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

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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, 2008oro

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. (Check one):

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 126-2 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, 2008: $140,046,736.

The
number of shares outstanding of Common Stock, as of March 9, 2009, was 24,303,133.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not
deemed to be filed as part of this Form 10-K.



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TABLE OF CONTENTS



PagePART IItem 1.

Business

3Item 1A.

Risk Factors

21Item 1B.

Unresolved Staff Comments

28Item 2.

Properties

28Item 3.

Legal Proceedings

29Item 4.

Submission of Matters to a Vote of Security Holders

29PART IIItem 5.

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

30Item 6.

Selected Financial Data

32Item 7.

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

34Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk

75Item 8.

Financial Statements and Supplementary Data

76Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

131Item 9A.

Controls and Procedures

131Item 9B.

Other Information

131PART IIIItem 10.

Directors, Executive Officers and Corporate
Governance

132Item 11.

Executive Compensation

132Item 12.

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

132Item 13.

Certain Relationships and Related Transactions, and Director
Independence

132Item 14.

Principal Accounting Fees and Services

133Part IVItem 15.

Exhibits, Financial Statement Schedules

133


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

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PART I

Item 1.    Business

Overview

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

We
own Cardinal Bank, a Virginia state-chartered community bank headquartered in Tysons Corner, Virginia. Cardinal Bank has offices in Alexandria, Annandale, Arlington, Chantilly,
Clifton, Fairfax, Fredericksburg, Herndon, Leesburg, Manassas, McLean, Purcellville, Reston, Stafford, Sterling, Sterling Park, Tysons Corner, and Woodbridge, Virginia, Washington, D.C. and Bethesda,
Maryland. We conduct all of our business through Cardinal Bank (the "Bank"), our principal operating unit, its subsidiary George Mason Mortgage, LLC ("George Mason"), Cardinal Wealth
Services, Inc. ("CWS"), and Wilson/Bennett Capital Management, Inc. ("Wilson/Bennett"). In January 2009, we opened Cardinal First Mortgage, LLC ("Cardinal First"), a wholly owned
subsidiary of Cardinal Bank. Cardinal First originates mortgage loans for new homes and refinancing in Virginia, Maryland, and Washington, D.C. principally for existing Cardinal Bank customers.

Cardinal
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. We have
25 branch office locations and provide competitive products and services.

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 $1.4 billion in 2008 and $2.2 billion in 2007, excluding advances on construction loans and including loans purchased from other mortgage banking companies owned by local
home builders but managed by George Mason.

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.

On
February 9, 2006, Cardinal Bank acquired certain fiduciary and other assets and assumed certain liabilities of FBR National Trust Company, formerly a subsidiary of Friedman,
Billings, Ramsey Group, Inc. As a result of this transaction, the Bank acts as trustee or custodian for client assets and earns fees primarily based upon balances under management. This
transaction has helped to diversify

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the
Bank's sources of non-interest income and allows us to provide additional services to our customers.

Growth Strategy

We believe that the strong demographic characteristics of our market, the ongoing bank consolidation, and the stable economy in the
metropolitan Washington, D.C. area, particularly in 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:

Expand our footprint through branch expansion.We intend to continue to expand our footprint by establishing new branches and
potentially acquiring
existing branches or other financial institutions in communities that present attractive growth opportunities within Northern Virginia and other markets in the greater Washington, D.C. metropolitan
area.

As
a result of the recent consolidation of banks in our market, 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. Our current plans, which are
subject to change, contemplate that we will add no new branches in 2009. 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 or completed bank mergers will
result in further
consolidation in our target market and intend to capitalize on the dislocation of customers resulting from this consolidation. We believe this consolidation creates opportunities for us to further
expand our branch network, as discussed above, as well as to increase our market share of bank deposits within our target market. As a local banking organization, we believe we can compete effectively
by providing a high level of personalized service in a service-oriented and customer-centric branch system. We will also 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.We have substantially increased our legal lending limit to over $25.0 million as of
December 31, 2008 as
a result of earnings retained in the business. 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
serve larger residential homebuilders and allows us to seek business from larger government contractors. According to George Mason's Center for Regional Analysis, federal government spending in the
greater Washington 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. During periods of growth in our loan portfolio, our earnings could be adversely impacted by
provisions to our allowance for loan losses as a result of increases in loan balances.

Continue to recruit experienced bankers.We have been successful in recruiting senior bankers with experience in and knowledge of our
market who have
been displaced or have grown dissatisfied as a result of the previously mentioned bank consolidation. We intend to continue our efforts to recruit experienced bankers, particularly experienced
lenders, who can immediately generate additional loan volume through their existing credit relationships.

