such loan is approved in
advance by a majority of the board of directors of the bank with any "interested" director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other
outstanding loans to such person, as to which such prior board 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 that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other
persons.

Community Reinvestment Act

Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in
meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The Community Reinvestment Act requires the adoption by each
institution of a Community Reinvestment Act statement for each of its market areas describing the depository institution's efforts to assist in its community's credit needs. Depository institutions
are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution's Community
Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating
can significantly delay or even prohibit regulatory approval of a proposed transaction by a financial holding company or its depository institution subsidiaries.

The
Gramm-Leach-Bliley Act ("GLBA") and federal bank regulators have made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements
with private parties must be disclosed and annual reports must be made to a bank's primary federal regulator. A financial holding company or any of its subsidiaries will not be permitted to engage in
new activities authorized under the GLBA if any bank subsidiary received less than a "satisfactory" rating in its latest Community Reinvestment Act examination.

Consumer Laws Regarding Fair Lending

In addition to the Community Reinvestment Act described above, other federal and state laws regulate various lending and consumer
aspects of our business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that
prospective borrowers may experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository
institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums of money, short of a full trial.

These
governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending
discrimination

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under
the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on
prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral
non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.

Banks
and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act,
the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various
disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.

Gramm-Leach-Bliley Act of 1999

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

The
GLBA repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations between banks and securities firms. It also permits bank holding companies
to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such
as underwriting, dealing, investment, merchant banking, insurance underwriting, sales and brokerage activities. In order to become a financial holding company, the bank holding company and all of its
affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. We became a financial holding
company in 2004.

The
GLBA provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering
with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance
activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in areas identified under the law. Under the law, the
federal bank regulatory agencies adopted
insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures.

The
GLBA adopts a system of functional regulation under which the Federal Reserve Board is designated as the umbrella regulator for financial holding companies, but financial holding
company affiliates are principally regulated by functional regulators such as the FDIC for bank affiliates, the Securities and Exchange Commission for securities affiliates, and state insurance
regulators for insurance affiliates. It repeals the broad exemption of banks from the definitions of "broker" and "dealer" for purposes of the Securities Exchange Act of 1934, as amended. It also
identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a "broker," and a set of activities in which a bank
may engage without being deemed a "dealer." Additionally, GLBA makes conforming changes in the definitions of "broker" and "dealer" for purposes of the Investment Company Act of 1940, as amended, and
the Investment Advisers Act of 1940, as amended.

The
GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer
relationship and on an annual basis, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. The law provides that, except for specific
limited exceptions,

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an
institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is
given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer credit reporting agency, customer account
numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are stricter than those contained in the act.

The Financial Reform Act

On July 21, 2010, the Financial Reform Act was signed into law. The Financial Reform Act provides for sweeping financial
regulatory reform and will alter the way in which we conduct certain businesses.

The
Financial Reform Act contains a broad range of significant provisions that could affect our businesses, including, without limitation, the following:



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The
Financial Reform Act is expected to have a negative impact on our earnings through fee reductions, higher costs and new restrictions. The Financial Reform Act may have a material
adverse impact on the value of certain assets and liabilities on our balance sheet. As a result of the Financial Reform Act and its related rules and subject to final rulemaking over the next year, we
believe that our debit card revenue could be adversely impacted beginning as soon as the third quarter of 2011. One provision of the Financial Reform Act requires the Federal Reserve to set a cap on
debit card interchange fees charged to retailers. In December 2010, the Federal Reserve proposed capping the fee at 12 cents per debit card transaction, which is well below the average
that banks currently charge. While banks with less than $10 billion in assets (such as the Bank) are exempted from this measure, as a practical matter we expect that, if this measure is
implemented, all banks could be forced by market pressures to lower their interchange fees or face potential rejection of their cards by retailers. As a result, our debit card revenue could be
adversely impacted if the interchange cap is implemented.

Most
provisions of the Financial Reform Act require various federal banking and securities regulators to issue regulations to clarify and implement its provisions or to conduct studies
on significant issues.
These proposed regulations and studies are generally subject to a public notice and comment period. The timing of issuance of final regulations, their effective dates and their potential impacts to
our businesses will be determined over the coming months and years. As a result, the ultimate impact of the Financial Reform Act's final rules on our businesses and results of operations will depend
on regulatory interpretation and rulemaking, as well as the success of any of our actions to mitigate the negative earnings impact of certain provisions.

Future Regulatory Uncertainty

Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, we
cannot forecast how federal and state regulation of financial institutions may change in the future and, as a result, impact our operations. We fully expect that the financial institution industry
will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices. Congress and the federal government have
continued to evaluate and develop legislation, programs, and initiatives designed to, among other things, stabilize the financial and housing markets, stimulate the economy, including the federal
government's foreclosure prevention program, and prevent future financial crises by further regulating the financial services industry. As a result of the recent financial crisis and the ongoing
challenging economic environment, we anticipate additional legislative and regulatory proposals and initiatives as well as continued legislative and regulatory scrutiny of the financial services
industry. At this time, we cannot determine the final form of any proposed programs or initiatives or related legislation, the likelihood and timing of any other future proposals or legislation, and
the impact they might have on us.

Additional Information

We file with or furnish to the Securities and Exchange Commission ("SEC") annual, quarterly and current reports, proxy statements, and
various other documents under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The public may read and copy any materials that we file with or furnish to the SEC at the SEC's
Public Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on 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 contains reports, proxy and information statements and other information regarding
registrants, including us, that file or furnish documents electronically with the SEC.

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

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Item 1A.    Risk Factors

We are subject to various risks, including the risks described below. Our operations, financial condition and performance and,
therefore, the market value of our Common Stock could be adversely affected by any of these risks or additional risks not presently known or that we currently deem immaterial.

Difficult conditions in the economy and the capital markets continue to adversely affect our industry.

Dramatic declines in the housing market, with falling home prices and increasing foreclosures, followed by unemployment and
under-employment, have negatively impacted the credit performance of real estate related loans and consumer loans and resulted in significant
write-downs of asset values by financial institutions. These write-downs spread to other securities and loans and have caused many financial institutions to seek additional capital, to reduce or
eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. In this environment, many lenders and institutional investors have reduced or ceased providing funding
to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and reduction of business activity generally. Continuing economic pressure on consumers may adversely affect our business and results of operations. Market
developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs
and provision for loan losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

The
capital and credit markets have experienced volatility and disruption in recent years. In some cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers' underlying financial strength. If these levels of market disruption and volatility recur, there can be no assurance that we will not
experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

Our mortgage banking revenue is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market and higher interest rates, any of
which could adversely impact our profits.

Our mortgage banking segment is a significant portion of our consolidated business and maintaining our revenue stream in this segment
is dependent upon our ability to originate loans and sell them to investors. Loan production levels are sensitive to changes in economic conditions and recently have suffered from a slowdown in the
local housing market and tightening credit conditions. Any sustained period of decreased activity caused by further housing price pressure, loan underwriting restrictions or higher interest rates
would adversely affect our mortgage originations and, consequently, reduce our income from mortgage banking activities. As a result, these conditions would also adversely affect our net income.

Deteriorating
economic conditions may also cause home buyers to default on their mortgages. In certain of these cases where we have originated loans and sold them to investors, we may be
required to repurchase loans or provide a financial settlement to investors if it is proven that the borrower failed to provide full and accurate information on or related to their loan application or
for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor. Such repurchases or settlements would also
adversely affect our net income.

George
Mason, as part of the service it provides to its managed companies, purchases the loans managed companies originate at the time of origination. These loans are then sold by George
Mason to

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investors.
George Mason has agreements with its managed companies requiring that, for any loans that were originated by a managed company and for which investors have requested George Mason to
repurchase due to the borrowers failure to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not
underwritten in accordance with the loan program specified by the loan investor, the managed company be responsible for buying back the loan. In the event that the managed company's financial
condition deteriorates and it is unable to fund the repurchase of such loans, George Mason may have to provide the funds to repurchase these loans from investors.

Government measures to regulate the financial industry, including the Financial Reform Act, could require us to change certain of our business practices, impose significant
additional costs on us, limit the products that we offer, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, impact the value of
the assets we hold, significantly reduce our revenues or otherwise materially affect our businesses, financial condition or results of operations.

As a financial institution, we are heavily regulated at the state and federal levels. As a result of the financial crisis and related
global economic downturn that began in 2007, we have faced, and expect to continue to face, increased public and legislative scrutiny as well as stricter and more comprehensive regulation of our
financial services practices. In July 2010, the Financial Reform Act was signed into law. Many of the provisions of the Financial Reform Act have begun to be or will be phased in over the next
several months or years and will be subject both to further rulemaking and the discretion of applicable regulatory bodies. Although we cannot predict the full effect of the Financial Reform Act on our
operations, it could, as well as the future rules implementing its reforms, impose significant additional costs on us, limit the products we offer, could limit our ability to pursue business
opportunities in an efficient manner, require us to increase our regulatory capital, impact the values of assets that we hold, significantly reduce our revenues or otherwise materially and adversely
affect our businesses, financial condition, or results of operations. For example, the Financial Reform Act requires the Federal Reserve to set a cap on debit card interchange fees charged to
retailers. In December 2010, the Federal Reserve proposed capping the fee at 12 cents per debit card transaction, which is well below the average that banks currently charge. While banks
with less than $10 billion in assets (such as the Bank) are exempted from this measure, as a practical matter we expect that, if this measure is implemented, all banks could be forced by market
pressures to lower their interchange fees or face potential rejection of their cards by retailers. As a result, we believe that our debit card revenue could be adversely impacted as soon as the third
quarter of 2011 if the interchange cap is implemented.

The
ultimate impact of the final rules on our businesses and results of operations, however, will depend on regulatory interpretation and rulemaking, as well as the success of any of our
actions to mitigate the negative earnings impact of certain provisions.

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

At December 31, 2010, we had $10.1 million of goodwill related to the George Mason acquisition. In addition, we have
identified and recorded other intangible assets, such as customer relationships and trade names, as a result of the George Mason acquisition. The carrying amount of these intangibles at
December 31, 2010 was $544,000. Goodwill and other intangibles are tested for impairment on an annual basis or when facts and circumstances indicate that impairment may have occurred.

As
noted above, our mortgage banking segment is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market and higher interest rates.
During the third quarter of 2008, we recorded a noncash impairment charge of $2.8 million in the mortgage banking segment. The aforementioned factors may result in an additional impairment
charge related to

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the
goodwill and other intangibles at George Mason if we determine the carrying value of the reporting unit, including its goodwill and other intangible assets, is greater than their fair value.

We
may be forced to recognize impairment charges in the future as operating and economic conditions change.

We may be adversely impacted by changes in the condition of financial markets.

We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of
assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with our operations and activities
including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market conditions that
may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and
futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Accordingly, depending on the instruments or activities impacted,
market risks can have adverse effects on our results of operations and our overall financial condition.

Recently,
the subprime mortgage market dislocation has also impacted the ratings of certain monoline insurance providers which, in turn, has affected the pricing of certain municipal
securities and the liquidity of the short term public finance markets. We have some exposure to monolines and, as a result, are continuing to monitor this exposure. Additionally, unfavorable economic
or political conditions and changes in government policy could impact the operating budgets or credit ratings of U.S. States and U.S. municipalities and expose us to credit risk.

We
have investments in pooled trust preferred securities, totaling $8.0 million at December 31, 2010. The collateral underlying these structured securities are instruments
issued by financial institutions or insurers. We own the A-3 tranches in each issue. Each of these bonds are rated by more than one rating agency. Two of the securities have composite
ratings of AA, one of the securities has a composite rating of BB- and the other security has a composite rating of B-. There is minimal observable trading activity for these
types of securities. We have estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services. Given the level of
subordination below our A-3 tranches, and the actual and expected performance of the underlying collateral, we expect to receive all contractual interest and principal payments and
concluded that these securities are not other-than-temporarily impaired. However, if there are additional deferrals or defaults that impact the contractual cash flows within
the tranches we own, we may be required to record an other-than-temporary impairment related to these securities. These securities are classified as
held-to-maturity.

We may be adversely affected by economic conditions in our market area.

We are headquartered in Northern Virginia, and our market is the greater Washington, D.C. metropolitan area. Because our lending and
deposit-gathering activities are concentrated in this market, we will be affected by the general economic conditions in the greater Washington area, which may, among other factors, be impacted by the
level of federal government spending. Changes in the economy, and government spending in particular, may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan
and deposit pricing. A significant decline in general economic condition caused by inflation, recession, unemployment or other factors, would impact these local economic conditions and the demand for
banking products and services generally, and could negatively affect our financial condition and performance.

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Our concentration in commercial real estate and business loans may increase our future credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home
equity, consumer and other loans. Approximately 86% 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
in the region's real estate market, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by raising interest rates, could adversely affect
our customers' ability to pay these loans, which in turn could adversely impact us. Risk of loan defaults and foreclosures are inherent in the banking industry, and we try to limit our exposure to
this risk by carefully underwriting and monitoring our extensions of credit. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.

Commercial real estate and business loans increase our exposure to credit risks.

At December 31, 2010, our portfolio of commercial and industrial and commercial real estate (including construction) totaled
$1.07 billion, or 76% of total loans. We plan to continue to emphasize the origination of loans to small and medium-sized businesses as well as government contractors, professionals, such as
physicians, accountants and attorneys, and commercial real estate developers and builders, which generally exposes us to a greater risk of nonpayment and loss than residential real estate loans
because repayment of such loans often depends on the successful operations and cash flows of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or
groups of related borrowers compared to residential real estate loans. Also, many of our borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect to
one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate loan. In addition, these small to
medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our
results of operations and financial condition may be adversely affected. This concentration also exposes us more to the market risks of real estate sales leasing and other activity in the areas we
serve. An adverse change in local real estate conditions and markets could materially adversely affect the values of our loans and the real estate held as collateral for such loans, and materially
affect our results of operation and financial condition. During 2006, the federal bank regulatory agencies released guidance on "Concentrations in Commercial Real Estate Lending" (the "Guidance"). The
Guidance defines commercial real estate ("CRE") loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family
property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which
50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. The Guidance
requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. This could include enhanced strategic planning, CRE
underwriting policies, risk management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately designed compensation and incentive
programs. Higher allowances for loan losses and capital levels may also be required. The Guidance is triggered when CRE loan concentrations exceed either:



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The
Guidance applies to our CRE lending activities. Although our regulators have not required us to maintain elevated levels of capital or liquidity due to our CRE concentrations, the regulators may
do so in the future, especially if there is a material downturn in our local real estate markets.

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

We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio.
Through a periodic review and analysis of the loan portfolio, management determines the adequacy of the allowance for loan losses by considering such factors as general and industry-specific market
conditions, credit quality of the loan portfolio, the collateral supporting the loans and financial performance of our loan customers relative to their financial obligations to us. The amount of
future losses is impacted by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. Actual losses may exceed our current estimates.
Rapidly growing loan portfolios are, by their nature, unseasoned. Estimating loan loss allowances for an unseasoned portfolio is more difficult than with seasoned portfolios, and may be more
susceptible to changes in estimates and to losses exceeding estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we
cannot fully predict such losses or assert that our loan loss allowance will be adequate in the future. Future loan losses that are greater than current estimates could have a material impact on our
future financial performance.

Banking
regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize additional loan charge-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 by these regulatory agencies could have a
negative effect on our operating results.

Our liquidity could be impaired by our inability to access the capital markets on favorable terms.

Liquidity is essential to our business. Under normal business conditions, primary sources of funding for our parent company may include
dividends received from banking and nonbanking subsidiaries and proceeds from the issuance of equity capital in the capital markets. The primary sources of funding for our banking subsidiary include
customer deposits and wholesale market-based funding. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This
situation may arise due to circumstances that we may be unable to control, such as a general market disruption, negative views about the financial services industry generally, or an operational
problem that affects third parties or us.

For
further discussion or our liquidity position and other liquidity matters, including policies and procedures we use to manage our liquidity risks, see "Capital Resources" and
"Liquidity" in Item 7 of this report.

Increases in FDIC insurance premiums may cause our earnings to decrease.

Since the financial crisis began several years ago, an increasing number of bank failures have imposed significant costs on the FDIC in
resolving those failures, and the regulator's deposit insurance fund has been depleted. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the
FDIC has increased, and may increase in the future, assessment rates of insured institutions, including Cardinal Bank.

Deposits
are insured by the FDIC, subject to limits and conditions or applicable law and the FDIC's regulations. Pursuant to the Financial Reform Act, FDIC insurance coverage limits were
permanently increased to $250,000 per customer. The Financial Reform Act also provides for unlimited FDIC insurance coverage for noninterest-bearing demand deposit accounts for a two-year
period

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beginning
on December 31, 2010 and ending on December 31, 2012. The FDIC administers the deposit insurance fund, and all insured depository institutions are required to pay assessments
to the FDIC that fund the deposit insurance fund. The Financial Reform Act changed the methodology for calculating deposit insurance assessments by changing the assessment base from the amount of an
insured depository institution's domestic deposits to its total assets minus tangible equity. On February 7, 2011 the FDIC issued a new regulation implementing revisions to the assessment
system mandated by the Financial Reform Act. The new regulation will be effective April 1, 2011 and will be reflected in the June 30, 2011 FDIC fund balance and the invoices for
assessments due September 30, 2011. As a result of the new regulations, we expect to incur higher annual deposit insurance assessments than we historically incurred before the financial crisis
began several years ago. While the burden of replenishing the DIF will be placed primarily on institutions with assets of greater than $10 billion, any future increases in required deposit
insurance premiums or other bank industry fees could have a significant adverse impact on our financial condition and results of operations.

A substantial decline in the value of our Federal Home Loan Bank of Atlanta common stock may result in an other-than temporary impairment charge.

We are a member of the Federal Home Loan Bank of Atlanta, or FHLB, which enables us to borrow funds under the Federal Home Loan Bank
advance program. As a FHLB member, we are required to own FHLB common stock, the amount of which increases with the level of our FHLB borrowings. The carrying value of our FHLB common stock was
$15.7 million as of December 31, 2010. The FHLB has suspended daily repurchases of FHLB common stock, which adversely affects the liquidity of these shares. If the financial condition of
FHLB deteriorates further, there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and
counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our
counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of
the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.

We may not be able to successfully manage our growth or implement our growth strategies, which may adversely affect our results of operations and financial condition.

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



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We
may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand. Our ability to successfully manage
our growth will also depend upon our ability to maintain capital levels sufficient to support this growth, maintain effective cost controls and adequate asset quality such that earnings are not
adversely impacted to a material degree.

As
we continue to implement our growth strategy by opening new branches or acquiring branches or other banks, we expect to incur increased personnel, occupancy and other operating
expenses. In the case of new branches, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into
attractively priced loans and other higher yielding earning assets. Thus, our plans to branch aggressively could depress our earnings in the short run, even if we efficiently execute our branching
strategy.

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and
retain key personnel.

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the
relationships maintained with our customers by our Chairman and Chief Executive Officer, Bernard H. Clineburg, and our other executive and senior lending officers. We have entered into
employment agreements with Mr. Clineburg and four other executive officers. The existence of such agreements, however, does not necessarily assure us that we will be able to continue to retain
their services. The unexpected loss of Mr. Clineburg or other key employees could have a significant adverse effect on our business and possibly result in reduced revenues and earnings. We
maintain bank owned life insurance policies on all of our corporate executives.

The
implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships, as well as
develop new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they
were to leave their current employment. These agreements make the recruitment of these professionals more difficult. While we have been recently successful in acquiring what we consider to be talented
banking professionals, the market for talented people is competitive and we may not continue to be successful in attracting, hiring, motivating or retaining experienced banking professionals.

We may incur losses if we are unable to successfully manage interest rate risk.

Our future profitability will substantially depend upon our ability to maintain or increase the spread between the interest rates
earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates will affect our operating performance and financial condition. The
shape of the yield curve can also impact net interest income. Changing rates will impact how fast our mortgage loans and mortgage backed securities will have the principal repaid. Rate changes can
also impact the behavior of our depositors, especially depositors in non-maturity deposits such as demand, interest checking, savings and money market accounts. While we attempt to
minimize our exposure to interest rate risk, we are unable to eliminate it as it is an inherent part of our business. Our net interest spread will depend on
many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and industry-specific conditions and economic conditions generally.

Our future success is dependent on our ability to compete effectively in the highly competitive banking and financial services industry.

We face vigorous competition from other commercial banks, savings and loan associations, savings banks, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms,

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insurance
companies, money market funds and other types of financial institutions for deposits, loans and other financial services in our market area. A number of these banks and other financial
institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of
banking services. Many of our nonbank competitors are not subject to the same extensive regulations that govern us. As a result, these nonbank competitors have advantages over us in providing certain
services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

Our businesses and earnings are impacted by governmental, fiscal and monetary policy.

We are affected by domestic monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the
United States and its policies determine in large part our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which
affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as loans and debt securities, and its policies also
can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by
various regulatory authorities of the United States. Changes in fiscal or monetary policy are beyond our control and hard to predict.

Our profitability and the value of any equity investment in us may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Recently enacted,
proposed and future banking and other legislation and regulations have had, and will continue to have, or may have 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 be expected to influence our earnings and growth. Our success depends on our continued ability to maintain compliance with these regulations. Many of these regulations increase
our costs and thus place other financial institutions that may not be subject to similar regulation in stronger, more favorable competitive positions.

If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable. This could negatively affect our performance
and the value of our common stock.

Our business strategy calls for continued growth. We anticipate that we will be able to support this growth through the generation of
additional deposits at existing and new branch locations, as well as expanded loan and other investment opportunities. However, we may need to raise additional capital in the future to support our
continued growth and to maintain desired capital levels. Our ability to raise capital through the sale of additional equity securities or the placement of financial instruments that qualify as
regulatory capital will depend primarily upon our financial condition and the condition of financial markets at that time. We may not be able to obtain additional capital in the amounts or on terms
satisfactory to us. Our growth may be constrained if we are unable to raise additional capital as needed.

We have extended off-balance sheet commitments to borrowers which expose us to credit and interest rate risk.

We enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of our
customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and guarantees which would impact our liquidity and capital resources to the
extent customers accept or use these commitments. These instruments involve, to

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varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Our exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit and guarantees written is represented by the contractual or notional amount of those instruments. We use the same
credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.

We have operational risk that could impact our ability to provide services to our customers.

We have potential operational risk exposure throughout our organization. Integral to our performance is the continued effectiveness and
efficiency of our technical systems, operational infrastructure, relationships with third parties and key individuals involved in our ongoing activities. Failure by any or all of these resources
subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, unlawful tampering with our information technology infrastructure,
terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of the key individuals to perform properly.

We may be parties to certain legal proceedings that may impact our earnings.

We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation
and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against us could have material adverse financial impact or cause
significant reputational risk to us, which in turn could seriously harm our business prospects.

Our ability to pay dividends is limited and we may be unable to pay future dividends.

Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital in the
Company and in our subsidiaries. The ability of our bank subsidiary to pay dividends to us is limited by their obligations to maintain sufficient capital, earnings and liquidity and by other general
restrictions on their dividends under federal and state bank regulatory requirements. In addition, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of
the Board of Governors of the Federal Reserve System, or the Federal Reserve, regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the
cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) on our financial condition. These guidelines
also require that we review our net income for the current and past four quarters, and the level of dividends on common stock and other Tier 1 capital instruments for those periods, as well as
our projected rate or earnings retention. Under the Federal Reserve's policy, the board of directors of a bank holding company should also consider different factors to ensure that its dividend level
is prudent relative to the organization's financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could
affect its ability to pay while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should
consult with the Federal Reserve and eliminate, defer, or significantly reduce bank holding company's dividends if: (i) its net income available to shareholders for the past four quarters, net
of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and
overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. If we do not satisfy these
regulatory requirements or the Federal Reserve's policies, we will be unable to pay dividends on our common stock.

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Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Cardinal Bank, excluding its George Mason subsidiary, conducts its business from 26 branch offices. Nine of these facilities are owned
and 17 are leased. Leased branch banking facilities range in size from 457 square feet to 11,182 square feet. Our leases on these facilities expire at various dates through 2022, and all but one of
our leases have renewal options. The branch that does not have a renewal option is located at the headquarters location of George Mason (see below for additional lease information for George Mason).
Fifteen of our branch banking locations have drive-up banking capabilities and all have ATMs.

Cardinal
Wealth Services, Inc. conducts its business from one of Cardinal Bank's branch facilities.

George
Mason conducts its business from six leased facilities which range in size from 1,476 square feet to 32,087 square feet. The leases have various expiration dates through 2011 and
only three of their six locations have renewal options.

Wilson/Bennett
conducts its business from office space located in our Tysons Corner, Virginia headquarters facility.

Our
headquarters facility in Tysons Corner, Virginia comprises 41,818 square feet of leased office space. This lease expires in January 2022 and has renewal options. In addition
to housing various administrative functionsincluding accounting, data processing, compliance, treasury, marketing, deposit and loan operationsour commercial and industrial
and commercial real estate lending functions and various other departments are located there.

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

Item 3.    Legal Proceedings

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

Item 4.    (Removed and Reserved)

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Price for Common Stock and Dividends.Our common stock is currently listed for quotation on the Nasdaq Global Select Market
under the symbol
"CFNL." As of February 10, 2011, our common stock was held by 614 shareholders of record. In addition, we estimate that there were 4,507 beneficial owners of our common stock who own their
shares through brokers or banks.

The
high and low sale prices per share for our common stock for each quarter of 2010 and 2009 as reported on the market at the time and dividends declared during those periods were as
follows:

Periods Ended

High

Low

Dividends2010First Quarter

$
10.77

$
8.38

$
0.02Second Quarter


11.56


8.89


0.02Third Quarter


10.92


8.56


0.02Fourth Quarter


12.15


9.42


0.032009First Quarter

$
6.47

$
4.98

$
0.01Second Quarter


8.97


5.60


0.01Third Quarter


8.69


6.56


0.01Fourth Quarter


9.41


7.79


0.02


Dividend Policy.The board of directors intends to follow a policy of retaining any earnings necessary to operate our business in
accordance with all
regulatory policies while maximizing the long-term return for the Company's investors. Our future dividend policy is subject to the discretion of the board of directors and future dividend
payments will depend upon a number of factors, including future earnings, alternative investment opportunities, financial condition, cash requirements, and general business conditions.

Our
ability to distribute cash dividends will depend primarily on the ability of our subsidiaries to pay dividends to us. Cardinal Bank is subject to legal limitations on the amount of
dividends it is permitted to pay. Furthermore, neither Cardinal Bank nor we may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would
render us insolvent or unable to pay our obligations as they become due in the ordinary course of business. For additional information on these limitations, see "Government Regulation and
SupervisionPayment of Dividends" in Item 1 above.

Repurchases.On February 26, 2007, we publicly announced that the Board of Directors had adopted a program to repurchase up to
1,000,000
shares of our common stock. The timing and amount of repurchases, if any, will depend on market conditions, share price, trading volume, and other factors, and there is no assurance that we will
purchase shares during any period. No termination date was set for the buyback program. Shares may be repurchased in the open market or through privately negotiated transactions.

Since
the inception of the program, we have purchased 477,608 shares of our common stock at a total cost of $4.1 million. All of these shares have been cancelled and retired. No
shares were repurchased during 2010.

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Stock Performance Graph.The graph set forth below shows the cumulative shareholder return on the Company's Common Stock during the
five-year period ended December 31, 2010, as compared with: (i) an overall stock market index, the NASDAQ Composite; and (ii) a published industry index, the SNL Bank
Index. The stock performance graph assumes that $100 was invested on December 31, 2005 in our common stock and each of the comparable indices and that dividends were reinvested.

Cardinal Financial Corporation
Total Return Performance

CHART

Period EndingIndex

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

12/31/10Cardinal Financial Corporation


100.00


93.51


85.38


52.40


80.92


108.53NASDAQ Composite


100.00


110.39


122.15


73.32


106.57


125.91SNL Bank


100.00


116.98


90.90


51.87


51.33


57.52


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Table of Contents

Item 6.    Selected Financial Data

Selected Financial Data(In thousands, except per share data)

Years Ended December 31,2010

2009

2008

2007

2006Income Statement Data:Interest income

$
96,633

$
86,742

$
88,611

$
98,643

$
87,401Interest expense


27,588


36,200


45,638


58,324


46,047Net interest income


69,045


50,542


42,973


40,319


41,354Provision for loan losses


10,502


6,750


5,498


2,548


1,232Net interest income after provision for loan losses


58,543


43,792


37,475


37,771


40,122Non-interest income


27,389


23,348


17,812


19,480


21,684Non-interest expense


59,469


52,427


55,913


51,884


51,245Net income (loss) before income taxes


26,463


14,713


(626
)

5,367


10,561Provision (benefit) for income taxes


8,021


4,388


(912
)

885


3,173Net income

$
18,442

$
10,325

$
286

$
4,482

$
7,388Balance Sheet Data:Total assets

$
2,072,018

$
1,976,185

$
1,743,757

$
1,690,031

$
1,638,429Loans receivable, net of fees


1,409,302


1,293,432


1,139,348


1,039,684


845,449Allowance for loan losses


24,210


18,636


14,518


11,641


9,638Loans held for sale


206,047


179,469


157,009


170,487


338,731Total investment securities


344,984


378,753


315,539


364,946


329,296Total deposits


1,403,725


1,297,005


1,179,844


1,096,925


1,218,882Other borrowed funds


389,586


427,579


367,198


400,060


194,631Total shareholders' equity


222,902


204,507


158,006


159,463


155,873Common shares outstanding


28,770


28,718


24,014


24,202


24,459Per Common Share Data:Basic net income

$
0.63

$
0.38

$
0.01

$
0.18

$
0.30Fully diluted net income


0.62


0.37


0.01


0.18


0.30Book value


7.75


7.12


6.58


6.59


6.37Tangible book value(1)


7.22


6.52


6.00


5.90


5.75Performance Ratios:Return on average assets


0.92
%

0.57
%

0.02
%

0.27
%

0.51
%Return on average equity


8.44


5.53


0.18


2.85


4.87Dividend payout ratio


0.12


0.10


3.38


0.22


0.13Net interest margin(2)


3.68


2.94


2.78


2.63


2.98Efficiency ratio(3)(4)


61.72


70.95


82.03


81.02


82.41Non-interest income to average assets


1.37


1.29


1.08


1.19


1.49Non-interest expense to average assets


2.98


2.89


3.40


3.18


3.52Loans receivable, net of fees to total deposits


100.40


99.72


96.57


94.78


69.36


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Table of Contents

Years Ended December 31,2010

2009

2008

2007

2006Asset Quality Ratios:Net charge-offs to average loans receivable, net of fees


0.37
%

0.22
%

0.24
%

0.06
%

0.00
%Nonperforming loans to loans receivable, net of fees


0.53


0.05


0.41





0.01Nonperforming loans to total assets


0.36


0.04


0.27





0.01Allowance for loan losses to nonperforming loans


320.03


2,677.59


310.81





11,822.87Allowance for loan losses to loans receivable, net of fees


1.72


1.44


1.27


1.12


1.14Capital Ratios:Tier 1 risk-based capital


12.67
%

12.97
%

11.67
%

12.10
%

13.25
%Total risk-based capital


14.06


14.15


12.72


12.98


14.06Leverage capital ratio


10.82


11.03


9.90


10.26


10.68Other:Average shareholders' equity to average total assets


10.93
%

10.31
%

9.74
%

9.65
%

10.43
%Average loans receivable, net of fees to average total deposits


96.28


97.57


96.00


78.87


68.42Average common shares outstanding:Basic


29,123


27,186


24,370


24,606


24,424Diluted


29,608


27,674


24,837


25,012


24,987


(1)Tangible
book value is calculated as total shareholders' equity, excluding accumulated other comprehensive income, less goodwill and other intangible
assets, divided by common shares outstanding.(2)Net
interest margin is calculated as net interest income divided by total average earning assets and reported on a tax equivalent basis at a rate of 30%.(3)Efficiency
ratio is calculated as total non-interest expense divided by the total of net interest income and non-interest income,
excluding the impairment loss on Fannie Mae perpetual preferred stock and the settlement with a mortgage correspondent during 2008; the impairment loss on escrow arrangement during 2007; and the
litigation recovery during 2010, 2008, 2007, and 2006.(4)The
calculation of the efficiency ratio, which is a financial measure not prepared in accordance with generally accepted accounting principles ("GAAP"), and
a reconciliation of the efficiency ratio to our GAAP financial information are included in our Table 1 to Item 7 to this Annual Report on Form 10-K.


