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





UNITED STATES
SECURITIES 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, 2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                  to


Commission file number: 0-24557

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

Virginia(State or other jurisdiction
of incorporation or organization)

54-1874630(I.R.S. Employer Identification No.)8270 Greensboro Drive, Suite 500
McLean, Virginia(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 (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
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, 2009: $213,107,818.

The
number of shares outstanding of Common Stock, as of March 8, 2010, was 28,720,789.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2010 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.



---







TABLE OF CONTENTS



PagePART IItem 1.

Business

3Item 1A.

Risk Factors

21Item 1B.

Unresolved Staff Comments

30Item 2.

Properties

31Item 3.

Legal Proceedings

31Item 4.

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

79Item 8.

Financial Statements and Supplementary Data

80Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

136Item 9A.

Controls and Procedures

136Item 9B.

Other Information

136PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

137Item 11.

Executive Compensation

137Item 12.

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

137Item 13.

Certain Relationships and Related Transactions, and Director Independence

137Item 14.

Principal Accounting Fees and Services

138PART IVItem 15.

Exhibits, Financial Statement Schedules

138


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

2

---





Table of Contents

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 25 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"), 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 five 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 $2.6 billion in 2009 and $1.4 billion in 2008, excluding advances on construction loans and including loans purchased from other mortgage banking companies owned by local
home builders but managed by George Mason.

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.

3

---



Table of Contents

Growth Strategy

We believe that the strong demographic characteristics of our market, the ongoing disruption in our market area due to the current
financial turmoil affecting the industry, 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, 2009, we have increased our legal lending limit to over $30.0 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.

4

---



Table of Contents

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 5.4 million people in 2008, the ninth 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 2009, 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 6.2%, compared to a national
unemployment rate of
10.0%. As of June 30, 2009, total deposits in this area were approximately $165 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.

5

---



Table of Contents

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 $165 billion in bank deposits in the greater Washington region at June 30, 2009, approximately 85% 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.

6

---



Table of Contents

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 while the loans are being serviced. 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.

George
Mason also 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.

George
Mason'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, George Mason 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 12%, 46%, 15%, 17%, 9% and 1%, respectively of our loan portfolio at December 31, 2009.

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 group provides secured lending to government
contracting firms and businesses based primarily on

7

---



Table of Contents

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, but have commensurately higher yields. 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

8

---



Table of Contents

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.

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.

9

---



Table of Contents

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.

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

10

---



Table of Contents

and
standby 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.

Employees

At December 31, 2009, we had 368 full-time equivalent employees. None of our employees are represented by any
collective bargaining unit. We believe our relations with our employees are good.

11

---



Table of Contents

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 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.

12

---



Table of Contents

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 over the past year has been
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 Bank Insurance Fund, or "BIF", 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 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.

13

---



Table of Contents

In
February 2006, The Federal Deposit Insurance Reform Act of 2005 and The Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively, "The Reform Act") was signed
into law. This legislation contained technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements.

The
Reform Act provides for the following changes:



Pursuant
to the Emergency Economic Stabilization Act of 2008 ("EESA"), the maximum deposit insurance amount per depositor has been increased from $100,000 to $250,000 until
December 31, 2013. Additionally, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, the
Secretary of the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to establish it's Temporary Liquidity Guarantee Program ("TLGP"). Under the transaction account
guarantee program of the TLGP, the FDIC will fully guarantee, until December 31, 2013, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of
0.5 percent or less and IOLTAs (lawyer trust accounts). On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except for
individual retirement accounts and other certain retirement accounts which will remain at $250,000 per depositor. Institutions were required to opt-out of the TLGP if they did not wish to
participate. The Company and its applicable subsidiaries elected to participate in this program.

14

---



Table of Contents

In
May 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured financial institution's total assets minus its tier 1 capital as of
June 30, 2009 to be paid on September 30, 2009. This special assessment assisted the FDIC in the replenishment of the Deposit Insurance Fund as a result of the increase in financial
institution failures during 2008 and 2009. The special assessment imposed on Cardinal Bank was $844,000. In November 2009, the FDIC adopted a final rule to require insured financial institutions to
prepay slightly over three years of estimated insurance assessments. This prepayment allows the FDIC to strengthen the cash position of the Deposit Insurance Fund immediately without immediately
impacting earnings of the industry. The payment of
the prepaid assessment was due on December 30, 2009. Cardinal Bank's prepaid assessment was $6.7 million.

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 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:



15

---



Table of Contents

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, 2009 and, in addition, our
bank subsidiary maintains sufficient capital to remain in compliance with capital requirements and is considered "well-capitalized" at December 31, 2009.

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 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.

16

---



Table of Contents

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.

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 2010, 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 $55.2 million. A 10% reserve ratio will be applied to amounts in net transaction account balances in
excess of $55.2 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
non-interest-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

17

---



Table of Contents

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.

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

18

---



Table of Contents

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 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

19

---



Table of Contents

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, 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.

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. Although Congress and the state legislature in recent years
have sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, 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.

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.

20

---





Table of Contents

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 market conditions 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 credit 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.

Recent levels of market volatility are unprecedented.

The capital and credit markets have recently experienced volatility and disruption. 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 recent 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 or higher interest rates and may
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.

21

---



Table of Contents

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 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.

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

At December 31, 2009, we had $10.1 million and $2.8 million of goodwill related to the George Mason and
Wilson/Bennett acquisitions, respectively. In addition, we have identified and recorded other intangible assets, such as customer relationships and trade names, as of the acquisition dates of both
George Mason and Wilson/Bennett. The carrying amounts of these intangibles at December 31, 2009 was $742,000 at George Mason and $127,000 at Wilson/Bennett. 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 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.

During
2009, we performed the required annual test for impairment of goodwill related to our acquisition of George Mason, and our analysis showed the current carrying value of goodwill
to be less than the fair value. Therefore, no impairment was recorded.

During
2009 and 2008, we performed the required annual test for impairment of goodwill related to our acquisition of Wilson/Bennett, and no goodwill impairment was indicated. However,
future
decreases in assets managed by Wilson/Bennett as a result of declines in its client base or the lack of success in attracting and maintaining new clients may result in a decline in investment
management fees and may result in a future impairment charge.

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.

22

---



Table of Contents

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 as the markets evolve.

We
have investments in pooled trust preferred securities, totaling $8.0 million at December 31, 2009. 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 and two of the securities have a composite rating of BBB. These ratings are consistent with the grades from other rating agencies. 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. 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.

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, 2009, our portfolio of commercial and industrial and commercial real estate (including construction) totaled
$945.5 million, or 73% 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

23

---



Table of Contents

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:



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

24

---



Table of Contents

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.

The impact on us of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and
their implementing regulations, and actions by the FDIC, cannot be predicted at this time.

The programs established or to be established under the EESA, ARRA and Troubled Asset Relief Program may have adverse effects upon us.
We may face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific
programs may subject us to additional restrictions. Similarly, programs established by the FDIC under the systemic risk exception of the FDA, whether we participate or not, may have an adverse effect
on us. Continued participation in the FDIC Temporary Liquidity Guarantee Program likely will require the payment of additional insurance premiums to the FDIC. We may be required to pay significantly
higher Federal Deposit Insurance Corporation premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The
affects of participating or not participating in any such programs, and the extent of our participation in such programs cannot reliably be determined at this time.

Legislative and regulatory changes could materially change our business and adversely affect our results of operations and financial condition.

Congress and the U.S. government continue to evaluate and develop various programs and initiatives designed to stabilize the financial
and housing markets and stimulate the economy, including the Treasury's Financial Stability Plan and various legislation and programs reduce residential mortgage foreclosures and stabilize the housing
market. Legislative and regulatory proposals regarding changes in banking, and the regulation of banks, thrifts, mortgage lenders and other financial institutions are being considered by the executive
branch of the Federal government, Congress and various state governments. Certain of these proposals, if adopted, could significantly change the regulation or operations of banks and the financial
services industry. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the
nation's financial institutions and markets. Another change under discussion includes the regulation of compensation in the financial services industry, generally. We cannot predict whether or in what
form any proposed law or regulation will be adopted or the extent to which our business may be affected by any new law or regulation. The current stresses on the financial system and the economy
generally, the powers granted to the Treasury under EESA and the ARRA, the expansion and supervision of government sponsored financial programs make the nature and extent of future

25

---



Table of Contents

legislative
and regulatory changes affecting financial institutions are unpredictable and subject to rapid changes. These changes are rapid and unpredictable. Any of these changes could materially
change our business and adversely affect our results of operations and financial condition.

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

The Emergency Economic Stabilization Act of 2008 temporarily increased the limit on FDIC coverage to $250,000 for all accounts through
December 31, 2009. This has subsequently been extended to December 31, 2013. We are participating in the FDIC's Temporary Liquidity Guarantee Program, or TLG, for noninterest-bearing
transaction deposit accounts. The FDIC almost doubled its assessment rate on well-capitalized institutions by raising the assessment rate 7 basis points at the beginning of 2009. In May
2009, the FDIC issued a final rule regarding a special assessment of 5 basis points on an institution's total assets minus its Tier 1 capital as of June 30, 2009. The FDIC adopted
another final rule effective April 1, 2009, to change the way that the FDIC's assessment system differentiates for risk, make corresponding changes to assessment rates beginning with the second
quarter of 2009, as well as other changes to the deposit insurance assessment rules. In November 2009, the FDIC adopted a final rule to require insured financial institutions to prepay slightly over
three years of estimated insurance payments on December 20, 2009. The prepayment allows the FDIC to strengthen the cash position of the Deposit Insurance Fund immediately without immediately
impacting earnings of the industry. Banks that participate in the TLG's noninterest bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in
such accounts above the amounts covered by FDIC deposit insurance.
To the extent that these TLG assessments are insufficient to cover any loss or expenses arising from the TLG program, the FDIC is authorized to impose an emergency special assessment on
FDIC-insured depository institutions. Legislation has been proposed to give the FDIC authority to impose charges for the TLG program upon depository institution holding companies, as well.
These changes will cause the premiums and TLG assessments charged by the FDIC to increase. These actions could significantly increase our noninterest expense for the foreseeable future.

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, 2009. 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, 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.

26

---





Table of Contents

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:



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

27

---



Table of Contents

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, 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

28

---



Table of Contents

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 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

29

---



Table of Contents

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.

Item 1B.    Unresolved Staff Comments

None.

30

---



Table of Contents

Item 2.    Properties

Cardinal Bank, excluding its George Mason subsidiary, conducts its business from 25 branch offices. Nine of these facilities are owned
and 16 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 five leased facilities which range in size from 1,476 square feet to 31,520 square feet. The leases have various expiration dates through 2011 and
only three of their five 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.    Reserved

31

---





Table of Contents

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 12, 2010, our common stock was held by 627 shareholders of record. In addition, we estimate that there were 5,378 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 2009 and 2008 as reported on the market at the time and dividends declared during those periods were as
follows:

Periods Ended

High

Low

Dividends2009First 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


0.022008First Quarter

$
9.50

$
6.51

$
0.01Second Quarter


9.50


5.89


0.01Third Quarter


10.50


5.80


0.01Fourth Quarter


8.50


4.40


0.01


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 2009.

32

---



Table of Contents

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, 2009, 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, 2004 in our common stock and each of the comparable indices and that dividends were reinvested.

Cardinal Financial Corporation
Total Return Performance

GRAPHIC

Period EndingIndex

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09Cardinal Financial Corporation


100.00


98.84


92.43


84.40


51.80


79.99NASDAQ Composite


100.00


101.37


111.03


121.92


72.49


104.31SNL Bank


100.00


101.36


118.57


92.14


52.57


52.03


33

---



Table of Contents

Item 6.    Selected Financial Data

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

Years Ended December 31,2009

2008

2007

2006

2005Income Statement Data:Interest income

$
86,742

$
88,611

$
98,643

$
87,401

$
67,374Interest expense


36,200


45,638


58,324


46,047


29,891Net interest income


50,542


42,973


40,319


41,354


37,483Provision for loan losses


6,750


5,498


2,548


1,232


2,456Net interest income after provision for loan losses


43,792


37,475


37,771


40,122


35,027Non-interest income


23,348


17,812


19,480


21,684


24,669Non-interest expense


52,427


55,913


51,884


51,245


44,653Net income (loss) before income taxes


14,713


(626
)

5,367


10,561


15,043Provision (benefit) for income taxes


4,388


(912
)

885


3,173


5,167Net income

$
10,325

$
286

$
4,482

$
7,388

$
9,876Balance Sheet Data:Total assets

$
1,976,185

$
1,743,757

$
1,690,031

$
1,638,429

$
1,452,287Loans receivable, net of fees


1,293,432


1,139,348


1,039,684


845,449


705,644Allowance for loan losses


18,636


14,518


11,641


9,638


8,301Loans held for sale


179,469


157,009


170,487


338,731


361,668Total investment securities


378,753


315,539


364,946


329,296


294,224Total deposits


1,297,005


1,179,844


1,096,925


1,218,882


1,069,872Other borrowed funds


427,579


367,198


400,060


194,631


155,421Total shareholders' equity


204,507


158,006


159,463


155,873


147,879Common shares outstanding


28,718


24,014


24,202


24,459


24,363Per Common Share Data:Basic net income

$
0.38

$
0.01

$
0.18

$
0.30

$
0.45Fully diluted net income


0.37


0.01


0.18


0.30


0.44Book value


7.12


6.58


6.59


6.37


6.07Tangible book value(1)


6.52


6.00


5.90


5.75


5.37Performance Ratios:Return on average assets


0.57
%

0.02
%

0.27
%

0.51
%

0.74
%Return on average equity


5.53


0.18


2.85


4.87


7.67Dividend payout ratio


0.10


3.38


0.22


0.13


0.02Net interest margin(2)


2.94


2.78


2.63


2.98


2.92Efficiency ratio(3)(4)


70.95


82.03


81.02


82.41


71.84Non-interest income to average assets


1.29


1.08


1.19


1.49


1.85Non-interest expense to average assets


2.89


3.40


3.18


3.52


3.35Loans receivable, net of fees to total deposits


99.72


96.57


94.78


69.36


65.96


34

---



Table of Contents

Years Ended December 31,2009

2008

2007

2006

2005Asset Quality Ratios:Net charge-offs to average loans receivable, net of fees


0.22
%

0.24
%

0.06
%

0.00
%

0.01
%Nonperforming loans to loans receivable, net of fees


0.05


0.41





0.01


0.03Nonperforming loans to total assets


0.04


0.27





0.01


0.01Allowance for loan losses to nonperforming loans


2,677.59


310.81





11,822.87


3,879.00Allowance for loan losses to loans receivable, net of fees


1.44


1.27


1.12


1.14


1.18Capital Ratios:Tier 1 risk-based capital


12.97
%

11.67
%

12.10
%

13.25
%

14.83
%Total risk-based capital


14.15


12.72


12.98


14.06


15.65Leverage capital ratio


11.03


9.90


10.26


10.68


10.71Other:Average shareholders' equity to average total assets


10.31
%

9.74
%

9.65
%

10.43
%

9.66
%Average loans receivable, net of fees to average total deposits


97.57


96.00


78.87


68.42


60.34Average common shares outstanding:Basic


27,186


24,370


24,606


24,424


22,113Diluted


27,674


24,837


25,012


24,987


22,454


(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 34%.(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 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.


35

---





Table of Contents

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, 2009 and
2008 and the results of our operations for the years ended December 31, 2009, 2008 and 2007. 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:



36

---



Table of Contents



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 25 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.

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
five branches

37

---



Table of Contents

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 $2.6 billion and $1.4 billion of loans in 2009 and 2008,
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.

George
Mason also 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 George Mason and are classified as loans held for sale.

George
Mason'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, George Mason has its lowest levels of quarterly loan closings during the first quarter of the year.

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

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 2.65% at December 31,
2009. 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 management of 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 these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, non-interest
income is an important source of revenue for us and

38

---



Table of Contents

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, 2009:

Net Interest
Income

Non-Interest
Income2009


68.4
%

31.6
%2008


70.7
%

29.3
%2007


67.4
%

32.6
%


Non-interest
income is a lower percentage of our total revenue in 2008 than 2009 and 2007 because mortgage originations were lower due to the cyclical nature of the mortgage
banking business.