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Focus on specialized lending services.We have expanded certain existing product lines, including government contract receivables
lending, SBA
guaranteed lending, and retail lending. Our commercial relationship managers focus on attracting small and medium sized businesses, including commercial real
estate developers, builders, country clubs, and professionals such as physicians, accountants and attorneys. Our goal is to create a diversified, community-focused banking franchise, balanced between
retail, commercial and real estate transactions and services.

Offer additional financial products and services.George Mason has increased our fee income and has allowed us to offer our existing
customer base a
far greater array of mortgage loan products. In addition, we aggressively market our traditional banking, trust and wealth management products to the George Mason customer base. Our focus at George
Mason is to build and maintain relationships with local and national homebuilders in an attempt to reduce reliance on the cyclical refinancing market. Building relationships with larger homebuilders
assists us in our efforts to increase our commercial real estate lending activities.

We
plan to further develop and expand the investment services we offer through CWS, Wilson/Bennett and through our trust services department. We believe we have opportunities to
cross-sell additional services to both our traditional banking customers and George Mason's customers. We further believe we will be able to attract new customers by offering a broader
array of financial products and services.

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.

Results
related to the assets acquired and liabilities assumed from FBR National Trust Company have been reflected in the wealth management and trust services segment since the date of
their acquisition and assumption, February 9, 2006.

For
financial information about the reportable segments, see "Business Segment Operations" in Item 7 below and note 17 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 the Maryland county of Montgomery. 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 5.3 million people in 2006, the eighth largest
statistical area in the

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country.
The median annual household income for this area in 2006 was approximately $73,000, which makes it one of the wealthiest regions in the country. Based on estimates released by the Bureau of
Labor Statistics of the U.S. Department of Labor for December 2008, the unemployment rate for the greater Washington metropolitan area was approximately 4.7%, compared to a national unemployment rate
of 7.1%. As of June 30, 2008, total deposits in this area were approximately $160 billion as reported by the Federal Deposit Insurance Corporation ("FDIC").

Our
headquarters is located approximately seven miles west of Washington, D.C. in 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 highest median household income of any
county in the United States of $108,209, recently surpassing its neighbor, Loudoun County.

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 $160 billion in bank deposits in the greater Washington region at June 30, 2008, approximately 81% were held by banks that are either based outside of the greater
Washington region or are operating wholesale banks that generate deposits nationally. Excluding the deposits held by institutions based outside our region, we have grown to the seventh 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.

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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.

The
principal business of George Mason, the Bank's 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 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 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.

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Lending

We offer a full range of short to long-term commercial, real estate and consumer lending products and services, which are
described in further detail below. We have established target percentage goals for each type of loan to insure adequate diversification of our loan portfolio. These goals, however, may change from
time to time as a result of competition, market conditions, employee expertise, and other factors. Commercial and industrial loans, real estate-commercial loans, real estate-construction loans, real
estate-residential loans, home equity loans, and consumer loans account for approximately 14%, 41%, 16%, 19%, 9% and 1%, respectively of our loan portfolio at December 31, 2008.

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 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.

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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 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 evaluate accurately 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 for owner occupied residential or commercial properties to 80%, and for investor-owned residential
or commercial properties to 80% of when-completed appraised values. 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.

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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.

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 assist us in attracting and retaining customers and encourages
our existing customers to consider Cardinal for all of their banking and financial needs.

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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 pay their make 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 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

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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.

On
February 9, 2006, the Bank acquired certain fiduciary and other assets and assumed certain liabilities of FBR National Trust Company, formerly a subsidiary of Friedman,
Billings, Ramsey Group, Inc. This acquisition allowed us to create 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, 2008, we had 352 full-time equivalent employees. None of our employees are represented by any
collective bargaining unit. We believe our relations with our employees are good.

Government Supervision and Regulation

General

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

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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.

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.

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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.

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:



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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, 2009. 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 its Temporary Liquidity Guarantee Program ("TLGP"). Under the transaction account guarantee
program of the TLGP, the FDIC will fully guarantee, until the end of 2009, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent
or less and IOLTAs (lawyer trust accounts). The TLGP also guarantees all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14,
2008 and June 30, 2009 with a stated maturity greater than 30 days. All eligible institutions were permitted to participate in both of the components of the TLGP without cost for the
first 30 days of the program. Following the initial 30 day grace period, institutions were assessed at the rate of ten basis points for transaction account balances in excess of $250,000
for the transaction account guarantee program and at the rate of either 50, 75, or 100 basis points of the amount of debt issued, depending on the maturity date of the guaranteed debt, for the debt
guarantee program. 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 both of
these programs.