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following presents management's discussion and analysis of our consolidated financial condition at December 31, 2010 and
2009 and the results of our operations for the years ended December 31, 2010, 2009 and 2008. The discussion should be read in conjunction with the consolidated financial statements and related
notes included in this report.

Caution About Forward-Looking Statements

We make certain forward-looking statements in this Form 10-K that are subject to risks and uncertainties. These
forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, growth strategy, and financial and other goals. The words "believes," "expects," "may," "will," "should," "projects," "contemplates," "anticipates," "forecasts," "intends,"
or other similar words or terms are intended to identify forward-looking statements.

These
forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:



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

In
addition, this section should be read in conjunction with the description of our "Risk Factors" in Item 1A above.

Overview

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

We
own Cardinal Bank (the "Bank"), a Virginia state-chartered community bank with 26 banking offices located in Northern Virginia and the greater Washington, D.C. metropolitan area. The
Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers. Our commercial relationship managers focus on attracting small and
medium sized businesses as well as government contractors, commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys.

Additionally,
we complement our core banking operations by offering a wide range of services through our various subsidiaries, including mortgage banking through George Mason
Mortgage, LLC ("George Mason") and Cardinal First Mortgage, LLC ("Cardinal First"), collectively the "mortgage banking segment," retail securities brokerage though Cardinal Wealth
Services, Inc. ("CWS"), asset management through Wilson/Bennett Capital Management, Inc. ("Wilson/Bennett"), and trust, estate, custody, investment management and retirement planning
through the trust division of Cardinal Bank.

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George
Mason, based in Fairfax, Virginia, engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis through
six branches located throughout the metropolitan Washington, D.C. region. George Mason does business in eight states, primarily Virginia and Maryland, and the District of Columbia. George Mason is one
of the largest residential mortgage originators in the greater Washington metropolitan area, generating originations of approximately $3.2 billion and $2.6 billion of loans in 2010 and
2009, respectively, excluding advances on construction loans and including loans purchased from other mortgage banking companies which are owned by local home builders but managed by George Mason (the
"managed companies"). George Mason's primary sources of revenue include loan origination fees, net interest income earned on loans held for sale, gains on sales of loans and contractual management
fees earned relating to services provided to other mortgage companies owned by local home builders. At the time we enter into an interest rate lock arrangement with the borrower, we enter into a loan
forward sale commitment with a third party. Our mortgage loans are then sold servicing released.

Cardinal
First originates mortgage loans for new homes and refinancing in Virginia, Maryland, and Washington, D.C. principally for existing Cardinal Bank customers. In addition, Cardinal
First offers a construction-to-permanent loan program. This program provides variable rate financing for customers to construct their residences. Once the home has been
completed, the loan converts to fixed rate financing and is sold into the secondary market. These construction-to-permanent loans generate fee income as well as net interest
income for Cardinal First and are classified as loans held for sale.

The
mortgage banking segment's business is both cyclical and seasonal. The cyclical nature of its business is influenced by, among other factors, the levels of and trends in mortgage
interest rates, national and local economic conditions and consumer confidence in the economy. Historically, the mortgage banking segment has its lowest levels of quarterly loan closings during the
first quarter of the year.

Wilson/Bennett
provides asset management services to certain of our customers. Wilson/Bennett uses a value-oriented approach that focuses on large capitalization stocks. Wilson/Bennett's
primary source of revenue is management fees earned on the assets it manages for its customers. These management fees are generally based upon the market value of managed and custodial assets and,
accordingly, revenues from Wilson/Bennett will be, assuming a consistent customer base, more when appropriate indices, such as the S&P 500, are higher and lower when such indices are depressed.

In
July 2004, we formed a wholly-owned subsidiary, Cardinal Statutory Trust I, for the purpose of issuing $20.0 million of floating rate junior subordinated
deferrable interest debentures ("trust preferred securities"). These trust preferred securities are due in 2034 and pay interest at a rate equal to LIBOR
(London Interbank Offered Rate) plus 2.40%, which adjusts quarterly. These securities are redeemable at par beginning September 2009. The interest rate on this debt was 2.70% at
December 31, 2010. We have guaranteed payment of these securities. The $20.6 million payable by us to Cardinal Statutory Trust I is included in other borrowed funds in the
consolidated statements of condition since Cardinal Statutory Trust I is an unconsolidated subsidiary as we are not the primary beneficiary of this entity. We utilized the proceeds from the
issuance of the trust preferred securities to make a capital contribution into the Bank.

Net
interest income is our primary source of revenue. We define revenue as net interest income plus non-interest income. As discussed further in the interest rate sensitivity
section, we manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread
between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to
eliminate it entirely. In addition to managing interest rate risk, we also analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking
industry, and we attempt to limit our exposure to

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these
risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, noninterest income is an important source of revenue for us and includes, among
other things, service charges on deposits and loans, investment fee income, which includes trust revenues, gains and losses on sales of investment securities available-for-sale, gains on
sales of mortgage loans, and management fee income.

Net
interest income and non-interest income represented the following percentages of total revenue for the three years ended December 31, 2010:

Net Interest
Income

Non-Interest
Income2010


71.6
%

28.4
%2009


68.4
%

31.6
%2008


70.7
%

29.3
%


Non-interest
income is a lower percentage of our total revenue in 2010 as compared to 2009 and 2008 as a result of the increase in our net interest income. During 2010, we
managed our balance sheet growth and strategically decreased the interest rates we paid on our deposit liabilities in order improve our net interest margin.

2010 Economic Environment

The banking environment and the markets in which we conduct our businesses will continue to be strongly influenced by developments in
the U.S. and global economies, as well as the continued implementation and rulemaking from recent financial reforms. The global economy continued to recover modestly during 2010. In the U.S., the
economy began to recover early in 2010, fueled by moderate growth in consumption and inventory rebuilding, but slowed in late spring, as the sovereign debt crisis in Europe intensified. A slowdown in
consumption and domestic demand growth contributed to weak employment gains and an unemployment rate that drifted close to 10 percent. Year-over-year inflation measures
receded below one percent and stock market indices declined. Concerns about high unemployment and fears that U.S. might incur deflation led the Federal Reserve to adopt a second round or quantitative
easing that involved purchases of $600 billion of U.S. Treasury securities scheduled to occur through June 2011. The announcement of this policy led to lower interest rates. Bond yields
rebounded in the second half of 2010 as economic growth in the U.S. accelerated, driven by stronger consumer spending, rapid growth of exports and business investment in equipment and software.
Despite only moderate economic growth
in 2010, corporate profits rose sharply, benefiting from strong productivity gains and constraints on hiring and operating costs.

The
housing market remained weak throughout 2010. Home sales were soft, despite lower home prices and low interest rates. There were delays in the foreclosure process on the large number
of distressed mortgages and the supply of unsold homes remained high. Housing prices renewed a downward trend in the second half of 2010, due in part to the expiration of tax incentives for home
buyers.

Despite
the challenges in the national and global economies, the metropolitan Washington, D.C. area, the region we operate in, performed relatively well as compared to other geographic
regions. The unemployment rate in the Washington, D.C. metropolitan area did not increase to the same level as the national unemployment rate, and commercial and residential real estate values held up
comparatively well to other geographic regions.

At
December 31, 2010, we have non-accrual loans totaling $7.5 million and loans contractually past due 90 days or more as to principal or interest of
$49,000. Annualized net charge-offs were 0.37% of our average loans receivable for the year ended December 31, 2010. Due to historically low mortgage loan rates, originations from
our mortgage banking segment for 2010 surpassed originations for 2009.

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As
a result, net income from our mortgage banking segment increased to $6.8 million for the year ended December 31, 2010 compared to net income of $4.0 million for the year ended
December 31, 2009.

Market
illiquidity continues to impact certain portions of our investment securities portfolio, specifically the ratings of certain corporate bonds in our portfolio. We hold investments
of $8.0 million in par value of pooled trust preferred securities, which are significantly below book value as of December 31, 2010 due to the lack of liquidity in the market and
investor apprehension for investing in these types of investments.

We
expect challenging economic and operating conditions and an evolving regulatory regime to continue for the foreseeable future. These conditions could continue to affect the markets in
which we do business and could adversely impact our results for 2011. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

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

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

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

Critical Accounting Policies

General

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

The
accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, the fair value
measurements of

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certain
assets and liabilities, accounting for economic hedging activities, accounting for impairment testing of goodwill, accounting for the impairment of amortizing intangible assets and other
long-lived assets, and the valuation of deferred tax assets.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level that represents management's best estimate of known and inherent losses in our
loan portfolio. Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions,
actual and expected credit losses, historical trends and specific conditions of individual borrowers. Unusual and infrequently occurring events, such as weather-related disasters, may impact our
assessment of possible credit losses. As a part of our analysis, we use comparative peer group data and qualitative factors such as levels of and trends in delinquencies and non-accrual
loans, national and local economic trends and conditions and concentrations of loans exhibiting similar risk profiles to support our estimates.

For
purposes of our analysis, we categorize our loans into one of five categories: commercial and industrial, commercial real estate (including construction), home equity lines of
credit, residential mortgages, and consumer loans. In the absence of meaningful historical loss factors, peer group loss factors are applied and are adjusted by the qualitative factors mentioned
above. The indicated loss factors resulting from this analysis are applied for each of the five categories of loans. In addition, we individually assign loss factors to all loans that have been
identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent. Since we
have limited historical data on which to base loss factors for classified loans, we typically apply, in accordance with regulatory guidelines, a 5% loss factor to loans classified as special mention,
a 15% loss factor to loans classified as substandard and a 50% loss factor to loans classified as doubtful. Loans classified as loss loans are fully reserved or charged off. In certain instances, we
evaluate the impairment of certain loans on a loan by loan basis. For these loans, we analyze the fair value of the collateral underlying the loan and consider estimated costs to sell the collateral
on a discounted basis. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an
impairment and establish a specific reserve for the impaired loan.

Credit
losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are
adequate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory
comment. Additional
provisions for such losses, if necessary, would be recorded in the commercial banking or mortgage banking segments, as appropriate, and would negatively impact earnings.

Fair Value Measurements

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

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observable
inputs from a national valuation service. These inputs are applied to a third party industry-wide valuation model.

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

Accounting for Economic Hedging Activities

We record all derivative instruments on the statement of condition at their fair values. We do not enter into derivative transactions
for speculative purposes. For derivatives designated as hedges, we contemporaneously document the hedging relationship, including the risk
management objective and strategy for undertaking the hedge, how effectiveness will be assessed at inception and at each reporting period and the method for measuring ineffectiveness. We evaluate the
effectiveness of these transactions at inception and on an ongoing basis. Ineffectiveness is recorded through earnings. For derivatives designated as cash flow hedges, the fair value adjustment is
recorded as a component of other comprehensive income, except for the ineffective portion which is recorded in earnings. For derivatives designated as fair value hedges, the fair value adjustments for
both the hedged item and the hedging instrument are recorded through the income statement with any difference considered the ineffective portion of the hedge.

We
discontinue hedge accounting prospectively when it is determined that the derivative is no longer highly effective. In situations in which cash flow hedge accounting is discontinued,
we continue to carry the derivative at its fair value on the statement of condition and recognize any subsequent changes in fair value in earnings over the term of the forecasted transaction. When
hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we recognize immediately in earnings any gains and losses that were accumulated in other
comprehensive income.

In
the normal course of business, we enter into contractual commitments, including rate lock commitments, to finance residential mortgage loans. These commitments, which contain fixed
expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by us. Interest rate risk arises on these
commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to residential
mortgage loans intended to be sold are considered derivatives and are marked to market through earnings.

To
mitigate the effect of interest rate risk inherent in providing rate lock commitments, we economically hedge our commitments by entering into best efforts delivery forward loan sales
contracts. During the rate lock commitment period, these forward loan sales contracts are marked to market through earnings and are not designated as accounting hedges. The changes in fair value
related to movements in market rates of the rate lock commitments and the forward loan sales contracts generally move in opposite directions, and the net impact of changes in these valuations on net
income during the loan commitment period is generally inconsequential. At the closing of the loan, the loan commitment derivative expires and we record a loan held for sale and continue to be
obligated under the same forward loan sales contract. The forward sales contract is then designated as a hedge against the variability in cash to be received from the loan sale. Loans held for sale
are accounted for at the lower of cost or fair value.

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Accounting for Impairment Testing of Goodwill

To test goodwill for impairment, we perform an analysis to compare the fair value of the reporting unit to which the goodwill is
assigned to the carrying value of the reporting unit. We make estimates of the discounted cash flows from the expected future operations of the reporting unit. This discounted cash flow analysis
involves the use of unobservable inputs including: estimated future cash flows from operations; an estimate of a terminal value; a discount rate; and other inputs. Our estimated future cash flows are
largely based on our historical actual cash flows. If the analysis indicates that the fair value of the reporting unit is less than its carrying value, we do an analysis to compare the implied fair
value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all its
assets and liabilities. If the implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized.

Accounting for the Impairment of Amortizing Intangible Assets and Other Long-Lived Assets

We continually review our long-lived assets for impairment whenever events or changes in circumstances indicate that the
remaining estimated useful life of such assets might warrant revision or that the balances may not be recoverable. We evaluate possible impairment by comparing estimated future cash flows, before
interest expense and on an undiscounted basis, with the net book value of long-term assets, including amortizable intangible assets. If undiscounted cash flows are insufficient to recover
assets, further analysis is performed in order to determine the amount of the impairment.

An
impairment loss is recorded for the excess of the carrying amount of the assets over their fair values. Fair value is usually determined based on the present value of estimated
expected future cash flows using a discount rate commensurate with the risks involved.

Valuation of Deferred Tax Assets

We record a provision for income tax expense based on the amounts of current taxes payable or refundable and the change in net deferred
tax assets or liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement
purposes that will reverse in future periods. When substantial uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of
the asset is reduced by a valuation allowance. The amount of any valuation allowance established is based upon an estimate of the deferred tax asset that is more likely than not to be recovered.
Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

New Financial Accounting Standards

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

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

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

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

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

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

Financial Overview

The year ended December 31, 2010 was our second consecutive year of record profitability for us. For the year, we reported net
income of $18.4 million on a consolidated basis. The Bank recorded net income of $16.3 million and our mortgage banking operations recorded net income of $6.8 million. The wealth
management and trust services business segment reported a net loss of $1.8 million for the year ended December 31, 2010, which was mostly attributable to a noncash goodwill and other
intangibles impairment charge of $3.0 million.

For
the year ended December 31, 2009, we reported net income of $10.3 million. The Bank recorded net income of $8.4 million and our mortgage banking operations
recorded net income of $4.0 million. The wealth management and trust services segment reported net income of $321,000 for the year ended December 31, 2009.

2010 Compared to 2009

At December 31, 2010, total assets were $2.07 billion, an increase of 4.85%, or $95.8 million, from
$1.98 billion at December 31, 2009. Total loans receivable, net of deferred fees and costs, increased 8.96%, or $115.9 million, to $1.41 billion at December 31,
2010, from $1.29 billion at December 31, 2009. Total investment securities decreased by $37.5 million, or 9.8%, to $345.0 million at December 31, 2010, from
$382.5 million at December 31, 2009. Total deposits increased 8.2%, or $106.7 million, to $1.40 billion at December 31, 2010, from $1.30 billion at
December 31, 2009. Other borrowed funds, which primarily include repurchase agreements and Federal Home Loan Bank
("FHLB") advances, decreased $38.0 million to $389.6 million at December 31, 2010, from $427.6 million at December 31, 2009.

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Shareholders' equity at December 31, 2010 was $222.9 million, an increase of $18.4 million from $204.5 million at December 31,
2009. The increase in shareholders' equity was primarily attributable our recording net income of $18.4 million for the year ended December 31, 2010. Accumulated other comprehensive
income increased $1.1 million for the year ended December 31, 2010. Total shareholders' equity to total assets at December 31, 2010 and 2009 was 10.8% and 10.3%, respectively.
Book value per share at December 31, 2010 and 2009 was $7.75 and $7.12, respectively. Total risk-based capital to risk-weighted assets was 14.06% at December 31,
2010 compared to 14.15% at December 31, 2009. Accordingly, we were considered "well capitalized" for regulatory purposes at December 31, 2010.

We
recorded net income of $18.4 million, or $0.62 per diluted common share, for the year ended December 31, 2010, compared to net income of $10.3 million, or $0.37
per diluted common share, in 2009. Net interest income increased $18.5 million to $69.0 million for the year ended December 31, 2010, compared to $50.5 million for the year
ended December 31, 2009, a result of our balance sheet management and strategically decreasing the rates we pay on our deposit liabilities. Provision for loan losses increased
$3.8 million to $10.5 million for the year ended December 31, 2010, compared to $6.8 million for the same period of 2009. Non-interest income increased
$4.0 million to $27.4 million for the year ended December 31, 2010 as compared to $23.3 million for the same period of 2009 due primarily to increases in realized and
unrealized gains on sales of loans and management fee income from our mortgage banking subsidiaries. Noninterest expense was $59.5 million for the year ended December 31, 2010, an
increase of $7.0 million, or 13.4%, compared to $52.4 million for the year ended December 31, 2009. The increase in noninterest expense was primarily related to increases in
salaries and benefits expense and a noncash impairment charge of goodwill and other intangible assets of $3.0 million in our wealth management and trust services segment.

The
return on average assets for the years ended December 31, 2010 and 2009 was 0.92% and 0.57%, respectively. The return on average equity for the years ended December 31,
2010 and 2009 was 8.44% and 5.53%, respectively.

Our
results of operations for the year ended December 31, 2010 were adversely impacted by two noncash impairment charges. Historically, we had three reporting units with
associated goodwillWilson/Bennett, the Trust Division and George Mason Mortgage. Over time, the people and processes associated with the Wilson/Bennett and Trust Division reporting units
were assimilated to the point where the same group of employees were performing services for both subsidiaries; the subsidiaries had common customers/clients; and, strategic and resource allocation
decisions contemplated for the reporting units as if they were combined. Our annual assessment period for the goodwill associated with our Wilson/Bennett reporting unit was the second calendar
quarter. Commencing on July 1, 2010, we made the decision to combine the Wilson/Bennett and Trust Division reporting units. We performed the annual Wilson/Bennett goodwill recoverability
assessment in the second quarter and prior to the combination of the reporting units, and recognized an impairment loss of $451,000.

During
the fourth quarter of 2010, we were notified by a large trust customer that it would solicit bids from other trust services providers. We were also notified that an institutional
wealth management customer was also closing its account. Because of the uncertainty surrounding these events, we performed an updated analysis of the recoverability of the goodwill and intangible
assets associated with this now combined reporting unit. While we were successful in retaining the large trust client, the projected reduction in net cash flows indicated that the goodwill and other
intangible assets were impaired resulting in the write-off of approximately $2.4 million in goodwill and $200,000 in unamortized intangible assets. No goodwill or intangible assets
remain on the balance sheet associated with this reporting unit as of December 31, 2010. Management continues to evaluate various operating strategies with respect to this reporting unit.

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2009 Compared to 2008

At December 31, 2009, total assets were $1.98 billion, an increase of 13.3%, or $232.4 million, from
$1.74 billion at December 31, 2008. Total loans receivable, net of deferred fees and costs, increased 13.5%, or $154.1 million, to $1.29 billion at December 31,
2009, from $1.14 billion at December 31, 2008. Total investment securities increased by $63.2 million, or 20.0%, to $378.8 million at December 31, 2009, from
$315.5 million at December 31, 2008. Total deposits increased 9.9%, or
$117.2 million, to $1.30 billion at December 31, 2009, from $1.18 billion at December 31, 2008. Other borrowed funds, which primarily include fed funds purchased,
repurchase agreements and Federal Home Loan Bank ("FHLB") advances, increased $60.4 million to $427.6 million at December 31, 2009, from $367.2 million at
December 31, 2008.

Shareholders'
equity at December 31, 2009 was $204.5 million, an increase of $46.5 million from $158.0 million at December 31, 2008. The increase in
shareholders' equity was primarily attributable to our completion of a common stock offering during May 2009, when we added $31.6 million in capital. In addition, we recorded net income
of $10.3 million that further contributed to the increase in our shareholders' equity. Accumulated other comprehensive income increased $3.4 million for the year ended
December 31, 2009. Total shareholders' equity to total assets at December 31, 2009 and 2008 was 10.3% and 9.1%, respectively. Book value per share at December 31, 2009 and 2008
was $7.12 and $6.58, respectively. Total risk-based capital to risk-weighted assets was 14.15% at December 31, 2009 compared to 12.72% at December 31, 2008.
Accordingly, we were considered "well capitalized" for regulatory purposes at December 31, 2009.

We
recorded net income of $10.3 million, or $0.37 per diluted common share, for the year ended December 31, 2009, compared to net income of $286,000, or $0.01 per diluted
common share, in 2008. Our results for 2008 were impacted by impairments and nonrecurring noncash expenses which are more fully discussed below. Net interest income increased $7.6 million to
$50.5 million for the year ended December 31, 2009, compared to $43.0 million for the year ended December 31, 2008. Provision for loan losses increased $1.3 million
to $6.8 million for the year ended December 31, 2009, compared to $5.5 million for the same period of 2008. Non-interest income increased $5.5 million to
$23.3 million for the year ended December 31, 2009 as compared to $17.8 million for the same period of 2008 due primarily to increases in realized and unrealized gains on sales of
loans.

The
return on average assets for the years ended December 31, 2009 and 2008 was 0.57% and 0.02%, respectively. The return on average equity for the years ended December 31,
2009 and 2008 was 5.53% and 0.18%, respectively.

Our
operating results for the year ended December 31, 2008 were adversely impacted by several events. These events are discussed in detail below:



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Efficiency Ratio

The efficiency ratio measures the costs expended to generate a dollar of revenue. It represents noninterest expense as a percentage of
net interest income and noninterest income. The lower the percentage, the more efficient we are operating. We believe use of the efficiency ratio, excluding nonrecurring expenses, which is a
non-GAAP financial measure, provides additional clarity in assessing our operating results.

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See Table 1 below for the components of our calculation of our efficiency ratio as of December 31, 2010, 2009 and 2008.

Table 1.

Efficiency Ratio Calculation  Years Ended December 31, 2010, 2009 and 2008(In thousands, except per share data)

2010

2009

2008GAAP reported non-interest expense

$
59,469

$
52,427

$
55,913Less nonrecurring expensesImpairment of Fannie Mae perpetual preferred stock








4,408Settlement with mortgage correspondent








1,800Loss related to escrow arrangement








Non-interest expense without nonrecurring expenses

$
59,469

$
52,427

$
49,705GAAP reported non-interest income

$
27,389

$
23,348

$
17,812Less nonrecurring incomeLitigation recovery on previously impaired investment


87





190Non-interest income without nonrecurring income

$
27,302

$
23,348

$
17,622Calculation of efficiency ratio(1):Non-interest expense without nonrecurring expenses (from above)

$
59,469

$
52,427

$
49,705GAAP reported net interest income


69,045


50,542


42,973Non-interest income without nonrecurring income (from above)


27,302


23,348


17,622Total net interest income and non-interest income for efficiency ratio

$
96,347

$
73,890

$
60,595Efficiency ratio without nonrecurring income and expenses


61.72
%

70.95
%

82.03
%


(1)Efficiency
ratio is calculated as total non-interest expense divided by the total of net interest income and non-interest income,
excluding the impairment loss on Fannie Mae perpetual preferred stock and the settlement with a mortgage correspondent during 2008; the impairment loss on an escrow arrangement during 2007; and
litigation recoveries during 2010, 2008 and 2007.


Statements of Operations

Net Interest Income/Margin

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning
assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is affected primarily by variations in the volume and mix of these assets and
liabilities, as well as changes in interest rates. During 2007, the Federal Reserve began easing the federal funds rate due to worsening economic conditions related to the tightening credit markets
and decreased the rate four times to end at 4.25% at December 31, 2007. This easing continued into 2008, and as the economy continued to slow and go into a recessionary phase, the Federal
Reserve continued to decrease the fed funds rate to ultimately 0.25% as of December 31, 2008 where it has remained during all of 2009 and 2010. See "Interest Rate Sensitivity" for further
information.

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Tables 2 and 3.

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities  Years Ended December 31, 2010, 2009 and 2008  (In thousands)

2010

2009

2008Average
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Balance

Interest
Income/
Expense

Average
Yield/
RateAssetsInterest-earning assets:Loans(1):Commercial and industrial

$
163,497

$
7,507


4.58
%
$
157,703

$
7,530


4.77
%
$
130,608

$
8,019


6.14
%Real estatecommercial


609,568


38,193


6.23
%

546,593


34,203


6.26
%

440,746


28,905


6.56
%Real estateconstruction


204,167


11,474


5.62
%

181,365


8,707


4.80
%

190,354


11,175


5.87
%Real estateresidential


227,950


11,768


5.16
%

207,238


10,922


5.27
%

213,125


11,957


5.61
%Home equity lines


119,686


4,361


3.64
%

111,858


4,065


3.63
%

93,635


4,460


4.76
%Consumer


2,690


157


5.87
%

2,671


159


5.95
%

2,637


171


6.48
%1,327,558


73,460


5.53
%

1,207,428


65,586


5.43
%

1,071,105


64,687


6.04
%Loans held for sale


194,928


9,039


4.64
%

160,790


7,358


4.58
%

124,993


7,140


5.71
%Investment securities available-for-sale


307,612


13,799


4.49
%

258,971


12,601


4.87
%

261,600


13,645


5.22
%Investment securities held-to-maturity


28,476


935


3.28
%

42,375


1,587


3.75
%

58,915


2,521


4.28
%Other investments


15,728


54


0.34
%

15,705


30


0.19
%

15,307


567


3.70
%Federal funds sold


20,011


46


0.23
%

49,864


118


0.24
%

32,077


569


1.77
%Total interest-earning assets and interest income(2)


1,894,313


97,333


5.14
%

1,735,133


87,280


5.03
%

1,563,997


89,129


5.70
%Noninterest-earning assets:Cash and due from banks


12,893








1,427








7,833Premises and equipment, net


16,436








15,854








17,523Goodwill and other intangibles, net


13,587








14,060








16,404Accrued interest and other assets


81,988








60,993








51,300Allowance for loan losses


(21,306
)







(16,309
)







(12,568
)Total assets

$
1,997,911







$
1,811,158







$
1,644,489Liabilities and Shareholders' EquityInterest-bearing liabilities:Interest-bearing deposits:Interest checking

$
133,105

$
466


0.35
%
$
123,017

$
1,207


0.98
%
$
121,537

$
2,732


2.25
%Money markets


109,771


618


0.56
%

53,030


510


0.96
%

41,586


982


2.36
%Statement savings


272,843


1,423


0.52
%

291,751


4,034


1.38
%

341,059


9,987


2.93
%Certificates of deposit


661,906


13,054


1.97
%

622,617


17,947


2.88
%

480,408


18,390


3.83
%Total interest-bearing deposits


1,177,625


15,561


1.32
%

1,090,415


23,698


2.17
%

984,590


32,091


3.26
%Other borrowed funds


376,508


12,027


3.19
%

366,965


12,502


3.41
%

350,889


13,547


3.86
%Total interest-bearing liabilities and interest expense


1,554,133


27,588


1.78
%

1,457,380


36,200


2.48
%

1,335,479


45,638


3.42
%Noninterest-bearing liabilities:Demand deposits


201,262








147,062








131,197Other liabilities


24,059








19,965








17,645Common shareholders' equity


218,457








186,751








160,168Total liabilities and shareholders' equity

$
1,997,911







$
1,811,158







$
1,644,489Net interest income and net interest margin(2)




$
69,745


3.68
%



$
51,080


2.94
%



$
43,491


2.78
%


(1)Non-accrual
loans are included in average balances and do not have a material effect on the average yield. Interest income on
non-accruing loans was not material for the years presented.(2)Interest
income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of
35% for 2010, 34.5% for 2009 and 34% for 2008.


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Tables 2 and 3.