2009 Economic Environment

2009 was a transition year as the U.S. economy began to stabilize although unemployment continued to rise. Consumer spending, which had
declined sharply in the second half of 2008, rose modestly in each quarter of 2009 and received a boost from government sponsored programs such as Cash-for-Clunkers during the
third quarter of 2009. Despite this modest rise, consumer spending remained tentative as households saved more and paid down debt. After reaching lows in January, housing activity increased compared
to 2008 as home sale and new housing starts rose through the year lifting residential construction. However, large inventories of unsold homes and the increase in foreclosures continued to weigh
heavily on the housing sector.

Businesses
cut production, inventories, employment and capital spending aggressively in response to the financial crisis in late 2008 continuing into 2009. Despite the modest growth in
product demand and output in the second half of the year, job layoffs mounted, and the unemployment rate increased to over 10% in the fourth quarter, its highest level since the early 1980s.

The
Federal Reserve lowered the federal funds rate to close to zero percent early in the first quarter of 2009 and in mid-March announced a program whereby the Federal
Reserve purchased U. S. Treasury securities, mortgage-backed securities, and the long-term debt of government-sponsored agencies. This program contributed to lower mortgage rates
generating an increase in consumer mortgage refinancing which helped homeowners, and along with lower home prices, stimulated activity in the housing market.

In
early 2009, the short-term funding markets began to return to normal and the U.S. government began to wind down its alternative liquidity funding facilities and loan and
asset guarantee programs. By mid-year, order had been restored to most financial market sectors. The stock market rally through year-end partially restored household net worth and
increased consumer confidence.

Despite
the aforementioned economic conditions, our credit quality remained strong. At December 31, 2009, we have non-accrual loans totaling $696,000, a decrease of
$4.0 million compared to $4.7 million at December 31, 2008. In addition, loans contractually past due 90 days or more as to principal or interest decreased $228,000 from
$379,000 at December 31, 2008 to $151,000 at December 31, 2009. Net charge-offs were 0.22% of our average loans receivable for the year ended December 31, 2009 as
compared to 0.24% at December 31, 2008. Our mortgage banking segment has profited from the recent actions taken by the Federal Reserve to reduce interest rates, which spurred an increase in
mortgage activity as homeowners sought to refinance their current mortgages and other consumers have seen an opportunity to purchase housing as it has become more affordable. In addition, the
extension of the first-time home buyers credit to April 30, 2010 has increased the number of homes sold. Net income from our mortgage banking segment was $4.0 million for the
year ended

39

---



Table of Contents

December 31,
2009, compared to a loss of $2.7 million for the year ended December 31, 2008. A majority of the change in net income from our mortgage banking segment was a result
of the 2008 goodwill impairment charge and repurchases and settlements of previously sold mortgage loans. Also, during the year ended December 31, 2009, we successfully raised
$31.6 million in common equity capital to further capitalize the Company, to further penetrate our existing footprint and take advantage of bank consolidation opportunities.

The
market disturbances that have been experienced in the financial markets over the past two years continue to impact our results. Market illiquidity continues to impact certain
portions of our investment securities portfolio, specifically the ratings of certain monoline insurance providers, which has affected the pricing of certain municipal securities in our portfolio. In
addition, 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, 2009 due to the lack of
liquidity in the market and investor apprehension for investing in these types of securities.

We
expect very challenging economic and operating conditions to continue for the foreseeable future and these conditions will continue to affect the markets in which we do business and
could adversely impact our results in 2010. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

While
our loan growth was strong during 2009, 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. Continued 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 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.

In
addition to the Emergency Economic Stabilization Act of 2008 ("EESA"), the U.S. government has continued to respond to the ongoing financial crisis and economic slowdown by enacting
new legislation and expanding or establishing a number of programs and initiatives. The American Recovery and Reinvestment Act ("ARRA") is intended to expand and establish government spending programs
and provide tax cuts to stimulate the economy. Congress and the U.S. government continue to evaluate and develop various programs and initiatives designed to stabilize the financial and housing
markets and stimulate the economy, including the U.S. Treasury's announced Financial Stability Plan and the U.S. government's announced foreclosure prevention program. There can be no assurance as to
the impact these programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of these efforts to
stabilize the financial markets and a continuation or worsening of current or financial market conditions could

40

---



Table of Contents

materially
and adversely affect our business, financial condition, results of operations, access to credit, our regulatory capital position or the trading price of our common stock.

Financial Developments

The year ended December 31, 2009 was a record year of profitability for us. For the year, we reported net income of
$10.3 million on a consolidated basis. 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 business segment reported net income of $321,000 for the year ended December 31, 2009. A loss of $2.2 million was recorded in the parent company for the year ended
December 31, 2009, as the parent company serves as a source of strength to its subsidiaries and represents an overhead function rather than an operating segment.

For
the year ended December 31, 2008, we reported net income of $286,000, which was impacted by several cash and noncash charges. The Bank recorded net income of
$5.3 million which was offset by net losses recorded by George Mason of $2.7 million during 2008. George Mason's results for 2008 were impacted by an impairment charge to its goodwill of
$2.8 million and a cash settlement of $1.8 million to one of its mortgage correspondents related to the loan purchase agreement between the two parties. In addition, the Bank recorded an
other-than-temporary impairment charge of $4.4 million on our investment in Fannie Mae perpetual preferred stock. (See "Financial Overview" below for additional
information on these charges). The wealth management and trust services segment, which includes CWS, Wilson/Bennett and our trust division, recorded net income of $47,000 for the year ended
December 31, 2008.

Critical Accounting Policies

General

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

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

41

---



Table of Contents

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 observable inputs from a national valuation service. These rates 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 consider 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.

42

---





Table of Contents

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 its 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 fair values of loan
commitments and the fair values of forward loan sales contracts generally move in opposite directions, and the net impact of changes in these valuations on net income during the loan commitment period
is generally inconsequential. At the closing of the loan, the loan commitment derivative expires and we record a loan held for sale and continue to be obligated under the same forward loan sales
contract. The forward sales contract is then designated as a hedge against the variability in cash to be received from the loan sale. Loans held for sale are accounted for at the lower of cost or fair
value.

Accounting for Impairment Testing of Goodwill

Goodwill is not amortized but is tested on at least an annual basis for impairment.

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

43

---



Table of Contents

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

Effective January 1, 2009, we adopted new accounting guidance for disclosures about derivative instruments and hedging
activities. This guidance requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged
items are accounted for, and how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. The required disclosures include the fair
value of derivative instruments
and their gains and losses in tabular format, information about credit-risk-related contingent features in derivative agreements, counterparty credit risk, and the Company's
strategies and objectives for using derivative instruments. This guidance is effective prospectively for periods beginning on or after November 15, 2008. The adoption provided for enhanced
disclosure but otherwise did not have a material impact on our consolidated financial condition or results of operations.

In
April 2009, we adopted new accounting guidance for recognition and presentation of other-than-temporary impairments. This standard modified the indicator of
other-than-temporary impairment for debt securities. In addition, it amended the amount of an other-than-temporary impairment that is recognized in
earnings when there are credit losses on a debt security for which management does not intend to sell and for which it is more likely than not that the entity will not have to sell prior to recovery
of the amortized cost basis of the debt security. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining
difference between the debt security's amortized cost basis and its fair value would be included in other comprehensive income. This guidance is effective for interim and annual periods ending after
June 15, 2009. The adoption of this standard did not have a material impact on our consolidated financial condition or results of operations.

44

---



Table of Contents

In
April 2009, we adopted new accounting guidance for determining when a market for an asset or a liability is active or inactive and determining when a transaction is distressed. This
standard reaffirmed the exit price objective of fair value measurements and provides guidance on inactive markets and distressed transactions. This standard is to be applied prospectively and is
effective for interim and annual periods ending June 15, 2009. The adoption of this standard did not have a material impact on our consolidated financial condition or results of operations.

In
April 2009, we adopted new accounting guidance for interim disclosures about fair value of financial instruments. This guidance requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance requires those disclosures in summarized financial information at
interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption provided for enhanced disclosure but otherwise did not have a
material impact on our consolidated financial condition or results of operations.

On
July 1, 2009, we adopted new accounting guidance for the FASB accounting standards codification and the hierarchy of generally accepted accounting principles, the
"Codification." The Codification is the exclusive authoritative reference for nongovernmental U.S. GAAP for use in financial statements issued for interim and annual periods ending after
September 15, 2009, except for SEC rules and
interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards.

Financial Overview

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

45

---



Table of Contents

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.

2008 Compared to 2007

At December 31, 2008, total assets were $1.74 billion, an increase of 3.2%, or $53.7 million, from
$1.69 billion at December 31, 2007. Total loans receivable, net of deferred fees and costs, increased 9.6%, or $99.7 million, to $1.14 billion at December 31, 2008,
from $1.04 billion at December 31, 2007. Total investment securities decreased by $49.4 million, or 13.5%, to $315.5 million at December 31, 2008, from
$364.9 million at December 31, 2007. Total deposits increased 7.6%, or $82.9 million, to $1.18 billion at December 31, 2008, from $1.10 billion at
December 31, 2007. Other borrowed funds, which primarily include repurchase agreements and Federal Home Loan Bank ("FHLB") advances, decreased $32.9 million to $367.2 million at
December 31, 2008, from $400.1 million at December 31, 2007.

Shareholders'
equity at December 31, 2008 was $158.0 million, a decrease of $1.5 million from $159.5 million at December 31, 2007. The decrease in
shareholders' equity was primarily attributable to repurchases and retirement of our common stock totaling $1.4 million. In addition, dividends paid during 2008 totaled $966,000. These
decreases were offset by net income of $286,000 for the year ended December 31, 2008 and increases in other comprehensive income of $314,000 for the year ended December 31, 2008. Total
shareholders' equity to total assets at December 31, 2008 and 2007 was 9.1% and 9.4%, respectively. Book value per share at December 31, 2008 and 2007 was $6.58 and $6.59, respectively.
Total risk-based capital to risk-weighted assets was 12.72% at December 31, 2008 compared to 12.98% at December 31, 2007. Accordingly, we were considered "well
capitalized" for regulatory purposes at December 31, 2008.

We
recorded net income of $286,000, or $0.01 per diluted common share, for the year ended December 31, 2008, compared to net income of $4.5 million, or $0.18 per diluted
common share, in 2007. Our operating results for the year ended December 31, 2008 and 2007 were adversely impacted by several events. These events are discussed in detail
below:



46

---



Table of Contents



Also
contributing to our decrease in net income for the year ended December 31, 2008 as compared to the year ended December 31, 2007 was an increase in our provision for
loan losses of $3.0 million to $5.5 million for the year ended December 31, 2008 due to the loan growth we had during the year, increase in net loan charge-offs, and
changes to certain qualitative factors in our allowance for loan losses estimates, as compared to $2.5 million for the same period of 2007. Non-interest income decreased
$1.7 million to $17.8 million for the year ended December 31, 2008 as compared to $19.5 million for the same period of 2007 due primarily to decreases in gains on sales of
loans and investment fee income.

The
return on average assets for the years ended December 31, 2008 and 2007 was 0.02% and 0.27%, respectively. The return on average equity for the years ended December 31,
2008 and 2007 was 0.18% and 2.85%, respectively.

47

---



Table of Contents

See
Table 1 below for the components of our calculation of our efficiency ratio as of December 31, 2009, 2008 and 2007.

Table 1.

Efficiency Ratio Calculation  Years Ended December 31, 2009, 2008 and 2007(In thousands, except per share data)

2009

2008

2007GAAP reported non-interest expense

$
52,427

$
55,913

$
51,884Less nonrecurring expensesImpairment of Fannie Mae perpetual preferred stock





4,408


Settlement with mortgage correspondent





1,800


Loss related to escrow arrangement








3,500Non-interest expense without nonrecurring expenses

$
52,427

$
49,705

$
48,384GAAP reported non-interest income

$
23,348

$
17,812

$
19,480Less nonrecurring incomeLitigation recovery on previously impaired investment





190


83Non-interest income without nonrecurring income

$
23,348

$
17,622

$
19,397Calculation of efficiency ratio(1):Non-interest expense without nonrecurring expenses (from above)

$
52,427

$
49,705

$
48,384GAAP reported net interest income


50,542


42,973


40,319Non-interest income without nonrecurring income (from above)


23,348


17,622


19,397Total net interest income and non-interest income for efficiency ratio

$
73,890

$
60,595

$
59,716Efficiency ratio without nonrecurring income and expenses


70.95
%

82.03
%

81.02
%


---

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-bearing
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. We report our net interest income on a tax equivalent basis as a result of certain tax-exempt investments we hold on our balance sheet.
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 is remained during all of 2009. See "Interest Rate Sensitivity" for further information.

48

---





Table of Contents

Table 2.

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities  Years Ended December 31, 2009, 2008 and 2007  (In thousands)

2009

2008

2007Average
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

$
157,703

$
7,530


4.77
%
$
130,608

$
8,019


6.14
%
$
108,762

$
8,263


7.60
%Real estatecommercial


546,593


34,203


6.26


440,746


28,905


6.56


366,176


24,598


6.72Real estateconstruction


181,365


8,707


4.80


190,354


11,175


5.87


169,503


14,077


8.30Real estateresidential


207,238


10,922


5.27


213,125


11,957


5.61


201,863


11,029


5.46Home equity lines


111,858


4,065


3.63


93,635


4,460


4.76


69,908


4,967


7.11Consumer


2,671


159


5.95


2,637


171


6.48


6,405


508


7.93Total loans


1,207,428


65,586


5.43


1,071,105


64,687


6.04


922,617


63,442


6.88Loans held for sale


160,790


7,358


4.58


124,993


7,140


5.71


233,451


16,686


7.15Investment securitiestrading








0.00








0.00


11


1


4.62Investment securities available-for-sale


258,971


12,601


4.87


261,600


13,645


5.22


266,935


13,256


4.97Investment securities held-to-maturity


42,375


1,587


3.75


58,915


2,521


4.28


88,803


3,722


4.19Other investments


15,705


30


0.19


15,307


567


3.70


10,626


635


5.98Federal funds sold


49,864


118


0.24


32,077


569


1.77


25,217


1,318


5.23Total interest-earning assets and interest income(2)


1,735,133


87,280


5.03


1,563,997


89,129


5.70


1,547,660


99,060


6.40Noninterest-earning assets:Cash and due from banks


1,427








7,833








8,122Premises and equipment, net


15,854








17,523








19,565Goodwill and other intangibles, net


14,060








16,404








17,371Accrued interest and other assets


60,993








51,300








48,586Allowance for loan losses


(16,309
)







(12,568
)







(10,322
)Total assets

$
1,811,158







$
1,644,489







$
1,630,982Liabilities and Shareholders' EquityInterest-bearing liabilities:Interest-bearing deposits:Interest checking

$
123,017

$
1,207


0.98
%
$
121,537

$
2,732


2.25
%
$
122,806

$
3,691


3.01
%Money markets


53,030


510


0.96


41,586


982


2.36


56,229


1,437


2.56Statement savings


291,751


4,034


1.38


341,059


9,987


2.93


352,078


16,354


4.64Certificates of deposit


622,617


17,947


2.88


480,408


18,390


3.83


515,182


24,215


4.70Total interest-bearing deposits


1,090,415


23,698


2.17


984,590


32,091


3.26


1,046,295


45,697


4.37Other borrowed funds


366,965


12,502


3.41


350,889


13,547


3.86


281,417


12,627


4.49Total interest-bearing liabilities and interest expense


1,457,380


36,200


2.48


1,335,479


45,638


3.42


1,327,712


58,324


4.39Noninterest-bearing liabilities:Demand deposits


147,062








131,197








123,493Other liabilities


19,965








17,645








22,382Common shareholders' equity


186,751








160,168








157,395Total liabilities and shareholders' equity

$
1,811,158







$
1,644,489







$
1,630,982Net interest income and net interest margin(2)




$
51,080


2.94
%



$
43,491


2.78
%



$
40,736


2.63
%


---

49

---



Table of Contents

Table 3.