On
February 29, 2009, the FDIC passed an interim rule that allows it to charge banks a special assessment of 20 basis points on insured deposits to replenish the deposit insurance
fund. Subsequently, on March 5, 2009, the FDIC announced it intends to cut this special assessment in half, from 20 to 10 basis points, provided that Congress clears legislation expanding the
FDIC's line of credit with the U.S. Treasury from $30 billion to $100 billion. This special assessment would be collected at September 30, 2009. Additionally, the FDIC will
increase fees by approximately two basis points on insured deposits.

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

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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:



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

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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, 2008 and, in addition, our bank
subsidiary maintains sufficient capital to remain in compliance with capital requirements and is considered "well-capitalized" at December 31, 2008.

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.

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,

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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 2009, the first $10.3 million of balances will be exempt from reserve requirements. A 3% reserve ratio will be
assessed on net transaction account balances over $10.3 million to and including $44.4 million. A 10% reserve ratio will be applied to amounts in net transaction account balances in
excess of $44.4 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
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

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

Consumer Laws Regarding Fair Lending

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

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

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Gramm-Leach-Bliley Act of 1999

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

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

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

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

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

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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 atwww.sec.govthat 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.

Item 1A.    Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the
market value of our Common Stock. The risk factors applicable to us are the following:

Difficult market conditions have adversely affected our industry.

Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and
under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs,
initially of asset-backed securities but spreading to other securities and loans, 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. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, 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 widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected
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.

Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for more than 12 months. Recently, the
volatility and disruption has reached unprecedented levels. 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 current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect,

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which
may be material, on our ability to access capital and on our business, financial condition and results of operations.

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.

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the "EESA"). The
legislation was the result of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress in response to the financial crises affecting the banking system and financial markets and threats to
investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On
October 14, 2008, the U.S. Department of Treasury announced a program under the EESA pursuant to which it would make senior preferred stock investments in participating financial institutions
(the "TARP Capital Purchase Program"). On October 14, 2008, the Federal Deposit Insurance Corporation announced the development of a guarantee program under the systemic risk exception to the
Federal Deposit Act ("FDA") pursuant to which the FDIC would offer a guarantee of certain financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing
financial institutions (the "FDIC Temporary Liquidity Guarantee Program"). More recently, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the "ARRA") was signed into
law, which amends certain provisions of the EESA and contains a wide array of provisions aimed at stimulating the U.S. economy.

There
can be no assurance, however, as to the actual impact that the EESA and ARRA and their implementing regulations, the FDIC programs, or any other governmental program will have on
the financial markets. The failure of the EESA, the ARRA, the FDIC, or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions
could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

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

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participate
or not, may have an adverse effect on us. 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.

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.

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, 2008, we had $10.1 million and $2.7 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, 2008 was $940,000 at George Mason and $149,000 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 performed our annual evaluation of the goodwill associated with our acquisition of George Mason. Goodwill of $12.9 million was recognized as a result of
this acquisition.

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We
employed the services of a valuation consultant to assist us with the goodwill evaluation. The analysis included certain valuation techniques, including a discounted cash flow approach. Following
the acquisition, George Mason delivered excellent financial results and returns on our investment. Recent and ongoing challenges in the regional residential real estate market have negatively impacted
the cash flows expected to be generated by George Mason in the near term. The valuation analysis indicated that the goodwill was impaired and we recorded a noncash impairment charge of
$2.8 million in the mortgage banking segment. In addition to directly impacting our revenues and net income, these conditions, if sustained, 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 goodwill and other intangible assets is greater than their fair value.

At
Wilson/Bennett, we recorded an impairment loss totaling $2.9 million pretax, and $1.9 million after tax, during the quarter ended September 30, 2006. This was due
to the loss of several significant clients
as a result of the unexpected retirement of John W. Fisher, Wilson/Bennett's founder, Chief Executive Officer and President. After that announcement, these clients terminated their asset management
contracts, triggering the impairment evaluation.

In
2007, we performed the required annual test for impairment of goodwill, and our analysis showed the current carrying value of goodwill to be less than the fair value. However, we
cannot fully predict future balances of assets under management, and future declines in assets managed by Wilson/Bennett as a result of additional losses in its client base or the lack of success in
attracting and maintaining new clients could again result in an impairment condition and adversely impact earnings in future periods.