Rate and Volume Analysis  Years Ended December 31, 2010, 2009, and 2008  (In thousands)

2010 Compared to 2009

2009 Compared to 2008Average
Volume(3)

Average
Rate

Increase
(Decrease)

Average
Volume(3)

Average
Rate

Increase
(Decrease)Interest income:Loans(1):Commercial and industrial

$
293

$
(316
)
$
(23
)
$
1,664

$
(2,153
)
$
(489
)Real estatecommercial


4,184


(194
)

3,990


6,942


(1,644
)

5,298Real estateconstruction


1,095


1,672


2,767


(528
)

(1,940
)

(2,468
)Real estateresidential


1,092


(246
)

846


(330
)

(705
)

(1,035
)Home equity lines


284


12


296


868


(1,263
)

(395
)Consumer


0


(2
)

(2
)

2


(14
)

(12
)Total loans


6,948


926


7,874


8,618


(7,719
)

899Loans held for sale


1,562


119


1,681


2,045


(1,827
)

218Investment securities available-for-sale


2,367


(1,169
)

1,198


(137
)

(907
)

(1,044
)Investment securities held-to-maturity


(521
)

(131
)

(652
)

(708
)

(226
)

(934
)Other investments


0


24


24


15


(552
)

(537
)Federal funds sold


(71
)

(1
)

(72
)

316


(767
)

(451
)Total interest income(2)


10,285


(232
)

10,053


10,149


(11,998
)

(1,849
)Interest expense:Interest-bearing deposits:Interest checking


99


(840
)

(741
)

33


(1,558
)

(1,525
)Money markets


546


(438
)

108


270


(742
)

(472
)Statement savings


(261
)

(2,350
)

(2,611
)

(1,444
)

(4,509
)

(5,953
)Certificates of deposit


1,133


(6,026
)

(4,893
)

5,444


(5,887
)

(443
)Total interest-bearing deposits


1,517


(9,654
)

(8,137
)

4,303


(12,696
)

(8,393
)Other borrowed funds


325


(800
)

(475
)

621


(1,666
)

(1,045
)Total interest expense


1,842


(10,454
)

(8,612
)

4,924


(14,362
)

(9,438
)Net interest income(2)

$
8,443

$
10,222

$
18,665

$
5,225

$
2,364

$
7,589


(1)Non-accrual
loans are included in average balances and do not have a material effect on the average yield. Interest income on
non-accruing loans was not material for the years presented.(2)Interest
income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of
35% for 2010, 34.5% for 2009 and 34% for 2008.(3)Changes
attributable to rate/volume have been allocated to volume.


2010 Compared to 2009

Net interest income for the year ended December 31, 2010 was $69.0 million, compared to $50.5 million for the year
ended December 31, 2009, an increase of $18.5 million, or 36.6%. The increase in net interest income was primarily a result of our slightly increasing rates on our interest-earning
assets while lowering the interest rates paid on deposits and other borrowed funds during 2010 compared with 2009, in addition to increases in our interest earnings assets during 2010.

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Our
net interest margin, on a tax equivalent basis, for the years ended December 31, 2010 and 2009 was 3.68% and 2.94%, respectively, the increase for which was primarily a result
of our ability to decrease interest rates on deposits faster as we managed our balance sheet in order to increase our yields on our interest-earning assets. We believe this financial measure provides
a more accurate picture of the interest margin for comparative purposes. To derive our net interest margin on a tax equivalent basis, net interest income is adjusted to reflect tax-exempt
income on an equivalent before tax basis with a corresponding increase in income tax expense. For purposes of this calculation, we use our
federal statutory tax rates for the periods presented. This measure ensures comparability of net interest income arising from taxable and tax-exempt sources.

Our
interest rates on our other borrowed funds decreased due to the continued significantly low interest rate environment of 2010. The average yield on interest-earning assets increased
to 5.14% in 2010 from 5.03% in 2009, and our cost of interest-bearing liabilities decreased to 1.78% in 2010 from 2.48% in 2009. The cost of other borrowed funds, which generally are shorter term
fundings and which we continued to utilize during 2010 to help fund our balance sheet growth and support our loans held for sale portfolio, decreased 22 basis points to 3.19% in 2010 from 3.41% in
2009. The cost of deposit liabilities decreased 85 basis points to 1.32% in 2010 from 2.17% for 2009.

Total
average earning assets increased by 9.2% to $1.89 billion at December 31, 2010 compared to $1.74 billion at December 31, 2009. The increase in our
earnings assets were primarily driven by an increase in average loans receivable of $120.1 million, an increase in our inventory of loans held for sale of $34.1 million and an increase
in investment securities of $34.7 million. These increases were funded by an increase in interest-bearing deposits of $87.2 million, an increase in other borrowed funds of
$9.5 million and an increase in noninterest-bearing deposits of $54.2 million.

Average
loans receivable increased $120.1 million to $1.33 billion during 2010 from $1.21 billion in 2009. Average balances of nonperforming assets, which consist of
non-accrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2010 and 2009. Additional interest income of
approximately $643,000 for 2010 and $414,000 for 2009 would have been realized had all nonperforming assets performed as originally expected. Nonperforming assets exclude loans that are both past due
90 days or more and still accruing interest due to an assessment of collectibility.

Average
interest-bearing deposits increased $87.2 million to $1.18 billion in 2010 from $1.09 billion in 2009. The largest increase in average interest-bearing
deposit balances was in our money market deposits, which increased $56.7 million compared to 2009. In addition, certificates of deposit increased $39.3 million to $661.9 million
for 2010 compared to $622.6 million for 2009. Overall, we have continued to see an increase in our deposits as a result of a "flight to safety" by consumers who were seeking the increase in
FDIC insurance protection. Offsetting this increase was a decrease in average statement savings of $18.9 million to $272.8 million for 2010 compared to $291.8 million for 2009.

2009 Compared to 2008

Net interest income for the year ended December 31, 2009 was $50.5 million, compared to $43.0 million for the year
ended December 31, 2008, an increase of $7.6 million, or 17.6%. The increase in net interest income was primarily a result of decreases in the interest rates paid on deposits and other
borrowed funds, net of the impact of decreased yields on
earning assets during 2009, compared with 2008. In addition, we were able to deploy $31.6 million as a result of our capital raising efforts during 2009 in interest-bearing assets at no cost.

Our
net interest margin, on a tax equivalent basis, for the years ended December 31, 2009 and 2008 was 2.94% and 2.78%, respectively, the increase for which was primarily a result
of our ability to decrease interest rates on deposits faster than rates decreased on our interest earning assets. In addition, our interest rates on our other borrowed funds decreased due to the
significantly low interest

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rate
environment of 2009. The average yield on interest-earning assets decreased to 5.03% in 2009 from 5.70% in 2008, and our cost of interest-bearing liabilities decreased to 2.48% in 2009 from 3.42%
in 2008. The cost of other borrowed funds, which generally are shorter term fundings and which we continued to utilize during 2009 to help fund our balance sheet growth, decreased 45 basis points to
3.41% in 2009 from 3.86% in 2008. The cost of deposit liabilities decreased 109 basis points to 2.17% in 2009 from 3.26% for 2008.

Total
average earning assets increased by 10.9% to $1.74 billion at December 31, 2009 compared to $1.56 billion at December 31, 2008. The increase in our
earnings assets were primarily driven by an increase in average loans receivable of $136.3 million and an increase in our inventory of loans held for sale of $35.8 million and offset by
a decrease in investment securities of $19.2 million. These increases were funded by an increase in interest-bearing deposits of $105.8 million, an increase in other borrowed funds of
$16.1 million and an increase in noninterest-bearing deposits of $15.9 million.

Average
loans receivable increased $136.3 million to $1.21 billion during 2009 from $1.07 million in 2008. Average balances of nonperforming assets, which consist of
non-accrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2009 and 2008. Additional interest income of
approximately $414,000 for 2009 and $59,000 for 2008 would have been realized had all nonperforming assets performed as originally expected. Nonperforming assets exclude loans that are both past due
90 days or more and still accruing interest due to an assessment of collectibility.

Average
interest-bearing deposits increased $105.8 million to $1.1 billion in 2009 from $984.6 million in 2008. The largest increase in average interest-bearing
deposit balances was in certificates of deposit, which increased $142.2 million compared to 2008. Overall, we saw an increase in our deposits as a result of a "flight to safety" by consumers
who were seeking the increase in FDIC insurance protection. Offsetting this increase was a decrease in average statement savings of $49.3 million to $291.8 million for 2009 compared to
$341.1 million for 2008.

Interest Rate Sensitivity

We are exposed to various business risks including interest rate risk. Our goal is to maximize net interest income without incurring
excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that we maintain. We manage interest rate risk through
an asset and liability committee ("ALCO"). ALCO is responsible for managing our interest rate risk in conjunction with liquidity and capital management.

We
employ an independent consulting firm to model our interest rate sensitivity. We use a net interest income simulation model as our primary tool to measure interest rate sensitivity.
Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions
are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover
how we expect rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts as well as certificates of deposit. Based on inputs that include
the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain
unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year
period and include ramped rate changes of down 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the current level of interest rates. In the ramped
down rate change, the model moves rates gradually down 100 basis points over the first year and then rates remain flat in the second year.

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For
the up 200 basis point scenario, rates are gradually moved up 200 basis points in the first year and then rates remain flat in the second year. In both the up and down scenarios, the
model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

At
December 31, 2010, our asset/liability position was neutral based on our interest rate sensitivity model. Our net interest income would decrease by less than 1% in a down 100
basis point scenario and would increase less than 0.5% in an up 200 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would
decrease by less than 1.9% in a down 100 basis point scenario and would increase by less than 1.2% in an up 200 basis point scenario.

Provision Expense and Allowance for Loan Losses

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

The
provision for loan losses was $10.5 million and $6.8 million for the years ended December 31, 2010 and 2009, respectively. The allowance for loan losses at
December 31, 2010 was $24.2 million compared to $18.6 million at December 31, 2009. Our allowance for loan loss ratio at December 31, 2010 was 1.72% compared to
1.44% at December 31, 2009. The increase in the allowance for loan loss ratio is a direct result of increases in non-performing loans and the adverse migration of certain loans
through our allowance for loan losses calculation model because of current and ongoing adverse economic conditions. While we continue to report strong credit quality in our loan portfolio, we have
experienced increases in our watch list credits and net charge-offs. Our provision was impacted by net new loan growth in addition to our evaluation of the credit quality in our loan
portfolio and the qualitative factors we use to determine the adequacy of our loan loss reserves. We recorded net loan charge-offs of $4.9 million and $2.6 million for the
years ended December 31, 2010 and 2009, respectively. During 2010, we charged-off $3.2 million in commercial and industrial loans, residential loans of $2.1 million
and consumer loans of $50,000. Annualized net charged-off loans was 0.37% of average loans receivable for the year ended December 31, 2010, compared to 0.22% for the year ended
December 31, 2009. Non-accrual loans totaled $7.5 million at December 31, 2010 compared to $696,000 at December 31, 2009.

Continued
challenging economic conditions could adversely affect our home equity lines of credit, credit card and other loan portfolios, including causing increases in delinquencies and
default rates, which we expect could impact our charge-offs and provision for loan losses. Continued deterioration in commercial and residential real estate values, employment data and
household incomes could result in higher credit losses for us. Also, in the ordinary course of business, we may also be subject to a concentration of credit risk to a particular industry,
counterparty, borrower or issuer. At December 31, 2010, our commercial real estate (including construction lending) portfolio was 62% of our total loan portfolio. A deterioration in the
financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps
materially, and the systems by which we set limits and monitor the level or our credit exposure to individual entities and industries, may not function as we have anticipated.

The
provision for loan losses was $5.5 million for 2008. Net charge-offs for the year ended December 31, 2008 was $2.6 million.

See
"Critical Accounting Policies" above for more information on our allowance for loan losses methodology.

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The
following tables present additional information pertaining to the activity in and allocation of the allowance for loan losses by loan type and the percentage of the loan type to the
total loan portfolio.

Table 4.

Allowance for Loan Losses  Years Ended December 31, 2010, 2009, 2008, 2007, and 2006  (In thousands)

2010

2009

2008

2007

2006Beginning balance, January 1

$
18,636

$
14,518

$
11,641

$
9,638

$
8,301Provision for loan losses


10,502


6,750


5,498


2,548


1,232Loans charged off:Commercial and industrial


(3,187
)

(876
)

(1,188
)

(449
)

(42
)Residential


(2,064
)

(1,756
)

(576
)

(100
)

Consumer


(50
)

(6
)

(892
)

(3
)

(1
)Total loans charged off


(5,301
)

(2,638
)

(2,656
)

(552
)

(43
)Recoveries:Commercial and industrial


3


5


8


7


148Residential


219











Consumer


151


1


27





Total recoveries


373


6


35


7


148Net (charge offs) recoveries


(4,928
)

(2,632
)

(2,621
)

(545
)

105Ending balance, December 31,

$
24,210

$
18,636

$
14,518

$
11,641

$
9,638




2010

2009

2008

2007

2006Loans:Balance at year end

$
1,409,302

$
1,293,432

$
1,139,348

$
1,039,684

$
845,449Allowance for loan losses to loans receivable, net of fees


1.72
%

1.44
%

1.27
%

1.12
%

1.14
%Net charge-offs to average loans receivable


0.37
%

0.22
%

0.24
%

0.06
%

0.00
%


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Table 5.

Allocation of the Allowance for Loan Losses  At December 31, 2010, 2009, 2008, 2007, and 2006  (In thousands)

2010

2009

2008Allocation

% of Total*

Allocation

% of Total*

Allocation

% of Total*Commercial and industrial

$
2,941


14.20
%
$
2,797


12.45
%
$
2,129


14.12
%Real estatecommercial


10,558


44.73
%

9,666


45.80
%

6,110


41.41
%Real estateconstruction


7,593


17.01
%

2,829


14.80
%

3,118


16.53
%Real estateresidential


1,875


15.39
%

2,096


17.67
%

2,138


18.57
%Home equity lines


1,175


8.46
%

1,182


9.07
%

965


9.16
%Consumer


68


0.21
%

66


0.21
%

58


0.21
%Total allowance for loan losses

$
24,210


100.00
%
$
18,636


100.00
%
$
14,518


100.00
%




2007

2006Allocation

% of Total*

Allocation

% of Total*Commercial and industrial

$
1,956


13.51
%
$
1,670


12.09
%Real estatecommercial


5,225


39.95
%

3,687


37.50
%Real estateconstruction


2,217


17.93
%

1,764


18.27
%Real estateresidential


1,402


20.50
%

2,025


23.80
%Home equity lines


772


7.81
%

384


7.75
%Consumer


69


0.30
%

108


0.59
%Total allowance for loan losses

$
11,641


100.00
%
$
9,638


100.00
%


*Percentage
of loan type to the total loan portfolio.


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Non-Interest Income

The following table provides detail for non-interest income for the years ended December 31, 2010, 2009, and 2008.

Table 6.

Non-Interest Income  Years Ended December 31, 2010, 2009 and 2008  (In thousands)

2010

2009

2008Insufficient funds fee income

$
515

$
546

$
664Service charges on deposit accounts


559


488


463Other fee income on deposit accounts


107


217


283ATM transaction fees


700


683


655Credit card fees


99


77


67Loan service charges


2,212


2,649


1,643Trust adminstration fee income


3,538


3,134


2,949Investment fee income


550


480


528Realized and unrealized gains on mortgage banking activities


13,860


12,452


7,752Net realized gains on investment securities available-for-sale


726


760


913Net realized gain on investment securitiestrading


188


(425
)

(9
)Management fee income


3,657


1,833


765Bank-owned life insurance income


646


536


860Litigation recovery on previously impaired investment


87





190Gain on debt extinguishments








275Other income (loss)


(55
)

(82
)

(186
)Total non-interest income

$
27,389

$
23,348

$
17,812


Non-interest
income includes service charges on deposits and loans, realized and unrealized gains on mortgage banking activities, investment fee income, management fee
income, and gains on sales of investment securities available-for-sale, and continues to be an important factor in our operating results. Non-interest income for the years
ended December 31, 2010 and 2009 was $27.4 million and $23.3 million, respectively. The increase in non-interest income for the year ended December 31, 2010,
compared to the same period of 2009, is primarily the result of an increase in realized and unrealized gains on mortgage banking activities and management fee income from our mortgage banking segment.
Realized and unrealized gains on mortgage banking activities increased $1.4 million to $13.9 million for the year ended December 31, 2010, compared to $12.5 million for
2009. The increase in realized and unrealized gains on mortgage banking activities is directly related to an increase in loan origination and sales volume occurring in the mortgage banking segment as
a result of decreased in mortgage rates and more affordable home prices during 2010. In addition, we have added mortgage loan originators during 2010 to help increase our market share. Included in
realized and unrealized gains on mortgage banking activities are any origination, underwriting, and discount points and other funding fees and gains associated with our sales of loans to third party
investors. Costs include direct costs associated with loan origination, such as commissions and salaries. Management fee income, which represents the income earned for services George Mason provides
to other mortgage companies owned by local home builders and generally fluctuates based on the volume of loan sales, increased $1.8 million to $3.7 million during 2010 as compared to
$1.8 million in 2009, again due to the origination volumes in the residential real estate market.

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Another
contributing factor to the increase in our non-interest income was an increase in investment fee income, which increased $474,000 to $4.1 million for the year
ended December 31, 2010, compared to $3.6 million for 2009. Investment fee income includes net commissions earned at CWS and income earned at Wilson/Bennett and from our trust division.
The increase in the market values of managed and custodial assets and an increase in customer relationships in the wealth management and trust services segment have contributed to the increase in
investment fee income during 2010. As previously mentioned, we recently completed negotiations of our service agreement with one of our largest wealth management clients. While we were successful in
retaining this client, in order to remain competitive in the negotiations process, we had to significantly decrease the fees we charge for our services to this particular client. As a result, we
anticipate fee income from this business line will decrease during 2011.

Service
charges on deposit accounts decreased $130,000 to $1.9 million for the year ended December 31, 2010, compared to $2.0 million for the year ended
December 31, 2009. Service charges on deposit accounts include insufficient funds fee income, service charges on deposit accounts, other fee income on deposit accounts and ATM transaction fees
as shown in Table 6. Loan service charges totaled $2.3 million for the year ended December 31, 2010, a decrease of $338,000, compared to $2.6 million for the year ended
December 31, 2009. The decrease in loan service charges is primarily a result of a decrease in fee income earned by George Mason's title company during 2010.

For
the year ended December 31, 2010, the increase in the cash surrender value of our bank-owned life insurance was $646,000, an increase of $110,000 when compared to
the same period of 2009. This increase is a result of the increase in the earnings of the underlying investment assets of our bank-owned life insurance.

For
the year ended December 31, 2010, we recorded net gains on the sales of investment securities totaling $726,000 compared to $760,000 for the same period of 2009. In addition,
we recorded trading gains of $188,000 for the year ended December 31, 2010, compared to trading losses of $425,000 for the year ended December 31, 2009. We have purchased investments to
economically hedge against fair value changes of our nonqualified deferred compensation plan liability. These investments are designated as trading securities, and as such, the changes in fair value
are reflected in earnings. These trading gains were primarily the result of increased stock prices and were mostly offset by a compensation expense associated with this benefit plan.

Non-interest
income for the years ended December 31, 2009 and 2008 was $23.3 million and $17.8 million, respectively. The increase in
non-interest income for the year ended December 31, 2009, compared to the same period of 2008, is primarily the result of an increase in realized and unrealized gains on mortgage
banking activities and management fee income from our mortgage banking segment. Realized and unrealized gains on mortgage banking activities increased $4.7 million to $12.5 million for
the year ended December 31, 2009, compared to $7.8 million for 2008. The increase in realized and unrealized gains on mortgage banking activities is directly related to an increase in
loan origination and sales volume occurring in the mortgage banking segment as a result of decreased in mortgage rates and more affordable home prices during 2009. Management fee income increased
$1.1 million to $1.8 million during 2009 as compared to $765,000 in 2008, again due to the origination volumes in the residential real estate market.

Another
contributing factor to the increase in our non-interest income was an increase in loan service charges of $1.0 million for the year ended December 31,
2009 to $2.6 million, compared to $1.6 million for the same period of 2008. The increase in loan service charges is primarily a result of fee income earned by George Mason's title
company and again a result of an increase in loan origination and sales activity. Total investment fee income increased $137,000 to $3.6 million for the year ended December 31, 2009,
compared to $3.5 million for 2008. The increase in the market values

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of
managed and custodial assets and an increase in customer relationships in the wealth management and trust services segment have contributed to the increase in investment fee income during 2009.

Service
charges on deposit accounts decreased $121,000 to $2.0 million for the year ended December 31, 2009, compared to $2.1 million for the year ended
December 31, 2008. For the year ended December 31, 2009, the increase in the cash surrender value of our bank-owned life insurance was $536,000, a decrease of $324,000 when
compared to the same period of 2008. This decrease is a result of the decrease in the earnings of the underlying investment assets of our bank-owned life insurance.

For
the year ended December 31, 2009, we recorded net gains on the sales of investment securities totaling $760,000 compared to $913,000 for the same period of 2008. Included in
our net gains on investment securities available-for-sale were losses totaling $217,000 which were related to our sale of all of our shares of Fannie Mae perpetual preferred stock during
the first quarter of 2009. We elected to sell these shares as a result of these shares being traded well below their par value following the placement of Fannie Mae into conservatorship by federal
regulators during 2008. In addition, we recorded trading losses of $425,000 for the year ended December 31, 2009. These trading losses were primarily the result of lower stock prices and were
partially offset by a reduction in our compensation expense associated with this benefit plan.

For
the year ended December 31, 2008 gains related to the extinguishment of four borrowings totaling $275,000.

One
provision of the Financial Reform Act requires the Federal Reserve to set a cap on debit card interchange fees charged to retailers. In December 2010, the Federal Reserve
proposed capping the fee at 12 cents per debit card transaction, which is well below the average that banks currently charge. While banks with less than $10 billion in assets (such as
the Bank) are exempted from this measure, as a practical matter we expect that, if this measure is implemented, all banks could be forced by market pressures to lower their interchange fees or face
potential rejection of their cards by retailers. As a result, we believe that our debit card revenue could be adversely impacted as soon as the third quarter of 2011 if the interchange cap is
implemented.

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Non-Interest Expense

The following table reflects the components of non-interest expense for the years ended December 31, 2010, 2009 and
2008.

Table 7.

Non-Interest Expense  Years Ended December 31, 2010, 2009, and 2008  (In thousands)

2010

2009

2008Salary and benefits

$
27,445

$
23,571

$
21,939Occupancy


5,723


5,442


5,547Professional fees


2,733


2,142


2,225Depreciation


1,938


1,948


2,390Data communications


4,295


3,352


2,685FDIC insurance assessments


1,853


2,692


721Mortgage loan repurchases and settlements


(686
)

2,569


3,835Bank franchise taxes


1,897


1,525


1,482Amortization of intangibles


238


238


245Impairment of Fannie Mae perpetual preferred stock








4,408Impairment of goodwill and other intangible assets


3,008





2,821Impairment of other real estate owned


1,365





Loss related to escrow arrangement








Premises and equipment


2,149


2,156


1,965Advertising and marketing


2,310


2,084


2,116Stationary and supplies


1,084


936


881Loan expenses


482


748


264Other taxes


400


419


398Travel and entertainment


528


403


460Miscellaneous


2,707


2,202


1,531Total non-interest expense

$
59,469

$
52,427

$
55,913


Non-interest
expense includes, among other things, salaries and benefits, occupancy costs, professional fees, depreciation, data processing, telecommunications and
miscellaneous expenses. Non-interest expense was $59.5 million and $52.4 million for the years ended December 31, 2010 and 2009, respectively, an increase of
$7.0 million, or 13.4%. The increase in non-interest expense for the year ended December 31, 2010, compared to 2009, was primarily the result of the aforementioned noncash
goodwill and other intangibles impairment charge related to our wealth management and trust services business segment of $3.0 million during 2010 and increases in salary and benefits costs. See
the "Financial Overview" above for additional information on these transactions.

Salaries
and benefits expense increased $3.9 million to $27.4 million for the year ended December 31, 2010 compared to $23.6 million for 2009. The increase in
salaries and benefits expense is primarily related to increases in our business development personnel in all of our business lines. Also, we recorded $801,000 during 2010 related to our CEO's new
employment agreement, which includes the immediate vesting of his supplemental executive retirement plan. In addition, accruals for incentive pay for 2010 have increased compared to 2009 as a result
of better than expected financial results for 2010.

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Data
communications expense increased $943,000 to $4.3 million for the year ended December 31, 2010 compared to $3.4 million for the same period of 2009. The
increase in this expense is primarily related to our core operating system conversion costs which occurred during the second quarter of 2010. Professional fees increased $591,000 to
$2.7 million for 2010 compared to $2.1 million for 2009. The increase in professional fees was due to an increase in consulting expenses to help support our core operating system
conversion.

FDIC
insurance premiums decreased $839,000 million to $1.9 million for the year ended December 31, 2010 compared to $2.7 million for the same period of 2009.
The decrease in FDIC insurance premiums is a due to the special assessment imposed during the second quarter of 2009 of $844,000, a result of the FDIC's efforts in replenishing the levels of the
Deposit Insurance Fund which has been depleted due to increasing levels of bank failures.

We
recorded a benefit of $686,000 related to our mortgage loan repurchases and settlements for 2010 compared to an expense of $2.6 million for 2009. During the past two years, we
have taken steps to limit our exposure to loan repurchases through agreements entered into with various investors. During 2010, we experienced favorable results in resolving various investor claims
and reduced our reserves by $1.1 million. At December 31, 2010, there were no outstanding loan repurchase claims.

During
2010, we recorded an impairment related to other real estate owned of $1.4 million related to one property. This property was foreclosed upon in 2009, and the carrying
value was recorded based on a then current appraisal. During the fourth quarter of 2010, we obtained an updated appraisal of the property which indicated a different highest and best use of the
property resulting in the additional charge. The fair value of the property, which is discounted for estimated costs to sell, was less than the current value recorded on our balance sheet. No such
expense was recorded during 2009. Additional increases in noninterest expense are related to branch expansion as we added a branch banking office and a mortgage banking office during 2010.

Non-interest
expense was $52.4 million and $55.9 million for the years ended December 31, 2009 and 2008, respectively, a decrease of $3.5 million,
or 6.2%. The decrease in non-interest expense for the year ended December 31, 2009, compared to 2008, was primarily the result of the aforementioned other-than temporary
impairment charge related to an investment in Fannie Mae perpetual preferred stock, the goodwill impairment charge recorded at George Mason and the cash settlement George Mason made to a mortgage
correspondent, all during 2008. See the "Financial Overview" above for additional information on these transactions.

Salaries
and benefits expense increased $1.6 million to $23.6 million for the year ended December 31, 2009 as compared to $21.9 million for the same period of
2008. This increase was attributable to an increase in incentive pay at the Bank due to better than expected results for 2009. Depreciation expense decreased $442,000 to $1.9 million for the
year ended December 31, 2009 as compared to $2.4 million for the year ended December 31, 2008 due to fixed assets becoming fully depreciated. Data communications expense increased
$667,000 to end at $3.4 million for the year ended December 31, 2009 compared to $2.7 million for the same period of 2008. The increase in this expense is directly related to
deconversion costs for our upcoming systems conversion which occurred during the second quarter of 2010.

FDIC
insurance premiums increased $2.0 million to $2.7 million for the year ended December 31, 2009 compared to $721,000 for the same period of 2008. The increase in
FDIC insurance premiums is a due to the special assessment imposed during the second quarter of 2009 of $844,000, and changes to the assessment calculation during 2009 all a result of the FDIC's
efforts in replenishing the levels of the Deposit Insurance Fund which has been depleted due to increasing levels of bank failures.

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Mortgage
loan repurchases and settlements decreased to $2.6 million for 2009 compared to $3.8 million for 2008, a result of a decrease in loan repurchases and settlements
at George Mason during 2009.

Income Taxes

We recorded a provision for income tax expense of $8.0 million for the year ended December 31, 2010, compared to
$4.4 million for the year ended December 31, 2009. Our effective tax rate for December 31, 2010 was 30.3%, compared to 29.8% for 2009.

We
recorded an income tax benefit of $912,000 for the year ended December 31, 2008. The income tax benefit recorded during 2008 was primarily the result of the
other-than-temporary impairment of our investment in Fannie Mae perpetual preferred stock and the result of our tax-exempt income from investments being a larger
portion of our overall net income. During 2008, the Emergency Economic Stabilization Act of 2008 was enacted which included a provision permitting banks to recognize the
other-than-temporary impairment charge related to Fannie Mae perpetual preferred stock as an ordinary loss rather than a capital loss which allowed us to record an additional
benefit for this loss.

For
more information, see "Critical Accounting Policies" above. In addition, Note 13 to the notes to consolidated financial statements provides additional information with respect
to the deferred tax accounts and the net operating loss carryforward.

Statements of Condition

Loans Receivable, Net

Total loans receivable, net of deferred fees and costs, were $1.41 billion at December 31, 2010, an increase of
$115.9 million, or 9.0%, compared to $1.29 billion at December 31, 2009. During 2010, we achieved growth in all our loan categories, with the exception or our residential real
estate loan portfolio. Residential real estate loans decreased $11.6 million to $217.1 million at December 31, 2010 compared $228.7 million at December 31, 2009,
primarily a result of repayments that occurred during 2010. Loans held for sale increased $26.6 million to $206.0 million at December 31, 2010 compared to $179.5 million at
December 31, 2009.

At
December 31, 2010, we had loans accounted for on a non-accrual basis totaling $7.5 million. Non-accrual loans at December 31, 2009 totaled
$696,000. Accruing loans, which are contractually past due 90 days or more as to principal or interest payments, at December 31, 2010 and December 31, 2009 were $49,000 and
$151,000, respectively, all of which were determined to be well secured and in the process of collection. The increase in non-accrual loans from December 31, 2009 is primarily a
result of the continued deterioration in commercial and residential real estate markets, as all of our non-accrual loans are collateralized by real estate. There were no loans at
December 31, 2010 and December 31, 2009 that were "troubled debt restructurings".

Interest
income on non-accrual loans, if recognized, is recorded when cash is received . When a loan is placed on non-accrual, unpaid interest is reversed against
interest income if it was accrued in the current year and is charged to the allowance for loan losses if it was accrued in prior years. While on non-accrual, the collection of interest is
recorded as interest income only after all past-due principal has been collected. When all past contractual obligations are collected and, in our opinion, the borrower has demonstrated the
ability to remain current, the loan is returned to an accruing status. At December 31, 2010, the loans on nonaccrual status had a valuation allowance of $1.5 million. We
charged-off $3.5 million during 2010 related to the outstanding principal balances of those impaired loans which were unsecured based on the estimated values of the underlying
collateral. Gross interest income that would have been recorded if our non-accrual loans had been current with their original

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terms
and had been outstanding throughout the period or since origination if held for part of the period for the years ended December 31, 2010 and 2009 was $337,000 and $414,000, respectively.
The interest income realized prior to the loans being placed on non-accrual status for the year ended December 31, 2010 and 2009 was $325,000, and $120,000, respectively.