Rate and Volume Analysis
Years Ended December 31, 2009, 2008 and 2007
(In thousands)

2009 Compared to 2008

2008 Compared to 2007Average
Volume(3)

Average
Rate

Increase
(Decrease)

Average
Volume(3)

Average
Rate

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

$
1,664

$
(2,153
)
$
(489
)
$
1,660

$
(1,904
)
$
(244
)Real estatecommercial


6,942


(1,644
)

5,298


5,009


(702
)

4,307Real estateconstruction


(528
)

(1,940
)

(2,468
)

1,732


(4,634
)

(2,902
)Real estateresidential


(330
)

(705
)

(1,035
)

615


313


928Home equity lines


868


(1,263
)

(395
)

1,686


(2,193
)

(507
)Consumer


2


(14
)

(12
)

(299
)

(38
)

(337
)Total loans


8,618


(7,719
)

899


10,403


(9,158
)

1,245Loans held for sale


2,045


(1,827
)

218


(7,752
)

(1,794
)

(9,546
)Investment securitiestrading











(1
)




(1
)Investment securities available-for-sale


(137
)

(907
)

(1,044
)

(265
)

654


389Investment securities held-to-maturity


(708
)

(226
)

(934
)

(1,253
)

52


(1,201
)Other investments


15


(552
)

(537
)

280


(348
)

(68
)Federal funds sold


316


(767
)

(451
)

359


(1,108
)

(749
)Total interest income(2)


10,149


(11,998
)

(1,849
)

1,771


(11,702
)

(9,931
)Interest expense:Interest-bearing deposits:Interest checking


33


(1,558
)

(1,525
)

(38
)

(921
)

(959
)Money markets


270


(742
)

(472
)

(374
)

(81
)

(455
)Statement savings


(1,444
)

(4,509
)

(5,953
)

(512
)

(5,855
)

(6,367
)Certificates of deposit


5,444


(5,887
)

(443
)

(1,634
)

(4,191
)

(5,825
)Total interest-bearing deposits


4,303


(12,696
)

(8,393
)

(2,558
)

(11,048
)

(13,606
)Other borrowed funds


621


(1,666
)

(1,045
)

3,117


(2,197
)

920Total interest expense


4,924


(14,362
)

(9,438
)

559


(13,245
)

(12,686
)Net interest income(2)

$
5,225

$
2,364

$
7,589

$
1,212

$
1,543

$
2,755


---

50

---



Table of Contents

2009 Compared to 2008

For purposes of analyzing the effects of rate and volume on our interest income from loans receivable, investment securities and fed
funds sold, we calculate interest income on a tax equivalent basis because of the tax benefit we receive on certain tax-exempt financial instruments. Net interest income on a tax equivalent basis for
the year ended December 31, 2009 was $51.1 million, compared to $43.5 million for the year ended December 31, 2008, an increase of $7.6 million, or 17.5%. 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 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.

2008 Compared to 2007

Net interest income on a tax equivalent basis for the year ended December 31, 2008 was $43.5 million, compared to
$40.7 million for the year ended December 31, 2007, an increase of $2.8 million, or 6.8%. 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 2008, compared with 2007.

51

---



Table of Contents

Our
net interest margin, on a tax equivalent basis, for the years ended December 31, 2008 and 2007 was 2.78% and 2.63%, 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 rate environment of 2008. The average yield on interest-earning assets decreased to 5.70% in 2008 from 6.40% in 2007, and our cost of interest-bearing liabilities decreased
to 3.42% in 2008 from 4.39% in 2007. The cost of other borrowed funds, which generally are shorter term fundings and which we continued to utilize in 2008 to help fund our balance sheet growth,
decreased 63 basis points to 3.86% in 2008 from 4.49% in 2007. The cost of deposit liabilities decreased 111 basis points to 3.26% in 2008 from 4.37% for 2007.

Total
average earning assets increased by 1.1% to $1.56 billion at December 31, 2008 compared to $1.55 billion at December 31, 2007. The increase in our
earnings assets were primarily driven by an increase in average loans receivable of $148.5 million offset by a decrease in our inventory of loans held for sale of $108.5 million and a
decrease in investment securities of $35.2 million. These increases were funded by an increase in other borrowed funds of $69.5 million.

Average
loans receivable increased $148.5 million to $1.07 billion during 2008 from $922.6 million in 2007. 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 2008 and 2007. Additional interest income of
approximately $59,000 for 2008 and $5,000 for 2007 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 collectability.

Average
interest-bearing deposits decreased $61.7 million to $984.6 million in 2008 from $1.05 billion in 2007. The largest decrease in average interest-bearing
deposit balances was in certificates of deposit, which decreased $34.8 million compared to 2007.

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. With the funding markets still
lacking liquidity, forecasts for deposit rate movements carry greater uncertainty than when this market is functioning normally. 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

52

---



Table of Contents

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, 2009, we were asset sensitive for the entire two year simulation period. Asset sensitive means that yields on the Bank's interest-earnings assets will rise faster
than interest-bearing liability costs in a rising rate environment. For a declining rate environment, asset yields will fall faster than interest-bearing liability costs. Being asset sensitive our net
interest income should increase in a rising rate scenario. In the up 200 basis point scenario, our net interest income would improve by not more than 0.4% for the one year period and by not more than
2.2% over the two year time horizon. In the down 100 basis point scenario the interest rate risk model indicates that our net interest income would decrease by not more than 0.8% for the one year
period and by not more than 2.6% over the two year time horizon.

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 $6.8 million and $5.5 million for the years ended December 31, 2009 and 2008, respectively. The allowance for loan losses at
December 31, 2009 was $18.6 million compared to $14.5 million at December 31, 2008. Our allowance for loan loss ratio at December 31, 2009 was 1.44% compared to
1.27% at December 31, 2008. 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 credit 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 $2.6 million for each of the years ended
December 31, 2009 and 2008. We charged-off $876,000 in commercial and industrial loans, residential loans of $1.8 million and consumer loans of $6,000. Annualized net
charged-off loans was 0.22% of average loans receivable for the year ended December 31, 2009, compared to 0.24% for the year ended December 31, 2008. Non-accrual
loans totaled $696,000 at December 31, 2009 compared to $4.7 million at December 31, 2008

While
our loan growth was strong during 2009, continued negative economic conditions could adversely affect our home equity line 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, 2009, our commercial real estate portfolio was 46% 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.

53

---



Table of Contents

The
provision for loan losses was $2.5 million for 2007. Net charge-offs for the year ended December 31, 2007 was $545,000, most of which were commercial and
industrial loans.

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

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, 2009, 2008, 2007, 2006 and 2005
(In thousands)

2009

2008

2007

2006

2005Beginning balance, January 1

$
14,518

$
11,641

$
9,638

$
8,301

$
5,878Provision for loan losses


6,750


5,498


2,548


1,232


2,456Loans charged off:Commercial and industrial


(876
)

(1,188
)

(449
)

(42
)

(120
)Residential


(1,756
)

(576
)

(100
)




Consumer


(6
)

(892
)

(3
)

(1
)

(9
)Total loans charged off


(2,638
)

(2,656
)

(552
)

(43
)

(129
)Recoveries:Commercial and industrial


5


8


7


148


82Consumer


1


27








14Total recoveries


6


35


7


148


96Net (charge offs) recoveries


(2,632
)

(2,621
)

(545
)

105


(33
)Ending balance, December 31,

$
18,636

$
14,518

$
11,641

$
9,638

$
8,301




2009

2008

2007

2006

2005Loans:Balance at year end

$
1,293,432

$
1,139,348

$
1,039,684

$
845,449

$
705,644Allowance for loan losses to loans receivable, net of fees


1.44
%

1.27
%

1.12
%

1.14
%

1.18
%Net charge-offs to average loans receivable


0.22
%

0.24
%

0.06
%

0.00
%

0.01
%


54

---



Table of Contents

Table 5.

Allocation of the Allowance for Loan Losses
At December 31, 2009, 2008, 2007, 2006 and 2005
(In thousands)

2009

2008

2007Allocation

% of Total*

Allocation

% of Total*

Allocation

% of Total*Commercial and industrial

$
2,797


12.45
%
$
2,129


14.12
%
$
1,956


13.51
%Real estatecommercial


9,666


45.80


6,110


41.41


5,225


39.95Real estateconstruction


2,829


14.80


3,118


16.53


2,217


17.93Real estateresidential


2,096


17.67


2,138


18.


1,402


20.50Home equity lines


1,182


9.07


965


9.16


772


7.81Consumer


66


0.21


58


0.21


69


0.30Total allowance for loan losses

$
18,636


100.00
%
$
14,518


100.00
%
$
11,641


100.00
%




2006

2005Allocation

% of Total*

Allocation

% of Total*Commercial and industrial

$
1,670


12.09
%
$
1,153


9.83
%Real estatecommercial


3,687


37.50


3,338


39.01Real estateconstruction


1,764


18.27


1,432


18.13Real estateresidential


2,025


23.80


1,490


21.65Home equity lines


384


7.75


721


10.63Consumer


108


0.59


167


0.75Total allowance for loan losses

$
9,638


100.00
%
$
8,301


100.00
%


*Percentage
of loan type to the total loan portfolio.


55

---



Table of Contents

Non-Interest Income

The following table provides detail for non-interest income for the years ended December 31, 2009, 2008, and 2007.

Table 6.

Non-Interest Income
Years Ended December 31, 2009, 2008 and 2007
(In thousands)

2009

2008

2007Insufficient funds fee income

$
546

$
664

$
704Service charges on deposit accounts


488


463


312Other fee income on deposit accounts


217


283


381ATM transaction fees


683


655


579Credit card fees


77


67


61Loan service charges


2,649


1,643


1,502Trust adminstration fee income


3,134


2,949


3,474Investment fee income


480


528


813Realized and unrealized gains on mortgage banking activities


12,452


7,752


8,779Net realized gains on investment securities available-for-sale


760


913


Net realized loss on investment securitiestrading


(425
)

(9
)

Management fee income


1,833


765


1,072Bank-owned life insurance income


536


860


1,670Litigation recovery on previously impaired investment





190


83Gain on debt extinguishments





275


Other income (loss)


(82
)

(186
)

50Total non-interest income

$
23,348

$
17,812

$
19,480


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, 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 by George Mason and Cardinal First
of $4.7 million. 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. 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 that are deferred at the time of origination. 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 $1.1 million during 2009 as compared to 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

56

---



Table of Contents

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. 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 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. 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. 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 a result of our purchasing 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 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.

Non-interest
income for the years ended December 31, 2008 and 2007 was $17.8 million and $19.5 million, respectively. The decrease in
non-interest income for the year ended December 31, 2008, compared to the same period of 2007, is primarily the result of decreased realized and unrealized gains on mortgage banking
activities by George Mason of $1.0 million. The decrease in realized and unrealized gains on mortgage banking activities was directly related to the deterioration in the residential real estate
market. Management fee income decreased $307,000 during 2008 as compared to 2007, again due to the deterioration of the real estate market.

Another
contributing factor to the decrease in our non-interest income was the decrease in total investment fee income of $810,000 to $3.5 million for the year ended
December 31, 2008, compared to $4.3 million for the year ended December 31, 2007. Investment fee income, which includes net commissions earned at CWS and income earned at
Wilson/Bennett, decreased $285,000 to $528,000 as of December 31, 2008 from $813,000 as of December 31, 2007. Trust administration fee income was $2.9 million as of
December 31, 2008, a decrease of $525,000 from $3.5 million as of December 31, 2007, mostly due to the loss of low margin custody relationships with two clients. In addition, the
decrease in the market values of managed and custodial assets in the wealth management and trust services segment have contributed to the decrease in investment fee income during 2008.

Service
charges on deposit accounts increased $144,000 to $2.1 million for the year ended December 31, 2008, compared to $2.0 million for the year ended
December 31, 2007. Deposit service charges increased primarily as a result of an increased number of transaction accounts in 2008 compared to 2007. Loan service charges increased $141,000 to
$1.6 million for the year ended December 31, 2008, compared to $1.5 million in 2007. For the year ended December 31, 2008, the increase in the cash surrender value of our
bank-owned life insurance was $860,000, a decrease of

57

---



Table of Contents

$810,000
when compared to the same period of 2007. 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, 2008, we recorded gains on the sales of investment securities totaling $913,000 compared to none for the same period of 2007.

For
the year ended December 31, 2008 gains related to the extinguishment of four borrowings totaling $275,000. There were no similar transactions for the year ended
December 31, 2007.

During
the year ended December 31, 2007, we received a litigation settlement from a previously charged off investment of $190,000. For the year ended December 31, 2007, the
amount recovered for this same charge-off was $83,000.

Non-Interest Expense

The following table reflects the components of non-interest expense for the years ended December 31, 2009, 2008 and
2007.

Table 7.

Non-Interest Expense
Years Ended December 31, 2009, 2008 and 2007
(In thousands)

2009

2008

2007Salary and benefits

$
23,571

$
21,939

$
23,815Occupancy


5,442


5,547


5,348Professional fees


2,142


2,225


2,095Depreciation


1,948


2,390


3,035Data communications


3,352


2,685


2,632FDIC insurance assessments


2,692


721


768Mortgage loan repurchases and settlements


2,569


3,835


348Bank franchise taxes


1,525


1,482


1,369Amortization of intangibles


238


245


254Impairment of Fannie Mae perpetual preferred stock





4,408


Impairment of goodwill





2,821


Loss related to escrow arrangement








3,500Premises and equipment


2,156


1,965


1,771Advertising and marketing


2,084


2,116


2,058Stationary and supplies


936


881


1,091Loan expenses


748


264


783Other taxes


419


398


332Travel and entertainment


403


460


492Miscellaneous


2,202


1,531


2,193Total non-interest expense

$
52,427

$
55,913

$
51,884


58

---



Table of Contents

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 $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 charged by our existing vendor for our upcoming systems conversion to a new applications vendor which will occur 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.

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 repurchase and settlement
claims made by third party investors to George Mason during 2009. We have worked over the past twelve months to limit our exposure to loan repurchases and claims from investors and believe that any
additional expense recorded will be minimal in future periods. Investors have claimed, for specific loan purchases, that certain representations and warranties in the loan sale agreement were
violated. We have denied certain claims and for others, after analyzing all facts surrounding the underwriting of such loans, we have agreed to repurchase the loans or settle the claims.

Non-interest
expense was $55.9 million and $51.9 million for the years ended December 31, 2008 and 2007, respectively, an increase of
$4.0 million, or 7.8%. The increase in non-interest expense for the year ended December 31, 2008, compared to 2007, 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. For the year ended December 31, 2007, non-interest expense was impacted by the aforementioned loss of
$3.5 million related to our escrow arrangement with Liberty Growth Fund, LP. See the "Financial Overview" above for additional information on these transactions.

Salaries
and benefits expense decreased $1.9 million to $21.9 million for the year ended December 31, 2008 as compared to $23.8 million for the same period of
2007. This decrease was attributable to expense control measures put in place at George Mason and at the Bank during 2008 in order to decrease non-interest expense. Depreciation expense
decreased $645,000 to $2.4 million for the year ended December 31, 2008 as compared to $3.0 million for the year ended December 31, 2007 due to fixed assets becoming fully
depreciated.

59

---



Table of Contents

Income Taxes

We recorded a provision for income tax expense of $4.4 million for the year ended December 31, 2009, compared to 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 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. Our effective tax rate for December 31, 2009 was 29.9%.

We
recorded a provision for income tax expense of $885,000 for the year ended December 31, 2007. Our effective tax rate for the year ended December 31, 2007 was 16.5%.

For
more information, see "Critical Accounting Policies" above. In addition, Note 10 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 $1.29 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, 2009 and December 31, 2008 that were "troubled debt restructurings".

Interest
income on non-accrual loans, if recognized, is recorded using the cash basis method of accounting. When a loan is placed 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, 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.

Total
loans receivable, net of deferred fees and costs, were $1.14 billion at December 31, 2008, an increase of $99.7 million, or 9.6%, compared to
$1.04 billion at December 31, 2007. We achieved growth in all our loan categories with the exception of our residential real estate loans and consumer loans. Residential real estate
loans decreased $1.5 million to $211.7 million at December 31, 2008

60

---



Table of Contents

compared
to $213.2 million at December 31, 2007. Consumer loans decreased $736,000 to $2.4 million at December 31, 2008 from $3.1 million at December 31,
2007. Each of these decreases are primarily a result of repayments during 2008. Loans held for sale decreased $13.5 million to $157.0 million at December 31, 2008 compared to
$170.5 million at December 31, 2007.