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

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.

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

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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 six other executive officers. The existence of such agreements, however, does not necessarily assure us that we will be able to continue to retain their
services. The unexpected loss of Mr. Clineburg or other key employees could have a significant adverse effect on our business and possibly result in reduced revenues and earnings. We maintain
bank owned life insurance policies on all of our corporate executives.

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

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

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

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

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rates,
equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Accordingly, depending on the instruments or
activities impacted, market risks can have adverse effects on our results of operations and our overall financial condition.

Recently,
the subprime mortgage market dislocation has also impacted the ratings of certain monoline insurance providers which, in turn, has affected the pricing of certain municipal
securities and the liquidity of the short term public finance markets. We have some exposure to monolines and, as a result, are continuing to monitor this exposure as the markets evolve.

We
have investments in pooled trust preferred securities, totaling $8.0 million at December 31, 2008. 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 AAA. One of the securities has a composite rating of AA, and one has a composite rating of A+. 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.

Our concentration in loans secured by real estate 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.

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.

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Banking
regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize additional loan charge-offs,
based on credit judgments different than those of our management. Any increase in the amount of our allowance or loans charged-off as required by these regulatory agencies could have a
negative effect on our operating results.

Our 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 capital through the sale of additional equity securities or the placement of financial instruments that

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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.

Item 1B.    Unresolved Staff Comments

None.

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 2018, 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.

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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 2010. 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.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of
2008.

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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 March 9, 2009, our common stock was held by 614 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 2008 and 2007 as reported on the market at the time and dividends declared during those periods were as
follows:

Periods Ended

High

Low

Dividends2008First 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


0.012007First Quarter

$
10.82

$
9.62

$
0.01Second Quarter


10.07


9.40


0.01Third Quarter


10.20


8.50


0.01Fourth Quarter


10.49


8.56


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.

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As
of December 31, 2008, we had 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.

Period

(a) Total
Number of
Shares
Purchased

(b) Average
Price Paid per
Share ($)

(c) Total
Number of
Shares
Purchased as
Part of Publicly
Announced
Program

(d) Maximum
Number of
Shares that May
Yet Be
Purchased
Under the
ProgramOctober 1October 31, 2008


18,298


5.74


18,298


594,121November 1November 30, 2008











December 1December 31, 2008


71,729


5.45


71,729


522,392Total


90,027


5.51


90,027


522,392


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, 2008, 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, 2003 in our common stock and each of the comparable indices and that dividends were reinvested.

Total Return Performance

GRAPHIC

Period EndingIndex

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08Cardinal Financial Corporation


100.00


134.70


133.14


124.51


113.68


69.77NASDAQ Composite


100.00


108.59


110.08


120.56


132.39


78.72SNL Bank


100.00


112.06


113.59


132.87


103.25


58.91


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Table of Contents

Item 6.    Selected Financial Data

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

Years Ended December 31,2008

2007

2006

2005

2004Income Statement Data:Interest income

$
88,611

$
98,643

$
87,401

$
67,374

$
40,522Interest expense


45,638


58,324


46,047


29,891


15,969Net interest income


42,973


40,319


41,354


37,483


24,553Provision for loan losses


5,498


2,548


1,232


2,456


1,626Net interest income after provision for loan losses


37,475


37,771


40,122


35,027


22,927Non-interest income


17,812


19,480


21,684


24,669


9,409Non-interest expense


55,913


51,884


51,245


44,653


27,154Net income (loss) before income taxes


(626
)

5,367


10,561


15,043


5,182Provision (benefit) for income taxes


(912
)

885


3,173


5,167


1,713Net income

$
286

$
4,482

$
7,388

$
9,876

$
3,469Balance Sheet Data:Total assets

$
1,743,757

$
1,690,031

$
1,638,429

$
1,452,287

$
1,211,576Loans receivable, net of fees


1,139,348


1,039,684


845,449


705,644


489,896Allowance for loan losses


14,518


11,641


9,638


8,301


5,878Loans held for sale


157,009


170,487


338,731


361,668


365,454Total investment securities


315,539


364,946


329,296


294,224


289,507Total deposits


1,179,844


1,096,925


1,218,882


1,069,872


824,210Other borrowed funds


367,198


400,060


194,631


155,421


201,085Total shareholders' equity


158,006


159,463


155,873


147,879


95,105Common shares outstanding


24,014


24,202


24,459


24,363


18,463Per Common Share Data:Basic net income

$
0.01

$
0.18

$
0.30

$
0.45

$
0.19Fully diluted net income


0.01


0.18


0.30


0.44


0.19Book value


6.58


6.59


6.37


6.07


5.15Tangible book value(1)