Total
loans receivable, net of deferred fees and costs, were $1.29 billion at December 31, 2009, an increase of $154.1 million, or 13.5%, compared to
$1.14 billion at December 31, 2008. During 2009, we achieved growth in all our loan categories. Loans held for sale increased $22.5 million to $179.5 million at
December 31, 2009 compared to $157.0 million at December 31, 2008.

At
December 31, 2009, we had loans accounted for on a non-accrual basis totaling $696,000. Non-accrual loans at December 31, 2008 totaled
$4.7 million. Accruing loans, which are contractually past due 90 days or more as to principal or interest payments, at December 31, 2009 and December 31, 2008 were
$151,000 and $379,000, respectively, all of which were determined to be well secured and in the process of collection. The decrease in non-accrual loans from December 31, 2008 was a
result of these loans being paid off or charged off during 2009. There were no loans at December 31, 2008 that were "troubled debt restructurings".

At
December 31, 2009, the loans on nonaccrual status did not have a valuation allowance as we charged-off $411,000 of the outstanding principal balances which were
unsecured based on the estimated values of the underlying collateral. Gross interest income that would have been recorded if our non-accrual loans had been current with their original
terms and had been outstanding throughout the period or since origination if held for part of the period for the years ended December 31, 2009 and 2008 was $414,000 and $59,000, respectively.
The interest income realized prior to the loans being placed on non-accrual status for the year ended December 31, 2009 and 2008 was $120,000, and $348,000, respectively.

The
ratio of non-performing loans to total loans was 0.53%, 0.05%, and 0.41% at December 31, 2010, 2009 and 2008, respectively.

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The
following tables present the composition of our loans receivable portfolio at the end of each of the five years ended December 31, 2010 and additional information on
non-performing loans receivable.

Table 8.

Loans Receivable  At December 31, 2010, 2009, 2008, 2007, and 2006  (In thousands)

2010

2009

2008Commercial and industrial

$
200,384


14.20
%
$
161,156


12.45
%
$
160,989


14.12
%Real estatecommercial


631,292


44.73
%

592,780


45.80
%

472,131


41.41
%Real estateconstruction


240,007


17.01
%

191,523


14.80
%

188,484


16.53
%Real estateresidential


217,130


15.39
%

228,693


17.67
%

211,651


18.57
%Home equity lines


119,403


8.46
%

117,392


9.07
%

104,370


9.16
%Consumer


3,042


0.21
%

2,859


0.21
%

2,393


0.21
%Gross loans


1,411,258


100.00
%

1,294,403


100.00
%

1,140,018


100.00
%Net deferred (fees) costs


(1,956
)




(971
)




(670
)Less: allowance for loan losses


(24,210
)




(18,636
)




(14,518
)Loans receivable, net

$
1,385,092




$
1,274,796




$
1,124,830




2007

2006Commercial and industrial

$
140,531


13.51
%
$
102,284


12.09
%Real estatecommercial


415,471


39.95
%

317,201


37.50
%Real estateconstruction


186,514


17.93
%

154,525


18.27
%Real estateresidential


213,197


20.50
%

201,320


23.80
%Home equity lines


81,247


7.81
%

65,557


7.75
%Consumer


3,129


0.30
%

4,904


0.59
%Gross loans


1,040,089


100.00
%

845,791


100.00
%Net deferred (fees) costs


(405
)




(342
)Less: allowance for loan losses


(11,641
)




(9,638
)Loans receivable, net

$
1,028,043




$
835,811


Table 9.

Nonperforming Loans  At December 31, 2010, 2009, 2008, 2007, and 2006  (In thousands)

2010

2009

2008

2007

2006Nonaccruing loans

$
7,516

$
696

$
4,671

$


$
82Loans contractually past-due 90 days or more


49


151


379


963


Total nonperforming loans

$
7,565

$
847

$
5,050

$
963

$
82


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Table of Contents

The
following table presents information on loan maturities and interest rate sensitivity.

Table 10.

Loan Maturities and Interest Rate Sensitivity  At December 31, 2010  (Dollars in thousands)

One Year
or Less

Between
One and
Five Years

After
Five Years

TotalCommercial and industrial

$
101,159

$
82,511

$
16,714

$
200,384Real estatecommercial


199,357


330,938


100,997


631,292Real estateconstruction


167,655


46,685


25,667


240,007Real estateresidential


102,848


86,239


28,043


217,130Home equity lines


119,403








119,403Consumer


912


740


1,390


3,042Total loans receivable

$
691,334

$
547,113

$
172,811

$
1,411,258Fixed-rate loans




$
253,109

$
121,835

$
374,944Floating-rate loans





294,004


50,976


344,980Total loans receivable




$
547,113

$
172,811

$
719,924


*Payments
due by period are based on the repricing characteristics and not contractual maturities.


Investment Securities

Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment
securities available-for-sale, investment securities held-to-maturity and trading securities. Investment securities
available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value
and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity are those securities that
we have the intent and ability to hold to maturity and are carried at amortized cost. Investment securities-trading are securities we purchase to economically hedge against fair value changes of our
nonqualified deferred compensation plan liability. These securities include cash equivalents, equities and mutual funds. See Note 4 to our notes to consolidated financial statements for
additional information on our trading securities. Investment securities were $345.0 million at December 31, 2010, a decrease of $37.5 million or 9.8%, from $382.5 million
in investment securities at December 31, 2009.

At
December 31, 2010, the yield on the available-for-sale investment portfolio was 4.26% and the yield on the held-to-maturity
portfolio was 3.19%.

We
complete reviews for other-than-temporary impairment at least quarterly. As of December 31, 2010, the majority of the investment securities portfolio
consisted of securities rated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. At
December 31, 2010, 97% of our mortgage-backed securities are guaranteed by the Federal National Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government
National Mortgage Association (GNMA).

We
have $7.1 million in non-government non-agency mortgage-backed securities. These securities are rated from AAA to AA. The various protective elements on
the non agency securities may change in the future if market conditions or the financial stability of credit insurers changes, which could impact the ratings of these securities.

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At December 31, 2010, certain of our investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a
result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency
mortgage-backed securities are guaranteed and/or funded by the U.S. government. Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative
indications that the contractual cash flows will not be received when due. We do not intend to sell nor do we believe it is probable that we will be required to sell any of our temporarily impaired
securities prior to the recovery of the amortized cost.

The
held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at December 31,
2010 (each security has a par value of $2.0 million). These securities are presented as corporate bonds in the table below. The collateral underlying these structured securities are instruments
issued by financial institutions or insurers. We own the A-3 tranches in each issuance. Each of the bonds is rated by more than one rating agency. Two of the securities have a composite
rating of AA, one of the securities has a composite rating of BB- and the other security has a composite rating of B-. There is minimal observable trading activity for these
types of securities. We have estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services. Given the level of
subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, we expect to receive all contractual interest and principal payments recovering
the amortized cost basis of each of the four securities, and concluded that these securities are not other-than-temporarily impaired. We continuously monitor the financial
condition of the underlying issues and the level of subordination below the A-3 tranches. We also utilize a multi-scenario model which assumes varying levels of additional defaults and
deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches. In each of the adverse scenarios, there was no indication of a break to the
A-3 contractual cash flows. Significant judgment is involved in the evaluation of other-than-temporary impairment. We do not intend to sell nor do we believe it is
probable that we will be required to sell these corporate bonds prior to the recovery of our investment.

In
one of the pooled trust preferred securities issues, 40% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow
would occur if $151 million of the remaining $318 million, or 48% of the performing collateral defaulted or deferred payment. In another of the pooled trust preferred securities issues,
41% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $90 million of the remaining $265 million,
or 35% of the performing collateral defaulted or deferred payment. In the third of the pooled trust preferred securities issues, 64% of the principal balance is subordinate to our class of ownership,
and it is estimated that a break in contractual cash flow would occur if $149 million of the remaining $160 million, or 85% of the performing collateral defaulted or deferred payment. In
the fourth of the pooled trust preferred securities issues, 46% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur
if $277 million of the remaining $324 million, or 73% of the performing collateral defaulted or deferred payment.

No
other-than-temporary impairment has been recognized on the securities in our investment portfolio as of December 31, 2010 and 2009, and we do not
continue to hold any investment securities for which we previously recognized other-than-temporary impairment. During 2008, we recognized an
other-than-temporary impairment of $4.4 million related to an investment in Fannie Mae perpetual preferred stock as discussed above.

We
hold $15.7 million in FHLB stock at December 31, 2010. During 2008, the FHLB of Atlanta announced a change in their dividend declaration and payment schedule beginning
during the fourth quarter of 2008. The change was initiated so that the dividend can be declared and paid to member banks after the FHLB has calculated their net income for the preceding quarter.
During 2009, the

65

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Table of Contents

FHLB
announced changes to its capital stock requirements. Specifically, the FHLB Board of Directors increased the dollar cap on its stock purchases from $25 million to $26 million and
repurchases of member excess stock will be evaluated on a quarterly basis instead of a daily basis. We do not expect the above changes to materially impact our liquidity position.

Investment
securities were $378.8 million at December 31, 2009, an increase of $63.2 million or 20.0%, from $315.5 million in investment securities at
December 31, 2008.

Of
the $378.8 million in the investment portfolio at December 31, 2009, $35.2 million were classified as held-to-maturity, and
$343.6 million were classified as available-for-sale. At December 31, 2009, the yield on the available-for-sale investment portfolio was 4.55% and the yield on
the held-to-maturity portfolio was 3.66%.

The
following table reflects the composition of the investment portfolio at December 31, 2010, 2009, and 2008.

Table 11.

Investment Securities
At December 31, 2010, 2009 and 2008
(In thousands)

Available-for-sale at December 31, 2010

Amortized
Cost

Fair
Value

Average
YieldU.S. government-sponsored agenciesFive to ten years

$
30,941

$
32,119


3.95
%Total U.S. government-sponsored agencies


30,941


32,119


3.95
%Mortgage-backed securities(1)One to five years


7


7


9.02
%Five to ten years


21,976


22,997


4.24
%After ten years


190,600


196,478


4.54
%Total mortgage-backed securities


212,583


219,482


4.51
%Tax exempt municipal securities(2)Five to ten years


7,063


7,198


3.38
%After ten years


52,907


52,776


3.98
%Taxable municipal securitiesFive to ten years


3,318


3,320


4.96
%After ten years


996


989


5.10
%Total municipal securities


64,284


64,283


3.73
%U. S. treasury securitiesOne to five years


4,923


5,114


2.36
%Total U.S. treasury securities


4,923


5,114


2.36
%Total investment securities available-for-sale

$
312,731

$
320,998


4.26
%


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Held-to-maturity at December 31, 2010

Amortized
Cost

Fair
Value

Average
YieldMortgage-backed securities(1)One to five years

$
351

$
368


4.14
%Five to ten years


3,766


3,965


4.63
%After ten years


9,758


10,203


4.12
%Total mortgage-backed securities


13,875


14,536


4.26
%Corporate bondsAfter ten years


8,004


3,197


1.34
%Total corporate bonds


8,004


3,197


1.34
%Total investment securities held-to-maturity


21,879


17,733


3.19
%Total investment securities

$
334,610

$
338,731


4.19
%




Available-for-sale at December 31, 2009

Amortized
Cost

Fair
Value

Average
YieldU.S. government-sponsored agenciesFive to ten years

$
26,074

$
26,030


4.15
%After ten years


29,974


29,629


5.01
%Total U.S. government-sponsored agencies


56,048


55,659


4.61
%Mortgage-backed securities(1)One to five years


9


9


8.97
%Five to ten years


33,079


33,964


4.21
%After ten years


184,635


189,432


4.84
%Total mortgage-backed securities


217,723


223,405


4.74
%Tax exempt municipal securities(2)Five to ten years


6,090


6,156


3.34
%After ten years


50,270


50,227


4.01
%Taxable municipal securitiesAfter ten years


3,331


3,225


4.96
%Total municipal securities


59,691


59,608


3.99
%U. S. treasury securitiesOne to five years


4,901


4,897


2.36
%Total U.S. treasury securities


4,901


4,897


2.36
%Total investment securities available-for-sale

$
338,363

$
343,569


4.55
%


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Held-to-maturity at December 31, 2009

Amortized
Cost

Fair
Value

Average
YieldMortgage-backed securities(1)One to five years

$
1,833

$
1,884


4.43
%Five to ten years


6,244


6,478


4.59
%After ten years


19,103


19,731


4.26
%Total mortgage-backed securities


27,180


28,093


4.35
%Corporate bondsAfter ten years


8,004


3,343


1.33
%Total corporate bonds


8,004


3,343


1.33
%Total investment securities held-to-maturity


35,184


31,436


3.66
%Total investment securities

$
373,547

$
375,005


4.47
%




Available-for-sale at December 31, 2008

Amortized
Cost

Fair
Value

Average
YieldU.S. government-sponsored agenciesFive to ten years

$
24,917

$
24,962


5.28
%After ten years


436


166


8.25
%Total U.S. government-sponsored agencies


25,353


25,128


5.33
%Mortgage-backed securities(1)One to five years


4,263


4,277


4.19
%Five to ten years


42,503


43,626


4.45
%After ten years


158,969


160,301


5.27
%Total mortgage-backed securities


205,735


208,204


5.08
%Municipal securities(2)After ten years


33,265


31,424


4.09
%Total municipal securities


33,265


31,424


4.09
%U. S. treasury securitiesOne to five years


598


600


1.02
%Total U.S. treasury securities


598


600


1.02
%Total investment securities available-for-sale

$
264,951

$
265,356


4.97
%


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Held-to-maturity at December 31, 2008

Amortized
Cost

Fair
Value

Average
YieldU.S. government-sponsored agenciesOne to five years

$
2,001

$
2,025


4.30
%Total U.S. government-sponsored agencies


2,001


2,025


4.30
%Mortgage-backed securities(1)One to five years


1,836


1,867


4.26
%Five to ten years


9,267


9,463


4.45
%After ten years


29,075


29,142


4.39
%Total mortgage-backed securities


40,178


40,472


4.40
%Corporate bondsAfter ten years


8,004


3,262


4.09
%Total corporate bonds


8,004


3,262


4.09
%Total investment securities held-to-maturity


50,183


45,759


4.34
%Total investment securities

$
315,134

$
311,115


4.87
%


(1)Based
on contractual maturities.(2)Yields
for our tax-exempt municipal securities are not reported on a tax-equivalent basis.


Deposits and Other Borrowed Funds

Total deposits were $1.40 billion at December 31, 2010, an increase of $106.7 million, or 8.2%, from
$1.30 billion at December 31, 2009. We have had success in attracting deposit balances from customers seeking to deposit their money with smaller, local banks and depositors are
increasing balances held with financial institutions as a result of the increased protection of their money by the FDIC. We are a member of the Certificates of Deposit Account Registry Service
("CDARS"). CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank. When a customer places a large deposit through CDARS, we
place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection. At
December 31, 2010, we had brokered certificates of deposit of $88.4 million, of which $43.5 million were placed in the CDARS program. Brokered certificates of deposit at
December 31, 2009 were $87.7 million, of which $59.4 million were in the CDARS program.

Other
borrowed funds, which primarily include repurchase agreements, FHLB advances and our payable to Cardinal Statutory Trust I, were $389.6 million at December 31,
2010, a decrease of $40.0 million, from $427.6 million at December 31, 2009. The primary reason for the decrease in other borrowed funds at December 31, 2010 was due to us
not having any federal funds purchased fundings at December 31, 2010 compared to $45.0 million at December 31, 2009. Advances from the Federal Home Loan Bank of Atlanta were
$280.0 million at each of December 31, 2010 and 2009. These advances primarily leverage some of our larger commercial real estate fundings and assist in financing George Mason's
inventory of loans held for sale.

Other
borrowed funds at each of December 31, 2010 and 2009, included $20.6 million payable to Cardinal Statutory Trust I, the issuer of our trust preferred
securities. This debt had an interest rate of 2.70% and 2.65% at December 31, 2010 and 2009, respectively. Cardinal Statutory Trust I is an unconsolidated entity as we are not the
primary beneficiary of the trust.

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At December 31, 2010, other borrowed funds also included $87.5 million in customer repurchase agreements and $1.5 million borrowed under the
Federal Reserve Treasury, Tax & Loan note option.

The
following table reflects the short-term borrowings and other borrowed funds outstanding at December 31, 2010.

Table 12.

Short-Term Borrowings and Other Borrowed Funds
At December 31, 2010
(In thousands)

Advance Date

Term of Advance

Maturity or
Call Date

Interest Rate

Amount
OutstandingOther short-term borrowed funds:TT&L note option


0.00
%
$
1,470Customer repurchase agreements


0.25
%

87,497Federal Funds Purchased


0.28
%

Total other short-term borrowed funds and weighted average rate


0.25
%
$
88,967Other borrowed funds:Trust preferred


3.98
%
$
20,619FHLB advanceslong term


3.90
%

280,000Other borrowed funds and weighted average rate


3.91
%

300,916Total other borrowed funds and weighted average rate


3.07
%
$
389,586


Total
deposits were $1.30 billion at December 31, 2009, an increase of $117.2 million, or 9.9%, from $1.18 billion at December 31, 2008. At
December 31, 2009, we had brokered certificates of deposit of $87.7 million, of which $59.4 million were placed in the CDARS program. Brokered certificates of deposit at
December 31, 2008 were $89.2 million, of which $53.5 million were in the CDARS program.

Other
borrowed funds, which primarily include repurchase agreements, FHLB advances and our payable to Cardinal Statutory Trust I, were $427.6 million at December 31,
2009, an increase of $60.4 million, up from $367.2 million at December 31, 2008. The primary reason for the increase in other borrowed funds at December 31, 2009 was an
increase in federal funds purchased funding of $45.0 million at December 31, 2009 compared to none at December 31, 2008. Advances from the Federal Home Loan Bank of Atlanta were
$280.0 million at each of December 31, 2009 and 2008.

Other
borrowed funds at each of December 31, 2009 and 2008, included $20.6 million payable to Cardinal Statutory Trust I, the issuer of our trust preferred
securities. This debt had an interest rate of 2.65% and 4.40% at December 31, 2009 and 2008, respectively.

At
December 31, 2009, other borrowed funds also included $80.0 million in customer repurchase agreements and $2.0 million borrowed under the Federal Reserve
Treasury, Tax & Loan note option.

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The
following table reflects the maturities of the certificates of deposit of $100,000 or more as of December 31, 2010, 2009 and 2008.

Table 13.

Certificates of Deposit of $100,000 or More
At December 31, 2010, 2009, and 2008
(In thousands)

Maturities:

Fixed Term

2010
No-Penalty*

TotalThree months or less

$
60,347

$
16,341

$
76,688Over three months through six months


47,109


5,224


52,333Over six months through twelve months


81,625


16,344


97,969Over twelve months


121,368


20,494


141,862$
310,449

$
58,403

$
368,852




Maturities:

Fixed Term

2009
No-Penalty*

TotalThree months or less

$
116,527

$
31,183

$
147,710Over three months through six months


44,528


10,394


54,922Over six months through twelve months


66,064


3,190


69,254Over twelve months


95,185


20,917


116,102$
322,304

$
65,684

$
387,988




Maturities:

Fixed Term

2008
No-Penalty*

TotalThree months or less

$
35,561

$
68,190

$
103,751Over three months through six months


19,705


12,089


31,794Over six months through twelve months


27,095


5,614


32,709Over twelve months


71,433


1,585


73,018$
153,794

$
87,478

$
241,272


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


Business Segment Operations

We provide banking and non-banking financial services and products through our subsidiaries. We operate in three business
segments, commercial banking, mortgage banking and wealth management and trust services.

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

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

The
wealth management and trust services segment provides investment and financial services to businesses and individuals, including financial planning, retirement/estate planning,
trusts, estates, custody, investment management, escrows, and retirement plans.

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Information
about the reportable segments, and reconciliation of this information to the consolidated financial statements at December 31, 2010, 2009 and 2008 follows.

Table 14.

Segment Reporting
December 31, 2010, 2009, and 2008
(In thousands)

At and for the Year Ended December 31, 2010:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and
Trust Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
67,480

$
2,385

$


$
(820
)
$


$
69,045Provision for loan losses


10,502














10,502Non-interest income


3,975


19,203


4,102


205


(96
)

27,389Non-interest expense


37,226


11,103


6,798


4,438


(96
)

59,469Provision (benefit) for income taxes


7,432


3,640


(942
)

(2,109
)




8,021Net income (loss)

$
16,295

$
6,845

$
(1,754
)
$
(2,944
)
$


$
18,442Total Assets

$
2,051,529

$
220,946

$
592

$
251,100

$
(452,149
)
$
2,072,018


At and for the Year Ended December 31, 2009:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and
Trust Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
48,712

$
2,717

$


$
(887
)
$


$
50,542Provision for loan losses


6,656


94











6,750Non-interest income


3,993


16,213


3,639


(413
)

(84
)

23,348Non-interest expense


34,104


12,779


3,156


2,472


(84
)

52,427Provision (benefit) for income taxes


3,566


2,084


162


(1,424
)




4,388Net income (loss)

$
8,379

$
3,973

$
321

$
(2,348
)
$


$
10,325Total Assets

$
1,943,223

$
199,704

$
3,433

$
230,962

$
(401,137
)
$
1,976,185


At and for the Year Ended December 31, 2008:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and
Trust Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
40,747

$
3,418

$


$
(1,192
)
$


$
42,973Provision for loan losses


4,290


1,208











5,498Non-interest income


4,806


9,494


3,477


35





17,812Non-interest expense


34,152


15,824


3,402


2,535





55,913Provision (benefit) for income taxes


1,785


(1,438
)

28


(1,287
)




(912
)Net income (loss)

$
5,326

$
(2,682
)
$
47

$
(2,405
)
$


$
286Total Assets

$
1,708,233

$
165,791

$
3,505

$
180,683

$
(314,455
)
$
1,743,757


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Table of Contents

During
the year ended December 31, 2010, we recorded a non-cash impairment loss of $3.0 million pretax ($2.0 million after tax) through
the wealth management and trust services business segment. No such impairments occurred during 2009 and 2008.

We
recorded a benefit of $686,000 related to our mortgage loan repurchases and settlements for 2010 compared to an expense of $2.6 million for 2009 and $3.8 million in
2008. During the second quarter of 2008, George Mason recorded a cash settlement to one of its mortgage correspondents related to the loan purchase agreement between the two parties. This settlement
totaled $1.8 million pretax ($1.2 million after tax) and was recorded in the mortgage banking segment.

During
the third quarter of 2008, we recorded a noncash impairment charge of $2.8 million pretax ($1.8 million after tax) to the goodwill associated with the mortgage
banking segment. No such impairments occurred during 2010 and 2009.

During
the third quarter of 2008, we recognized an other-than-temporary impairment charge of $4.4 million pretax ($2.9 million after tax) on our
investment in Fannie Mae perpetual preferred stock. This impairment charge was recorded in the commercial banking segment. We recorded no other-than-temporary impairments
during 2010 and 2009.

Capital Resources

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

Regulatory
agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of a financial institution. The guidelines define capital as both
Tier 1 (which includes common shareholders' equity, defined to include certain debt obligations) and Tier 2 (to include certain other debt obligations and a portion of the allowance for
loan losses and 45% of unrealized gains in equity securities).

Shareholders'
equity at December 31, 2010 was $222.9 million, an increase of $18.4 million, compared to $204.5 million at December 31, 2009. For the
year ended December 31, 2010, we recorded net income of $18.4 million, which primarily caused the increase in shareholders' equity during 2010. Accumulated other comprehensive income
increased $1.1 million for the year ended December 31, 2010. Total shareholders' equity to total assets at December 31, 2010 and 2009 was 10.8% and 10.4%, respectively. Book value
per share at December 31, 2010 and 2009 was $7.75 and $7.12, respectively. Total risk-based capital to risk-weighted assets was 14.06% at December 31, 2010
compared to 14.15% at December 31, 2009. Accordingly, we were considered "well capitalized" for regulatory purposes at December 31, 2010.

Shareholders'
equity at December 31, 2009 was $204.5 million, an increase of $46.5 million, compared to $158.0 million at December 31, 2008. The
increase in shareholders' equity was primarily attributable to our completion of a common stock offering during May 2009, from which we added $31.6 million in capital. In addition, for
2009 we recorded net income of $10.3 million. Accumulated other comprehensive income increased $3.4 million for the year ended December 31, 2009. Total shareholders' equity to
total assets at December 31, 2009 and 2008 was 10.4% and 9.1%, respectively. Book value per share at December 31, 2009 and 2008 was $7.12 and $6.58, respectively. Total
risk-based capital to risk-weighted assets was 14.15% at December 31, 2009 compared to 12.72% at
December 31, 2008. Accordingly, we were considered "well capitalized" for regulatory purposes at December 31, 2009.

As
noted above, regulatory capital levels for the bank and bank holding company meet those established for well-capitalized institutions. While we are currently considered
well-capitalized, we may

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from
time-to-time find it necessary to access the capital markets to meet our growth objectives or capitalize on specific business opportunities.

The
following table shows the minimum capital requirement and our capital position at December 31, 2010, 2009, and 2008, for the Company and for the Bank.

Table 15.

Capital Components
At December 31, 2010, 2009, and 2008
(In thousands)

Cardinal Financial Corporation (Consolidated):

Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount



Ratio

Amount



RatioAt December 31, 2010Total risk-based capital

$
248,294


14.06
%
$
141,284

3


8.00
%
$
176,606

3


10.00
%Tier I risk-based capital


223,789


12.67
%

70,642

3


4.00
%

105,963

3


6.00
%Leverage capital ratio


223,789


10.82
%

82,753

3


4.00
%

103,441

3


5.00
%At December 31, 2009Total risk-based capital

$
226,137


14.15
%
$
127,869

3


8.00
%
$
159,837

3


10.00
%Tier I risk-based capital


207,286


12.97
%

63,935

3


4.00
%

95,902

3


6.00
%Leverage capital ratio


207,286


11.03
%

75,185

3


4.00
%

93,981

3


5.00
%At December 31, 2008Total risk-based capital

$
178,420


12.72
%
$
112,207

3


8.00
%
$
140,259

3


10.00
%Tier I risk-based capital


163,716


11.67
%

56,104

3


4.00
%

84,156

3


6.00
%Leverage capital ratio


163,716


9.90
%

66,168

3


4.00
%

82,711

3


5.00
%


Cardinal Bank:

Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount



Ratio

Amount



RatioAt December 31, 2010Total risk-based capital

$
232,274


13.25
%
$
140,262

3


8.00
%
$
175,328

3


10.00
%Tier I risk-based capital


207,768


11.85
%

70,131

3


4.00
%

105,197

3


6.00
%Leverage capital ratio


207,768


10.09
%

82,383

3


4.00
%

102,979

3


5.00
%At December 31, 2009Total risk-based capital

$
206,413


12.98
%
$
127,257

3


8.00
%
$
159,071

3


10.00
%Tier I risk-based capital


187,562


11.79
%

63,629

3


4.00
%

95,443

3


6.00
%Leverage capital ratio


187,562


10.02
%

74,884

3


4.00
%

93,605

3


5.00
%At December 31, 2008Total risk-based capital

$
168,513


12.04
%
$
111,957

3


8.00
%
$
139,946

3


10.00
%Tier I risk-based capital


153,810


10.99
%

55,978

3


4.00
%

83,968

3


6.00
%Leverage capital ratio


153,810


9.32
%

66,018

3


4.00
%

82,523

3


5.00
%


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Liquidity

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

In
addition to deposits, we have access to the different wholesale funding markets. These markets include the brokered CD market, the repurchase agreement market and the federal funds
market. During 2008, we joined the Certificates of Deposit Account Registry Services ("CDARS"). CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of
deposit through our Bank. When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than
$250,000 so that principal and interest are eligible for FDIC insurance protection. We also maintain secured lines of credit with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of
Atlanta. Having diverse funding alternatives reduces our reliance on any one source for funding.

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

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

Liquid
assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $348.9 million at December 31, 2010, or 16.7%
of total assets. We held investments that are classified as held-to-maturity in the amount of $21.9 million at December 31, 2010. To maintain ready access to the
Bank's secured lines of credit, the Bank has pledged roughly half of its investment securities and a portion of its residential real estate loan portfolio to the Federal Home Loan Bank of Atlanta with
additional investment securities and certain loans in its commercial real estate and commercial & industrial loan portfolios pledged to the Federal Reserve Bank of Richmond. Additional
borrowing capacity at the Federal Home Loan Bank of Atlanta at December 31, 2010 was approximately $154 million. Borrowing capacity with the Federal Reserve Bank of Richmond was
approximately $107 million at December 31, 2010. These facilities are subject to the FHLB and the Federal Reserve approving disbursement to us. In addition, we have unsecured federal
funds purchased lines of $315 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all
regulatory requirements.

Contractual Obligations

We have entered into a number of long-term contractual obligations to support our ongoing activities. These contractual
obligations will be funded through operating revenues and liquidity sources

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held
or available to us. The required payments under such obligations excluding interest were as follows:

Table 16.

Contractual Obligations
At December 31, 2010
(In thousands)

Payments Due by PeriodTotal

Less than
1 Year

1-3 Years

3-5 Years

More than
5 YearsLong-Term Debt Obligations:Certificates of deposit

$
571,070

$
303,361

$
103,880

$
135,487

$
28,342Brokered certificates of deposit


88,365


44,663


24,645


19,057


Advances from the Federal Home Loan Bank of Atlanta


280,000


15,000


90,000


20,000


155,000Trust preferred securities


20,619











20,619Operating lease obligations


29,065


4,369


3,448


8,967


12,281Total

$
989,119

$
367,393

$
221,973

$
183,511

$
216,242


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

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

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

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

The
Bank's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is
represented by
the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

A
summary of the contract amount of the Bank's exposure to off-balance-sheet risk as of December 31, 2010 and 2009, is as follows:

2010

2009(In thousands)Financial instruments whose contract amounts represent potential credit risk:Commitments to extend credit

$
526,636

$
409,341Standby letters of credit


22,279


13,877


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Commitments
to extend credit of $87.8 million as of December 31, 2010 were related to George Mason's mortgage loan funding commitments and were of a short-term
nature. Commitments to extend credit of $438.8 million primarily have floating rates as of December 31, 2010. It is uncertain as to the amount that we will be required to fund on these
commitments as many such arrangements expire with no amount drawn.

Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of
financial condition. The rates and terms of these instruments are competitive with others in the market in which we do business.