At
December 31, 2008 we had one loan accounted for on a non-accrual basis totaling $4.7 million. There were no non-accrual loans at
December 31, 2007. Accruing loans, which are contractually past due 90 days or more as to principal or interest payments, at December 31, 2008 and December 31, 2007 were
$379,000 and $963,000, respectively, all of which were determined to be well secured and in the process of collection. The decrease in past due loans 90 days or more is a result of loans that
were past due at December 31, 2007 being paid off or charged off during 2008. There were no loans at December 31, 2008 and December 31, 2007 that were "troubled debt
restructurings".

At
December 31, 2008, the one loan on nonaccrual status did not have a valuation allowance as we charged-off $1.1 million of the outstanding principal balance
which was unsecured based on the estimated values of the underlying collateral. Gross interest income that would have been recorded if the 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, 2008 and 2007 was $59,000 and $5,000,
respectively. The interest income realized prior to the loans being placed on non-accrual status for the year ended December 31, 2008 and 2007 was $348,000 and $38,000,
respectively.

The
ratio of non-performing loans to total loans was 0.05%, 0.41%, and 0.00% at December 31, 2009, 2008 and 2007, respectively.

61

---



Table of Contents

The
following tables present the composition of our loans receivable portfolio at the end of each of the five years ended December 31, 2009 and additional information on
non-performing loans receivable.

Table 8.

Loans Receivable
At December 31, 2009, 2008, 2007, 2006 and 2005
(In thousands)

2009

2008

2007Commercial and industrial

$
161,156


12.45
%
$
160,989


14.12
%
$
140,531


13.51
%Real estatecommercial


592,780


45.80


472,131


41.41


415,471


39.95Real estateconstruction


191,523


14.80


188,484


16.53


186,514


17.93Real estateresidential


228,693


17.67


211,651


18.57


213,197


20.50Home equity lines


117,392


9.07


104,370


9.16


81,247


7.81Consumer


2,859


0.21


2,393


0.21


3,129


0.30Gross loans


1,294,403


100.00
%

1,140,018


100.00
%

1,040,089


100.00
%Net deferred (fees) costs


(971
)




(670
)




(405
)Less: allowance for loan losses


(18,636
)




(14,518
)




(11,641
)Loans receivable, net

$
1,274,796




$
1,124,830




$
1,028,043




2006

2005Commercial and industrial

$
102,284


12.09
%
$
69,392


9.83
%Real estatecommercial


317,201


37.50


275,381


39.01Real estateconstruction


154,525


18.27


128,009


18.13Real estateresidential


201,320


23.80


152,818


21.65Home equity lines


65,557


7.75


75,048


10.63Consumer


4,904


0.59


5,255


0.75Gross loans


845,791


100.00
%

705,903


100.00
%Net deferred (fees) costs


(342
)




(259
)Less: allowance for loan losses


(9,638
)




(8,301
)Loans receivable, net

$
835,811




$
697,343


Table 9.

Nonperforming Loans
At December 31, 2009, 2008, 2007, 2006 and 2005
(In thousands)

2009

2008

2007

2006

2005Nonaccruing loans

$
696

$
4,671

$


$
82

$
214Loans contractually past-due 90 days or more


151


379


963





33Total nonperforming loans

$
847

$
5,050

$
963

$
82

$
247


62

---



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, 2009
(Dollars in thousands)

One Year
or Less

Between
One and
Five Years

After
Five Years

TotalCommercial and industrial

$
105,725

$
43,588

$
11,843

$
161,156Real estatecommercial


156,716


345,840


90,224


592,780Real estateconstruction


149,593


28,352


13,578


191,523Real estateresidential


96,470


114,835


17,388


228,693Home equity lines


117,392








117,392Consumer


1,393


723


743


2,859Total loans receivable

$
627,289

$
533,338

$
133,776

$
1,294,403Fixed-rate loans




$
226,860

$
106,344

$
333,204Floating-rate loans





306,478


27,433


333,911Total loans receivable




$
533,338

$
133,777

$
667,115


---

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 $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%.

We
complete reviews for other-than-temporary impairment at least quarterly. As of December 31, 2009, 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, 2009, 96% of our mortgage-backed investment securities portfolio are guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation
(FHLMC) and the Government National Mortgage Association (GNMA).

63

---



Table of Contents

We
have $9.9 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, 2009 and 2008, 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 we will be required to sell any of our temporarily impaired securities.

In
addition, our held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million at December 31,
2009 (each security has a par value of $2.0 million). The collateral underlying these structured securities are instruments issued by financial institutions or insurers. We own the
A-3 tranches in each issuance. Each of the bonds are rated by more than one rating agency. Two of the securities have composite ratings of AA and two the securities have a composite rating
of BBB. These ratings are consistent with the grades from the other rating agencies. 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 recovering the amortized cost basis of each of the four securities, and
concluded that these securities are not other-than-temporarily impaired.

No
other-than-temporary impairment was recorded on the securities in our investment portfolio as of December 31, 2009. During 2008, we recognized an
other-than-temporary impairment of $4.4 million related to an investment in Fannie Mae perpetual preferred stock. 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, we made a decision to exit this type of
investment security and no longer own any similar equity investment in our investment securities portfolio. During 2009, we sold all shares of our Fannie Mae perpetual preferred stock for a loss of
$217,000. We elected to sell our 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 in 2008.

We
hold $15.7 million in FHLB stock at December 31, 2009. 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 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 $315.5 million at December 31, 2008, a decrease of $49.4 million or 13.5%, from $364.9 million in investment securities at
December 31, 2007.

Of
the $315.5 million in the investment portfolio at December 31, 2008, $50.2 million were classified as held-to-maturity, and
$265.4 million were classified as available-for-sale. At December 31, 2008, the yield on the available-for-sale investment portfolio was
4.97% and the yield on the held-to-maturity portfolio was 4.34%.

64

---



Table of Contents

The
following table reflects the composition of the investment portfolio at December 31, 2009, 2008, and 2007.

Table 11.

Investment Securities
At December 31, 2009, 2008 and 2007
(In thousands)

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


5.01Total U.S. government-sponsored agencies


56,048


55,659


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


9


9


8.97Five to ten years


33,079


33,964


4.21After ten years


184,635


189,432


4.84Total mortgage-backed securities


217,723


223,405


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


6,090


6,156


3.34After ten years


50,270


50,227


4.01Taxable municipal securitiesAfter ten years


3,331


3,225


4.96Total municipal securities


59,691


59,608


3.99U. S. treasury securitiesOne to five years


4,901


4,897


2.36Total U.S. treasury securities


4,901


4,897


2.36Total investment securities available-for-sale

$
338,363

$
343,569


4.55
%




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


4.59After ten years


19,103


19,731


4.26Total mortgage-backed securities


27,180


28,093


4.35Corporate bondsAfter ten years


8,004


3,343


1.33Total corporate bonds


8,004


3,343


1.33Total investment securities held-to-maturity


35,184


31,436


3.66Total investment securities

$
373,547

$
375,005


4.47
%


65

---



Table of Contents



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


8.25Total U.S. government-sponsored agencies


25,353


25,128


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


4,263


4,277


4.19Five to ten years


42,503


43,626


4.45After ten years


158,969


160,301


5.27Total mortgage-backed securities


205,735


208,204


5.08Municipal securities(2)After ten years


33,265


31,424


4.09Total municipal securities


33,265


31,424


4.09U. S. treasury securitiesOne to five years


598


600


1.02Total U.S. treasury securities


598


600


1.02Total investment securities available-for-sale

$
264,951

$
265,356


4.97
%




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


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


1,836


1,867


4.26Five to ten years


9,267


9,463


4.45After ten years


29,075


29,142


4.39Total mortgage-backed securities


40,178


40,472


4.40Corporate bondsAfter ten years


8,004


3,262


4.09Total corporate bonds


8,004


3,262


4.09Total investment securities held-to-maturity


50,183


45,759


4.34Total investment securities

$
315,134

$
311,115


4.87
%


66

---



Table of Contents



Available-for-sale at December 31, 2007

Amortized
Cost

Fair
Value

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

$
44,160

$
44,161


5.59
%Five to ten years


39,116


39,850


5.99Total U.S. government-sponsored agencies


83,276


84,011


5.78Mortgage-backed securities(1)One to five years


3,552


3,526


4.25Five to ten years


10,902


10,746


3.89After ten years


154,435


153,912


5.13Total mortgage-backed securities


168,889


168,184


5.03Municipal securities(2)After ten years


33,671


33,219


4.09Total municipal securities


33,671


33,219


4.09U. S. treasury securitiesOne to five years


592


584


4.09Total U.S. treasury securities


592


584


4.09Total investment securities available-for-sale

$
286,428

$
285,998


5.14
%




Held-to-maturity at December 31, 2007

Amortized
Cost

Fair
Value

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

$
6,500

$
6,468


3.63
%Five to ten years


11,011


10,998


4.52After ten years


2,000


2,002


5.30Total U.S. government-sponsored agencies


19,511


19,468


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


379


383


4.71Five to ten years


7,618


7,555


4.29After ten years


43,436


43,133


4.52Total mortgage-backed securities


51,433


51,071


4.49Corporate bondsAfter ten years


8,004


7,629


4.56Total corporate bonds


8,004


7,629


4.56Total investment securities held-to-maturity


78,948


78,168


4.45Total investment securities

$
365,376

$
364,166


4.99
%


---

67

---



Table of Contents

Deposits and Other Borrowed Funds

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. 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, 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. 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, 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. Cardinal Statutory Trust I is an unconsolidated entity as we are not the primary beneficiary of the
trust.

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.

68

---



Table of Contents

The
following table reflects the short-term borrowings and other borrowed funds outstanding at December 31, 2009.

Table 12.

Short-Term Borrowings and Other Borrowed Funds
At December 31, 2009
(In thousands)

Short-term FHLB advances:Advance Date

Term of Advance

Maturity or
Call Date

Interest Rate

Amount
OutstandingMay-08


2 year


May-10


3.31
%

10,000Total short-term FHLB advances and weighted average rate


3.31
%
$
10,000




Interest Rate

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


0.07
%
$
1,986Customer repurchase agreements


0.46


79,974Federal Funds Purchased


0.31


45,000Total other short-term borrowed funds and weighted average rate


0.40
%
$
126,960Other borrowed funds:Trust preferred


4.31
%
$
20,619FHLB advanceslong term


4.00


270,000Other borrowed funds and weighted average rate


4.02
%
$
290,619Total other borrowed funds and weighted average rate


2.93
%
$
427,579


Total
deposits were $1.18 billion at December 31, 2008, an increase of $82.9 million, or 7.6%, from $1.10 billion at December 31, 2007. The increase in
our total deposit balances is primarily a result of certain certificates of deposit promotions we had during 2008. At December 31, 2008, we had brokered certificates of deposit of
$89.2 million, of which $53.5 million were placed in the CDARS program. Brokered certificates of deposit at December 31, 2007 were $10.0 million.

Other
borrowed funds, which primarily include repurchase agreements, FHLB advances and our payable to Cardinal Statutory Trust I, were $367.2 million at December 31, 2008,
a decrease of $32.9 million, from $400.1 million at December 31, 2007. The primary reason for the decrease in other
borrowed funds at December 31, 2008 was a decrease in federal funds purchased funding. Advances from the Federal Home Loan Bank of Atlanta were $280.0 million at December 31,
2008, compared to $232.5 million at December 31, 2007.

69

---



Table of Contents

The
following table reflects the maturities of the certificates of deposit of $100,000 or more as of December 31, 2009, 2008 and 2007.

Table 13.

Certificates of Deposit of $100,000 or More
At December 31, 2009, 2008 and 2007
(In thousands)

Fixed Term

2009
No-Penalty*

TotalMaturities:Three 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




Fixed Term

2008
No-Penalty*

TotalMaturities:Three 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




Fixed Term

2007
No-Penalty*

TotalMaturities:Three months or less

$
113,430

$
11,140

$
124,570Over three months through six months


27,587


7,033


34,620Over six months through twelve months


12,120


13,248


25,368Over twelve months


22,314


731


23,045$
175,451

$
32,152

$
207,603


---

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.

Information
about the reportable segments, and reconciliation of this information to the consolidated financial statements at December 31, 2009, 2008 and 2007 follows.

70

---



Table of Contents

Table 14.

Segment Reporting
December 31, 2009, 2008 and 2007
(In thousands)

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


At and for the Year Ended December 31, 2007:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and
Trust Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
38,707

$
3,005

$


$
(1,393
)
$


$
40,319Provision for loan losses


2,548














2,548Non-interest income


4,032


11,112


4,287


49





19,480Non-interest expense


30,316


11,587


7,096


2,885





51,884Provision (benefit) for income taxes


2,470


907


(979
)

(1,513
)




885Net income (loss)

$
7,405

$
1,623

$
(1,830
)
$
(2,716
)
$


$
4,482Total Assets

$
1,663,834

$
184,602

$
3,893

$
176,366

$
(338,664
)
$
1,690,031


71

---



Table of Contents

Charges
for mortgage loan repurchases and settlements were $2.6 million and $3.8 million in 2009 and 2008, respectively. 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 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 2009.

During
the third quarter of 2007, we recorded a loss of $3.5 million pretax ($2.3 million after tax) from our escrow arrangement with Liberty Growth Fund, LP. This
loss was recorded in our wealth management and trust services segment.

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, 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, for 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.

Shareholders'
equity at December 31, 2008 was $158.0 million, a decrease of $1.5 million, compared to $159.5 million at December 31, 2007. The decrease
in shareholders' equity was primarily attributable to repurchases and retirement of our common stock totaling $1.4 million. In addition, dividends paid during 2008 totaled $966,000. These
decreases were offset by net income of $286,000 for the year ended December 31, 2008 and increases in other comprehensive income of $314,000 for the year ended December 31, 2008. Total
shareholders' equity to total assets at December 31, 2008 and 2007 was 9.1% and 9.4%, respectively. Book value per share at December 31, 2008 and 2007 was $6.58 and $6.59, respectively.
Total risk-based capital to risk-weighted assets was 12.72% at December 31, 2008 compared to 12.98% at December 31, 2007. Accordingly, we were considered "well
capitalized" for regulatory purposes at December 31, 2008.

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

72

---



Table of Contents

The following table shows the minimum capital requirement and our capital position at December 31, 2009, 2008, and 2007, for the Company and for the Bank.

Table 15.

Capital Components
At December 31, 2009, 2008 and 2007
(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, 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


6.00Leverage capital ratio


207,286


11.03


75,185

3


4.00


93,981

3


5.00At 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


6.00Leverage capital ratio


163,716


9.90


66,168

3


4.00


82,711

3


5.00At December 31, 2007Total risk-based capital

$
174,523


12.98
%
$
107,569

3


8.00
%
$
134,461

3


10.00
%Tier I risk-based capital


162,691


12.10


53,785

3


4.00


80,677

3


6.00Leverage capital ratio


162,691


10.26


63,456

3


4.00


79,320

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, 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


6.00Leverage capital ratio


187,562


10.02


74,884

3


4.00


93,605

3


5.00At 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


6.00Leverage capital ratio


153,810


9.32


66,018

3


4.00


82,523

3


5.00At December 31, 2007Total risk-based capital

$
159,745


11.91
%
$
107,308

3


8.00
%
$
134,135

3


10.00
%Tier I risk-based capital


147,913


11.03


53,654

3


4.00


80,481

3


6.00Leverage capital ratio


147,913


9.34


63,331

3


4.00


79,163

3


5.00


73

---



Table of Contents

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 $368.4 million at December 31, 2009, or 18.6%
of total assets. We held investments that are classified as held-to-maturity in the amount of $35.2 million at December 31, 2009. 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, 2009 was approximately $3 million. Borrowing capacity with the Federal Reserve Bank of Richmond was
approximately $333 million at December 31, 2009. 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.

74

---



Table of Contents

Contractual Obligations

We have entered into a number of long-term contractual obligations to support our ongoing activities. These contractual
obligations will be funded through operating revenues and liquidity sources held or available to us. The required payments under such obligations excluding interest were as follows:

Table 16.

Contractual Obligations
At December 31, 2009
(In thousands)

Payments Due by PeriodTotal

Less than
1 Year

1-2 Years

3-5 Years

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

$
559,841

$
376,536

$
86,658

$
94,481

$
2,166Brokered certificates of deposit


87,656


85,294


2,362





Advances from the Federal Home Loan Bank of Atlanta


280,000


10,000


15,000


100,000


155,000Trust preferred securities


20,619











20,619Operating lease obligations


30,309


4,165


3,458


9,054


13,632Total

$
978,425

$
475,995

$
107,478

$
203,535

$
191,417


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.