6.00


5.90


5.75


5.37


4.41Performance Ratios:Return on average assets


0.02
%

0.27
%

0.51
%

0.74
%

0.37
%Return on average equity


0.18


2.85


4.87


7.67


3.69Dividend payout ratio


3.38


0.22


0.13


0.02


Net interest margin(2)


2.78


2.63


2.98


2.92


2.72Efficiency ratio(3)(4)


82.03


81.02


82.41


71.84


79.95Non-interest income to average assets


1.08


1.19


1.49


1.85


1.00Non-interest expense to average assets


3.40


3.18


3.52


3.35


2.90Loans receivable, net of fees to total deposits


96.57


94.78


69.36


65.96


59.44


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Table of Contents

Years Ended December 31,2008

2007

2006

2005

2004Asset Quality Ratios:Net charge-offs to average loans receivable, net of fees


0.24
%

0.06
%

0.00
%

0.01
%

0.02
%Nonperforming loans to loans receivable, net of fees


0.41





0.01


0.03


0.11Nonperforming loans to total assets


0.27





0.01


0.01


0.05Allowance for loan losses to nonperforming loans


310.81





11,822.87


3,879.00


1,074.60Allowance for loan losses to loans receivable, net of fees


1.27


1.12


1.14


1.18


1.20Capital Ratios:Tier 1 risk-based capital


11.67
%

12.10
%

13.25
%

14.83
%

12.65
%Total risk-based capital


12.72


12.98


14.06


15.65


13.40Leverage capital ratio


9.90


10.26


10.68


10.71


8.83Other:Average shareholders' equity to average total assets


9.74
%

9.65
%

10.43
%

9.66
%

10.05
%Average loans receivable, net of fees to average total deposits


96.00


78.87


68.42


60.34


59.97Average common shares outstanding:Basic


24,370


24,606


24,424


22,113


18,448Diluted


24,837


25,012


24,987


22,454


18,705


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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, 2008 and
2007 and the results of our operations for the years ended December 31, 2008, 2007 and 2006. The discussion should be read in conjunction with the consolidated financial statements and related
notes included in this report.

Caution About Forward-Looking Statements

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

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



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

Overview

We are a locally managed financial holding company headquartered in Tysons Corner, Virginia, committed to providing superior customer
service, a diversified mix of financial products and services, and convenient banking to our retail and business customers. We own Cardinal Bank (the "Bank"), a Virginia state-chartered community
bank, Cardinal Wealth Services, Inc. ("CWS"), an investment services subsidiary, and Wilson/Bennett Capital Management, Inc. ("Wilson/Bennett"), an asset management firm. Through these
three subsidiaries and George Mason Mortgage, LLC ("George Mason"), a mortgage banking subsidiary of the Bank, we offer a wide range of traditional banking 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. We have 25 branch office locations and five mortgage banking office locations and provide competitive products and services.
We complement our core banking operations by offering a full range of investment products and services to our customers through our third-party brokerage relationship with Raymond James Financial
Services, Inc., asset management services through Wilson/Bennett and services through our trust division which include trust, estate, custody, investment management, escrows, and retirement
plans. The trust division is included, along with CWS and Wilson/Bennett, in the wealth management and trust services segment.

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 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 $1.4 billion and $2.2 billion of loans in 2008
and 2007, 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 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. Loans are made pursuant to purchase commitments and are sold servicing released.

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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.

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 4.40% at December 31, 2008. 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 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, 2008:

Net Interest
Income

Non-Interest
Income2008


70.7
%

29.3
%2007


67.4
%

32.6
%2006


65.6
%

34.4
%


Non-interest
income is a lower percentage of our total revenue in 2008 than 2007 and 2006 because mortgage originations were lower due to the cyclical nature of the mortgage
banking business.

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2008 Economic Environment

Our credit quality remains strong despite the challenges we face during the current economic environment. At December 31, 2008,
we have one non-accrual loan totaling $4.7 million and a decrease in loans contractually past due 90 days or more as to principal or interest of $584,000 from $963,000 at
December 31, 2007 to $379,000 at December 31, 2008. Net charge-offs were 0.24% of our average loans receivable for the year ended December 31, 2008.