We
use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. We evaluate each customer's credit worthiness on
a case-by-case basis and require collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based on
management's evaluation of the counterparty. Collateral held varies but may include deposits held by
us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

We
have counter-party risk which may arise from the possible inability of George Mason's third-party investors to meet the terms of their forward sales contracts. George Mason works with
third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. We do not expect any third-party investor to
fail to meet its obligation. In addition, we have derivative counterparty risk relating to three interest rate swaps we have with third parties. This risk may arise from the inability of the third
party to meet the terms of the contract. We continuously monitor the financial condition of these third parties. We do not expect these third parties to fail to meet their obligations.

George
Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan
application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its
investors related to loan sales activities. We evaluate the merits of each claim and estimate the reserve based on actual and expected claims received and consider the historical amounts paid to
settle such claims. During the past two years, we have taken steps to limit our exposure to such loan repurchases through agreements entered into with various investors. During 2010, we experienced
favorable results in resolving various investor claims and have reduced our reserve related to such claims. At December 31, 2010, we had no outstanding loan repurchases or settlements.

During
2010 and 2009, George Mason either repurchased from or settled with investors on such loans for a total of $1.0 million and $2.6 million, respectively. At
December 31, 2010 and 2009, the reserve for unresolved claims was $0 and $1.7 million, respectively.

Quarterly Data

The following table provides quarterly data for the years ended December 31, 2010 and 2009. Quarterly per share results may not
calculate to the year-end per share results due to rounding.

During
the year ended December 31, 2010, we recorded a non-cash impairment loss of $3.0 million pretax ($2.0 million after tax) through the wealth
management and trust services business segment. No such impairments occurred during 2009 and 2008.

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We
recorded a benefit of $686,000 related to our mortgage loan repurchases and settlements for 2010 compared to an expense of $2.6 million for 2009 and $3.8 million in
2008. During the second quarter of 2008, George Mason recorded a cash settlement to one of its mortgage correspondents related to the loan purchase agreement between the two parties. This settlement
totaled $1.8 million pretax ($1.2 million after tax) and was recorded in the mortgage banking segment.

During
the third quarter of 2008, we recorded a noncash impairment charge of $2.8 million pretax ($1.8 million after tax) to the goodwill associated with the mortgage
banking segment. No such impairments occurred during 2010 and 2009.

During
the third quarter of 2008, we recognized an other-than-temporary impairment charge of $4.4 million pretax ($2.9 million after tax) on our
investment in Fannie Mae perpetual preferred stock. This impairment charge was recorded in the commercial banking segment. We recorded no other-than-temporary impairments
during 2010 and 2009.

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Table 17.

Quarterly Data
Years ended December 31, 2010 and 2009
(In thousands, except per share data)

2010Fourth
Quarter

Third
Quarter

Second
Quarter

First
QuarterInterest income

$
24,993

$
24,771

$
23,944

$
22,925Interest expense


6,527


6,589


6,815


7,657Net interest income


18,466


18,182


17,129


15,268Provision for loan losses


(1,877
)

(3,500
)

(2,700
)

(2,425
)Net interest income after provision for loan losses


16,589


14,682


14,429


12,843Non-interest income


5,522


9,306


6,847


5,714Non-interest expense


16,917


15,369


14,153


13,030Net income before income taxes


5,194


8,619


7,123


5,527Provision for income taxes


1,164


2,716


2,414


1,727Net income

$
4,030

$
5,903

$
4,709

$
3,800Earnings per sharebasic

$
0.14

$
0.20

$
0.16

$
0.13Earnings per sharediluted

$
0.14

$
0.20

$
0.16

$
0.132009Fourth
Quarter

Third
Quarter

Second
Quarter

First
QuarterInterest income

$
23,171

$
21,923

$
21,130

$
20,518Interest expense


8,303


8,831


9,167


9,899Net interest income


14,868


13,092


11,963


10,619Provision for loan losses


(2,000
)

(2,050
)

(1,484
)

(1,216
)Net interest income after provision for loan losses


12,868


11,042


10,479


9,403Non-interest income


5,637


5,704


6,251


5,756Non-interest expense


13,707


12,978


13,705


12,037Net income before income taxes


4,798


3,768


3,025


3,122Provision for income taxes


1,388


1,164


883


953Net income

$
3,410

$
2,604

$
2,142

$
2,169Earnings per sharebasic

$
0.12

$
0.09

$
0.08

$
0.09Earnings per sharediluted

$
0.12

$
0.09

$
0.08

$
0.09


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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Our Asset/Liability Committee is responsible for reviewing our liquidity requirements and maximizing our net interest income consistent
with capital requirements, liquidity,
interest rate and economic outlooks, competitive factors and customer needs. Interest rate risk arises because the assets of the Bank and the liabilities of the Bank have different maturities and
characteristics. In order to measure this interest rate risk, we use a simulation process that measures the impact of changing interest rates on net interest income. This model is run for the Bank by
an independent consulting firm. The simulations incorporate assumptions related to expected activity in the balance sheet. For maturing assets, assumptions are developed for the redeployment of these
assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that reprice during the modeled time
period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts as well as certificates of
deposit. Based on inputs that include the most recent period end balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net
interest income assuming that interest rates remain unchanged. This becomes the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The
rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the
current level of interest rates. In the ramped down rate change, the model moves rates gradually down 100 basis points over the first year and then rates remain flat in the second year.

For
the up 200 basis point scenario, rates are gradually moved up 200 basis points in the first year and then rates remain flat in the second year. In both the up and down scenarios, the
model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

At
December 31, 2010, our asset/liability position was neutral based on our interest rate sensitivity model. Our net interest income would decrease by less than 1% in a down 100
basis point scenario and would increase less than 0.5% in an up 200 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would
decrease by less than 1.9% in a down 100 basis point scenario and would increase by less than 1.2% in an up 200 basis point scenario.

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

We
have counter-party risk which may arise from the possible inability of George Mason's third-party investors to meet the terms of their forward sales contracts. George Mason works with
third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. We do not expect any third-party investor to
fail to meet its obligation. In addition, we have derivative counterparty risk relating to certain interest rate swaps we have with third parties. This risk may arise from the inability of the third
party to meet the terms of the contract. We monitor the financial condition of these third parties on an annual basis. We do not expect these third parties to fail to meet their obligations.

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Item 8.    Financial Statements and Supplementary Data



PageReport of Independent Registered Public Accounting Firm

82Consolidated Statements of Condition

84Consolidated Statements of Income

85Consolidated Statements of Comprehensive Income

86Consolidated Statements of Changes in Shareholders' Equity

87Consolidated Statements of Cash Flows

88Notes to Consolidated Financial Statements

90


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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Cardinal Financial Corporation:

We
have audited the accompanying consolidated statements of condition of Cardinal Financial Corporation and subsidiaries (the Company) as of December 31, 2010 and 2009, and the
related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31,
2010. We also have audited the Company's internal control over financial reporting as of December 31, 2010, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and
2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.



McLean,
Virginia
March 14, 2011

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PART II

Item 8.    Financial Statements and Supplementary Data.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CONDITION  December 31, 2010 and 2009  (In thousands, except share data)

2010

2009AssetsCash and due from banks

$
12,963

$
19,804Federal funds sold


12,905


5,037Total cash and cash equivalents


25,868


24,841Investment securities available-for-sale


320,998


343,569Investment securities held-to-maturity (market value of $17,733 and $31,436 at December 31, 2010 and December 31, 2009, respectively)


21,879


35,184Investment securities-trading


2,107


3,724Total investment securities


344,984


382,477Other investments


16,469


16,467Loans held for sale


206,047


179,469Loans receivable, net of deferred fees and costs


1,409,302


1,293,432Allowance for loan losses


(24,210
)

(18,636
)Loans receivable, net


1,385,092


1,274,796Premises and equipment, net


16,717


15,743Deferred tax asset, net


10,690


7,691Goodwill and intangibles, net


10,688


13,935Bank-owned life insurance


34,358


33,712Prepaid FDIC insurance premiums


4,574


6,683Other real estate owned


1,250


4,991Accrued interest receivable and other assets


15,281


15,380Total assets

$
2,072,018

$
1,976,185Liabilities and Shareholders' EquityNon-interest bearing deposits

$
229,575

$
166,019Interest bearing deposits


1,174,150


1,130,986Total deposits


1,403,725


1,297,005Other borrowed funds


389,586


427,579Mortgage funding checks


662


13,918Escrow liabilities


1,454


2,079Accrued interest payable and other liabilities


53,689


31,097Total liabilities


1,849,116


1,771,678




2010

2009Common stock, $1 par valueShares authorized


50,000,000


50,000,000Shares issued and outstanding


28,769,849


28,717,839


28,770


28,718Additional paid-in capital


160,859


159,798Retained earnings


28,848


12,705Accumulated other comprehensive income, net


4,425


3,286Total shareholders' equity


222,902


204,507Total liabilities and shareholders' equity

$
2,072,018

$
1,976,185


See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  Years Ended December 31, 2010, 2009, and 2008  (In thousands, except per share data)

2010

2009

2008Interest income:Loans receivable

$
73,414

$
65,526

$
64,619Loans held for sale


9,039


7,358


7,140Federal funds sold


46


118


569Investment securities available-for-sale


13,145


12,123


13,195Investment securities held-to-maturity


935


1,587


2,521Other investments


54


30


567Total interest income


96,633


86,742


88,611Interest expense:Deposits


15,561


23,698


32,091Other borrowed funds


12,027


12,502


13,547Total interest expense


27,588


36,200


45,638Net interest income


69,045


50,542


42,973Provision for loan losses


10,502


6,750


5,498Net interest income after provision for loan losses


58,543


43,792


37,475Non-interest income:Service charges on deposit accounts


1,881


2,011


2,132Loan fees


2,311


2,649


1,643Investment fee income


4,088


3,614


3,477Realized and unrealized gains on mortgage banking activities


13,860


12,452


7,752Net realized gains on investment securities available-for-sale


726


760


913Net realized gain (loss) on investment securities-trading


188


(425
)

(9
)Management fee income


3,657


1,833


765Increase in cash surrender value of bank-owned life insurance


646


536


860Litigation recovery on previously impaired investment


87





190Other income (loss)


(55
)

(82
)

89Total non-interest income


27,389


23,348


17,812Non-interest expense:Salary and benefits


27,445


23,571


21,939Occupancy


5,723


5,442


5,547Professional fees


2,733


2,142


2,225Depreciation


1,938


1,948


2,390Data communications


4,295


3,352


2,685FDIC insurance assessment


1,853


2,692


721Mortgage loan repurchases and settlements


(686
)

2,569


3,835Bank franchise taxes


1,897


1,525


1,482Amortization of intangibles


238


238


245Impairment of Fannie Mae perpetual preferred stock








4,408Impairment of goodwill and other intangible assets


3,008





2,821Impairment of other real estate owned


1,365





Other operating expenses


9,660


8,948


7,615Total non-interest expense


59,469


52,427


55,913Income (loss) before income taxes


26,463


14,713


(626
)Provision (benefit) for income taxes


8,021


4,388


(912
)Net income

$
18,442

$
10,325

$
286Earnings per common sharebasic

$
0.63

$
0.38

$
0.01Earnings per common sharediluted

$
0.62

$
0.37

$
0.01Weighted-average common shares outstandingbasic


29,123


27,186


24,370Weighted-average common shares outstandingdiluted


29,608


27,674


24,837


See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        Years ended December 31, 2010, 2009 and 2008        (In thousands)

2010

2009

2008Net income

$
18,442

$
10,325

$
286Other comprehensive income:Unrealized gain on available-for-sale investment securities:Unrealized holding gain arising during the year, net of tax expense of $1.1 million in 2010, $1.5 million in 2009, and $289 thousand in
2008


2,475


3,618


1,180Less: reclassification adjustment for net gains included in net income net of tax expense of $227 thousand in 2010, $262 thousand in 2009, and
$310 thousand in 2008


(499
)

(498
)

(602
)1,976


3,120


578Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $444 thousand, net of tax expense of
$169 thousand in 2009, and net of tax benefit of $43 thousand in 2008


(837
)

320


(264
)Comprehensive income

$
19,581

$
13,765

$
600


See
accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY        Years Ended December 31, 2010, 2009, and
2008        (In thousands)

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

TotalBalance, December 31, 2007


24,202

$
24,202

$
131,516

$
4,213

$
(468
)
$
159,463Cumulative effect adjustment at January 1, 2008 for the adoption of ASC 820.10











(96
)




(96
)Stock options exercised


11


11


47








58Stock compensation expense, net of tax benefit








343








343Purchase and retirement of common stock


(199
)

(199
)

(1,197
)







(1,396
)Dividends on common stock of $0.04 per share











(966
)




(966
)Change in accumulated other comprehensive loss














314


314Net income











286





286Balance, December 31, 2008


24,014

$
24,014

$
130,709

$
3,437

$
(154
)
$
158,006Public offering shares issued


4,378


4,378


27,233








31,611Stock options exercised


39


39


139








178Stock compensation expense, net of tax benefit








439








439Shares issued for deferred compensation plan


287


287


1,278








1,565Dividends on common stock of $0.04 per share











(1,057
)




(1,057
)Change in accumulated other comprehensive (loss) income














3,440


3,440Net income











10,325





10,325Balance, December 31, 2009


28,718

$
28,718

$
159,798

$
12,705

$
3,286

$
204,507Stock options exercised


52


52


152








204Stock compensation expense, net of tax benefit








909








909Dividends on common stock of $0.08 per share











(2,299
)




(2,299
)Change in accumulated other comprehensive income














1,139


1,139Net income











18,442





18,442Balance, December 31, 2010


28,770

$
28,770

$
160,859

$
28,848

$
4,425

$
222,902


See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2010, 2009, and 2008    
  (In thousands)

2010

2009

2008Cash flows from operating activities:Net income

$
18,442

$
10,325

$
286Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation


1,938


1,948


2,390Amortization of premiums, discounts and intangibles


807


433


330Impairment of goodwill and other intangible assets


3,008





2,821Provision for loan losses


10,502


6,750


5,498Loans held for sale originated


(3,198,160
)

(2,647,108
)

(1,354,047
)Proceeds from the sale of loans held for sale


3,185,442


2,637,100


1,375,277Realized and unrealized gains on mortgage banking activities


(13,860
)

(12,452
)

(7,752
)Proceeds from sale, maturity and call of investment securities-trading


140


2,631


7,847Purchase of investment securities-trading


(1,181
)

(6,780
)

(7,856
)Unrealized (gain) loss on sale of investments securities-trading


(188
)

619


9Relaized loss on sale of investment securities-trading





(194
)

Gain on sale of investment securities available-for-sale


(735
)

(977
)

(913
)Loss on sale of investment securities available-for-sale


9


217


(Gain) loss on sale of other assets


1


(6
)

10Gain from early extinguishment of long-term FHLB advances








(275
)Decrease in fair value of other real estate owned


1,365





Loss on sales of other real estate owned


76


15


Stock compensation expense, net of tax benefits


523


439


343Provision for deferred income taxes


(3,670
)

(635
)

(2,493
)Impairment of Fannie Mae perpetual preferred stock








4,408Increase in cash surrender value of bank-owned life insurance


(646
)

(536
)

(860
)(Increase) decrease in accrued interest receivable, other assets and deferred tax asset


958


(15,282
)

3,535Increase in accrued interest payable, escrow liabilities and other liabilities


4,350


3,646


1,534Net cash provided by (used in) operating activities


9,121


(19,847
)

30,092Cash flows from investing activities:Net purchases of premises and equipment


(1,809
)

(1,222
)

(400
)Proceeds from maturity and call of investment securities available-for-sale


30,577


35,963


150,165Proceeds from sale of investment securities available-for-sale


10,013


15,988


15,000Proceeds from sale of mortgage-backed securities available-for-sale


24,175


43,589


22,610Proceeds from maturity and call of investment securities held-to-maturity


5,857


2,000


17,492Proceeds from sale of other investments








1,365Purchase of investment securities available-for-sale


(30,220
)

(103,469
)

(110,813
)Purchase of mortgage-backed securities available-for-sale


(46,369
)

(100,040
)

(92,969
)Purchase of other investments


(2
)

(97
)

(3,547
)Redemptions of investment securities available-for-sale


57,975


45,230


27,867Redemptions of investment securities held-to-maturity


7,548


12,890


11,127Proceeds from the sale of other real estate owned


1,536





Net increase in loans receivable, net of deferred fees and costs


(121,138
)

(156,716
)

(102,285
)Net cash used in investing activities


(61,857
)

(205,884
)

(64,388
)


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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2010, 2009, and 2008

(In thousands)

2010

2009

2008Cash flows from financing activities:Net increase in deposits


106,720


117,161


82,919Net increase (decrease) in other borrowed funds


(37,993
)

60,381


(81,129
)Net increase (decrease) in mortgage funding checks


(13,256
)

(5,260
)

9,775Proceeds from FHLB advances


10,000





90,000Repayments of FHLB advances


(10,000
)




(41,458
)Proceeds from issuance of stock





31,611


Stock options exercised


204


178


58Purchase and retirement of common stock








(1,396
)Shares issued for deferred compensation plan





1,565


Excess tax benefit from stock option exercises


387


65


Dividends on common stock


(2,299
)

(1,057
)

(966
)Net cash provided by financing activities


53,763


204,644


57,803Net increase (decrease) in cash and cash equivalents


1,027


(21,087
)

23,507Cash and cash equivalents at beginning of year


24,841


45,928


22,421Cash and cash equivalents at end of year

$
25,868

$
24,841

$
45,928Supplemental disclosure of cash flow information:Cash paid during the year for interest

$
27,825

$
36,493

$
45,437Cash paid for income taxes


10,162


4,599


3,039Supplemental schedule of noncash investing and financing activities:Unsettled purchases of investment securities available-for-sale

$
30,460

$
9,999

$
Transfer of loans to other real estate owned


340


4,991


121


See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization

Cardinal Financial Corporation (the "Company") is incorporated under the laws of the Commonwealth of Virginia as a financial holding Company whose activities consist of investments in
its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the "Bank"), a state-chartered institution and its subsidiary, George Mason Mortgage, LLC
("George Mason"), a mortgage banking company based in Fairfax, Virginia. In January 2009, the Bank organized a second mortgage banking company, Cardinal First Mortgage, LLC ("Cardinal
First"), also based in Fairfax, Virginia. The Bank has a trust division, Cardinal Trust and Investment Services. In addition to the Bank, the Company has two nonbank subsidiaries; Wilson/Bennett
Capital Management, Inc. ("Wilson/Bennett"), an asset management firm and Cardinal Wealth Services, Inc. ("CWS"), an investment services subsidiary.

(2) Summary of Significant Accounting Policies



U.S. generally accepted accounting principles are complex and require management to make estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of contingent assets and contingent liabilities, at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates affecting the Company's financial statements relate to accounting for business combinations and impairment testing of goodwill,
the allowance for loan losses, accounting for impairment of identifiable intangible assets, the valuation of the deferred tax assets, fair value measurements of certain assets and liabilities, fair
values of derivatives and investment securities and reserves for repurchase of mortgage loans previously sold to investors. Actual results could differ from these estimates.



The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.



Business combinations are accounted for under the purchase method. The purchase method requires that the cost of an acquired entity be
allocated to the assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisition. The excess of the cost of an acquired entity over the net of the amounts
assigned to assets acquired and liabilities assumed, including identifiable intangibles, is recorded as goodwill.



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



The Company classifies its investment securities in one of three categories: available-for-sale,
held-to-maturity or trading. Held-to-maturity securities are those securities for which the Company has the ability and intent to hold until maturity.
Trading securities are those securities for which the

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

Company
has purchased and holds for the purpose of selling in the near future. All other securities are classified as available-for-sale.

Held-to-maturity
securities are carried at amortized cost. available-for-sale and trading securities are carried at estimated fair value. Unrealized
gains and losses, net of applicable tax, on available-for-sale securities are reported in other comprehensive income (loss). Unrealized market value adjustments, fees and realized gains
and losses, on trading securities are reported in non-interest income.

At
December 31, 2010 and 2009, the Company had investment securities classified as trading. These investments were purchased to economically hedge against fair value changes of
the Company's nonqualified deferred compensation plan liability. Those investments were designated as trading securities, and as such, the changes in fair value are reflected in earnings.

Gains
and losses on the sale of securities are determined using the specific identification method.

The
Company regularly evaluates its securities whose values have declined below their amortized cost to assess whether the decline in fair value is
other-than-temporary. The Company considers various factors in determining whether a decline in fair value is other-than-temporary including the
issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads, the expected recovery period and other quantitative and qualitative information. The
valuation of securities for impairments process is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current
period earnings. The risks and uncertainties include changes in general economic conditions and future changes in assessments of the aforementioned factors. It is at least reasonably probable that
such factors will change in the future, which may result in other-than-temporary impairments. Beginning in 2009, under new accounting guidance for impairments of debt
securities that are deemed to be other-than-temporary, the credit portion of an other-than-temporary impairment loss is recognized in earnings and the
non-credit portion is recognized in accumulated other comprehensive income in those situations where the Company does not intend to sell the security and it is more likely than not that
the Company will not be required to sell the security prior to recovery. Prior to January 1, 2009, any other-than-temporary impairment recognized was deemed to be credit
related and reported in earnings.

Interest
income and dividends on securities are recognized in interest income on an accrual basis. Premiums and discounts are recognized in interest income using the effective interest
method. Prepayments of the mortgages securing mortgage-backed securities may affect the yield to maturity. The Company uses actual principal prepayment experience and estimates of future principal
prepayments in calculating the yield necessary to apply the effective interest method.



Mortgage loans originated and intended for sale into the secondary market are carried at the lower of cost or estimated fair value,
determined on an aggregate loan basis. The Company sells its mortgage loans forward to investors and the estimated fair value is largely dependent upon the terms of these outstanding loan purchase
commitments as well as movement in market interest rates. Net unrealized losses, if any, are recognized through a valuation allowance by charges to operations. The carrying amount of loans held for
sale includes principal balances, valuation
allowances, origination premiums or discounts and fees and direct costs that are deferred at the time of origination.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

The
Company sells its originated mortgage loans to third party investors servicing released. Upon sale and deliver, the loans are legally isolated from the Company and the Company has no
ability to restrict or constrain the ability of third-party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or
unilaterally cause third-party investors to put the mortgage loans back to the Company.



Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal balance adjusted for any charge-offs, and net of the allowance for loan losses and deferred fees and costs. Loan origination fees and certain
direct origination costs are deferred and amortized as an adjustment of the yield using the payment terms required by the loan contract.

Loans
are generally placed into non-accrual status when they are past-due 90 days as to either principal or interest or when, in the opinion of management,
the collection of principal and/or interest is in doubt. A loan remains in non-accrual status until the loan is current as to payment of both principal and interest or past-due
less than 90 days and the borrower demonstrates the ability to pay and remain current. Loans are charged-off when a loan or a portion thereof is considered uncollectible. When cash
payments are received, they are applied to principal first, then to accrued interest. It is the Company's policy not to record interest income on non-accrual loans until principal has
become current. In certain instances, accruing loans that are past due 90 days or more as to principal or interest may not go on non-accrual status if the Chief Credit Officer
determines that the loans are well secured and are in the process of collection.

The
Company determines and recognizes impairment of certain loans when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the loan agreement. A loan is not considered impaired during a period of delay in payment if the Company expects to collect all amounts due, including past-due interest. An
impaired loan is measured at the present value of its expected future cash flows discounted at the loan's coupon rate, or at the loan's observable market price or fair value of the collateral if the
loan is
collateral dependent. Because substantially all of the Company's loans are collateral dependent, the Company generally measures impairment based on the estimated fair value of the collateral. The
Company measures the collateral value on impaired loans by obtaining an updated appraisal of the underlying collateral and may discount further the appraised value, if necessary, to an amount equal to
the expected cash proceeds in the event the loan is foreclosed upon and the collateral is sold. In addition, an estimate of costs to sell the collateral is assumed.

Nonperforming
assets include nonaccrual loans, loans past due 90 days or more and other real estate owned.

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

The
Company maintains the allowance for loan losses at a level that represents management's best estimate of known and inherent losses in the loan portfolio. Both the amount of the
provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses,
historical trends and specific conditions of the individual borrowers including the value of the underlying collateral. Unusual and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

infrequently
occurring events, such as weather-related disasters, may impact the assessment of possible credit losses. As a part of its analysis, the Company uses comparative peer group data and
qualitative factors, such as levels of and trends in delinquencies and non-accrual loans, national and local economic trends and conditions and concentrations of loans exhibiting similar
risk profiles to support estimates.

For
purposes of this analysis, the Company categorizes loans into one of five categories: commercial and industrial, commercial real estate (including construction), home equity lines of
credit, residential mortgages, and consumer loans. In the absence of meaningful historical loss factors, peer group loss factors are applied and are adjusted by the qualitative factors mentioned
above. The indicated loss factors resulting from this analysis are applied to each of the five categories of loans. In addition, the Company individually assigns loss factors to all loans that have
been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent.
Since the Company has limited historical data on which to base loss factors for classified loans, the Company generally applies, in accordance with regulatory guidelines, a 5% loss factor to all loans
classified as special mention, a 15% loss factor to all loans classified as substandard and a 50% loss factor to all loans classified as doubtful. Loans classified as loss loans are fully reserved or
charged off. In certain instances, the Company evaluates the impairment of certain loans on a loan by loan basis. For these loans, the Company analyzes the fair value of the collateral underlying the
loan and considers estimated costs to sell the collateral on a discounted basis. If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or
discount associated with the loan) the Company recognizes an impairment and establishes a specific reserve for the impaired loan.

In
addition, various regulatory agencies, as part of their examination process, periodically review the Company's allowance for loan losses. These agencies may require the Company to
recognize additions to the allowance based on their risk evaluation and credit judgment. Management believes that the allowance for loan losses at December 31, 2010 and 2009 is a reasonable
estimate of known and inherent losses in the loan portfolio at those dates.



Land is carried at cost. Premises, furniture, equipment, and leasehold improvements are carried at cost, less accumulated depreciation
and amortization. Depreciation of premises, furniture and equipment is computed using the straight-line method over estimated useful lives from three to 25 years. Amortization of
leasehold improvements is computed using the straight-line method over the useful lives of the improvements or the lease term, whichever is shorter. Purchased computer software which is
capitalized is amortized over estimated useful lives of one to three years. Internally developed software is expensed as incurred. Rent expense on operating leases is recorded using the straight-line
method over the appropriate lease term.



Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is not amortized but is evaluated at
least annually for impairment by comparing its fair value with its carrying amount. An impairment loss is recognized to the extent that the carrying amount exceeds fair value.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

Historically,
Wilson/Bennett and Cardinal Trust and Investments have been separate reporting units within the Wealth Management and Trust Services business segment. Both of these units
manage financial assets for institutional clients and for upper middle class to wealthy individuals. The Company uses a single "wealth management" sales team to present financial products to prospects
and also to service existing clients. The "back office" for each of these components is performed by the same administrative staff, and there is a single person that oversees the combined sales effort
and manages the operations. Prospectively and beginning in the third quarter of 2010, the Wilson/Bennett and
Cardinal Trust and Investments reporting units have been combined into a single reporting unit and evaluations of the recoverability of goodwill and other intangible assets are now based on the
combined cash flows of these businesses. Note 8 discusses the impairment charges recorded during the year ended December 31, 2010 and 2008. No impairment was indicated for 2009. The
Company also has amortizable intangible assets. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of nine years. These assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.



Under the Company's bank-owned life insurance policy, executives or other key individuals are the insureds and the Company
is the owner and beneficiary of the policy. As such, the insured has no claim to the insurance policy, the policy's cash value, or a portion of the policy's death proceeds. The increase in the cash
surrender value over time is recorded as other non-interest income. The Company monitors the financial strength and condition of the counterparty.



Realized and unrealized gains on mortgage banking activities include income earned by George Mason and Cardinal First from the
origination and sale of mortgage loans to third party investors, and other activities incidental to mortgage banking activities. The Company enters into interest rate lock commitments to sell and
deliver the mortgage loans, servicing released, to third party investors on a best efforts basis. Unrealized gains include the recognition of the fair value of the rate lock commitment derivative,
which approximates the differential between the par value of the loan and the amount that will be received upon delivery of the loan to the third party investor.



Management fee income represents income earned for the management and operational support provided by George Mason to other mortgage
banking companies (the "managed companies") owned by local homebuilders. The relationship of George Mason to these managed companies is solely as service provider and there is no fiduciary
relationship. Fees earned by George Mason are accrued based on contractual arrangements with each of the managed companies
and are generally determined as a percentage of the managed company's net income before income taxes.



Investment fee income represents commissions paid by customers of CWS and asset management fees paid by the customers of Wilson/Bennett
for investment services. Revenue from Trust Services is also a component of investment fee income and is recognized in the period earned in accordance with contractual percentage of assets under
management or custody. Trust Services revenue is generally

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

determined
based upon the fair value of assets under management or custody at the end of the period. Fees are recognized in income as they are earned.



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

When
uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset may be reduced by a valuation allowance. The amount of any valuation
allowance established is based upon an estimate of the deferred tax asset that is more likely than not to be recovered. Increases or decreases in the valuation allowance result in increases or
decreases to the provision for income taxes.



Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of
shares of common stock outstanding during the periods, including shares which will be issued to settle liabilities of the deferred compensation plans. Diluted earnings per share reflects the impact of
dilutive potential common shares that would have been outstanding if common stock equivalents had been issued, as well as any adjustment to income that would result from the assumed issuance. Common
stock equivalents that may be issued by the Company relate primarily to outstanding stock options, and the dilutive potential common shares resulting from outstanding stock options are determined
using the treasury stock method. Common stock equivalents for diluted earnings per share purposes also includes common shares which may be issued, but are not required to be issued, to settle the
Company's obligations under its deferred compensation plans. The effects of anti-dilutive common stock equivalents are excluded from the calculation of diluted earnings per share.