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

We
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 obligations. 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 estimates a reserve (early pay-off reserve) for mortgage loans sold that are repaid by the borrower within a certain number of days following the loan sale,
thereby requiring that George Mason refund part of the service release premium and/or premium pricing received from the investor pursuant to the loan sale agreement. The reserve as of
December 31, 2009 and 2008 was $25,000 and $9,000, respectively.

75

---





Table of Contents

George Mason has a reserve 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. During
2009 and 2008, George Mason either repurchased from or settled with investors on such loans for a total of $2.6 million and $3.8 million, respectively. At December 31, 2009 and
2008, the reserve for unresolved claims was $1.7 million and $1.6 million, respectively. We evaluate the merits of each claim and estimate the reserve based on actual and expected claims
received and consider the historical amounts paid to settle such claims. We have taken actions with respect to our investor arrangements in an attempt to limit the number of future claims.

In
addition, George Mason, as part of the service it provides to its managed companies, purchases the loans originated by managed companies at the time of origination. These loans are
then sold by George Mason to investors. George Mason has agreements with its managed companies requiring that the managed company fund the repurchase or settle the claim, for any loans that were
originated by the 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. 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. In this instance,
George Mason would establish an allowance on the receivable from the managed company. There is no such allowance recorded at December 31, 2009 or 2008 as management fully recovered all amounts
owed by managed companies as of these same period end dates.

During
the second quarter of 2008, George Mason entered into an agreement with a mortgage correspondent related to the loan purchase agreement between the two parties. The agreement
provided for the release of known and unknown claims by the mortgage correspondent in exchange for a $2.8 million payment to the correspondent. The terms of this agreement require that we may
be obligated to make additional payments to the correspondent in future periods based on certain conditions. We believe the additional exposure under this agreement is not material over the course of
the next two years. The amount of the exposure declines with the passage of time. In conjunction with this agreement, George Mason also entered into similar agreements with certain managed companies,
from which George Mason purchased mortgage loans and subsequently sold to this mortgage correspondent. These settlement agreements provided for a total payment of $1.0 million to George Mason
by those managed companies. The net amount of this settlement is reported in the non-interest expense section of the statement of operations.

A
summary of the contract amount of the Bank's exposure to off-balance-sheet risk as of December 31, 2009 and 2008, is as follows:

2009

2008(In thousands)Financial instruments whose contract amounts represent potential credit risk:Commitments to extend credit

$
409,341

$
413,457Standby letters of credit


13,877


10,811


Commitments
to extend credit of $71.0 million as of December 31, 2009 were related to George Mason's pipeline and were of a short-term nature.

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 or other termination clauses and may require payment of a fee. Since many of the commitments

76

---



Table of Contents

are
expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial properties.

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.

Quarterly Data

The following table provides quarterly data for the years ended December 31, 2009 and 2008. Quarterly per share results may not
calculate to the year-end per share results due to rounding.

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.

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.

77

---



Table of Contents

Table 17.

Quarterly Data
Years ended December 31, 2009 and 2008
(In thousands, except per share data)

2009Fourth
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




2008Fourth
Quarter

Third
Quarter

Second
Quarter

First
QuarterInterest income

$
21,328

$
21,951

$
22,177

$
23,155Interest expense


11,015


10,671


11,132


12,820Net interest income


10,313


11,280


11,045


10,335Provision for loan losses


(2,764
)

(1,645
)

(769
)

(320
)Net interest income after provision for loan losses


7,549


9,635


10,276


10,015Non-interest income


4,431


4,395


4,375


4,611Non-interest expense


11,195


19,256


13,639


11,823Net income (loss) before income taxes


785


(5,226
)

1,012


2,803Provision expense (benefit) for income taxes


(995
)

(816
)

138


761Net income (loss)

$
1,780

$
(4,410
)
$
874

$
2,042Earnings (loss) per sharebasic

$
0.07

$
(0.18
)
$
0.04

$
0.08Earnings (loss) per sharediluted

$
0.07

$
(0.18
)
$
0.04

$
0.08


78

---



Table of Contents

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. With the funding markets still lacking liquidity, forecasts for deposit rate movements carry greater uncertainty than when this market is
functioning normally. 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, 2009, we were asset sensitive for the entire two year simulation period. Asset sensitive means that yields on the Bank's interest-earnings assets will rise faster
than interest-bearing liability costs in a rising rate environment. For a declining rate environment, asset yields will fall faster than interest-bearing liability costs. Being asset sensitive our net
interest income should increase in a rising rate scenario. In the up 200 basis point scenario, our net interest income would improve by not more than 0.4% for the one year period and by not more than
2.2% over the two year time horizon. In the down 100 basis point scenario the interest rate risk model indicates that our net interest income will
decrease by not more than 0.8% over the one year period and the and by not more than 2.6% two year time horizon.

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.

79

---





Table of Contents

Item 8.    Financial Statements and Supplementary Data



PageReport of Independent Registered Public Accounting Firm

81Consolidated Statements of Condition

83Consolidated Statements of Income

84Consolidated Statements of Comprehensive Income

85Consolidated Statements of Changes in Shareholders' Equity

86Consolidated Statements of Cash Flows

87Notes to Consolidated Financial Statements

89


80

---





Table of Contents

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, 2009 and 2008, 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,
2009. We also have audited the Company's internal control over financial reporting as of December 31, 2009, 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.

81

---



Table of Contents

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, 2009 and
2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, 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, 2009, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.



McLean,
Virginia
March 15, 2010

82

---





Table of Contents

PART II

Item 8.    Financial Statements and Supplementary Data.

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CONDITION  December 31, 2009 and 2008  (In thousands, except share data)

2009

2008AssetsCash and due from banks

$
19,804

$
14,919Federal funds sold


5,037


31,009Total cash and cash equivalents


24,841


45,928Investment securities available-for-sale


343,569


265,356Investment securities held-to-maturity (market value of $31,436 and $45,759 at December 31, 2009 and December 31, 2008, respectively)


35,184


50,183Total investment securities


378,753


315,539Investment securities-trading


3,724


Other investments


16,467


16,370Loans held for sale


179,469


157,009Loans receivable, net of deferred fees and costs


1,293,432


1,139,348Allowance for loan losses


(18,636
)

(14,518
)Loans receivable, net


1,274,796


1,124,830Premises and equipment, net


15,743


16,463Deferred tax asset, net


7,691


8,799Goodwill and intangibles, net


13,935


14,173Bank-owned life insurance


33,712


33,176Prepaid FDIC insurance premiums


6,683


Other real estate owned


4,991


121Accrued interest receivable and other assets


15,380


11,349Total assets

$
1,976,185

$
1,743,757Liabilities and Shareholders' EquityNon-interest bearing deposits

$
166,019

$
147,529Interest bearing deposits


1,130,986


1,032,315Total deposits


1,297,005


1,179,844Other borrowed funds


427,579


367,198Mortgage funding checks


13,918


19,178Escrow liabilities


2,079


1,832Accrued interest payable and other liabilities


31,097


17,699Total liabilities


1,771,678


1,585,751




2009

2008Common stock, $1 par valueShares authorized


50,000,000


50,000,000Shares issued and outstanding


28,717,839


24,013,663


28,718


24,014Additional paid-in capital


159,798


130,709Retained earnings


12,705


3,437Accumulated other comprehensive income (loss), net


3,286


(154
)Total shareholders' equity


204,507


158,006Total liabilities and shareholders' equity

$
1,976,185

$
1,743,757


See
accompanying notes to consolidated financial statements.

83

---





Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  Years Ended December 31, 2009, 2008 and 2007  (In thousands, except per share data)

2009

2008

2007Interest income:Loans receivable

$
65,526

$
64,619

$
63,392Loans held for sale


7,358


7,140


16,686Federal funds sold


118


569


1,303Investment securities available-for-sale


12,123


13,195


12,905Investment securities held-to-maturity


1,587


2,521


3,722Other investments


30


567


635Total interest income


86,742


88,611


98,643Interest expense:Deposits


23,698


32,091


45,697Other borrowed funds


12,502


13,547


12,627Total interest expense


36,200


45,638


58,324Net interest income


50,542


42,973


40,319Provision for loan losses


6,750


5,498


2,548Net interest income after provision for loan losses


43,792


37,475


37,771Non-interest income:Service charges on deposit accounts


2,011


2,132


1,988Loan service charges


2,649


1,643


1,502Investment fee income


3,614


3,477


4,287Realized and unrealized gains on mortgage banking activities


12,452


7,752


8,779Net realized gains on investment securities available-for-sale


760


913


Net realized and unrealized loss on investment securitiestrading


(425
)

(9
)

Management fee income


1,833


765


1,072Increase in cash surrender value of bank-owned life insurance


536


860


1,670Litigation recovery on previously impaired investment





190


83Other income (loss)


(82
)

89


99Total non-interest income


23,348


17,812


19,480Non-interest expense:Salary and benefits


23,571


21,939


23,815Occupancy


5,442


5,547


5,348Professional fees


2,142


2,225


2,095Depreciation


1,948


2,390


3,035Data communications


3,352


2,685


2,632FDIC insurance premiums


2,692


721


768Mortgage loan repurchases and settlements


2,569


3,835


348Bank franchise taxes


1,525


1,482


1,369Amortization of intangibles


238


245


254Impairment of Fannie Mae perpetual preferred stock





4,408


Impairment of goodwill and intangible assets





2,821


Loss related to escrow arrangement








3,500Other operating expenses


8,948


7,615


8,720Total non-interest expense


52,427


55,913


51,884Net income (loss) before income taxes


14,713


(626
)

5,367Provision (benefit) for income taxes


4,388


(912
)

885Net income

$
10,325

$
286

$
4,482Earnings per common sharebasic

$
0.38

$
0.01

$
0.18Earnings per common sharediluted

$
0.37

$
0.01

$
0.18Weighted-average common shares outstandingbasic


27,186


24,370


24,606Weighted-average common shares outstandingdiluted


27,674


24,837


25,012


See accompanying notes to consolidated financial statements.

84

---





Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        Years ended December 31, 2009, 2008 and 2007        (In thousands)

2009

2008

2007Net income

$
10,325

$
286

$
4,482Other comprehensive income:Unrealized gain on available-for-sale investment securities:Unrealized holding gain arising during the year, net of tax expense of $1.8 million in 2009, $289 thousand in 2008 and $1.1 million in
2007


3,618


1,180


2,084Less: reclassification adjustment for gains included in net income net of tax expense of $262 thousand in 2009 and $310 thousand in
2008


(498
)

(602
)

3,120


578


2,084Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax expense of $169 thousand in 2009, net of tax benefit of
$43 thousand in 2008, net of tax benefit of $123 thousand in 2007


320


(264
)

(276
)Comprehensive income

$
13,765

$
600

$
6,290


See
accompanying notes to consolidated financial statements.

85

---





Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY        Years Ended December 31, 2009, 2008 and
2007        (In thousands)

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

TotalBalance, December 31, 2006


24,459

$
24,459

$
132,985

$
705

$
(2,276
)
$
155,873Stock options exercised


21


21


91








112Stock compensation expense, net of tax benefit








882








882Payment of deferred compensation shares








4








4Purchase and retirement of common stock


(278
)

(278
)

(2,446
)







(2,724
)Dividends on common stock of $0.04 per share











(974
)




(974
)Change in accumulated other comprehensive loss














1,808


1,808Net income











4,482





4,482Balance, 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

$
204,507


See accompanying notes to consolidated financial statements.

86

---





Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2009, 2008 and 2007    
 (In thousands)

2009

2008

2007Cash flows from operating activities:Net income

$
10,325

$
286

$
4,482Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation


1,948


2,390


3,035Amortization of premiums, discounts and intangibles


433


330


533Impairment of goodwill and intangible assets





2,821


Provision for loan losses


6,750


5,498


2,548Loans held for sale originated


(2,647,108
)

(1,354,047
)

(2,180,476
)Proceeds from the sale of loans held for sale


2,637,100


1,375,277


2,357,499Realized and unrealized gains on mortgage banking activities


(12,452
)

(7,752
)

(8,779
)Proceeds from sale of investment securities-trading


2,631


7,847


10,099Purchase of investment securities-trading


(6,780
)

(7,856
)

(10,109
)Realized loss on sale of investments securities-trading


619


9


10Unrealized gain on investment securities-trading


(194
)




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


(977
)

(913
)

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


217





(Gain) loss on sale of other assets


(6
)

10


2Gain from early extinguishment of long-term FHLB advances





(275
)

Loss on sales of other real estate owned


15





Stock compensation expense, net of tax benefits


439


343


338Provision for deferred income taxes


(635
)

(2,493
)

223Impairment of Fannie Mae perpetual preferred stock





4,408


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


(536
)

(860
)

(1,670
)(Increase) decrease in accrued interest receivable, other assets and deferred tax asset


(15,282
)

3,535


(2,286
)Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities


3,646


1,534


(3,903
)Net cash provided by (used in) operating activities


(19,847
)

30,092


171,546Cash flows from investing activities:Net purchases of premises and equipment


(1,222
)

(400
)

(1,461
)Proceeds from maturity and call of investment securities available-for-sale


35,963


150,165


146,147Proceeds from sales of investment securities available-for-sale


15,988


15,000


Proceeds from sale, of mortgage-backed securities available-for-sale


43,589


22,610


Proceeds from maturity and call of investment securities held-to-maturity


2,000


17,492


4,467Proceeds from sale of other investments





1,365


3,666Purchase of investment securities available-for-sale


(103,469
)

(110,813
)

(164,880
)Purchase of mortgage-backed securities available-for-sale


(100,040
)

(92,969
)

(50,286
)Purchase of other investments


(97
)

(3,547
)

(8,696
)Redemptions of investment securities available-for-sale


45,230


27,867


23,450Redemptions of investment securities held-to-maturity


12,890


11,127


14,018Net increase in loans receivable, net of deferred fees and costs


(156,716
)

(102,285
)

(194,780
)Net cash used in investing activities


(205,884
)

(64,388
)

(228,355
)


87

---



Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2009, 2008 and 2007

(In thousands)

2009

2008

2007Cash flows from financing activities:Net increase (decrease) in deposits


117,161


82,919


(121,957
)Net increase (decrease) in other borrowed funds


60,381


(81,129
)

85,679Net increase (decrease) in mortgage funding checks


(5,260
)

9,775


(36,756
)Proceeds from FHLB advanceslong term





90,000


155,000Repayments of FHLB advanceslong term





(41,458
)

(35,250
)Proceeds from issuance of stock


31,611





Stock options exercised


178


58


112Purchase and retirement of common stock





(1,396
)

(2,724
)Deferred compensation payments








4Shares issued for deferred compensation plan


1,565





Excess tax benefit from stock option exercises


65





20Dividends on common stock


(1,057
)

(966
)

(974
)Net cash provided by financing activities


204,644


57,803


43,154Net (decrease) increase in cash and cash equivalents


(21,087
)

23,507


(13,655
)Cash and cash equivalents at beginning of year


45,928


22,421


36,076Cash and cash equivalents at end of year

$
24,841

$
45,928

$
22,421Supplemental disclosure of cash flow information:Cash paid during the year for interest

$
36,493

$
45,437

$
57,743Cash paid for income taxes


4,599


3,039


3,925Supplemental schedule of noncash investing and financing activities:Unsettled purchases of investment securities available-for-sale

$
9,999

$


$
6,183Transfer of loans to other real estate owned


4,991


121





See accompanying notes to consolidated financial statements.

88

---





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 investment in its
wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the "Bank"), a state-chartered institution and its subsidiary, George Mason Mortgage, LLC ("George
Mason"), a mortgage banking company based in Fairfax, Virginia. In January 2009, the Bank organized a second mortgage 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 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 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

89

---



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, 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. At
December 31, 2008, the Company did not have any investment securities classified as trading.

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

The
Company regularly evaluates its securities whose value 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.

Premiums
and discounts are recognized in interest income using the effective interest method. Prepayments of the mortgages securing mortgage-backed securities may affect the anticipated
maturity date and, therefore, 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.

90

---



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 delivery, 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. 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.

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. Unusual and 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.