The
economic recession and declining housing prices has continued to impact our mortgage banking operations, resulting in an impairment to the goodwill associated with our 2004
acquisition of George Mason. The market dislocations that have been experienced in the financial markets over the past year continue to impact our results. We incurred an
other-than-temporary impairment charge on our Fannie Mae preferred stock investment. 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 in pooled
trust preferred securities, which are significantly below book value as of December 31, 2008 due to the lack of liquidity in the market.

The
recessionary conditions together with deterioration in the overall economy may continue to affect these and other markets in which we do business and could adversely impact our
results in 2009. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

While
our loan growth was strong during the fourth quarter of 2008, continued negative economic conditions are likely to 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 real estate values 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. 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.

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.

On
October 14, 2008, as a result of Emergency Economic Stabilization Act, the U.S. Treasury and Federal Deposit Insurance Corporation ("FDIC") announced certain programs to
encourage financial institutions to build capital and to strengthen confidence and encourage liquidity in the banking system. Specifically, the U.S. Treasury announced a voluntary Capital Purchase
Program ("CPP"), pursuant to which the U.S. Treasury will purchase up to $250 billion of senior preferred securities from eligible U.S. financial institutions on standardized terms. This amount
was subsequently increased to $350 billion. On December 12, 2008, the Company announced that its application for $41.2 million in capital under the CPP had received the U.S.
Treasury's preliminary approval. Upon preliminary approval, our Board of Directors performed careful analysis and decided to decline to participate in the CPP concluding that the significant expense
of the program and challenge to prudently and profitably deploy the capital

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were
inconsistent with our long term strategic objectives, and that the participation in the CPP would not be in the best interest of Cardinal's shareholders.

In
addition, the FDIC announced a Temporary Liquidity Guarantee Program pursuant to which the FDIC will guarantee certain newly-issued senior unsecured debt issued by eligible
institutions on or before June 30, 2009, as well as funds in noninterest-bearing transaction deposit accounts held by FDIC-insured banks until December 31, 2009. The Company
and its applicable subsidiaries elected to participate in both of these programs.

In
addition to the 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 recently enacted 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 recently
announced Financial Stability Plan and the U.S. government's recently announced foreclosure prevention program. The final form of any such programs or initiatives or related legislation cannot be
known at this time. 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 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, 2008 was our sixth consecutive year of profitability. For the year, 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.

For
the year ended December 31, 2007, we reported net income of $4.5 million. George Mason contributed $1.6 million to consolidated net income during 2007. The
wealth management and trust services segment, which includes CWS, Wilson/Bennett and our trust division, recorded a net loss for 2007 totaling $1.8 million. This segment reported a loss because
of $3.5 million in expense resulting from an arrangement where we served as the escrow agent in connection with an equity financing transaction between Liberty Growth Fund and AIMS Worldwide.
The $3.5 million expense caused by this transaction is discussed below in the "Financial Overview" section.

For
the year ended December 31, 2006, we reported net income of $7.4 million. George Mason contributed $1.9 million to consolidated net income during 2006. The
wealth management and trust services segment, which includes CWS, Wilson/Bennett and the trust services division since the date of its acquisition, February 9, 2006, recorded a net loss of
$2.0 million. This segment reported a net loss as a result of the unexpected retirement of John W. Fisher, Wilson/Bennett's founder, Chief Executive Officer and President, which casued a
non-cash impairment charge of $2.9 million. This charge is discussed in the "Financial Overview" section.

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

Allowance for Loan Losses

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

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

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

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Accounting for Economic Hedging Activities

We account for our derivatives and hedging activities in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 133,Accounting for Derivative Instruments and Certain Hedging Activities, as amended, which requires that all derivative instruments be
recorded 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 under SFAS No. 133, as
amended. 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 market in accordance with SFAS No. 65,Accounting for Certain Mortgage Banking Activities.

Accounting for Business Combinations and Impairment Testing of Goodwill

We account for acquisitions of other businesses in accordance with SFAS No. 141,Business
Combinations. This statement mandates the use of purchase accounting and, accordingly, assets and liabilities, including previously unrecorded assets and liabilities, are
recorded at fair values as of the acquisition date. We utilize a variety of valuation methods to estimate fair value of acquired assets and liabilities. To support our purchase allocations, we have
utilized independent consultants to identify and value identifiable purchased intangibles. The difference between the fair value of assets acquired and the liabilities assumed is recorded as goodwill.
Goodwill and any other intangible assets are accounted

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for
in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. In accordance with this statement, goodwill will not be amortized but
will be 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. If the analysis indicates that the fair value of the reporting unit is less than its carrying
value, we do an analysis to compare the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by
allocating the fair value of the reporting unit to all its assets and liabilities. If the implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized.