The Company records its derivatives at their fair values in other assets and other liabilities on the statement of condition. The
Company does not enter into derivative transactions for speculative purposes. For derivatives designated as hedges, the Company contemporaneously documents the hedging relationship, including the risk
management objective and strategy for undertaking the hedge, how effectiveness will be assessed at inception and at each reporting period and the method for measuring ineffectiveness. The Company
evaluates the effectiveness of these transactions at inception and on an ongoing basis. Ineffectiveness is recorded through earnings. For derivatives designated as cash flow hedges, the fair value
adjustment is recorded as a component of other comprehensive income, net of tax, except for the ineffective portion. For derivatives designated as fair value hedges, the fair value adjustments for
both the hedged item and the hedging instrument are recorded through the income statement with any difference considered the ineffective portion of the hedge. The Company discontinues hedge accounting
when i) the hedge is no longer considered highly effective or ii) the derivative matures or is sold or terminates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

In
the normal course of business, the Company enters into rate lock commitments, to finance residential mortgage loans. These commitments, which contain fixed expiration dates, offer the
borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company. Interest rate risk arises on these commitments and
subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to residential mortgage loans
intended to be sold are considered derivatives and are marked to market through earnings. These rate lock commitments are considered derivatives and marked to fair value through earnings. In addition
to the effects of the change in market interest rate, the fair value measurement of the derivative also contemplates the expected cash flows to be received from the counterparty to the future sale of
the loan. For purposes of calculating the aggregate fair value of the rate lock derivatives at year end, the Company assumes an estimated loan closing and investor delivery rate based on historical
experience. The measurement of the estimated fair value of the rate lock derivatives is presented as realized and unrealized gains from mortgage banking activities.

To
mitigate the effect of interest rate risk inherent in providing rate lock commitments, the Company economically hedges its commitments by entering into best efforts forward delivery
loan sales contracts. During the rate lock commitment period, these forward loan sales contract derivatives are marked to fair value. The fair values of loan commitments and the fair values of forward
sales contracts generally move in opposite directions, and the net impact of the changes in these valuations on net income during the loan commitment period is generally inconsequential, excluding the
effect of the fair value component associated with the projected cash flows from the loan delivery to the investor. At the closing of the loan, the rate lock commitment derivative matures and the
Company records a loan held for sale and continues to be obligated under the same forward loan sales contract. The loans held for sale are then designated as the hedged item in a cash flow hedge. The
derivative in this relationship is the forward loan sale commitment.

When
hedge accounting is discontinued because it is probable an anticipated loan sale will not occur, the Company recognizes immediately in earnings any gains and losses that were
accumulated in other comprehensive income.



The Company recognizes in the income statement the grant-date fair value of stock options and other equity-based
compensation. The Company classifies stock awards as either an equity award or a liability award. Equity classified awards are valued as of the grant date using either an observable market price or a
valuation methodology. Liability classified awards are valued at fair value at each reporting date. For the periods presented, all of the Company's stock options are classified as equity awards.

The
Company awards stock options with a graded-vesting period and as such has elected to recognize compensation costs over the requisite service period for the entire award. Total
compensation cost charged against income for the years ended December 31, 2010, 2009, and 2008, was $523,000, $374,000, and $343,000, respectively. The total income tax benefit related to stock
options exercised and recognized in the income statement for share-based compensation arrangements was $123,000, $65,000, and $0 for the years ended December 31, 2010, 2009, and 2008,
respectively.

At
December 31, 2010, the Company had two stock-based employee compensation plans, which are described more fully in Note 21.

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(2) Summary of Significant Accounting Policies (Continued)

Stock options are granted with an exercise price equal to the common stock's fair market value at the date of grant. Director stock options have ten year terms and vest and become fully
exercisable at the grant date. Certain employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning as of the grant date. In addition, the Company has
granted stock options to employees of the Company that have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service.

The
weighted average per share fair values of stock option grants made in 2010, 2009, and 2008, were $4.64, $2.92, and $3.10, respectively. The fair values of the options granted were
estimated on the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

2010

2009

2008Estimated option life

6.5 years

6.5 years

6.5 yearsRisk free interest rate

1.79-3.30%

2.10-3.09%

3.77-3.44%Expected volatility

45.90%

44.60%

40.50%Expected dividend yield

0.89%

0.67%

0.56%


Expected
volatility is based upon the average annual historical volatility of the Company's common stock. The estimated option life is derived from the "simplified method" formula as
described in Staff Accounting Bulletin No. 110. The risk free interest rate is based upon the seven-year U.S. Treasury note rate in effect at the time of grant. The expected
dividend yield is based upon implied and historical dividend declarations.

(3) Investment Securities and Other Investments

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

2010(In thousands)

Gross
Amortized
cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
valueInvestment Securities Available-for-SaleU.S. government-sponsored agencies

$
30,941

$
1,262

$
(84
)
$
32,119Mortgage-backed securities


212,583


6,979


(80
)

219,482Municipal securities


64,284


424


(425
)

64,283U.S. treasury securities


4,923


191





5,114Total

$
312,731

$
8,856

$
(589
)
$
320,998Investment Securities Held-to-MaturityMortgage-backed securities


13,875


661





14,536Corporate bonds


8,004





(4,807
)

3,197Total

$
21,879

$
661

$
(4,807
)
$
17,733


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)



2009(In thousands)

Gross
Amortized
cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
valueInvestment Securities Available-for-SaleU.S. government-sponsored agencies

$
56,048

$
178

$
(567
)
$
55,659Mortgage-backed securities


217,723


6,451


(769
)

223,405Municipal securities


59,691


486


(569
)

59,608U.S. treasury securities


4,901





(4
)

4,897Total

$
338,363

$
7,115

$
(1,909
)
$
343,569Investment Securities Held-to-MaturityMortgage-backed securities


27,180


917


(4
)

28,093Corporate bonds


8,004





(4,661
)

3,343Total

$
35,184

$
917

$
(4,665
)
$
31,436


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

2010Available-for-Sale

Held-to-Maturity(In thousands)

Amortized
cost

Fair
Value

Amortized
cost

Fair
ValueAfter 1 year but within 5 years

$
4,923

$
5,114

$


$
After 5 years but within 10 years


41,322


42,637





After 10 years


53,903


53,765


8,004


3,197Mortgage-backed securities


212,583


219,482


13,875


14,536Total

$
312,731

$
320,998

$
21,879

$
17,733


For
the years ended December 31, 2010, 2009, and 2008, proceeds from sales of investment securities available-for-sale amounted to $34.2 million,
$59.6 million, and $37.5 million, respectively. Gross realized gains in 2010, 2009, and 2008, amounted to $735,000, $977,000, and $913,000, respectively. Gross realized losses for the
years ended December 31, 2010, 2009 and 2008 were $9,000, $217,000, and $0, respectively. In 2009, the Company sold all shares of its Fannie Mae perpetual preferred stock. The Company elected
to sell these shares they were continuing to trade well below their par value following the placement of Fannie Mae into conservatorship by federal regulators during 2008. The Company recognized an
other-than-temporary impairment of $4.4 million on this investment as of December 31, 2008. The full amount of this impairment was deemed to be related to credit
deterioration of the issuer, and not related to equity market conditions. Because of the minimal likelihood that these shares would recover, the Company made the decision to exit this type of
investment security and no longer owns any similar equity investment in its investment securities portfolio.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)

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

At December 31, 2010

Less than 12 months

12 months or more

Total(In thousands)

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
lossInvestment Securities Available-for-SaleU.S. government-sponsored agencies

$
9,957

$
(84
)
$


$


$
9,957

$
(84
)Mortgage-backed securities


4,892


(14
)

814


(66
)

5,706


(80
)Municipal securities


27,845


(415
)

1,475


(10
)

29,320


(425
)Total temporarily impaired securities

$
42,694

$
(513
)
$
2,289

$
(76
)
$
44,983

$
(589
)




Less than 12 months

12 months or more

Total(In thousands)

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
lossInvestment Securities Held-to-MaturityCorporate bonds

$


$


$
3,197

$
(4,807
)
$
3,197

$
(4,807
)Total temporarily impaired securities

$


$


$
3,197

$
(4,807
)
$
3,197

$
(4,807
)


At December 31, 2009

Less than 12 months

12 months or more

Total(In thousands)

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
lossInvestment Securities Available-for-SaleU.S. treasury securities

$
4,897

$
(4
)
$


$



4,897


(4
)U.S. government-sponsored agencies


34,816


(567
)







34,816


(567
)Mortgage-backed securities


28,665


(372
)

8,258


(397
)

36,923


(769
)Municipal securities


22,504


(317
)

8,147


(252
)

30,651


(569
)Total temporarily impaired securities

$
90,882

$
(1,260
)
$
16,405

$
(649
)
$
107,287

$
(1,909
)




Less than 12 months

12 months or more

Total(In thousands)

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
lossInvestment Securities Held-to-MaturityMortgage-backed securities

$
56

$


$
39

$
(4
)
$
95

$
(4
)Corporate bonds








3,343


(4,661
)

3,343


(4,661
)Total temporarily impaired securities

$
56

$


$
3,382

$
(4,665
)
$
3,438

$
(4,665
)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)

The
Company completes reviews for other-than-temporary impairment at least quarterly. As of December 31, 2010, the majority of the investment securities
portfolio consisted of securities rated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment
risk. At December 31, 2010, 97% of the Company's mortgage-backed securities are guaranteed by the Federal National Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the
Government National Mortgage Association (GNMA).

The
Company has $7.1 million in non-government non-agency mortgage-backed securities. These securities are rated from AAA to AA. The various protective
elements on the non agency securities may change in the future if market conditions or the financial stability of credit insurers changes, which could impact the ratings of these securities.

At
December 31, 2010, certain of the Company's investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of
pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed
securities are guaranteed and/or funded by the U.S. government. Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications
that the contractual cash flows will not be received when due. The Company does not intend to sell nor does the Company believe it is
probable that it will be required to sell any of its temporarily impaired securities prior to the recovery of the amortized cost.

The
held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at December 31,
2010 (each security has a par value of $2.0 million). These securities are presented as corporate bonds in the above tables. The collateral underlying these structured securities are
instruments issued by financial institutions or insurers. The Company owns the A-3 tranches in each issuance. Each of the bonds is rated by more than one rating agency. Two of the
securities have a composite rating of AA, one of the securities has a composite rating of BB- and the other security has a composite rating of B-. Observable trading activity
remains limited for these types of securities. The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing
services. Given the level of subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual
interest and principal payments recovering the amortized cost basis of each of the four securities, and concluded that these securities are not other-than-temporarily impaired.
The Company continuously monitors the financial condition of the underlying issues and the level of subordination below the A-3 tranches. The Company also utilizes a multi-scenario model
which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches. In each of the adverse
scenarios, there was no indication of a break to the A-3 contractual cash flows. Significant judgment is involved in the evaluation of other-than-temporary
impairment. The Company does not intend to sell nor does the Company believe it is probable that it will be required to sell these corporate bonds prior to the recovery of its investment.

No
other-than-temporary impairment has been recognized on the securities in the Company's investment portfolio as of December 31, 2010 and 2009, and the
Company does not continue to hold any investment securities for which the Company previously recognized other-than-temporary

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)

impairment.
During 2008, the Company recognized an other-than-temporary impairment of $4.4 million related to an investment in Fannie Mae perpetual preferred stock as
discussed above.

Investment
securities that were pledged to secure borrowed funds and other balances as required at December 31, 2010 and 2009 had carrying values of $324.7 million and
$235.5 million, respectively.

(In thousands)

2010

2009FHLB advances

$
131,250

$
106,973Repurchase agreements


113,015


108,976Debtor in possession, public deposits, trust services division deposits and interest rate swap


77,530


14,730FRB discount window and TT&L note option


2,938


4,809$
324,733

$
235,488


Other
investments at December 31, 2010 and 2009 include $15.7 million of Federal Home Loan Bank stock and $63,000 of Community Bankers' Bank stock. As a member of the
Federal Home Loan Bank of Atlanta ("FHLB"), the Company's banking subsidiary is required to hold stock in this entity. Stock membership in Community Bankers' Bank allows the Company to participate in
loan purchases and sales. In addition, included in other investments at December 31, 2010 and 2009 is the Company's $619,000 investment in Cardinal Statutory Trust I. At
December 31, 2010 and 2009, the Company had an equity investment in a local bank holding company of $50,000. These investments are carried at cost since no active trading markets exist.

In
February 2009, the FHLB announced changes to its capital stock requirements. Specifically, the FHLB Board of Directors increased the dollar cap on its stock purchases from
$25 million to $26 million and repurchases of member excess stock will be evaluated on a quarterly basis instead of a daily basis.

The
Company's policy is to review for impairment of FHLB stock at each reporting period. At December 31, 2010, FHLB was in compliance with all of its regulatory capital
requirements. The Company believes its holdings in the stock are ultimately recoverable at par value as of December 31, 2010. In addition, the Company has ample liquidity and does not require
redemption of its FHLB stock in the foreseeable future. Based on the Company's analysis of positive and negative factors, it believes that as of December 31, 2010 and 2009, its FHLB stock was
not impaired.

(4) Investment Securities-Trading

During 2009, the Company acquired investment assets and designated them as trading to economically hedge against fair value changes of the Company's nonqualified deferred compensation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Investment Securities-Trading (Continued)

plan
liability. Those investments were designated as trading securities, and as such, the changes in fair value are reflected in earnings. Trading securities at December 31, 2010 and 2009 are
as follows:

(in thousands)

2010

2009Cash equivalents

$
453

$
772Equities


69


2,045Mutual funds


1,585


907$
2,107

$
3,724


The
net unrealized gain on trading securities for the years ended December 31, 2010 and 2009 was $188,000 and $194,000, respectively. The net realized loss on trading securities
for the years ended December 31, 2010, 2009 and 2008 was $0, $619,000 and $9,000, respectively.

(5) Loans Receivable and Allowance for Loan Losses

The loan portfolio at December 31, 2010 and 2009 consists of the following:

(In thousands)

2010

2009Commercial and industrial

$
200,384

$
161,156Real estatecommercial


631,292


592,780Real estateconstruction


240,007


191,523Real estateresidential


217,130


228,693Home equity lines


119,403


117,392Consumer


3,042


2,8591,411,258


1,294,403Net deferred fees


(1,956
)

(971
)Loans receivable, net of fees


1,409,302


1,293,432Allowance for loan losses


(24,210
)

(18,636
)Loans receivable, net

$
1,385,092

$
1,274,796


Loans
totaling $751.7 million serve as collateral for the Company's Federal Home Loan Bank advance capacity at December 31, 2010. Loans held as collateral at the Federal
Reserve for use of the Company's discount window line of credit total $126.9 million at December 31, 2010.

For
purposes of monitoring the performance of the loan portfolio and estimating the allowance for loan losses, the Company's loans receivable portfolio is segmented as follows:
commercial and industrial, real estate-commercial, real estate-construction, real estate-residential, home equity lines and consumer loans.

Commercial and Industrial Loans.The Company makes commercial loans to qualified businesses within its market area. The commercial
lending portfolio
consists primarily of commercial and industrial loans for the financing of accounts receivable, property, plant and equipment. The Company has a government contract lending group which provides
secured lending to government contracting firms and businesses based primarily on receivables from the federal government. In addition, the

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(5) Loans Receivable and Allowance for Loan Losses (Continued)

Company,
which is certified as a preferred lender by the Small Business Administration (SBA), offers SBA guaranteed loans and asset-based lending arrangements to its customers.

Commercial
and industrial loans generally have a higher degree of risk than other certain types of loans. Commercial loans typically are made on the basis of the borrower's ability to
repay the loan from the cash flow from its business and are secured by business assets, such as commercial real estate,
accounts receivable, equipment and inventory, the values of which may fluctuate over time and generally cannot be appraised with as much precision as residential real estate. As a result, the
availability of funds for the repayment of commercial loans may be substantially dependent upon the commercial success of the business itself. To manage these risks, the Company's policy is to secure
commercial loans originated with both the assets of the business, which are subject to the risks described above, and other additional collateral and guarantees that may be available.

Real EstateCommercial Loans.Real estate-commercial loans are primarily secured by various types of commercial real estate,
including
office, retail, warehouse, industrial and other non-residential types of properties and are made to the owners and/or occupiers of such property.

These
loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income-producing
properties is typically dependent upon the successful operation of a business or real estate project and thus may be subject to adverse conditions in the commercial real estate market or in the
general economy. The Company generally requires personal guarantees or endorsements with respect to these loans and loan-to-value ratios for real estate-commercial loans
generally do not exceed 80%.

Real EstateConstruction Loans.The Company's real estate-construction loan portfolio consists of single-family residential
properties,
multi-family properties and commercial projects. Construction lending entails significant additional risks as they often involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Construction loans also involve additional risks since funds are advanced while the property is under construction, which property has uncertain value prior to the completion of
construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan-to-value ratios. To reduce the risks
associated with construction lending, the Company generally limits loan-to-value ratios to 80% of when-completed appraised values for owner-occupied residential or
commercial properties and for investor-owned residential or commercial properties.

Real EstateResidential and Home Equity Loans.Real estate-residential loans are originated by Cardinal Bank, Cardinal First and
George
Mason. This portfolio consists of residential first and second mortgage loans, residential construction loans and home equity lines of credit and term loans secured primarily by the residences of
borrowers.

Residential
mortgage loans and home equity lines of credit secured by owner-occupied property generally are made with a loan-to-value ratio of up to 80%.
Loan-to-value ratios of up to 90% may be allowed on residential owner-occupied property if the borrower exhibits unusually strong creditworthiness.

Consumer Loans.The Company's consumer loans consist primarily of installment loans made to individuals for personal, family and
household purposes.
The specific types of consumer loans

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Loans Receivable and Allowance for Loan Losses (Continued)

originated
include home improvement loans, automobile loans, debt consolidation loans and other general consumer lending.

Consumer
loans may entail greater risk than certain other types of loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly
depreciable assets, such as automobiles.

The
Company's policy for consumer loans is to accept moderate risk while minimizing losses, primarily through a careful credit and financial analysis of the borrower. In evaluating
consumer loans, the Company requires its lending officers to review the borrower's collateral and stability of income, past credit history, amount of debt currently outstanding and the impact of these
factors on the ability of the borrower to repay the loan in a timely manner.

The
Company also issues credit cards to certain of its customers. In determining to whom the Company will issue credit cards, the Company evaluates the borrower's level and stability of
income, past credit history and other factors. Credit card receivables are included in the consumer loan portfolio.

Substantially
all of the Company's loans, commitments and standby letters of credit have been granted to customers located in the Washington, D.C. metropolitan area. As a matter of
regulatory restriction, the Company's banking subsidiary limits the amount of credit extended to any single borrower or group of related borrowers. At December 31, 2010, the amount of credit
extended to any single borrower or group of related borrowers was limited to $34.8 million. Loans in process at December 31, 2010 and 2009 were $786,000 and $103,000, respectively.

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

An
analysis of the change in the allowance for loan losses follows:

(In thousands)

2010

2009

2008Balance, beginning of year

$
18,636

$
14,518

$
11,641Provision for loan losses


10,502


6,750


5,498Loans charged-off


(5,301
)

(2,638
)

(2,656
)Recoveries


373


6


35Balance, end of year

$
24,210

$
18,636

$
14,518


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Loans Receivable and Allowance for Loan Losses (Continued)

An analysis of the allowance for loan losses based on loan type, or segment, and the Company's loan portfolio, which identifies certain loans that are evaluated for individual or
collective impairment, is below:

Allowance for Loan Losses  For the Year Ended December 31, 2010  (In thousands)

Commercial and
Industrial

Real Estate
Commercial

Real Estate
Construction

Real Estate
Residential

Home Equity
Lines

Consumer

TotalAllowance for loan losses:Ending Balance, December 31, 2010

$
2,941

$
10,558

$
7,593

$
1,875

$
1,175

$
68

$
24,210Ending Balance:Individually evaluated for impairment

$
209

$
1,095

$
3,996

$
33

$
5

$


$
5,338Collectively evaluated for impairment


2,732


9,463


3,597


1,842


1,170


68


18,872


Loans Receivable  At December 31, 2010  (In thousands)

Commercial and
Industrial

Real Estate
Commercial

Real Estate
Construction

Real Estate
Residential

Home Equity
Lines

Consumer

TotalEnding Balance, December 31, 2010

$
200,384

$
631,292

$
240,007

$
217,130

$
119,403

$
3,042

$
1,411,258Ending Balance:Individually evaluated for impairment

$
4,142

$
13,955

$
16,494

$
845

$
49

$


$
35,485Collectively evaluated for impairment


196,242


617,337


223,513


216,285


119,354


3,042


1,375,773


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

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

105

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Loans Receivable and Allowance for Loan Losses (Continued)

monitor
our loan portfolio, maintain our watch list, and compile the analysis necessary to calculate the allowance for loan losses.

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

In
addition to internal activities, the Company also engages an external consultant on a quarterly basis to review the Company's loan portfolio. This external loan review function helps
to ensure the soundness of the loan portfolio through a third party review of existing exposures in the portfolio, supporting the commercial loan officers in the execution of its credit management
responsibilities, and promoting and monitoring the adherence to the Company's credit risk management standards.

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

Nonaccrual and Past Due Loans  At December 31, 2010  (In thousands)

30-59 Days
Past Due

60-89 Days
Past Due

90 Days
or More
Past Due
(includes
nonaccrual)

Total
Past Due

Current

Total
Loans

90 Days
Past Due
and Still
Accruing

Nonaccrual
LoansCommercial and industrial

$
664

$


$
2,887

$
3,551

$
196,833


200,384

$


$
2,887Real estatecommercialOwner occupied








238


238


196,139


196,377





238Non-owner occupied














434,915


434,915





Real estateconstructionResidential


715








715


60,020


60,735





Commercial








3,546


3,546


175,726


179,272





3,546Real estateresidentialSingle family


653





845


1,498


169,505


171,003





845Multi-family














46,127


46,127





Home equity lines


99





49


148


119,255


119,403


49


ConsumerInstallment














2,203


2,203





Credit cards














839


839





$
2,131

$


$
7,565

$
9,696

$
1,401,562

$
1,411,258

$
49

$
7,516


At
December 31, 2010, 2009, and 2008, the Company had impaired loans on non-accrual status of $7.5 million, $696,000, and $4.7 million, respectively. The
valuation allowance for impaired loans at December 31, 2010 and 2009 was $4.1 million and $1.3 million, respectively. For the years ended December 31, 2010, 2009 and 2008,
the Company charged-off $3.5 million, $411,000 and $1.1 million

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Loans Receivable and Allowance for Loan Losses (Continued)

related
to impaired loans for the portion of the outstanding principal balance which was unsecured based on the estimated fair value of the underlying collateral.

The
average balance of impaired loans was $6.6 million, $6.6 million, and $13,000 for 2010, 2009, and 2008, respectively. Interest income that would have been recorded had
these loans been performing for the years ended December 31, 2010, 2009, and 2008, would have been $643,000, $414,000, and $59,000, respectively. The interest income realized prior to these
loans being placed on non-accrual status for December 31, 2010, 2009, and 2008, was $390,000, $120,000, and $348,000, respectively. At December 31, 2010 and 2009, the Company
had accruing loans past due 90 days or more as to principal or interest payments of $49,000 and $151,000, respectively, all of which were determined to be well-secured and in the
process of collection.

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

Impaired Loans  At December 31, 2010  (In thousands)

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Interest
Income
RecognizedWith no related allowance:Commercial and industrial

$
2,887

$
4,346

$


$
72Real estatecommercialOwner occupied


238


286





14Non-owner occupied











Real estateconstructionResidential











Commercial


3,546


4,737





261Real estateresidentialSingle family


845


1,196





23Multi-family











Home equity lines


49


49





With related allowance:Commercial and industrial

$
555

$
555

$
162

$
33Real estatecommercial











Owner occupied











Non-owner occupied


3,730


3,730


418


192Real estateconstruction











Residential











Commercial


10,898


10,898


3,550


537Real estateresidential











Single family











Multi-family











Home equity lines











By segment total:Commercial and industrial

$
3,442

$
4,901

$
162

$
105Real estatecommercial


3,968


4,016


418


206Real estateconstruction


14,444


15,635


3,550


798Real estateresidential


845


1,196





23Home equity lines


49


49





Total

$
22,748

$
25,797

$
4,130

$
1,132


107

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Loans Receivable and Allowance for Loan Losses (Continued)

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

Internal Risk Rating Grades

Pass

Substandard

Doubtful

Loss(In thousands)Commercial and industrial

$
196,242

$
4,142

$


$
Real estatecommercialOwner occupied


190,190


6,187





Non-owner occupied


427,147


7,768





Real estateconstructionResidential


58,935


1,800





Commercial


164,578


14,694





Real estateresidentialSingle family


170,158





845


Multi-family


46,127








Home equity lines


119,354





49


ConsumerInstallment


839








Credit cards


2,203








$
1,375,773

$
34,591

$
894

$



Loans
rated substandard and doubtful totaling $35.5 million were evaluated for impairment. Loans receivable of $12.9 million were not impaired as of December 31,
2010 because the Company expected to collect all contractual amounts due under the loan agreement. The related allowance for impaired loans at December 31, 2010 is $4.1 million. Loans
receivableevaluated for impairment and measured at fair value on a non-recurring basis, net of the related allowance is $31.5 million (see note 24 to the notes
to consolidated financial statements for additional information).

There
were no loans modified during 2010 that would be considered a troubled debt restructuring.

(6) Other Real Estate Owned

At December 31, 2010 and 2009, the Company had other real estate owned of $1.3 million and $5.0 million, respectively. The balances in other real estate owned are at
fair value less any costs to sell

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(6) Other Real Estate Owned (Continued)

on
the statement of condition. The fair value is determined by obtaining an updated appraisal of the foreclosed property which is then discounted for estimated selling costs.

The
Company recorded an impairment charge of $1.4 million during 2010 related to the decrease in fair value of the one property held in other real estate owned. No such expense
was recorded during 2009.

(7) Loans Held for Sale

The loans held for sale portfolio at December 31, 2010 and 2009, consisted of the following:

(In thousands)

2010

2009Residential

$
174,231

$
160,722Construction-to-permanent


29,308


17,530203,539


178,252Net deferred costs


2,508


1,217Loans held for sale, net

$
206,047

$
179,469


Loans
that are classified as construction-to-permanent are those loans that provide variable rate financing for customers to construct their residences. Once the
home has been completed, the loan converts to fixed rate financing and is sold into the secondary market.

(8) Goodwill and Other Intangible Assets

Goodwill is tested for impairment on an annual basis or more frequently if events or circumstances warrant. The Company performs an analysis to compare the fair value of the reporting
unit to which the goodwill is assigned to the carrying value of the reporting unit. The Company makes estimates of the discounted cash flows from the expected future operations of the reporting unit.
If the analysis indicates that the fair value of the reporting unit is less than its carrying value, the Company completes an analysis to compare the implied fair value of the reporting unit's
goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all of its assets and liabilities. If the
implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized.

The
Company continually reviews its identifiable/definite lived intangible assets for impairment whenever events or changes in circumstances indicate that the remaining estimated useful
life of such assets might warrant revision or that the balances may not be recoverable. The Company evaluates possible impairment by comparing estimated future cash flows, before interest expense and
on an undiscounted basis, with the net book value of the long-term assets, including amortizable intangible assets. If undiscounted cash flows are insufficient to recover assets, further
analysis is performed in order to determine the amount of the impairment. An impairment loss is then recorded for the excess of the carrying amount of the assets over their fair values. Fair value is
usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.

During
2010, the Company performed its annual review of goodwill at Wilson/Bennett, a reporting unit within its Wealth Management and Trust Services segment, and recognized an impairment
charge

109

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8) Goodwill and Other Intangible Assets (Continued)

of
$451,000. The analysis included the use of the expected present value technique. This technique used the probability-weighted average of expected certainty equivalent cash flows. The cash flow
assumptions were determined based upon recent experience in growth or declines of assets under management,
recent expense trends and recent valuations of other asset management firms and the costs associated with executing our business plan.

Prior
to the second quarter of 2010, Wilson/Bennett and Cardinal Trust and Investments were separate reporting units within the Wealth Management and Trust Services business segment.
Both of these units manage financial assets for institutional clients and for upper middle class to wealthy individuals. Over time, the people and processes associated with the Wilson/Bennett and
Trust Division reporting units were assimilated to the point where the same group of employees were performing services for both subsidiaries; the subsidiaries had common customers/clients; and,
strategic and resource allocation decisions contemplated for the reporting units as if they were combined. The Company's annual assessment period for the goodwill associated with the Wilson/Bennett
reporting unit was the second calendar quarter. Beginning in the third quarter of 2010, the Wilson/Bennett and Cardinal Trust and Investments reporting units were combined into a single reporting unit
and evaluations of the recoverability of goodwill and other intangible assets are now based on the combined cash flows of these businesses.

During
the fourth quarter of 2010, the Company was notified by a large trust customer that it would solicit bids from other trust services providers. The Company was also notified that
an institutional wealth management customer was also closing its account. Because of the uncertainty surrounding these events, the Company performed an updated analysis of the recoverability of the
goodwill and intangible assets associated with this now combined reporting unit. While the Company was successful in retaining the large trust client, the projected reduction in net cash flows
indicated that the goodwill and other intangible assets were impaired resulting in the write-off of approximately $2.4 million in goodwill and $200,000 in unamortized intangible
assets. No goodwill or intangible assets remain on the balance sheet associated with this reporting unit as of December 31, 2010. Management continues to evaluate various operating strategies
with respect to this reporting unit.

During
the quarter ended September 30, 2010, the Company performed an updated evaluation of the goodwill associated with its acquisition of George Mason, which is included in the
mortgage banking segment. This analysis and valuation of this reporting unit was performed by a third party valuation consultant during the quarter ended September 30, 2009, and was based upon
the present value of projected cash flow using assumptions derived from current trends in mortgage banking activity and the expenses required to support the sales effort. The Company performed an
internal update of the analysis for the 2010 assessment. The fair value of the reporting unit is estimated to be in excess of $27 million, which is substantially in excess of its carrying value
of $19 million. As a result, no impairment was indicated.

For
the year ended December 31, 2009, no impairment was indicated in either reporting unit. For the year ended December 31, 2008, the Company recorded an impairment of
$2.8 million related to its George Mason reporting unit.

110

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8) Goodwill and Other Intangible Assets (Continued)

Information concerning amortizable intangibles follows:

Mortgage Banking

Wealth Management and Trust Services

Total(In thousands)

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
AmortizationBalance at December 31, 2008

$
1,781

$
841

$
795

$
536

$
2,576

$
1,3772009 activity:Customer relationship intangibles





198





22





220Trade name











18





18Balance at December 31, 2009

$
1,781

$
1,039

$
795

$
576

$
2,576

$
1,6152010 activity:Customer relationship intangibles





198


(105
)

22


(105
)

220Trade name








(74
)

18


(74
)

18Balance at December 31, 2010

$
1,781

$
1,237

$
616

$
616

$
2,397

$
1,853


The
aggregate amortization expense for 2010, 2009, and 2008 was $238,000, $238,000, and $245,000, respectively. The estimated amortization expense for the next three years is as follows:

(In thousands)2011

$
1982012


1982013


148


The
changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 were as follows:

(In thousands)

Commercial
Banking

Mortgage
Banking

Wealth
Management and
Trust Services

TotalBalance at December 31, 2008


22


10,120


2,832


12,9742009 activity:None











Balance at December 31, 2009

$
22

$
10,120

$
2,832

$
12,9742010 activity:Goodwill impairment charge








(2,832
)

(2,832
)Balance at December 31, 2010

$
22

$
10,120

$


$
10,142


111

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9) Premises and Equipment

Components of premises and equipment at December 31, 2010 and 2009 were as follows:

(in thousands)

2010

2009Land

$
5,454

$
4,350Buildings


6,680


6,667Furniture and equipment


16,700


16,140Leasehold improvements


6,972


6,613Total cost


35,806


33,770Less accumulated depreciation and amortization


(19,089
)

(18,027
)Premises and equipment, net

$
16,717

$
15,743


Depreciation
expense for the years ended December 31, 2010, 2009, and 2008, was $1.9 million, $1.9 million, and $2.4 million, respectively.