91

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

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, 2009 and 2008 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.



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.

The
Company performs annual impairment evaluations for its reporting units in the calendar quarter as follows: George Mason (3rd quarter), Wilson/Bennett
(2nd quarter), and Trust Services (1st quarter) or more frequently as circumstances warrant. Note 8 discusses the impairment charges recorded during
the year ended December 31, 2008. No impairment was indicated for 2009 or 2007. The Company also has amortizable intangible assets. These intangible assets are being amortized on a
straight-line basis over their estimated useful lives from nine to ten years. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be

92

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

recoverable.
There was no indication that the carrying amounts of the Company's amortizable intangible assets were not recoverable during 2009.



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.



Realized and unrealized gains on mortgage banking activities include income earned by George Mason and Cardinal First for originating
loans, the sale of these loans, and other activities incidental to mortgage banking activities.



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 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.

93

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

As
of December 31, 2009 and 2008, 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, 2009 and 2008. 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.



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.

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.

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

94

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

marked
to fair value. The fair values of loan commitments and the fair value 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. 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. 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, 2009, 2008, and 2007 was $374,000, $343,000, and $338,000, respectively. The total income tax benefit related to stock
options exercised and recognized in the income statement for share-based compensation arrangements was $65,000, $0 and $20,000 for the years ended December 31, 2009, 2008, and 2007.

At
December 31, 2009, the Company had two stock-based employee compensation plans, which are described more fully in Note 18.

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 after three years. Other 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 2009, 2008, and 2007 were $2.92, $3.10, and $4.68, 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:

2009

2008

2007Estimated option life


6.5 years


6.5 years


6.5 yearsRisk free interest rate


2.103.09
%

3.773.44
%

4.814.14
%Expected volatility


44.60
%

40.50
%

42.10
%Expected dividend yield


0.67
%

0.56
%

0.40
%


95

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Summary of Significant Accounting Policies (Continued)

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.



Certain amounts in the 2008 and 2007 consolidated financial statements and notes thereto have been reclassified to conform to the 2009
presentation.

(3) Investment Securities and Other Investments

The fair value and amortized cost of investment securities at December 31, 2009 and 2008 are shown below.

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


96

---





CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)



2008(In thousands)

Gross
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

$
25,353

$
45

$
(270
)
$
25,128Mortgage-backed securities


205,735


4,464


(1,995
)

208,204Municipal securities


33,265





(1,841
)

31,424U.S. treasury securities


598


2





600Total

$
264,951

$
4,511

$
(4,106
)
$
265,356Investment Securities Held-to-MaturityU.S. government-sponsored agencies

$
2,001

$
24

$


$
2,025Mortgage-backed securities


40,178


475


(181
)

40,472Corporate bonds


8,004





(4,742
)

3,262Total

$
50,183

$
499

$
(4,923
)
$
45,759


The fair value and amortized cost of investment securities by contractual maturity at December 31, 2009 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.

Available-for-Sale

Held-to-Maturity(In thousands)

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
ValueAfter 1 year but within 5 years

$
4,901

$
4,897

$


$
After 5 years but within 10 years


32,164


32,186





After 10 years


83,575


83,081


8,004


3,343Mortgage-backed securities


217,723


223,405


27,180


28,093Total

$
338,363

$
343,569

$
35,184

$
31,436


For
the years ended December 31, 2009, 2008, and 2007, proceeds from sales of investment securities available-for-sale amounted to $59.6 million,
$37.5 million, and $0 million, respectively. Gross realized gains in 2009, 2008, and 2007, amounted to $977,000, $913,000, and $0, respectively. Gross realized losses for the year ended
December 31, 2009 were $217,000 from the sale of Fannie Mae perpetual preferred stock. The Company elected to sell these shares as they were continuing to trade well below 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. There were no realized losses in 2008 and 2007.

97

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)

The
tables below show 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, 2009 and 2008.

Temporarily Impaired Securities  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
)


Temporarily Impaired Investment Securities  At December 31, 2008

Investment Securities Available-for-Sale

Less than 12 months

12 months or more

Total(In thousands)

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
lossU.S. governmentsponsored agencies

$
166

$
(270
)
$


$


$
166

$
(270
)Mortgage-backed securities


24,107


(1,416
)

4,399


(579
)

28,506


(1,995
)Municipal securities


26,357


(1,362
)

5,067


(479
)

31,424


(1,841
)Total temporarily impaired securities

$
50,630

$
(3,048
)
$
9,466

$
(1,058
)
$
60,096

$
(4,106
)


98

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)

Investment Securities Held-to-Maturity

Less than 12 months

12 months or more

Total(In thousands)

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
loss

Fair
Value

Unrealized
lossMortgage-backed securities

$
10,036

$
(166
)
$
910

$
(15
)
$
10,946

$
(181
)Corporate bonds








3,262


(4,742
)

3,262


(4,742
)Total temporarily impaired securities

$
10,036

$
(166
)
$
4,172

$
(4,757
)
$
14,208

$
(4,923
)


The
Company completes reviews for other-than-temporary impairment at least quarterly. As of December 31, 2009, 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, 2009, 96% of the Company's mortgage-backed securities are guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation
(FHLMC) and the Government National Mortgage Association (GNMA).

The
Company has $9.9 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, 2009, certain of the Company's investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of
pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed
securities are guaranteed and/or funded by the U.S. government. Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications
that the contractual cash flows will not be received when due. The Company does not intend to sell nor does the Company believe it will be required to sell any of the temporarily impaired securities
prior to the recovery of 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,
2009 (each security has a par value of $2.0 million). These securities are presented as corporate bonds in the above table. 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 are rated by more than one rating agency. Two of the securities have a
composite rating of AA and two of the securities have a composite rating of BBB. These ratings are consistent with the grades from the other rating agencies. There is minimal observable trading
activity 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.

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 47% of the performing collateral defaulted or deferred payment. In another of the pooled trust preferred

99

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Investment Securities and Other Investments (Continued)

securities
issues, 38% 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 36% of the performing collateral
defaulted or deferred payment. In the third of the pooled trust preferred securities issues, 66% 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 83% of the performing collateral defaulted or deferred payment. In the fourth of the pooled trust preferred securities issues, 50% 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 73% of the performing collateral defaulted or deferred payment.

During
2009, no other-than-temporary impairment has been recognized on the securities in the Company's investment portfolio. 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, 2009 and 2008 had carrying values of $235.5 million and
$222.9 million, respectively.

(In thousands)

2009

2008FHLB advances

$
106,973

$
143,803Repurchase agreements


108,976


67,512Debtor in possession, public deposits, trust services division deposits and interest rate swap


14,730


7,196FRB discount window and TT&L note option


4,809


4,342$
235,488

$
222,853


Other
investments at December 31, 2009 include $15.7 million of Federal Home Loan Bank stock and $63,000 of Community Bankers' Bank stock. At
December 31, 2008, other investments included $15.6 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, 2009 and 2008 is the Company's $619,000 investment in Cardinal Statutory Trust I. At December 31, 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, 2009, 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, 2009. 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, 2009 and 2008, its FHLB stock was
not impaired.

100

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Investment Securities-Trading

During 2009, we acquired investment assets and designated them as trading 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.

(in thousands)

2009Cash equivalents

$
772Equities


2,045Mutual funds


907Total

$
3,724


The
net unrealized gain on trading securities for the year ended December 31, 2009 was $194,000.

There
were no trading securities at December 31, 2008. The net realized loss on trading securities for the years ended December 31, 2009 and 2008 was $619,000 and $9,000,
respectively.

(5) Loans Receivable

The loan portfolio at December 31, 2009 and 2008 consists of the following:

(In thousands)

2009

2008Commercial and industrial

$
161,156

$
160,989Real estatecommercial


592,780


472,131Real estateconstruction


191,523


188,484Real estateresidential


228,693


211,651Home equity lines


117,392


104,370Consumer


2,859


2,3931,294,403


1,140,018Net deferred fees


(971
)

(670
)Loans receivable, net of fees


1,293,432


1,139,348Allowance for loan losses


(18,636
)

(14,518
)Loans receivable, net

$
1,274,796

$
1,124,830


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, 2009, the amount of
credit extended to any single borrower or group of related borrowers was limited to $30.2 million. Loans in process at December 31, 2009 and 2008 were $103,000 and $1,000, respectively.

101

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Loans Receivable (Continued)

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

(In thousands)

2009

2008

2007Balance, beginning of year

$
14,518

$
11,641

$
9,638Provision for loan losses


6,750


5,498


2,548Loans charged-off


(2,638
)

(2,656
)

(552
)Recoveries


6


35


7Balance, end of year

$
18,636

$
14,518

$
11,641


At
December 31, 2009, 2008, and 2007, the Company had impaired loans on non-accrual status of $696,000, $4.7 million, and $0, respectively. At
December 31, 2009, the impaired loans did not have a valuation allowance as the Company charged-off $411,000, which represented the portion of the outstanding principal balance that
was in excess of the estimated values of the underlying collateral.

The
average balance of impaired loans was $6.6 million, $13,000, and $132,000 for 2009, 2008, and 2007, respectively. For the year ended December 31, 2009, the Company had
a loan on nonaccrual of $4.7 million which was foreclosed upon during December 2009, which contributed to the impaired loan average balance for all of 2009. Similarly, this same loan was placed
on nonaccrual in December 2008, which is why the average balance for impaired loans was low for the year ended December 31, 2008. Interest income that would have been recorded had these loans
been performing for the years ended December 31, 2009, 2008, and 2007 would have been $414,000, $59,000, and $5,000, respectively. The interest income realized prior to these loans being placed
on non-accrual status for
December 31, 2009, 2008, and 2007 was $120,000, $348,000, and $38,000, respectively. At December 31, 2009 and 2008, the Company had accruing loans past due 90 days or more as to
principal or interest payments of $151,000 and $379,000, respectively, all of which were determined to be well-secured and in the process of collection.

Loans
totaling $334.7 million serve as collateral for Federal Home Loan Bank advances at December 31, 2009.

(6) Other Real Estate Owned

At December 31, 2009 and 2008, the Company had other real estate owned of $5.0 million and $121,000, respectively. The balances in other real estate owned are recorded at
fair value 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.

102

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(7) Loans Held for Sale

The loans held for sale portfolio at December 31, 2009 and 2008, consisted of the following:

(In thousands)

2009

2008Residential

$
160,722

$
114,095Construction-to-permanent


17,530


42,162178,252


156,257Net deferred costs


1,217


752Loans held for sale, net

$
179,469

$
157,009


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.

Goodwill
is reported in two of the Company's reporting units: George Mason (mortgage banking segment) and Wilson/Bennett (wealth management and trust services segment). 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 the goodwill associated with
George Mason. The Company employed the services of a valuation consultant to assist with the goodwill evaluation for George Mason in both 2009 and 2008. During 2008, ongoing challenges in the regional
residential real estate market negatively impacted the forecasted cash flows expected to be generated by George Mason over the near term and the valuation analysis indicated that goodwill was impaired
and a non-cash impairment charge of $2.8 million was recognized.

During
2008, the Company evaluated the customer relationship intangibles related to George Mason. These intangible assets are related to the relationships that George Mason has with
other

103

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8) Goodwill and Other Intangible Assets (Continued)

mortgage
lenders and its managed companies. George Mason provides services to these managed companies and earns management fee income, which generally fluctuates based on the volume of loan sales. As
a result of the downturn in the regional housing market, fee income from managed companies was adversely impacted. This continued adverse change in the business climate caused the Company to evaluate
the intangibles assets related to these managed companies for impairment in both 2008 and 2007. These evaluations did not result in an impairment loss for these intangible assets in either year. No
triggering events were indicated during 2009 which would have required an assessment of the recoverability of these and other identified intangibles.

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, 2007

$
1,781

$
643

$
795

$
489

$
2,576

$
1,1322008 activity:Customer relationship intangibles





198





29





227Trade name











18





18Balance 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

$
1,615


The aggregate amortization expense for 2009, 2008, and 2007 was $238,000, $245,000, and $254,000, respectively. The estimated amortization expense
for the next five years is as follows:

(In thousands)2010

$
2382011


2382012


2382013


1892014


58


104

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8) Goodwill and Other Intangible Assets (Continued)

The
changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 were as follows:

(In thousands)

Commercial
Banking

Mortgage
Banking

Wealth
Management and
Trust Services

TotalBalance at December 31, 2007

$
22

$
12,941

$
2,832

$
15,7952008 activity:Goodwill impairment charge





(2,821
)




(2,821
)Balance at December 31, 2008


22


10,120


2,832


12,9742009 activity:None











Balance at December 31, 2009

$
22

$
10,120

$
2,832

$
12,974


(9) Premises and Equipment

Components of premises and equipment at December 31, 2009 and 2008 were as follows:

(in thousands)

2009

2008Land

$
4,350

$
4,350Buildings


6,667


6,667Furniture and equipment


16,140


15,109Leasehold improvements


6,613


6,556Total cost


33,770


32,682Less accumulated depreciation and amortization


(18,027
)

(16,219
)Premises and equipment, net

$
15,743

$
16,463


Depreciation
expense for the years ended December 31, 2009, 2008, and 2007 was $1.9 million, $2.4 million, and $3.0 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.

105

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9) Premises and Equipment (Continued)

Minimum
future rental payments under the noncancelable operating leases, as of December 31, 2009 were as follows:

(In thousands)

AmountYear ending December 31,2010

$
4,1652011


3,4582012


3,2652013


3,1302014


2,659Thereafter


13,632$
30,309


The
total rent expense was $5.5 million, $5.6 million, and $5.3 million in 2009, 2008, and 2007, respectively and is recorded in occupancy expense in the
consolidated statements of income.

The
Company subleased excess office space to third parties. Future minimum lease payments under noncancelable subleasing arrangements as of December 31, 2009 were as follows:

(In thousands)

AmountYear ending December 31,2010

$
4092011


1872012


1102013


1052014


63$
874


The
total rent income was $482,000, $434,000, and $409,000 in 2009, 2008, and 2007, 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, 2009 and 2008:

(In thousands)

2009

2008Non-interest-bearing demand deposits

$
166,019

$
147,529Interest-bearing deposits:Interest checking


129,795


118,868Money market and statement savings


353,694


306,892Certificates of deposit


647,497


606,555Total interest-bearing deposits


1,130,986


1,032,315Total deposits

$
1,297,005

$
1,179,844


106

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(10) Deposits (Continued)

Interest expense by deposit categories is as follows:

(In thousands)

2009

2008

2007Interest checking

$
1,207

$
2,732

$
3,691Money market and statement savings


4,544


10,969


17,791Certificates of deposit


17,947


18,390


24,215Total interest expense

$
23,698

$
32,091

$
45,697


The
aggregate amount of certificates of deposit, each with a minimum denomination of $100,000 was $388.0 million and $241.3 million at December 31, 2009 and 2008,
respectively.

At
December 31, 2009, 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

$
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


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

Brokered
certificates of deposits at December 31, 2009 and 2008 were $87.7 million and $89.2 million, respectively.

At
December 31, 2009, the scheduled maturities of certificates of deposit were as follows:

(In thousands)2010

$
461,8302011


89,0202012


46,4582013


13,3442014


34,6792015


2,166$
647,497


107

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11) Other Borrowed Funds

At December 31, 2009 and 2008, other borrowed funds consisted of the following:

(In thousands)

2009

2008Fixed rate FHLB advances

$
280,000

$
280,000Federal Funds purchased


45,000


Repurchase agreements


79,974


65,887Payable to Statutory Trust I


20,619


20,619Treasury, tax & loan note option


1,986


692$
427,579

$
367,198


The
Company had fixed rate advances from the FHLB totaling $280.0 million at December 31, 2009. These advances mature through 2018 and have interest rates ranging from
2.57% to 5.00%. Certain fixed rate FHLB advances have call options through 2013.

The
contractual maturities of the fixed rate FHLB advances for each of December 31, 2009 and 2008 were as follows:

(In thousands)At December 31, 2009 and 2008Type 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 the years ended December 31, 2009 and 2008 were $280.0 million and $273.2 million, respectively. The maximum amount
outstanding at any month-end during the years ended December 31, 2009 and 2008 was $280.0 million and $290.0 million, respectively. Total interest expense on FHLB
advances for the years ended December 31, 2009, 2008, and 2007 was $11.3 million, $11.0 million, and $7.2 million, respectively.