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

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of 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.

Fair Value Measurements

We determine the fair values of financial instruments based on the fair value hierarchy established in SFAS No. 157, Fair Value Measurements, 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. We carry our investment securities available-for-sale portfolio, derivative
assets and derivative liabilities at 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. 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, forwards loan sales and mortgage loans held for sale. The fair value of our interest rate lock commitments considers the expected
premium

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(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.

We
have not designated any asset or liability to be measured at fair value under SFAS No. 159,The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment for FAS 115.For additional information on the fair value of these assets, refer to Note 19 in our notes to the
consolidated financial statements.

New Financial Accounting Standards

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment of FAS 115. SFAS
No. 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value.
If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 also
establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. We have not designated any instruments to be accounted for under SFAS No. 159.

In
November 2007, the SEC issued Staff Accounting Bulletin No. 109 ("SAB No. 109"),Written Loan Commitments Recorded at Fair Value Through
Earnings. SAB No. 109 requires fair value measurements of derivatives or other written loan commitments recorded through earnings to include the future cash flows
related to the loan's servicing rights. SAB No. 109 also states that internally developed intangible assets should be excluded from these measurements. SAB No. 109, which supersedes SAB
No. 105,Application of Accounting Principles to Loan Commitments, applies to all loan commitments that are accounted for at fair value through
earnings. Previously, SAB No. 105 applied to only derivative loan commitments accounted for at fair value through earnings. SAB No. 109 should be applied prospectively to derivative loan
commitments issued or modified in fiscal quarters beginning after December 15, 2007. See our Note 20 to the notes to the consolidated financial statements in Item 8 below for the
impact of the adoption of this standard.

In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 ("SAB No. 110"),Certain Assumptions Used in Valuation
Methods.SAB No. 110 extends the use of the "simplified" method, under certain circumstances, in developing an estimate of expected term of "plain vanilla" share options
in accordance with SFAS No. 123R,Share-Based Payment.Prior to the issuance of SAB No. 110, SAB No. 107 stated that the simplified
method was only available for grants made up to December 31, 2007. We continued the use of the simplified method in 2008.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities.SFAS No. 161
amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,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 under SFAS No. 133, 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. SFAS No. 161 is effective

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prospectively
for periods beginning on or after November 15, 2008. The adoption of this standard is not expected to have a material impact on our consolidated financial condition or results of
operations.

Financial Overview

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:



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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.

2007 Compared to 2006

At December 31, 2007, total assets were $1.69 billion, an increase of 3.2%, or $51.6 million, from
$1.64 billion at December 31, 2006. Total loans receivable, net of deferred fees and costs, increased 23.0%, or $194.2 million, to $1.04 billion at December 31,
2007, from $845.4 million at December 31, 2006. Total investment securities increased by $35.7 million, or 10.8%, to $364.9 million at December 31, 2007, from
$329.3 million at December 31, 2006. Total deposits decreased 10.0%, or $122.0 million, to $1.10 billion at December 31, 2007, from $1.22 billion at
December 31, 2006. Other borrowed funds, which primarily include repurchase agreements, FHLB advances and fed funds purchased, increased $205.4 million to $400.1 million at
December 31, 2007, from $194.6 million at December 31, 2006.

Shareholders'
equity at December 31, 2007 was $159.5 million, an increase of $3.6 million from $155.9 million at December 31, 2006. The increase in
shareholders' equity was primarily attributable to net income of $4.5 million for the year ended December 31, 2007 and increases in other comprehensive income of $1.8 million for
the year ended December 31, 2007. These increases were offset by repurchases of our common stock totaling $2.7 million for the year. Total shareholders' equity to total assets at
December 31, 2007 and 2006 was 9.4% and 9.5%, respectively. Book value per share at December 31, 2007 and 2006 was $6.59 and $6.37, respectively. Total risk-based capital to
risk-weighted assets was 12.98% at December 31, 2007 compared to 14.06% at December 31, 2006. Accordingly, we were considered "well capitalized" for regulatory purposes at
December 31, 2007.