The
Company has entered into operating leases for office space over various terms. The leases generally have options to renew and are subject to annual increases as well as allocations
of real estate taxes and certain operating expenses.

Minimum
future rental payments under the no cancelable operating leases, as of December 31, 2010 were as follows:

(In thousands)

AmountYear ending December 31,2011

$
4,3692012


3,4482013


3,3172014


2,8512015


2,799Thereafter


12,281$
29,065


The
total rent expense was $5.5 million, $5.5 million, and $5.6 million in 2010, 2009, and 2008, respectively, and is recorded in occupancy expense in the
consolidated statements of income.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9) Premises and Equipment (Continued)

The
Company subleased excess office space to third parties. Future minimum lease payments under noncancelable subleasing arrangements as of December 31, 2010 were as follows:

(In thousands)

AmountYear ending December 31,2011

$
2222012


1102013


1052014


632015


$
500


The
total rent income was $374,000, $482,000, and $434,000, in 2010, 2009, and 2008, respectively, and is recorded as a reduction of occupancy expense in the consolidated statements of
income.

(10) Deposits

Deposits consist of the following at December 31, 2010 and 2009:

(In thousands)

2010

2009Non-interest bearing demand deposits

$
229,575

$
166,019Interest bearing deposits:Interest checking


135,395


129,795Money market and statement savings


379,320


353,694Certificates of deposit


659,435


647,497Total interest-bearing deposits


1,174,150


1,130,986Total deposits

$
1,403,725

$
1,297,005


Interest
expense by deposit categories is as follows:

(In thousands)

2010

2009

2008Interest checking

$
466

$
1,207

$
2,732Money market and statement savings


2,041


4,544


10,969Certificates of deposit


13,054


17,947


18,390Total interest expense

$
15,561

$
23,698

$
32,091


The
aggregate amount of certificates of deposit, each with a minimum denomination of $100,000 was $368.9 million and $388.0 million at December 31, 2010 and 2009,
respectively.

113

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(10) Deposits (Continued)

At
December 31, 2010, the scheduled maturities of certificates of deposit with a minimum denomination of $100,000 were as follows:

Maturities:

(In thousands)

Fixed Term

No-Penalty

TotalThree months or less

$
60,347

$
16,341

$
76,688Over three months through six months


47,109


5,224


52,333Over six months through twelve months


81,625


16,344


97,969Over twelve months


121,368


20,494


141,862$
310,449

$
58,403

$
368,852


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

Brokered
certificates of deposits at December 31, 2010 and 2009 were $88.4 million and $87.7 million, respectively.

At
December 31, 2010, the scheduled maturities of certificates of deposit were as follows:

(In thousands)2011

$
348,0242012


128,5252013


55,0642014


49,8632015


49,6172016


28,342$
659,435


(11) Other Borrowed Funds

At December 31, 2010 and 2009, other borrowed funds consisted of the following:

(In thousands)

2010

2009Fixed rate FHLB advances

$
280,000

$
280,000Federal Funds purchased





45,000Repurchase agreements


87,497


79,974Payable to Statutory Trust I


20,619


20,619Treasury, tax & loan note option


1,470


1,986$
389,586

$
427,579


The
Company had fixed rate advances from the FHLB totaling $280.0 million at each of December 31, 2010 and 2009. These advances mature through 2018 and have interest rates
ranging from 1.17% to 5.00%. Certain fixed rate FHLB advances have call options through 2013.

114

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11) Other Borrowed Funds (Continued)

The
contractual maturities of the fixed rate advances for each of December 31, 2010 and 2009 were as follows:

(In thousands)At December 31, 2010Type of Advance

Interest Rate

Advance Term

Maturity Date

BalanceARC Fixed Rate Hybrid


1.17%

24 months


2012

$
10,000ARC Fixed Rate Hybrid


3.52%

48 months


2012


5,000Convertible


4.244.52%

60 months


2011


15,000Convertible


3.645.00%

60 months


2012


75,000Convertible


2.573.19%

60 months


2013


20,000Convertible


3.934.55%

120 months


2016


50,000Convertible


3.104.85%

120 months


2017


80,000Convertible


2.81%4.00%

120 months


2018


25,000Total FHLB Advances


3.90%






$
280,000




(In thousands)At December 31, 2009Type of Advance

Interest Rate

Advance Term

Maturity Date

BalanceARC Fixed Rate Hybrid


3.30%

24 months


2010

$
10,000ARC Fixed Rate Hybrid


3.52%

48 months


2012


5,000Convertible


4.244.52%

60 months


2011


15,000Convertible


3.645.00%

60 months


2012


75,000Convertible


2.573.19%

60 months


2013


20,000Convertible


3.934.55%

120 months


2016


50,000Convertible


3.104.85%

120 months


2017


80,000Convertible


2.81%4.00%

120 months


2018


25,000Total FHLB Advances


3.98%






$
280,000


The
average balances of FHLB advances for each of the years ended December 31, 2010 and 2009 were $280.0 million. The maximum amount outstanding at any
month-end for each of the years ended December 31, 2010 and 2009 was $280.0 million. Total interest expense on FHLB advances for the years ended December 31, 2010,
2009, and 2008 was $11.2 million, $11.3 million, and $11.0 million, respectively.

Securities
sold under agreements to repurchase generally mature within one to four days and are reflected in the consolidated statements of financial condition at the amount of cash
received. The Company's deposit customers are the counterparties to these types of financial instruments. At December 31, 2010 and 2009 the Company had repurchase agreements of
$87.5 million and $80.0 million, respectively. The weighted-average interest rate of these repurchase agreements was 0.25% and 0.46% at December 31, 2010 and 2009, respectively.
The average balances of repurchase agreements during 2010 and 2009 were $80.0 million and $71.5 million, respectively, and the maximum amount outstanding at any month-end
during 2010 and 2009 was $98.0 million and $90.1 million, respectively. Interest expense on repurchase agreements for 2010, 2009, and 2008 was $196,000, $326,000, and
$1.2 million, respectively.

115

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11) Other Borrowed Funds (Continued)

The
Company had no outstanding federal funds purchased at December 31, 2010. At December 31, 2009, the Company had federal funds purchased of $45.0 million. During
2010, the Company did have federal funds purchased outstanding at certain times during the year. Interest expense on federal funds purchased in 2010, 2009, and 2008 was $45,000, $9,000, and $141,000,
respectively. The Company had no outstanding short-term dealer repurchase agreements at each of December 31, 2010 and 2009. Interest expense on short-term dealer
repurchase agreements for the years ended December 31, 2010, 2009, and 2008, were $0, $0, and $10,000, respectively.

The
Company has a Treasury, Tax, & Loan ("TT&L") note option with the Federal Reserve. At December 31, 2010 and 2009, the outstanding balance in the TT&L
note option was $1.5 million and $2.0 million, respectively. Interest expense related to the TT&L note option in 2010, 2009, and 2008 was $0, $1,000, and $27,000, respectively. The
Company has a line of credit at the Federal Reserve discount window in the amount of $106.4 million December 31, 2010, none of which was drawn as of that date. There was no interest
expense related to the discount window in 2010, 2009, and 2008.

In
July 2004, the Company formed a wholly-owned subsidiary, Cardinal Statutory Trust I (the "Trust"), for the purpose of issuing $20.0 million of floating rate
junior subordinated deferrable interest debentures ("trust preferred securities"). These trust preferred securities are due in 2034 and have an interest rate of LIBOR (London Interbank Offered Rate)
plus 2.40%, which adjusts quarterly. At December 31, 2010, the interest rate on trust preferred securities was 2.70%. These securities are redeemable at par beginning September 2009. The
Company has guaranteed payment of these securities. The $20.6 million payable by the Company to the Trust is included in other borrowed funds. The Trust is an unconsolidated subsidiary since
the Company is not the primary beneficiary of this entity. The additional $619,000 that is payable by the Company to the Trust represents the Company's unfunded capital investment in the Trust. The
Company utilized the proceeds from the issuance of the trust preferred securities to make a capital contribution into the Bank. Interest expense on the trust preferred securities in 2010, 2009, and
2008 was $821,000, $888,000, and $1.2 million, respectively.

The
scheduled maturities of other borrowed funds at December 31, 2010 were as follows:

(In thousands)

2011

2012

2013

2014

2015

2016 and
ThereafterFHLB advances

$
15,000

$
90,000

$
20,000

$


$


$
155,000Repurchase agreements


87,497














Payable to Statutory Trust I

















20,619TT&L note option


1,470














$
103,967

$
90,000

$
20,000

$


$


$
175,619


(12) Proceeds from Issuance of Common Stock

During 2009, the Company completed a secondary common stock offering. The Company issued 4,378,302 shares of its common stock at $7.75 per shares for net proceeds of
$31.6 million.

(13) Income Taxes

The Company and its subsidiaries file consolidated federal tax returns on a calendar-year basis. For the years ended December 31, 2010 and 2009, the Company recorded
income tax expense of

116

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(13) Income Taxes (Continued)

$8.0 million
and $4.4 million, respectively. For the year ended December 31, 2008, the Company recorded an income tax benefit of $912,000.

The
provision for income tax expense is reconciled to the amount computed by applying the federal corporate tax rate to income before taxes as follows:

(In thousands)

2010

2009

2008Income tax at federal corporate rate of 35% for 2010, 34.5% for 2009 and 34% for 2008

$
9,262

$
5,076

$
(213
)Change in valuation allowance


(31
)

58


228Change in the carrying rate of deferred tax assets and liabilities


(168
)

(142
)

52Expected state tax benefit of losses of nonbank entities


31


(58
)

(228
)State tax expense, net of federal tax benefit


166


69


6Nontaxable income


(1,053
)

(741
)

(764
)Nondeductible expenses


61


98


103Other


(247
)

28


(96
)$
8,021

$
4,388

$
(912
)


The
components of income tax expense (benefit) are as follows:

(In thousands)

2010

2009

2008Included in net incomeCurrentFederal

$
11,366

$
3,732

$
1,522State


325


78


59Total current


11,691


3,810


1,581DeferredFederal


(3,578
)

564


(2,477
)State


(92
)

14


(16
)Total deferred


(3,670
)

578


(2,493
)Total included in net income

$
8,021

$
4,388

$
(912
)Included in shareholders' equity:Deferred tax expense related to the change in the net unrealized gain on investment securities available for sale

$
1,125

$
1,580

$
289Deferred tax expense (benefit) related to the change in the net unrealized gain (loss) on derivative instruments designated as cash flow hedges


(454
)

169


43Total included in shareholders' equity

$
671

$
1,749

$
332


117

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(13) Income Taxes (Continued)

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

(In thousands)

2010

2009Deferred tax assets:Allowance for loan losses

$
8,739

$
7,201Net operating state loss carryforwards


1,587


1,618Unrealized losses on derivative instruments designated as cash flow hedges


509


55Deferred compensation


3,270


2,281Depreciation


866


948Other


1,865


1,023Total gross deferred tax assets


16,836


13,126Less valuation allowance


(1,587
)

(1,618
)Net deferred tax assets


15,249


11,508Deferred tax liabilities:Unrealized gains on investment securities available-for-sale


(2,946
)

(1,821
)Goodwill and intangibles, net


(74
)

(659
)Fair value adjustments


(1,024
)

(712
)Prepaid expenses


(101
)

(99
)Loan origination costs


(414
)

(526
)Total gross deferred tax liabilities


(4,559
)

(3,817
)Net deferred tax asset

$
10,690

$
7,691


Deferred
tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement purposes that will reverse
in future periods. When uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset may be reduced by a valuation allowance. Valuation allowances of
$1.6 million for each of December 31, 2010 and 2009 have been established for deferred tax assets. This valuation allowance relates primarily to the state net operating losses of the
parent company, CWS and Wilson/Bennett as realization is dependent upon generating future taxable income within those entities and in the specific jurisdiction. The realization of this deferred tax
asset is dependent upon generating future taxable income. There is uncertainty concerning the recoverability of these state net operating losses as the entities which own these losses have never
operated profitably and future profitability is uncertain. Management believes that future operations of the Company will generate sufficient taxable income to realize the net deferred tax assets at
each of December 31, 2010 and 2009.

As
of December 31, 2010 and 2009, the Company had no unrecognized tax benefits. The Company had no interest expense or tax penalties related to uncertain tax positions during the
years ended December 31, 2010 and 2009. If the Company had such expenses, they would be classified in the consolidated statements of income as part of the provision for income tax expense.

118

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14) Derivative Instruments and Hedging Activities

Forward Mortgage Loan Sales Commitments and Interest Rate Lock Commitments

The Company enters into rate lock commitments with its mortgage customers. The Company is also a party to forward mortgage loan sales
contracts to sell loans servicing released. The rate lock commitment and forward sale agreement are undesignated derivatives and marked to fair value through earnings. The fair value of the rate lock
derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates. Realized and unrealized gains on mortgage banking activities presents
the gain recognized for the period presented and associated with these elements of fair value. On the date the mortgage loan closes, the loan held for sale is designated as the hedged item in a cash
flow hedge relationship. The forward loan sale commitment is the hedging derivative.

At
December 31, 2010 and 2009, accumulated other comprehensive income included an after unrealized gain (loss), net of tax, of ($650,000) and $6,500, respectively, related to
forward loan sale contracts designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within sixty days of closing and, therefore, substantially all of the
amount recorded in accumulated other comprehensive income at December 31, 2010 which is related to the Company's cash flow hedges will be recognized in earnings during the first quarter of
2011. At December 31, 2010 the Company recognized minimal amounts due to hedge ineffectiveness.

At
December 31, 2010, the Company had $87.8 million in residential mortgage rate lock commitments and associated forward sales and had $182.0 million in forward loan
sales associated with $182.0 million of loans that had closed and were presented as held for sale. At December 31, 2010, the derivative asset was $4.7 million and the derivative
liability was $2.8 million.

At
December 31, 2009, the Company had $71.0 million in residential mortgage rate lock commitments and associated forward sales and had $163.4 million in forward loan
sales associated with $163.4 million of loans that had closed and were presented as held for sale. At December 31, 2009, the derivative asset was $4.6 million and the derivative
liability was $1.6 million.

Interest Rate Risk ManagementCash Flow Hedging Instruments

The Company uses long-term variable rate debt as a source of funds for use in the Company's lending and investment
activities and other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest
expense increases. Conversely, if interest rates
decrease, interest expense decreases. The Company believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its
variable-rate interest payments. To meet this objective and during 2008, the Company entered into interest rate swap agreements whereby the Company receives variable interest rate payments
and makes fixed interest rate payments during the contract period.

119

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14) Derivative Instruments and Hedging Activities (Continued)

At
December 31, 2010 and 2009, the information pertaining to outstanding interest rate swap agreements used to hedge variable rate debt (trust preferred securities which is
included in other borrowed funds on the statement of condition) is as follows:

(Dollars in thousands)

2010

2009Notional amount

$
10,000

$
10,000Weighted average pay rate


3.97
%

3.97
%Weighted average receive rate


1.54
%

1.45
%Weighted average maturity in years


3 years


4 yearsUnrealized loss relating to interest rate swaps

$
187

$
148


These
agreements provided for the Company to receive payments at a variable rate determined by a specific index (three month LIBOR) in exchange for making payments at a fixed rate. At
December 31, 2010, the unrealized loss relating to interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported
in other comprehensive income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the long-term
debt affects earnings. The cash flow hedging relationships were highly effective during 2010 and the amount of ineffectiveness was de minimus.

Interest Rate Risk ManagementFair Value Hedging Instruments

The Company originates fixed and variable rate loans. Fixed rate loans expose the Company to variability in their fair value due to
changes in the level of interest rates. The Company believes it is prudent to limit the variability in the fair value of a portion of its fixed rate loan portfolio. The Company also believes it is
economically prudent to keep hedge coverage ratios at
acceptable risk levels, which may vary depending on current and expected interest rate movement. It is the Company's objective to hedge the change in fair value of fixed rate loans at coverage levels
that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this asset to other assets of the Company. To meet
this objective, the Company utilizes interest rate swaps as an asset/liability management strategy to hedge the change in value of the loans due to changes in expected interest rate assumptions.
During 2006, the Company entered into an interest rate swap to hedge the change in fair value of one loan receivable. This interest rate swap agreement requires a series of floating rate payments in
exchange for receiving a series of fixed rate payments.

At
December 31, 2010 and 2009, the information pertaining to the single outstanding interest rate swap agreement used to hedge fixed-rate loans is as follows:

(Dollars in thousands)

2010

2009Notional amount

$
11,603

$
11,795Weighted average pay rate


5.42
%

5.42
%Weighted average receive rate


0.28
%

0.23
%Weighted average maturity in years


3 years


4 yearsUnrealized loss relating to interest rate swaps

$
1,402

$
1,283


120

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14) Derivative Instruments and Hedging Activities (Continued)

The
agreement provides for the Company to make payments at a variable rate determined by a specified index (one month LIBOR) in exchange for receiving payments at a fixed rate.

At
December 31, 2010 and 2009, the unrealized loss relating to use of interest rate swap was recorded in other income with an offsetting gain for the fair value of the loan. The
fair value of the loan is included in loans receivable on the statement of condition. The hedge relationship has been effective since inception and is forecasted to remain effective. Ineffectiveness
reflected in earnings is immaterial for the periods presented.

(15) Fair Value of Derivative Instruments and Hedging Activities

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

Derivative Instruments and Hedging Activities  At of December 31, 2010  (in thousands)

Asset Derivatives

Liability DerivativesBalance Sheet
Location

Fair Value

Balance Sheet
Location

Fair ValueDerivatives Designated as Hedging InstrumentsInterest Rate Swaps

Accrued Interest Receivable and Other Assets

$


Accrued Interest Payable and Other Liabilities

$
1,837Forward Loan Sales Commitments

Accrued Interest Receivable and Other Assets


1,465

Accrued Interest Payable and Other Liabilities


2,441Total Derivatives Designated as Hedging Instruments




1,465




4,278Derivatives Not Designated as Hedging InstrumentsRate Lock and Forward Loan Sales Commitments

Accrued Interest Receivable and Other Assets


2,951

Accrued Interest Payable and Other Liabilities


264Rate Lock Commitments

Accrued Interest Receivable and Other Assets


264

Accrued Interest Payable and Other Liabilities


77Total Derivatives Not Designated as Hedging Instruments




3,215




341Total Derivatives



$
4,680



$
4,619


121

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(15) Fair Value of Derivative Instruments and Hedging Activities (Continued)

Derivative Instruments and Hedging Activities  At of December 31, 2009  (in thousands)

Asset Derivatives

Liability DerivativesBalance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueDerivatives Designated as Hedging InstrumentsInterest Rate Swaps

Accrued Interest Receivable and Other Assets

$
5

Accrued Interest Payable and Other Liabilities

$
1,437Forward Loan Sales Commitments

Accrued Interest Receivable and Other Assets


2,163

Accrued Interest Payable and Other Liabilities


1,194Total Derivatives Designated as Hedging Instruments




2,168




2,631Derivatives Not Designated as Hedging InstrumentsRate Lock and Forward Loan Sales Commitments

Accrued Interest Receivable and Other Assets


2,444

Accrued Interest Payable and Other Liabilities


3Rate Lock Commitments

Accrued Interest Receivable and Other Assets


3

Accrued Interest Payable and Other Liabilities


407Total Derivatives Not Designated as Hedging Instruments




2,447




410Total Derivatives



$
4,615



$
3,041


122

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(15) Fair Value of Derivative Instruments and Hedging Activities (Continued)

Impact of Derivative Instruments on the Statement of Income  For the Year Ended December 31, 2010  (in thousands)

Locations of Gain
(Loss) Recognized
in Income on
Derivative

Amount of Gain
(Loss) Recognized
in Income on
Derivative

Location of Gain
(Loss) Recognized
in Income on
Hedged Item

Amount of Gain
(Loss) Recognized
in Income on
Hedged ItemDerivatives in Fair Value Hedging RelationshipsInterest Rate Swaps


Other Income

$
118


Other Income

$
(118
)Total




$
118




$
(118
)




Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivative
(Effective
Portion)

Location of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

Amount of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

Location of Gain
(Loss) Recognized
in Income on
Derivative
(Ineffective
Portion and
Amount Excluded
from
Effectiveness
Testing)

Amount of Gain
(Loss) Recognized
in Income on
Derivative
(Ineffective
Portion and
Amount Excluded
from
Effectiveness
Testing)Derivatives in Cash Flow Hedging RelationshipsInterest Rate Swaps

$
(187
)

Other Income

$



Other Income

$
Forward Loan Sales Commitments


(650
)

Other Income


548


Other Income


1Total

$
(837
)



$
548




$
1




Amount of Gain
(Loss) Recognized
in Income
on Derivative

Location of Gain
(Loss) Recognized
in Income
on DerivativeDerivatives Not Designated as Hedging InstrumentsForward Loan Sales Commitments

$
16,813

Realized and unrealized gains on mortgage banking activitiesForward Loan Sales Commitments


600

Other IncomeRate Lock Commitments


(600
)
Other IncomeTotal

$
16,813


123

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(15) Fair Value of Derivative Instruments and Hedging Activities (Continued)

Impact of Derivative Instruments on the Statement of Income  For the Year Ended December 31, 2009  (in thousands)

Locations of Gain
(Loss) Recognized
in Income
on Derivative

Amount of Gain
(Loss) Recognized
in Income
on Derivative

Location of Gain
(Loss) Recognized
in Income on
Hedged Item

Amount of Gain
(Loss) Recognized
in Income on
Hedged ItemDerivatives in Fair Value Hedging RelationshipsInterest Rate Swaps


Other Income

$
582


Other Income

$
(582
)Total




$
582




$
(582
)




Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivative
(Effective
Portion)

Location of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

Amount of Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into
Income (Effective
Portion)

Location of Gain
(Loss) Recognized
in Income on
Derivative
(Ineffective
Portion and
Amount Excluded
from
Effectiveness
Testing)

Amount of Gain
(Loss) Recognized
in Income on
Derivative
(Ineffective
Portion and
Amount Excluded
from
Effectiveness
Testing)Derivatives in Cash Flow Hedging RelationshipsInterest Rate Swaps

$
(102
)

Other Income

$



Other Income

$
Forward Loan Sales Commitments


(218
)

Other Income


1,218


Other Income


1Total

$
(320
)



$
1,218




$
1




Amount of Gain
(Loss) Recognized
in Income
on Derivative

Location of Gain
(Loss) Recognized
in Income
on DerivativeDerivatives Not Designated as Hedging InstrumentsForward Loan Sales Commitments

$
2,037

Realized and unrealized gains on mortgage banking activitiesForward Loan Sales Commitments


(404
)
Other IncomeRate Lock Commitments


404

Other IncomeTotal

$
2,037


(16) Regulatory Matters

The Bank, as a state-chartered bank, is subject to the dividend restrictions established by the State Corporation Commission of the Commonwealth of Virginia. Under such restrictions, the
Bank may not, without the prior approval of the Bank's primary regulator, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined)
from the prior two years. At December 31, 2010, there were approximately $68.2 million of accumulated earnings at the Bank which could be paid as dividends to the Company.

124

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(16) Regulatory Matters (Continued)

The Bank is required to maintain a minimum non-interest earning clearing balance with the Federal Reserve Bank. The average amount of the clearing balance was
$1.0 million for 2010.

The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires banking regulators to stratify banks into five quality tiers based upon their relative capital
strengths and increase
the regulation of the weaker institutions. The key measures of capital are: (1) total capital (Tier I capital plus the allowance for loan losses up to certain limitations) as a percent
of total risk-weighted assets, (2) Tier I capital (as defined) as a percent of total risk-weighted assets (as defined), and (3) Tier I capital (as
defined) as a percent of total average assets (as defined).

The
regulatory capital of the Company at December 31, 2010 and 2009 is as follows:

Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAt December 31, 2010
(In thousands)

Amount

Ratio

Amount



Ratio

Amount



RatioTotal capital to risk weighted assets

$
248,294


14.06
%
$
141,284

3


8.00
%
$
176,606

3


10.00
%Tier I capital to risk weighted assets


223,789


12.67
%

70,642

3


4.00
%

105,963

3


6.00
%Tier I capital to average assets


223,789


10.82
%

82,753

3


4.00
%

103,441

3


5.00
%At December 31, 2009
(In thousands)Total capital to risk weighted assets

$
226,137


14.15
%
$
127,869

3


8.00
%
$
159,837

3


10.00
%Tier I capital to risk weighted assets


207,286


12.97
%

63,935

3


4.00
%

95,902

3


6.00
%Tier I capital to average assets


207,286


11.03
%

75,185

3


4.00
%

93,981

3


5.00
%


The regulatory capital of the Bank at December 31, 2010 and 2009 is as follows:

Actual



For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAt December 31, 2010
(In thousands)

Amount

Ratio

Amount



Ratio

Amount



RatioTotal capital to risk-weighted assets

$
232,274


13.25
%
$
140,262

3


8.00
%
$
175,328

3


10.00
%Tier I capital to risk-weighted assets


207,768


11.85
%

70,131

3


4.00
%

105,197

3


6.00
%Tier I capital to average assets


207,768


10.09
%

82,283

3


4.00
%

102,979

3


5.00
%At December 31, 2009
(In thousands)Total capital to risk-weighted assets

$
206,413


12.98
%
$
127,257

3


8.00
%
$
159,071

3


10.00
%Tier I capital to risk-weighted assets


187,562


11.79
%

63,629

3


4.00
%

95,443

3


6.00
%Tier I capital to average assets


187,562


10.02
%

74,884

3


4.00
%

93,605

3


5.00
%


At December 31, 2010 and 2009, the Company and the Bank met all regulatory capital requirements and are considered
"well-capitalized" from a regulatory perspective.

George
Mason is also required to maintain defined capital levels under Department of Housing and Urban Development guidelines. At December 31, 2010 and 2009, George Mason
maintained capital in excess of these required guidelines.

125

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17) Related-Party Transactions

Certain directors, officers and employees and/or their related business interests are at present, as in the past, banking customers in the ordinary course of business of the Company. As
such, the Company has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with non-related parties and do not involve
more than normal risk of collectability or present other unfavorable features.

Analysis
of activity for loans to related parties follows:

(In thousands)

2010

2009Balance, beginning of year

$
45,403

$
50,707New loans


708


7,070Loans paid off or paid down


(9,489
)

(12,374
)Balance, end of year

$
36,622

$
45,403


George
Mason leases its headquarters office space from a director of the Company who is the manager and a 3.1% owner of the limited liability company that owns the building in which the
space is leased. The lease was renewed during 2010 and will terminate on June 30, 2011 without an option to extend. The rent that George Mason pays for the use of this space under the existing
lease is $982,000 annually. Rent payments totaled $1.0 million in 2010, $1.3 million in 2009, and $848,000 in 2008. During 2010, the Company leased branch office space from a director
who has an indirect ownership in the building. Certain of his immediate family members own a minority interest in the limited liability company that owns the building. The rent that the Bank pays for
use of this space under the existing lease is $29,000 beginning in 2011.

(18) Earnings Per Common Share

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

(In thousands, except per share data)

2010

2009

2008Net income

$
18,442

$
10,325

$
286Weighted average shares for basic


29,123


27,186


24,370Weighted average shares for diluted


29,608


27,674


24,837Basic earnings per common share

$
0.63

$
0.38

$
0.01Diluted earnings per common share

$
0.62

$
0.37

$
0.01


126

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(18) Earnings Per Common Share (Continued)

The
following shows the composition of basic outstanding shares for the years ended December 31, 2010, 2009, and 2008:

(in thousands)

2010

2009

2008Weighted average shares outstandingbasic


28,746


26,881


24,127Weighted average shares attributable to deferred compensation plans


377


305


243Total weighted average sharesbasic


29,123


27,186


24,370


Weighted
average shares for the basic earnings per share calculation is increased by the number of shares required to be issued under the Company's various deferred compensation plans.
These plans provide for a Company match. The Company match must be in common stock of the Company.

The
following shows the composition of diluted outstanding shares for the years ended December 31, 2010, 2009, and 2008:

(in thousands)

2010

2009

2008Weighted average shares outstandingbasic


28,746


26,881


24,127Weighted average shares attributable to deferred compensation plans


628


663


567Weighted average shares attributable to vested stock options


234


130


143Total weighted average sharesdiluted


29,608


27,674


24,837


During
2009, the Company issued 4,378,302 shares of its common stock for net proceeds of $31.6 million.

Employees
who participate in the Company's deferred compensation plans can allocate, at their discretion, their contributions to various investment options, including an option to invest
in Company Common Stock. The incremental weighted average shares attributable to the deferred compensation
plans included in diluted outstanding shares assumes the participants opt to invest all of their contributions into the Company's Common Stock investment option.

Antidilutive
outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation for the years ended December 31, 2010,
2009, and 2008, were 50,976, 289,894, and 319,509. These stock options have exercise prices that were greater than the average market price of the Company's common stock for the year. In addition, for
December 31, 2010, 2009, and 2008, there are no incremental shares related to unvested stock options because the addition of these shares to the diluted weighted average share calculation would
be antidilutive.

(19) 401(k) Plan

Employees who work twenty (20) hours or more a week and have been employed by the Company for a month can elect to participate in and make contributions into a 401(k) Plan. The
Company contributes $0.50 for $1.00 of employee contributions up to a maximum of 3% of the employee's

127

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(19) 401(k) Plan (Continued)

contribution.
Expense related to the Company's match in 2010, 2009, and 2008, was $590,000, $511,000, and $495,000, respectively. Employees are immediately vested in the Company's matching
contribution.