For
the year ended December 31, 2009 there were no extinguishments of FHLB advances. For the year ended December 31, 2008, the Company extinguished four FHLB advances
totaling $20.0 million. The net gain on the extinguishment of these advances for the year ended December 31, 2008 was $275,000 and was recorded in other income in the consolidated
statements of income.

Securities
sold under agreements to repurchase generally mature within one to four days and are reflected in the consolidated statements of condition at the amount of cash received. The
Company's deposit customers are the counterparties to these types of financial instruments. At December 31, 2009 and 2008 the Company had repurchase agreements of $80.0 million and
$65.9 million, respectively. The weighted-average interest rate of these repurchase agreements was 0.46% and 2.05% at December 31,

108

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11) Other Borrowed Funds (Continued)

2009
and 2008, respectively. The average balances of repurchase agreements during 2009 and 2008 were $71.5 million and $58.6 million, respectively, and the maximum amount outstanding at
any month-end during 2009 and 2008 was $90.1 million and $70.0 million, respectively. Interest expense on repurchase agreements for 2009, 2008, and 2007 was $326,000,
$1.2 million, and $1.7 million, respectively.

At
December 31, 2009, the Company had federal funds purchased of $45.0 million. The Company had no outstanding federal funds purchased at December 31, 2008. During
2008, the Company did have federal funds purchased outstanding at certain times during the year. Interest expense on federal funds purchased in 2009, 2008, and 2007 was $9,000, $141,000, and
$1.0 million, respectively. The Company had no outstanding short-term dealer repurchase agreements at December 31, 2009 and 2008. However, the Company did have
short-term dealer repurchase agreements outstanding at other times during the years 2008 and 2007. Interest Expense on short-term dealer repurchase agreements for the years
ended December 31, 2009, 2008, and 2007 was $0, $10,000, and $822,000, respectively.

The
Company has a Treasury, Tax, & Loan ("TT&L") note option with the Federal Reserve. At December 31, 2009 and 2008, the outstanding balance in the TT&L
note option was $2.0 million and $692,000, respectively. Interest expense related to the TT&L note option in 2009, 2008, and 2007 was $1,000, $27,000, and $206,000, respectively. The Company
has a line of credit at the Federal Reserve discount window in the amount of $307.4 million at December 31, 2009, none of which was drawn as of that date. There was no interest expense
related to the discount window in 2009, 2008 or 2007.

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, 2009, the interest rate on trust preferred securities was 2.65%. These securities are redeemable at par beginning September 2009. The Company has not redeemed
any portion of these securities. 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 2009, 2008, and 2007 was $888,000, $1.2 million and $1.6 million, respectively.

The
scheduled maturities of other borrowed funds at December 31, 2009 were as follows:

(In thousands)

2010

2011

2012

2013

2014

2015 and
thereafterFHLB advances

$
10,000

$
15,000

$
80,000

$
20,000

$



155,000Federal funds purchased


45,000














Repurchase agreements


79,974














Payable to Statutory Trust I

















20,619TT&L note option


1,986














$
136,960

$
15,000

$
80,000

$
20,000

$



175,619


109

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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 share 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, 2009 and 2007, the Company recorded
income tax expense of $4.4 million and $885,000, 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)

2009

2008

2007Income tax at federal corporate rate of 34.5% for 2009 and 2007 and 34% at 2008

$
5,076

$
(213
)
$
1,852Change in valuation allowance


58


228


302Change in the carrying rate of deferred tax assets and liabilities


(142
)

52


15Expected state tax benefit of losses of nonbank entities


(58
)

(228
)

(302
)State tax expense, net of federal tax benefit


69


6


37Nontaxable income


(741
)

(764
)

(976
)Nondeductible expenses


98


103


17Other


28


(96
)

(60
)$
4,388

$
(912
)
$
885


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

(In thousands)

2009

2008

2007Included in net incomeCurrentFederal

$
3,732

$
1,522

$
2,030State


78


59


62Total current


3,810


1,581


2,092DeferredFederal


564


(2,477
)

(1,201
)State


14


(16
)

(6
)Total deferred


578


(2,493
)

(1,207
)Total included in net income

$
4,388

$
(912
)
$
885Included in shareholders' equity:Deferred tax expense related to the change in the net unrealized gain on investment securities available for sale

$
1,580

$
289

$
1,107Deferred tax expense (benefit) related to the change in the net unrealized gain (loss) on derivative instruments designated as cash flow hedges


169


43


(123
)Total included in shareholders' equity

$
1,749

$
332

$
984


110

---



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)

2009

2008Deferred tax assets:Allowance for loan losses

$
7,201

$
5,621Net operating state loss carryforwards


1,618


1,560Unrealized losses on derivative instruments designated as cash flow hedges


55


224Deferred compensation


2,281


1,981Goodwill and intangibles, net





469Depreciation


948


797Other


1,023


706Total gross deferred tax assets


13,126


11,358Less valuation allowance


(1,618
)

(1,560
)Net deferred tax assets


11,508


9,798Deferred tax liabilities:Unrealized gains on investment securities available-for-sale


(1,821
)

(241
)Goodwill and intangibles, net


(659
)

Fair value adjustments


(712
)

(190
)Prepaid expenses


(99
)

(84
)Loan origination costs


(526
)

(484
)Total gross deferred tax liabilities


(3,817
)

(999
)Net deferred tax asset

$
7,691

$
8,799


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, 2009 and 2008 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 December 31, 2009 and 2008.

As
of December 31, 2009 and 2008, 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, 2009 and 2008. 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.

111

---





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 loan
commitment 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.

At
December 31, 2009 and 2008, accumulated other comprehensive income included an unrealized gain (loss), net of tax, of $6,500 and ($211,500), 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, 2009 which is related to the Company's cash flow hedges will be recognized in earnings during the first quarter of 2010. At
December 31, 2009 the Company recognized minimal amounts related to hedge ineffectiveness.

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.

At
December 31, 2008, the Company had $81.6 million in loan commitments and associated forward sales and had $117.6 million in forward loan sales associated with
$117.6 million of loans held for sale contracts. At December 31, 2008, the derivative asset was $2.1 million and the derivative liability was $1.4 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.

At
December 31, 2009 and 2008, 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)

2009

2008Notional amount

$
10,000

$
10,000Weighted average pay rate


3.97
%

3.97
%Weighted average receive rate


1.45
%

3.20
%Weighted average maturity in years


4 years


5 yearsUnrealized loss relating to interest rate swaps

$
148

$
304


112

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14) Derivative Instruments and Hedging Activities (Continued)

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, 2009, 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 2009 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, 2009 and 2008, the information pertaining to outstanding interest rate swap agreements used to hedge fixed-rate loans is as follows:

(Dollars in thousands)

2009

2008Notional amount

$
11,795

$
12,000Weighted average pay rate


5.42
%

5.42
%Weighted average receive rate


0.23
%

3.02
%Weighted average maturity in years


4 years


5 yearsUnrealized loss relating to interest rate swaps

$
1,283

$
1,865


These
agreements provide 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, 2009 and 2008, the unrealized loss relating to use of interest rate swaps was recorded in other income with an equal and 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 forcasted to remain effective.
Ineffectiveness reflected in earnings has been 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, 2009 and 2008.
In addition, the gains

113

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

and
losses related to these derivative instruments is provided for the years ended December 31, 2009 and 2008. See Note 14 above for a detail of the related hedged items.

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

Asset Derivatives

Liability DerivativesDerivatives Designated as Hedging Instruments

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueInterest 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 InstrumentsForward 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


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

Derivatives in Fair Value Hedging Relationships

Locations of Gain
(Loss) Recognized
in Income on
Derivative

Amount of Gain
(Loss) Recognized
in Income on
Derivative

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

Amount of Gain
(Loss) Recognized
in Income on
Hedged ItemInterest Rate Swaps

Other Income

$
582

Other Income

$
(582
)Total



$
582



$
(582
)


114

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



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


115

---



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, 2008
(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

$
2,170Forward Loan Sales Commitments

Accrued Interest Receivable and Other Assets


905

Accrued Interest Payable and Other Liabilities


1,234Total Derivatives Designated as
Hedging Instruments




905




3,404Derivatives Not Designated as Hedging InstrumentsForward Loan Sales Commitments

Accrued Interest Receivable and Other Assets


1,010

Accrued Interest Payable and Other Liabilities


187Rate Lock Commitments

Accrued Interest Receivable and Other Assets


187

Accrued Interest Payable and Other Liabilities


Total Derivatives Not Designated as Hedging Instruments




1,197




187Total Derivatives



$
2,102



$
3,591


Impact of Derivative Instruments on the Statement of Income
For the Year Ended December 31, 2008
(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

$
(1,263
)

Other Income

$
1,263Total




$
(1,263
)



$
1,263


116

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



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

$
(199
)
Other Income

$


Other Income

$
Forward Loan Sales Commitments


(65
)
Other Income


129

Other Income


1Total

$
(264
)


$
129



$
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

$
1,008

Realized and unrealized gains on mortgage banking activitiesForward Loan Sales Commitments


(185
)
Other IncomeRate Lock Commitments


185

Other IncomeTotal

$
1,008


(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, 2009, there were approximately $45.0 million of accumulated earnings at the Bank which could be paid as dividends to the Company.

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 2009.

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).

117

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(16) Regulatory Matters (Continued)

The
regulatory capital of the Company at December 31, 2009 and 2008 is as follows:

Actual

Adequacy Purposes

Action ProvisionsAt December 31, 2009
(In thousands)

Amount

Ratio

Amount



Ratio

Amount



RatioTotal risk-based capital

$
226,137


14.15
%
$
127,869

3


8.00
%
$
159,837

3


10.00
%Tier 1 risk-based capital


207,286


12.97


63,935

3


4.00


95,902

3


6.00Leverage capital ratio


207,286


11.03


75,185

3


4.00


93,981

3


5.00At December 31, 2008
(In thousands)Total risk-based capital

$
178,420


12.72
%
$
112,207

3


8.00
%
$
140,259

3


10.00
%Tier 1 risk-based capital


163,716


11.67


56,104

3


4.00


84,156

3


6.00Leverage capital ratio


163,716


9.90


66,168

3


4.00


82,711

3


5.00


The regulatory capital of the Bank at December 31, 2009 and 2008 is as follows:

Actual

For Capital Adequacy Purposes

Capitalized Under
Prompt Corrective
Action ProvisionsAt December 31, 2009
(In thousands)

Amount

Ratio

Amount



Ratio

Amount



RatioTotal risk-based capital

$
206,413


12.98
%
$
127,257

3


8.00
%
$
159,071

3


10.00
%Tier 1 risk-based capital


187,562


11.79


63,629

3


4.00


95,443

3


6.00Leverage capital ratio


187,562


10.02


74,884

3


4.00


93,605

3


5.00At December 31, 2008
(In thousands)Total risk-based capital

$
168,513


12.04
%
$
111,957

3


8.00
%
$
139,946

3


10.00
%Tier 1 risk-based capital


153,810


10.99


55,978

3


4.00


83,968

3


6.00Leverage capital ratio


153,810


9.32


66,018

3


4.00


82,523

3


5.00


At December 31, 2009 and 2008, 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, 2009 and 2008, George Mason
maintained capital in excess of these required guidelines.

(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 collectibility or present other unfavorable features.

118

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17) Related-Party Transactions (Continued)

Analysis
of activity for loans to related parties follows:

(In thousands)

2009

2008Balance, beginning of year

$
50,707

$
39,137New loans


7,070


14,060Loans paid off or paid down


(12,374
)

(2,490
)Balance, end of year

$
45,403

$
50,707


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 the second quarter of 2007 and will terminate on June 30, 2010 without any option to extend. George Mason has notified the lessor of its intention
to renew its lease. The rent that George Mason pays for the use of this space ranges from $737,000 to $1.3 million per year during the term of the lease. Rent payments totaled
$1.3 million in 2009, $848,000 in 2008, and $792,000 in 2007.

(18) Earnings Per Common Share

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

(In thousands, except per share data)

2009

2008

2007Net income

$
10,325

$
286

$
4,482Weighted average shares for basic


27,186


24,370


24,606Weighted average shares for diluted


27,674


24,837


25,012Basic earnings per common share

$
0.38

$
0.01

$
0.18Diluted earnings per common share

$
0.37

$
0.01

$
0.18


The
following shows the composition of basic outstanding shares for the years ended December 31, 2009, 2008, and 2007:

(In thousands)

2009

2008

2007Weighted average shares outstandingbasic


26,881


24,127


24,333Weighted average shares attributable to deferred compensation plans


305


243


273Total weighted average sharesbasic


27,186


24,370


24,606


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.

119

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(18) Earnings Per Common Share (Continued)

The following shows the composition of diluted outstanding shares for the years ended December 31, 2009, 2008, and 2007:

(In thousands)

2009

2008

2007Weighted average shares outstandingbasic


26,881


24,127


24,333Weighted average shares attributable to deferred compensation plans


663


567


437Weighted average shares attributable to vested stock options


130


143


242Total weighted average sharesdiluted


27,674


24,837


25,012


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, 2009,
2008, and 2007 were 289,894, 319,509, and 51,346. 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, 2009, 2008, and 2007, 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 per $1.00 of employee contributions up to a maximum of 3% of the employee's contribution. Expense related to the Company's match in 2009, 2008, and 2007 was $511,000,
$495,000, and $567,000, 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 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, 2009, 2008 and 2007 was $206,000, $240,000 and $149,000, 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.

120

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(20) Deferred Compensation Plans (Continued)

The
deferred compensation plan liability at December 31, 2009 and 2008 was $3.8 million and $4.0 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, 2009, 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 452,558 shares of the Company's common stock available for future grants and awards in the Equity Plan as of December 31, 2009.

The
following tables present a summary of the Company's stock option activity for the years ended December 31, 2009, 2008, and 2007:

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


121

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



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
)




Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value ($000)Outstanding at December 31, 2006


2,419,274

$
8.70Granted


50,500


10.00Exercised


(20,546
)

5.45Forfeited


(20,875
)

10.26Outstanding at December 31, 2007


2,428,353

$
8.53


6.50

$
1,428,443Options exercisable at December 31, 2007


2,136,325

$
8.39


6.46

$
1,994,521


Information
pertaining to stock options outstanding at December 31, 2009 is as follows:

At December 31, 2009

Options Outstanding

Options ExercisableWeighed AverageRange of Exercise Prices

Number
Outstanding

Remaining
Contractual Life

Exercise
Price

Number
Exercisable

Weighted
Average
Exercise Price$3.25$4.44


199,724

2.2 years

$
3.70


199,724

$
3.70$4.50$5.50


288,150

3.0 years


4.94


288,150


4.94$5.95$8.28


378,399

6.0 years


7.60


275,099


8.10$8.39$9.59


494,676

5.3 years


8.93


488,676


8.94$9.78$10.91


451,900

5.2 years


10.60


449,700


10.60$11.05$12.65


326,584

6.2 years


11.63


244,384


11.53Outstanding at year end


2,139,433

4.94

$
8.43


1,945,733

$
8.40


Total
intrinsic value of options exercised during the years ended December 31, 2009, 2008, and 2007 was $168,000, $10,000, and $80,000, respectively.

122

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

A
summary of the status of the Company's non-vested stock options and changes during the year ended December 31, 2009 is as follows:

Number of
Shares

Weighted Average
Grant Date
Fair ValueBalance at December 31, 2008


166,600

$
5.62Granted


139,650


2.92Vested


(82,500
)

4.95Forfeited


(30,050
)

5.34Balance at December 31, 2009


193,700

$
4.00


At
December 31, 2009, there was approximately $600,000 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 2.2 years. The total fair value of shares that vested during the years ended December 31,
2009, 2008, and 2007 was $295,000, $337,000, and $596,000, respectively.

For
the years ended December 31, 2009, 2008 and 2007, the Company received cash for stock options exercised of $178,000, $58,000 and $112,000, respectively. The tax benefit
realized as a result of these exercises for the years ended December 31, 2009, 2008 and 2007 was $65,000, $0 and $20,000, 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 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, 2009, 2008 and
2007 follows:

123

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22) Segment Reporting (Continued)

(In thousands)

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


124

---





CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(22) Segment Reporting (Continued)

At and for the Year Ended December 31, 2007:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and Trust
Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
38,707

$
3,005

$


$
(1,393
)
$


$
40,319Provision for loan losses


2,548














2,548Non-interest income


4,032


11,112


4,287


49





19,480Non-interest expense


30,316


11,587


7,096


2,885





51,884Provision (benefit) for income taxes


2,470


907


(979
)

(1,513
)




885Net income (loss)

$
7,405

$
1,623

$
(1,830
)
$
(2,716
)
$


$
4,482Total Assets

$
1,663,834

$
184,602

$
3,893

$
176,366

$
(338,664
)
$
1,690,031


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.