(20) Deferred Compensation Plans

The Company has deferred compensation plans for its directors and certain employees. Under the directors' plan, a director may elect to defer all or a portion of any director-related
fees including fees for serving on board committees. Under the employees' plan, certain employees may defer all or a portion of their compensation including any bonus or commission compensation.
Director and employee deferrals, other than employees of George Mason, are matched 50% by the Company. Deferrals made by employees of George Mason are not eligible for the Company match. The amount of
the Company match is deemed invested in Company common stock which vests immediately for the directors and after four years for employees. The maximum Company match per employee is $50,000 per year
and $10,000 per year per director. Expense relating to the deferred compensation plans for the years ended December 31, 2010, 2009, and 2008 was $486,000, $206,000, and $240,000, the employee
portion of which is included in salary and benefits expense and the directors portion of the expense is included in other operating expense in the consolidated statements of income.

The
deferred compensation plan liability at December 31, 2010 and 2009 was $5.2 million and $3.8 million, respectively. The trust established for the deferred
compensation plan is funded as of December 31, 2009. During 2009, the company issued 287,000 shares of common stock to fund the Company's obligation to its participants that had elected the
Cardinal Common Stock investment option in the various nonqualified deferred compensation plans. These shares were issued at $5.45 per share which resulted in an increase of $1.6 million to
shareholders' equity.

(21) Director and Employee Stock-Based Compensation Plans

At December 31, 2010, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan (the "Option Plan") and the 2002 Equity Compensation Plan (the
"Equity Plan").

In
1998, the Company adopted the Option Plan pursuant to which the Company may grant stock options for up to 625,000 shares of the Company's common stock to employees and members of the
Company's and its subsidiaries' boards of directors. As of November 23, 2008, the Option Plan expired, and therefore, there are no shares of common stock available to grant under this plan.

In
2002, the Company adopted the Equity Plan. The Equity Plan authorizes the granting of options, which may be incentive stock options or non-qualified stock options, stock
appreciation rights, restricted stock awards, phantom stock awards or performance share awards to directors, eligible officers and key employees of the Company. In 2006, the shareholders approved an
amendment to the Equity Plan to increase the number of shares of common stock reserved for issuance under it from 1,970,000 to 2,420,000. There are 328,918 shares of the Company's common stock
available for future grants and awards in the Equity Plan as of December 31, 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(21) Director and Employee Stock-Based Compensation Plans (Continued)

The
following tables present a summary of the Company's stock option activity for the years ended December 31, 2010, 2009, and 2008:

Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value ($000)Outstanding at December 31, 2009


2,139,433

$
8.43Granted


150,000


10.44Exercised


(52,010
)

3.92Forfeited


(33,710
)

9.41Expired


(6,424
)

4.39Outstanding at December 31, 2010


2,197,289

$
8.67


4.37

$
6,495,672Options exercisable at December 31, 2010


1,985,789

$
8.36


4.23

$
5,928,056




Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value ($000)Outstanding at December 31, 2008


2,364,733

$
8.70Granted


139,650


6.60Exercised


(38,777
)

4.42Forfeited


(317,400
)

10.17Expired


(8,773
)

6.38Outstanding at December 31, 2009


2,139,433

$
8.43


4.94

$
656,450Options exercisable at December 31, 2009


1,945,733

$
8.40


4.64

$
663,345




Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value ($000)Outstanding at December 31, 2007


2,428,353

$
8.53Granted


17,200


7.13Exercised


(11,570
)

4.83Forfeited


(69,250
)

10.05Outstanding at December 31, 2008


2,364,733

$
8.70


5.65

$
(6,913,013
)Options exercisable at December 31, 2008


2,198,133

$
8.46


5.52

$
(5,889,022
)


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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(21) Director and Employee Stock-Based Compensation Plans (Continued)

Information
pertaining to stock options outstanding at December 31, 2010 is as follows:

At December 31, 2010

Options Outstanding

Options ExercisableWeighed AverageRange of Exercise Prices

Number
Outstanding

Remaining
Contractual Life

Exercise
Price

Number
Exercisable

Weighted
Average
Exercise Price$3.25$4.41


156,300

1.3 years

$
3.76


156,300

$
3.76$4.50$5.25


279,090

2.1 years


4.95


279,090


4.95$5.95$8.28


365,189

5.0 years


7.63


288,389


8.00$8.39$9.59


491,926

4.3 years


8.93


482,876


8.93$9.78$10.91


528,000

5.1 years


10.50


443,450


10.60$11.05$12.65


376,784

5.8 years


11.59


335,684


11.55Outstanding at year end


2,197,289

4.37


8.67


1,985,789


8.36


Total
intrinsic value of options exercised during the years ended December 31, 2010, 2009, and 2008, was $406,000, $168,000, and $10,000, respectively.

A
summary of the status of the Company's non-vested stock options and changes during the year ended December 31, 2010 is as follows:

Number of
Shares

Weighted Average
Grant Date
Fair ValueBalance at December 31, 2009


193,700

$
4.00Granted


150,000


4.64Vested


(118,250
)

4.97Forfeited


(13,950
)

3.78Balance at December 31, 2010


211,500

$
3.93


At
December 31, 2010, there was $908,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the
plans. The expense is expected to be recognized over a weighted average period of 3.0 years. The total fair value of shares that vested during the years ended December 31, 2010, 2009,
and 2008, was $588,000, $295,000, and $337,000, respectively.

(22) Segment Reporting

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22) Segment Reporting (Continued)

primarily
in the origination and acquisition of residential mortgages for sale into the secondary market on a best efforts basis. The wealth management and trust services segment provides investment
and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, trust, estates, custody, investment management, escrows, and retirement plans.

Information
about the reportable segments and reconciliation of this information to the consolidated financial statements as of and for the years ended December 31, 2010, 2009,
and 2008 follows:

(In thousands)

At and for the Year Ended December 31, 2010:

Commercial
Banking

Mortgage
Banking

Wealth Management
and Trust
Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
67,480

$
2,385

$


$
(820
)
$


$
69,045Provision for loan losses


10,502














10,502Non-interest income


3,975


19,203


4,102


205


(96
)

27,389Non-interest expense


37,226


11,103


6,798


4,438


(96
)

59,469Provision for income taxes


7,432


3,640


(942
)

(2,109
)




8,021Net income (loss)

$
16,295

$
6,845

$
(1,754
)
$
(2,944
)
$


$
18,442Total Assets

$
2,051,529

$
220,946

$
592

$
251,100

$
(452,149
)
$
2,072,018


At and for the Year Ended December 31, 2009:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and Trust
Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
48,712

$
2,717

$


$
(887
)
$


$
50,542Provision for loan losses


6,656


94











6,750Non-interest income


3,993


16,213


3,639


(413
)

(84
)

23,348Non-interest expense


34,104


12,779


3,156


2,472


(84
)

52,427Provision for income taxes


3,566


2,084


162


(1,424
)




4,388Net income (loss)

$
8,379

$
3,973

$
321

$
(2,348
)
$


$
10,325Total Assets

$
1,943,223

$
199,704

$
3,433

$
230,962

$
(401,137
)
$
1,976,185


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22) Segment Reporting (Continued)

At and for the Year Ended December 31, 2008:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and Trust
Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
40,747

$
3,418

$


$
(1,192
)
$


$
42,973Provision for loan losses


4,290


1,208











5,498Non-interest income


4,806


9,494


3,477


35





17,812Non-interest expense


34,152


15,824


3,402


2,535





55,913Provision (benefit) for income taxes


1,785


(1,438
)

28


(1,287
)




(912
)Net income (loss)

$
5,326

$
(2,682
)
$
47

$
(2,405
)
$


$
286Total Assets

$
1,708,233

$
165,791

$
3,505

$
180,683

$
(314,455
)
$
1,743,757


During
the year ended December 31, 2010, the Company recorded a non-cash impairment loss of $3.0 million pretax ($2.0 million after tax) through the
wealth management and trust services business segment.

During
the year ended December 31, 2008, the Company recorded a loss of $4.4 million pretax ($2.9 million after tax) from the impairment of Fannie Mae Perpetual
Preferred Stock. This loss was recorded through the commercial banking segment. In the mortgage banking segment, the Company recorded losses of $1.8 million pretax ($1.2 million after
tax) and $2.8 million pretax ($1.8 million after tax) from a settlement with a mortgage correspondent and impairment of goodwill, respectively.

The
Company did not have any operating segments other than those reported. Parent company financial information is included in the "Other" category and represents an overhead function
rather than an operating segment. The parent company's most significant assets are its net investments in its subsidiaries. The parent company's net interest expense is comprised of interest income
from short-term investments and interest expense on trust preferred securities.

(23) Financial Instruments with Off Balance Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition
established in the contract. Commitments usually have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments represent obligations of the Company to extend credit or
guarantee borrowings and are not recorded on the consolidated statements of financial condition. The rates and terms of these instruments are competitive with others in the market in which the Company
operates.

Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of the contractual obligations by a customer to a third party. The majority of
these

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(23) Financial Instruments with Off Balance Sheet Risk (Continued)

guarantees
extend until satisfactory completion of the customer's contractual obligations. All standby letters of credit outstanding at December 31, 2010 are collateralized.

Commitments
to extend credit of $87.8 million as of December 31, 2010 are related to George Mason's mortgage loan funding commitments and are of a short term nature.
Commitments to extend credit of $438.8 million primarily have floating rates as of December 31, 2010. It is uncertain as to the amount, if
any, that the Company will be required to fund on these commitments as many such arrangements expire with no amount drawn.

Those
instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.
Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument fail to perform in accordance with the terms of the contract. The Company's maximum
exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amounts of those instruments.

A
summary of the contract amount of the Bank's exposure to off-balance-sheet risk as of December 31, 2010 and 2009 is as follows:

(In thousands)

2010

2009Financial instruments whose contract amounts represent potential credit risk:Commitments to extend credit

$
526,636

$
409,439Standby letters of credit


22,279


13,877


The
fair value of the liability associated with standby letters of credit at December 31, 2010 and 2009 was immaterial.

George
Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan
application or for which appraisals were not acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its
investors related to loan sales activities. The Company evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts
paid to settle such claims. During the past two years, the Company has taken steps to limit its exposure to such loan repurchases through agreements entered into with various investors. During 2010,
the Company experienced favorable results in resolving various investor claims and has reduced its reserve related to such claims. At December 31, 2010, the Company had no outstanding loan
repurchases or settlements.

During
2010 and 2009, George Mason either repurchased from or settled with investors on such loans for a total of $1.0 million and $2.6 million, respectively. At
December 31, 2010 and 2009, this reserve had a balance of $0 and $1.7 million, respectively. The expense (benefit) related to this reserve for the years ended December 31, 2010,
2009, and 2008 was ($686,000), $2.6 million, and $2.0 million, respectively.

The
Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company evaluates each customer's
creditworthiness on a case-by-case basis and requires collateral to support financial instruments when deemed necessary. The

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(23) Financial Instruments with Off Balance Sheet Risk (Continued)

amount
of collateral obtained upon extension of credit is based on management's evaluation of the counterparty. Collateral held varies but may include deposits held by the Company, marketable
securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

The
Company has derivative counter-party risk which may arise from the possible inability of George Mason's third-party investors to meet the terms of their forward sales contracts.
George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. The Company does not
expect any third-party investor to fail to meet its obligation. In addition, the Company has derivative counterparty risk relating to certain interest rate swaps it has with third parties. This risk
may arise from the inability of the third party to meet the terms of the contracts. The Company monitors the financial condition of these third parties on an annual basis. The Company does not expect
any of these third parties to fail to meet its obligations.

The
Company has guaranteed payment of the $20.0 million debt of Statutory Trust I. See Note 11 for further discussion of this debt.

(24) Fair Value Measurements

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

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

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

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

Recurring Fair Value Measurements

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

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

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

The
Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative
financial instruments at the balance sheet date. In the normal course of business, George Mason and Cardinal First (collectively, the "mortgage companies") enter into contractual interest rate lock
commitments to extend credit to borrowers with fixed expiration dates. The Commitments become effective when the borrowers "lock-in" a specified interest rate within the time frames
established by the mortgage companies. All borrowers are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time
of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the
mortgage companies enter into best efforts forward sales contracts to sell loans to investors. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the
specific rate lock commitments. Both the rate lock commitments to the borrowers and the forward sales contracts to the investors through to the date the loan closes are undesignated derivatives and
accordingly, are marked to fair value through earnings. These valuations fall into a Level 2 category.

There
were no significant transfers into and out of Level 1, Level 2 and Level 3 measurements in the fair value hierarchy during the year ended December 31,
2010. Transfers between levels are recognized at the end of each reporting period. The valuation technique used for fair value measurements using significant other observable inputs (Level 2)
is the market approach for each class of assets and liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

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

At December 31, 2010  (in thousands)

Fair Value Measurements UsingDescription

Balance

Quoted Prices in
Active markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Investment securities available-for-sale:U.S. treasury securities

$
5,114

$
5,114

$


$
U.S. government-sponsored agencies


32,119





32,119


Mortgage-backed securities


219,482





219,482


Municipal securities


64,283





64,283


Total investment securities available-for-sale


320,998


5,114


315,884


Investment securitiestrading


2,107





2,107


Loan receivable designated in fair value hedge


13,004





13,004


Bank-owned life insurance


34,358





34,358


Derivative liabilityinterest rate swaps


1,837





1,837


Derivative assetrate lock and forward loan sales commitments


4,416





4,416


Derivative assetinterest rate lock commitments


264





264


Derivative liabilityrate lock and forward loan sales commitments


2,705





2,705


Derivative liabilityinterest rate lock commitments


77





77





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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

At December 31, 2009  (In thousands)

Fair Value Measurements UsingDescription

Balance

Quoted Prices in
Active markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Investment securities available-for-sale:U.S. treasury securities

$
4,897

$
4,897

$


$
U.S. government-sponsored agencies


55,659





55,659


Mortgage-backed securities


223,405





223,405


Municipal securities


59,608





59,608


Total investment securities available-for-sale


343,569


4,897


338,672


Investment securitiestrading


3,724





3,724


Loan receivable designated in fair value hedge


13,078





13,078


Bank-owned life insurance


33,712





33,712


Derivative liabilityinterest rate swaps


1,437





1,437


Derivative assetinterest rate swaps


5





5


Derivative assetrate lock and forward loan sales commitments


4,607





4,607


Derivative asset interest rate lock commitments


3





3


Derivative liabilityrate lock and forward loan sales commitments


1,197





1,197


Derivative liabilityforward loan sales commitments


407





407





Nonrecurring Fair Value Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are not included in the tables above. These
assets include the Company's valuation of the George Mason reporting unit, the valuation of the Company's corporate bonds held in its held-to-maturity investment securities
portfolio, loans receivableevaluated for impairment and other real estate owned.

At December 31, 2010  (In thousands)

Fair Value Measurements UsingDescription

Balance

Quoted Prices
in Active
markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)George MasonReporting Unit

$
27,490

$


$


$
27,490Corporate bonds


3,197








3,197Loans receivableevaluated for impairment


31,355





12,942


18,413Other real estate owned


1,250





1,250





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

At December 31, 2009
(In thousands)

Fair Value Measurements UsingDescription

Balance

Quoted Prices
in Active
markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)George MasonReporting Unit

$
24,010

$


$


$
24,010GoodwillWilson/Bennett


3,551








3,551Corporate bonds


3,343








3,343Nonaccrual loans


696





696


Other real estate owned


4,991





4,991





During
the quarter ended September 30, 2010, the Company performed an updated evaluation of the goodwill associated with its acquisition of George Mason, which is included in the
mortgage banking segment. This analysis and valuation of this reporting unit was performed by a third party valuation consultant during the quarter ended September 30, 2009, and was based upon
the present value of projected cash flow using assumptions derived from current trends in mortgage banking activity and the expenses required to support the sales effort. The Company performed an
internal update of the analysis for the 2010 assessment. The fair value of the reporting unit is estimated to be in excess of $27 million, which is substantially in excess of its carrying value
of $19 million. As a result, no impairment was indicated.

The
Company's held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million of par value at
December 31, 2010 (each security has a par value of $2.0 million). The collateral underlying these structured securities are instruments issued by financial institutions or insurers. The
Company owns the A-3 tranches in each issuance. Observable trading activity remains limited for these types of securities. The Company has estimated the fair value of the securities
through the use of internal calculations and through information provided by external pricing services. Given the level of subordination below the A-3 tranches, and the actual and expected
performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the four securities, and
concluded that these securities are not other-than-temporarily impaired. The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults
and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches. In each of the adverse scenarios, there was no indication of a break to the
A-3 contractual cash flows.

The
Company's loans receivableevaluated for impairment are measured at the present value of its expected future cash flows discounted at the loan's coupon rate, or at the
loan's observable market price or fair value of the collateral if the loan is collateral dependent. The Company measures the collateral value on loans receivableevaluated for impairment
by obtaining an updated appraisal of the underlying collateral and may discount further the appraised value, if necessary, to an amount equal to the expected cash proceeds in the event the loan is
foreclosed upon and the collateral is sold. In addition, an estimate of costs to sell the collateral is assumed. The Company values other real estate owned by obtaining an updated appraisal of the
property foreclosed upon, and discounts further the appraised value to an amount equal to the expected cash proceeds upon the sale of the property.

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

Loans
receivableevaluated for impairment and other real estate owned are valued using third party appraisal data that is based on market comparisons and may be subject to further
adjustment for certain non-observable criteria. Thus, these asset categories are based on either Level 2 or Level 3 inputs.

Loans
receivableevaluated for impairment that are designated at fair value using Level 3 inputs on a nonrecurring basis total $18.4 million at
December 31, 2010. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment,
inventory, and accounts receivable. The vast majority of the Company's collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach
based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, in certain instances, the Company applies a discount to the valuation of
the collateral if the collateral being evaluated is in process of construction or a residence. In addition, the Company considers past experience of actual sales of collateral and may further discount
the appraisal of the collateral being evaluated. This is considered a level 3 valuation. The value of business equipment is based upon the net book value on the applicable business's financial
statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports
(Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income. At December 31, 2010 the Company's
level 3 loans consisted of four relationships secured primarily by commercial real estate of $11.1 million with a valuation allowance of $3.6 million; one relationship secured by
accounts receivable, inventory, equipment and commercial real estate of $2.9 million which did not have a valuation allowance; and five relationships primarily secured by residential real
estate of $4.4 million with a valuation allowance of $531,000.

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

Fair Value of Financial Instruments

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

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

Cash and Cash Equivalents

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

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

Investment Securities Held-to-Maturity and Other Investments

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

Loans Held for Sale

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

Loans Receivable, Net

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

Deposits

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

Other Borrowed Funds

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

Accrued Interest Receivable

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

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

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

December 31, 2010(In thousands)

Carrying
Amount

Estimated
Fair ValueFinancial assets:Cash and cash equivalents

$
25,868

$
25,868Investment securities held-to-maturity and other investments


30,344


30,999Loans held for sale


206,047


206,047Loans receivable, net


1,360,813


1,384,836Accrued interest receivable


6,699


6,699Financial liabilities:Demand deposits

$
229,575

$
229,575Interest checking


135,395


135,395Money market and statement savings


379,320


379,320Certificates of deposit


659,435


668,247Other borrowed funds


389,586


416,396Accrued interest payable


1,415


1,415




December 31, 2009(In thousands)

Carrying
Amount

Estimated
Fair ValueFinancial assets:Cash and cash equivalents

$
24,841

$
24,841Investment securities held-to-maturity and other investments


51,651


47,903Loans held for sale


179,469


179,469Loans receivable, net


1,279,657


1,279,515Accrued interest receivable


6,151


6,151Financial liabilities:Demand deposits

$
166,019

$
166,019Interest checking


129,795


129,795Money market and statement savings


353,694


353,694Certificates of deposit


647,497


655,049Other borrowed funds


427,579


448,657Accrued interest payable


1,368


1,368


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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(25) Parent Company Only Financial Statements

The Cardinal Financial Corporation (Parent Company only) condensed financial statements are as follows:

PARENT COMPANY ONLY CONDENSED STATEMENTS OF CONDITION  December 31, 2010 and 2009  (In thousands)

2010

2009AssetsCash and cash equivalents

$
14,522

$
19,589Investment securitiesTrading


2,107


3,724Other investments


113


113Investment in subsidiaries


227,685


204,448Premises and equipment, net


757


802Goodwill


24


134Other assets


5,892


2,152Total assets

$
251,100

$
230,962Liabilities and Shareholders' EquityDebt to Cardinal Statutory Trust I

$
20,619

$
20,619Other liabilities


7,578


5,836Total liabilities


28,197


26,455Total shareholders' equity

$
222,903

$
204,507Total liabilities and shareholders' equity

$
251,100

$
230,962


PARENT COMPANY ONLY CONDENSED STATEMENTS OF OPERATIONS  Years Ended December 31, 2010, 2009, and 2008  (In thousands)

2010

2009

2008Income:Net interest expense

$
(820
)
$
(888
)
$
(1,192
)Net realized and unrealized trading losses


187


(425
)

Other income


18


12


35Total income (loss)


(615
)

(1,301
)

(1,157
)Expensegeneral and administrative


4,438


2,471


2,535Net loss before income taxes and equity in undistributedearnings of subsidiaries


(5,053
)

(3,772
)

(3,692
)Income tax benefit


(2,109
)

(1,424
)

(1,287
)Equity in undistributed earnings of subsidiaries


21,386


12,673


2,691Net income

$
18,442

$
10,325

$
286


142

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(25) Parent Company Only Financial Statements (Continued)

PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS  Years ended December 31, 2010, 2009, and 2008  (In thousands)

2010

2009

2008Cash flows from operating activities:Net income

$
18,442

$
10,325

$
286Adjustments to reconcile net income to net cash provided by operating activities:Equity in undistributed earnings of subsidiaries


(21,386
)

(12,673
)

(2,691
)Depreciation


45


76


108Proceeds from sale of investment securitiestrading


(1,181
)

2,631


Purchase of investment securitiestrading


140


(6,780
)

Realized loss on sale of investment securitiestrading





619


Unreliazed gain on investment securitiestrading


(187
)

(194
)

Impairment of goodwill and other intangible assets


110





Increase in other assets and liabilities


1,045


5,709


2,847Net cash provided by (used in) operating activities


(2,972
)

(287
)

550Cash flows from investing activities:Capital investments in subsidiaries





(20,000
)

Dividends received from subsidiaries








Net change in premises and equipment








Net cash used in investing activities





(20,000
)

Cash flows from financing activities:Purchase and retirement of common stock








(1,396
)Proceeds from public stock offerings





31,611


Shares issued to employee benefits plan





1,565


Dividends on common stock


(2,299
)

(1,057
)

(966
)Stock options exercised


204


178


58Net cash provided by (used in) financing activities


(2,095
)

32,297


(2,304
)Net increase (decrease) in cash and cash equivalents


(5,067
)

12,010


(1,754
)Cash and cash equivalents at beginning of year


19,589


7,579


9,333Cash and cash equivalents at end of year

$
14,522

$
19,589

$
7,579


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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(26) Other Operating Expenses

The following shows the composition of other operating expenses for the years ended December 31, 2010, 2009, and 2008:

(In thousands)

2010

2009

2008Stationary and supplies

$
1,084

$
936

$
881Advertising and marketing


2,310


2,084


2,116Other taxes


400


419


398Travel and entertainment


528


353


404Premises and equipment


2,149


2,156


1,965Business memberships


399


438


426Employment services


310


156


77Board of directors expenses


458


247


186Miscellaneous


2,022


2,159


1,162Total other operating expense

$
9,660

$
8,948

$
7,615


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Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

No changes in the Company's independent accountants or disagreements on accounting and financial disclosure required to be reported
hereunder have taken place.

Item 9A.    Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be
disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the
Securities and Exchange Commission. An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this
report was carried out under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer. Based on the evaluation, the
aforementioned officers concluded that the Company's disclosure controls and procedures were effective as of the end of such period.

Management's Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of the Company's financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

Management
assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal ControlIntegrated Framework. Based on
management's assessment, management believes that as of December 31, 2010, the Company's internal control over financial reporting was effective based on criteria set forth by COSO in Internal ControlIntegrated
Framework.

Management's
assessment of the effectiveness of internal control over financial reporting as of December 31, 2010, has been audited by KPMG LLP, the independent registered
public accounting firm that also audited the Company's consolidated financial statements. KPMG LLP's attestation report on management's assessment of the Company's internal control over
financial reporting appears on page 77 hereof.

Changes in Internal Control Over Financial Reporting

There was no change in the Company's internal control over financial reporting identified in connection with the evaluation of internal
controls that occurred during the fourth quarter of 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

None.

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Table of Contents

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Pursuant to General Instruction G(3) of Form 10-K, the information contained in the "Election of Directors"
section and under the headings "Executive Officers," "The Committees of the Board of Directors," "Code of Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for the 2011 Annual Meeting of Shareholders is incorporated herein by reference.

Item 11.    Executive Compensation

Pursuant to General Instruction G(3) of Form 10-K, the information contained in the "Executive Compensation"
section and under the heading "Director Compensation" in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management.Pursuant to General Instruction G(3) of Form 10-K, the
information contained under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy Statement for the 2011
Annual Meeting of Shareholders is incorporated herein by reference.

Equity Compensation Plan Information.The following table sets forth information as of December 31, 2010, with respect to
compensation plans
under which shares of our Common Stock are authorized for issuance.

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)Plan CategoryEquity Compensation Plans Approved by Shareholders1999 Stock Plan


212,040

$
4.56


2002 Equity Compensation Plan


1,985,249

$
9.11


328,918Equity Compensation Plans Not Approved by Shareholders(2)








Total


2,197,289

$
8.67


328,918


(1)Amounts
exclude any securities to be issued upon exercise of outstanding options, warrants and rights.(2)The
Company does not have any equity compensation plans that have not been approved by shareholders.


Item 13.    Certain Relationships and Related Transactions, and Director Independence

Pursuant to General Instruction G(3) of Form 10-K, the information contained under the heading "Certain
Relationships and Related Transactions" and "Independence of the Directors" in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders is incorporated herein by reference.

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Table of Contents

Item 14.    Principal Accounting Fees and Services

Pursuant to General Instruction G(3) of Form 10-K, the information contained under the headings "Fees of
Independent Public Accountants" and "Audit Committee Pre-Approval Policies and Procedures," in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders is incorporated
herein by reference.

Part IV

Item 15.    Exhibits, Financial Statement Schedules

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

Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed January 22, 2009).3.4

Bylaws of Cardinal Financial Corporation (restated in electronic format as of April 24, 2009) (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended
March 31, 2009).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 November 1, 2010, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed November 1, 2010).*10.2

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).*10.3

Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Form SB-2).*10.4

Cardinal Financial Corporation 2002 Equity Compensation Plan, as amended and restated April 21, 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8, Registration
No. 333-134923).*10.5

Cardinal Financial Corporation Executive Deferred Income Plan, as amended and restated February 25, 2009 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period
ended March 31, 2009).*10.6

Cardinal Financial Corporation Directors Deferred Income Plan, as amended and restated February 25, 2009 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period
ended March 31, 2009).*


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Table of Contents

10.7

George Mason Mortgage, LLC Executive Deferred Income Plan, as amended and restated February 25, 2009 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the period ended
March 31, 2009).*10.8

Executive Employment Agreement, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the period ended September 30, 2007).*10.9

Amendment to Executive Employment Agreement of Kendal E. Carson (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the period ended March 31, 2009).*10.10

Supplemental Executive Retirement Plan, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q for the period ended September 30, 2007).*10.11

Executive Employment Agreement, dated March 17, 2010, between Cardinal Financial Corporation and Alice P. Frazier *10.12

Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the period ended December 31, 2007).*21

Subsidiaries of Cardinal Financial Corporation.23

Consent of KPMG LLP.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.


*Management
contracts and compensatory plans and arrangements.


See
Item 15(a)(3) above.

See
Item 15(a)(2) above.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CARDINAL FINANCIAL CORPORATIONMarch 14, 2011

By:

/s/ BERNARD H. CLINEBURG Name:  Bernard H. Clineburg
Title:Chairman and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 14, 2011.

Signatures

Titles/s/ BERNARD H. CLINEBURG Name: Bernard H. Clineburg

Chairman and Chief Executive Officer
(Principal Executive Officer)/s/ MARK A. WENDEL Name: Mark A. Wendel

Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)/s/ JENNIFER L. DEACON Name: Jennifer L. Deacon

Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)/s/ B.G. BECK Name: B. G. Beck

Director/s/ WILLIAM G. BUCK Name: William G. Buck

Director/s/ SIDNEY O. DEWBERRY Name: Sidney O. Dewberry

Director/s/ MICHAEL A. GARCIA Name: Michael A. Garcia

Director


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Table of Contents

Signatures

Titles/s/ J. HAMILTON LAMBERT Name: J. Hamilton Lambert

Director/s/ ALAN G. MERTEN Name: Alan G. Merten

Director/s/ WILLIAM E. PETERSON Name: William E. Peterson

Director/s/ JAMES D. RUSSO Name: James D. Russo

Director/s/ GEORGE P. SHAFRAN Name: George P. Shafran

Director/s/ ALICE M. STARR Name: Alice M. Starr

Director


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Table of Contents

EXHIBIT INDEX

Number

Description3.1

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

Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed January 22, 2009).3.4

Bylaws of Cardinal Financial Corporation (restated in electronic format as of April 24, 2009) (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended
March 31, 2009).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 November 1, 2010, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed November 1, 2010).*10.2

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).*10.3

Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Form SB-2).*10.4

Cardinal Financial Corporation 2002 Equity Compensation Plan, as amended and restated April 21, 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8, Registration
No. 333-134923).*10.5

Cardinal Financial Corporation Executive Deferred Income Plan, as amended and restated February 25, 2009 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period
ended March 31, 2009).*10.6

Cardinal Financial Corporation Directors Deferred Income Plan, as amended and restated February 25, 2009 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period
ended March 31, 2009).*10.7

George Mason Mortgage, LLC Executive Deferred Income Plan, as amended and restated February 25, 2009 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the period
ended March 31, 2009).*10.8

Executive Employment Agreement, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the period ended September 30, 2007).*10.9

Amendment to Executive Employment Agreement of Kendal E. Carson (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the period ended March 31, 2009).*10.10

Supplemental Executive Retirement Plan, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q for the period ended September 30, 2007).*


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Table of Contents

Number

Description10.11

Executive Employment Agreement, dated March 17, 2010, between Cardinal Financial Corporation and Alice P. Frazier *10.12

Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the period ended December 31, 2007).*21

Subsidiaries of Cardinal Financial Corporation.23

Consent of KPMG LLP.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.


*Management
contracts and compensatory plans and arrangements.


---