During
the year ended December 31, 2007, the Company recorded a loss of $3.5 million pretax ($2.3 million after tax) from an escrow arrangement with Liberty Growth
Fund, LP. This loss was recorded through the wealth management and trust services segment.

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 guarantees extend until satisfactory completion of the customer's contractual obligations. All standby letters of credit outstanding at December 31, 2009 are collateralized.

125

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Commitments
to extend credit of $71.0 million as of December 31, 2009 are related to George Mason's mortgage loan funding commitments and are of a short term nature.
Commitments to extend credit of $338.4 million primarily have floating rates as of December 31, 2009. It is uncertain as to the amounts that we will be required to fund on these
commitments as many such arrangements expire with no amounts 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, 2009 and 2008 is as follows:

(In thousands)

2009

2008Financial instruments whose contract amounts represent potential credit risk:Commitments to extend credit

$
409,341

$
413,457Standby letters of credit


13,877


10,811


The
fair value of the liability associated with standby letters of credit at December 31, 2009 and 2008 was immaterial.

George
Mason estimates a reserve (early pay-off reserve) for mortgage loans sold that are repaid by the borrower within a certain number of days following the loan sale,
thereby requiring that George Mason refund part of the service release premium and/or premium pricing received from the investor pursuant to the loan sale agreement. The reserves as of
December 31, 2009 and 2008 were $25,000 and $9,000, respectively.

George
Mason has a reserve 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. During 2009 and 2008, George Mason
either repurchased from or settled with investors on such loans for a total of $2.6 million and $3.8 million, respectively. At December 31, 2009 and 2008, this reserve had a
balance of $1.7 million and $1.6 million, respectively. The expense related to this reserve for the years ended December 31, 2009, 2008 and 2007 was $2.6 million,
$2.0 million, and $347,000, respectively. The Company evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical
amounts paid to settle such claims.

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

126

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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. In this instance, George Mason would establish an allowance on the receivable from the managed company. There is no such allowance
recorded at December 31, 2009 or 2008 as management fully recovered all amounts owed by managed companies as of these same period end dates.

During
2008, George Mason made a cash settlement to one of its mortgage correspondents related to the loan purchase agreement between the two parties. This settlement agreement provided
for the release of known and unknown claims by the mortgage correspondent in exchange for a $2.8 million payment to the correspondent. George Mason also entered into similar agreements with
certain third party mortgage companies managed by George Mason and from which George Mason purchased mortgage loans and sold to this mortgage correspondent. These settlement agreements provided for a
total payment of $1.0 million to George Mason by these third party mortgage companies. The net amount of this settlement is reported in the non-interest expense section of the
statement of operations.

The
Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company evaluates each customer's
creditworthiness on a case-by-case basis and requires collateral to support financial instruments when deemed necessary. The amount of collateral obtained upon extension of
credit is based 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.

The
Company has guaranteed payment of the $20.0 million debt of Statutory Trust I. See Note 9 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 instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in
which all significant inputs and significant value drivers are observable in active markets.

127

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

Level 3Valuations
derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Recurring Fair Value Measurements

The Company's investment securities available-for-sale 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 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 observable rates from a national
valuation service. These rates are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category. In addition, 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 using observable rates from a national valuation service. These rates are applied to a third party
industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.

Assets
and liabilities measured at fair value on a recurring basis as of December 31, 2009 are shown below:

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

$
343,569

$
4,897

$
338,672Investment securities-trading


3,724





3,724Loans receivable


13,078





13,078Bank-owned life insurance


33,712





33,712Derivative liabilityinterest rate swaps


1,437





1,437Derivative assetinterest rate swaps


5





5Derivative assetforward loan sales commitments


4,607





4,607Derivative assetinterest rate lock commitments


3





3Derivative liabilityforward loan sales commitments


1,197





1,197Derivative liabilityforward loan sale commitments


407





407


128

---





CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

The fair value of the Company's interest rate lock commitments and forward loan sale commitments are included in the above table. 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 investors through to the
date the loan closes are undesignated derivatives and accordingly, are marked to fair value through earnings.

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 and Wilson/Bennett reporting units, the valuation of the Company's corporate bonds held in its held-to-maturity
investment securities portfolio, nonaccrual loans and other real estate owned. As no impairment of the reporting units was indicated in 2009, the Company was not required to value the related
goodwill.

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

$


$


$
24,010Wilson/BennettReporting Unit


3,551








3,551Corporate bonds


3,343








3,343Nonaccrual loans


696





696


Other real estate owned


4,991





4,991





During
the second quarter of 2009, the Company performed its annual assessment of the goodwill related to its Wilson/Bennett subsidiary. The Company estimated the fair value of this
using a multi-scenario discounted cash flow approach. Those scenarios that more closely reflect actual results were weighted more heavily than scenarios that vary from recent experience. Cash flows
were projected with growth in assets under management being a primary input. Varying levels of expenses were also considered. Additionally, a terminal value, or ending cash value, was assigned to each
scenario based upon values of other asset management firms. In particular, the terminal value was projected based upon market values of these other firms as represented by market capitalization
multiples of asset under managements, revenues and net income. The average multiples were then applied to Wilson/Bennett's projected assets under management, revenues and net income to estimate a
terminal value.

129

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

Based
upon this analysis, the fair value of Wilson Bennett exceeded it current book value, and no further impairment testing was necessary.

During
the third quarter of 2009, the Company performed its annual assessment of the goodwill related to its George Mason mortgage banking subsidiary. The Company employed the services
of a valuation consultant to assist with this analysis. The consultant employed both the market approach and income approach of evaluation. The market approach involves a comparison to other companies
that have readily available market values or other transactions involving similar companies. The income approach recognizes that most businesses derive their value from their ability to generate
future returns, and the cash flow generating power of an operating business is the single most important determinant of value. The income approach utilizes the discounted cash flow method and arrives
at a value by discounting estimated future free cash flows and its estimated terminal value at the end of the holding period by a discount rate. In this analysis, cash flows were projected for five
years and the terminal value is an estimate of the fair value of the Company at the end of the five year holding period. The discount rate represents the George Mason's equity cost of capital, which
is generally defined as the rate of return required by investors for alternate investments of equal risk.

Due
to the distressed and disorderly current market for mortgage banking companies and the very limited number of transactions that have occurred over the past year and the even more
limited amount of data on these transactions, in determining the fair value of George Mason, considerably more weight was given to the income approach (80%) versus the market approach (20%). Although
only a 20% weight was applied to the value generated by the market approach, the income approach includes numerous inputs that are based on the current market, including the revenue and expense
assumptions and the underlying discount rates applied to the free cash flows and terminal cash flow. Based upon this analysis, the fair value of George Mason exceeded its carrying value.

The
Company's corporate bond portfolio consists of four pooled trust preferred securities, with a total par value of $8.0 million at December 31, 2009 (each security has a
par value of $2.0 million). The Company owns senior A-3 tranches of each of these pools and uses the services of a consultant to estimate the projected cash flow of each investment
based upon several scenarios regarding likely possible default rates of the underlying issuers of each pool. The analysis yielded a result that fell within the range of values provided by external
pricing sources.

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.

130

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

The
following summarizes the significant methodologies and assumptions used in estimating the fair values presented in the following table, and not disclosed elsewhere in this footnote.

Cash and Cash Equivalents

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

Investment Securities Held-to-Maturity and Other Investments

Fair values for investment securities held-to-maturity are based on quoted market prices or prices quoted for
similar financial instruments.

Loans Held for Sale

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

Loans Receivable, Net

In order to determine the fair market value for loans receivable, the loan portfolio was segmented based on loan type, credit quality
and maturities. For certain variable rate loans with no significant credit concerns and frequent repricings, estimated fair values are based on current carrying amounts. The fair values of other loans
are estimated using discounted cash flow analyses, at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. This method of estimating fair value
does not incorporate the exit-price concept of fair value which is appropriate for this disclosure.

Deposits

The fair values for demand deposits are equal to the carrying amount since they are payable on demand at the reporting date. The
carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on CDs to a schedule of aggregated expected monthly maturities on
time deposits.

Other Borrowed Funds

The fair value of other borrowed funds is estimated using a discounted cash flow calculation that applies interest rates currently
available for loans with similar terms.

Other Commitments to Extend Credit

The fair value of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of
funding, compensating balance and other covenants or requirements. These commitments have expiration dates and generally expire within one year. Many commitments are expected to, and typically do,
expire without being drawn upon. The rates and terms of these instruments are competitive with others in the market in which the Company operates. The carrying

131

---



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(24) Fair Value Measurements (Continued)

amounts
are reasonable estimates of the fair value of these financial instruments and are zero at December 31, 2009 and 2008.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

The
following summarizes the carrying amount of these financial assets and liabilities that the Company has not recorded at fair value on a recurring basis at December 31, 2009
and 2008:

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




December 31, 2008(In thousands)

Carrying
Amount

Estimated
Fair ValueFinancial assets:Cash and cash equivalents

$
45,928

$
45,928Investment securities held-to-maturity and other investments


66,553


62,129Loans held for sale


157,009


157,009Loans receivable, net


1,125,509


1,118,012Accrued interest receivable


5,204


5,204Financial liabilities:Demand deposits

$
147,529

$
147,529Interest checking


118,868


118,868Money market and statement savings


306,892


306,892Certificates of deposit


606,555


616,985Other borrowed funds


367,198


331,856Mortgage funding checks


19,178


19,178Accrued interest payable


1,660


1,660


132

---



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, 2009 and 2008  (In thousands)

2009

2008AssetsCash and cash equivalents

$
19,589

$
7,579Investment securities-trading


3,724


Other investments


113


113Investment in subsidiaries


204,448


167,813Premises and equipment, net


802


893Goodwill


134


134Other assets


2,152


4,151Total assets

$
230,962

$
180,683Liabilities and Shareholders' EquityDebt to Cardinal Statutory Trust I

$
20,619

$
20,619Other liabilities


5,836


2,058Total liabilities


26,455


22,677Total shareholders' equity

$
204,507

$
158,006Total liabilities and shareholders' equity

$
230,962

$
180,683


PARENT COMPANY ONLY CONDENSED STATEMENTS OF OPERATIONS  Years Ended December 31, 2009, 2008, and 2007  (In thousands)

2009

2008

2007Income:Net interest expense

$
(888
)
$
(1,192
)
$
(1,393
)Net realized and unrealized trading losses


(425
)




Other income


12


35


49Total income (loss)


(1,301
)

(1,157
)

(1,344
)Expensegeneral and administrative


2,471


2,535


2,885Net loss before income taxes and equity in undistributed earnings of subsidiaries


(3,772
)

(3,692
)

(4,229
)Income tax benefit


(1,424
)

(1,287
)

(1,513
)Equity in undistributed earnings of subsidiaries


12,673


2,691


7,198Net income

$
10,325

$
286

$
4,482


133

---





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, 2009, 2008, and 2007  (In thousands)

2009

2008

2007Cash flows from operating activities:Net income

$
10,325

$
286

$
4,482Adjustments to reconcile net income to net cash provided by operating activities:Equity in undistributed earnings of subsidiaries


(12,673
)

(2,691
)

(7,198
)Depreciation


76


108


113Proceeds from sale of investment securities-trading


2,631





Purchase of investment securities-trading


(6,780
)




Realized loss on sale of investment securities-trading


619





Unrealized gain on investment securities-trading


(194
)




Increase in other assets and liabilities


5,709


2,847


9,134Net cash provided by (used in) operating activities


(287
)

550


6,531Cash flows from investing activities:Capital investments in subsidiaries


(20,000
)




(7,500
)Dividends received from subsidiaries








300Net change in premises and equipment








(45
)Net cash used in investing activities


(20,000
)




(7,245
)Cash flows from financing activities:Purchase and retirement of common stock





(1,396
)

(2,724
)Proceeds from public stock offerings


31,611





Shares issued to employee benefits plan


1,565





4Dividends on common stock


(1,057
)

(966
)

(974
)Stock options exercised


178


58


132Net cash provided by (used in) financing activities


32,297


(2,304
)

(3,562
)Net decrease in cash and cash equivalents


12,010


(1,754
)

(4,276
)Cash and cash equivalents at beginning of year


7,579


9,333


13,609Cash and cash equivalents at end of year

$
19,589

$
7,579

$
9,333


134

---



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, 2009, 2008, and 2007:

(In thousands)

2009

2008

2007Stationary and supplies

$
936

$
881

$
1,091Advertising and marketing


2,084


2,116


2,058Other taxes


419


398


332Travel and entertainment


353


404


455Premises and equipment


2,156


1,965


1,770Business memberships


438


426


554Employment services


156


77


43Board of directors expenses


247


186


288Miscellaneous


2,159


1,162


2,129Total other operating expense

$
8,948

$
7,615

$
8,720


135

---





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, 2009. 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, 2009, 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, 2009, 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 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

None.

136

---





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," "Independence of the Directors," "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 2010 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 (except for the "Compensation Committee Report on Executive Compensation") and under the heading "Director Compensation" in the Company's Proxy Statement for the 2010 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 2010
Annual Meeting of Shareholders is incorporated herein by reference.

Equity Compensation Plan Information.The following table sets forth information as of December 31, 2009, 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


275,574

$
4.55


2002 Equity Compensation Plan


1,863,859

$
9.03


452,558Equity Compensation Plans Not Approved by Shareholders(2)








Total


2,139,433

$
8.43


452,558


---

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" in the Company's Proxy Statement for the 2010 Annual Meeting of Shareholders is incorporated herein by reference.

137

---



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 2010 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 February 12, 2002, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Form SB-2).*10.2

Amendment to Executive Employment Agreement of Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed July 23, 2009).*10.3

Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the
Form SB-2).*10.4

Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Form SB-2).*10.5

Cardinal Financial Corporation 2002 Equity Compensation Plan, as amended and restated April 21, 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8, Registration
No. 333-134923).*10.6

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).*


138

---



Table of Contents

10.7

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).*10.8

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).*10.9

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).*10.10

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).*10.11

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).*10.12

Form of Incentive Stock Option Agreement*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.


---

See
Item 15(a)(3) above.

See
Item 15(a)(2) above.

139

---





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 15, 2010

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 15, 2010.

Signatures

Titles/s/ BERNARD H. CLINEBURG Bernard H. Clineburg

Chairman and Chief Executive Officer
(Principal Executive Officer)/s/ MARK A. WENDEL Mark A. Wendel

Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)/s/ JENNIFER L. DEACON Jennifer L. Deacon

Senior Vice President and Controller
(Principal Accounting Officer)/s/ B.G. BECK B.G. Beck

Director/s/ WILLIAM G. BUCK William G. Buck

Director/s/ SIDNEY O. DEWBERRY Sidney O. Dewberry

Director/s/ MICHAEL A. GARCIA Michael A. Garcia

Director


140

---



Table of Contents

Signatures

Titles/s/ J. HAMILTON LAMBERT J. Hamilton Lambert

Director/s/ ALAN G. MERTEN Alan G. Merten

Director/s/ WILLIAM E. PETERSON William E. Peterson

Director/s/ JAMES D. RUSSO James D. Russo

Director/s/ GEORGE P. SHAFRAN George P. Shafran

Director/s/ ALICE M. STARR Alice M. Starr

Director


141

---





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 February 12, 2002, between Cardinal Financial Corporation and Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Form SB-2).*10.2

Amendment to Executive Employment Agreement of Bernard H. Clineburg (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed July 23, 2009).*10.3

Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the
Form SB-2).*10.4

Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Form SB-2).*10.5

Cardinal Financial Corporation 2002 Equity Compensation Plan, as amended and restated April 21, 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8, Registration
No. 333-134923).*10.6

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).*10.7

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).*10.8

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).*10.9

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).*10.10

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).*


---



Table of Contents

Number

Description10.11

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).*10.12

Form of Incentive Stock Option Agreement*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.


---