We
recorded net income of $4.5 million, or $0.18 per diluted common share, for the year ended December 31, 2007, compared to net income of $7.4 million, or $0.30 per
diluted common share, in

44

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Table of Contents

2006.
Each of these years had significant events which materially impacted earnings. The decrease in net income for the year ended December 31, 2007 compared to the same period of 2006 is
primarily a result of the aforementioned $3.5 million loss we recorded on the escrow arrangement with Liberty Growth Fund, LP and AIMS Worldwide, Inc. during the third quarter of
2007.

Net
income for the year ended December 31, 2006 included a non-cash impairment loss to the goodwill and certain other intangible assets related to our acquisition of
Wilson/Bennett. This impairment charge was a result of the retirement of Wilson/Bennett's founder and the unexpected loss of significant clients as a result of his retirement. The impairment charge
totaled $2.9 million for the year ended December 31, 2006.

Also
contributing to our decrease in net income for the year ended December 31, 2007 as compared to the year ended December 31, 2006 was an increase in our provision for
loan losses of $1.3 million to $2.5 million for the year ended December 31, 2007 primarily due to the significant loan growth we had during 2007. The provision for loan losses was
$1.2 million for the same period of 2006. Non-interest income decreased $2.2 million to $19.5 million for the year ended December 31, 2007 as compared to
$21.7 million for the same period of 2006 due primarily to decreases in gains on sales of loans and management fee income.

The
return on average assets for the years ended December 31, 2007 and 2006 was 0.27% and 0.51%, respectively. The return on average equity for the years ended December 31,
2007 and 2006 was 2.85% and 4.87%, respectively.

45

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Table of Contents

See Table 1 below for the components of our calculation of our efficiency ratio as of December 31, 2008, 2007 and 2006.

Efficiency Ratio CalculationYears Ended December 31, 2008, 2007 and 2006
(In thousands, except per share data)

2008

2007

2006GAAP reported non-interest expense

$
55,913

$
51,884

$
51,245Less nonrecurring expensesImpairment of Fannie Mae perpetual preferred stock


4,408





Settlement with mortgage correspondent


1,800





Loss related to escrow arrangement





3,500


Non-interest expense without nonrecurring expenses

$
49,705

$
48,384

$
51,245GAAP reported non-interest income

$
17,812

$
19,480

$
21,684Less nonrecurring incomeLitigation recovery on previously impaired investment


190


83


855Non-interest income without nonrecurring income

$
17,622

$
19,397

$
20,829Calculation of efficiency ratio(1):Non-interest expense without nonrecurring expenses (from above)

$
49,705

$
48,384

$
51,245GAAP reported net interest income


42,973


40,319


41,354Non-interest income without nonrecurring income (from above)


17,622


19,397


20,829Total net interest income and non-interest income for efficiency ratio

$
60,595

$
59,716

$
62,183Efficiency ratio without nonrecurring income and expenses


82.03
%

81.02
%

82.41
%


---

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. At the end of 2003, the federal funds rate was at 1.00%, its lowest level in over forty years. During 2004, as economic activity increased, the
Federal Reserve raised the key federal funds rate five times to 2.25% by year end. The Federal Reserve continued this policy in 2005, increasing the federal funds rate eight times to 4.25% by year
end, and in 2006 increased the federal funds rate four times to 5.25% by year end. 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. See "Interest Rate Sensitivity" for further information.

46

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Table of Contents

Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing LiabilitiesYears Ended December 31, 2008, 2007 and 2006
(In thousands)

2008

2007

2006Average
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

$
130,608

$
8,019


6.14
%
$
108,762

$
8,263


7.60
%
$
85,269

$
6,314


7.40
%Real estatecommercial


440,746


28,905


6.56
%

366,176


24,598


6.72
%

288,567


19,082


6.61
%Real estateconstruction


190,354


11,175


5.87
%

169,503


14,077


8.30
%

143,476


12,040


8.39
%Real estateresidential


213,125


11,957


5.61
%

201,863


11,029


5.46
%

172,809


9,012


5.22
%Home equity lines


93,635


4,460


4.76
%

69,908


4,967


7.11
%

73,194


5,089


6.95
%Consumer


2,637


171


6.48
%

6,405


508


7.93
%

4,865


367


7.54
%Total loans


1,071,105


64,687


6.04
%

922,617


63,442


6.88
%

768,180


51,904


6.76
%Loans held for sale


124,993


7,140


5.71
%

233,451


16,686


7.15
%

259,743


19,288


7.43
%Investment securitiestrading








0.00
%

11


1


4.62
%







0.00
%Investment securities available-for-sale


261,600


13,645


5.22
%

266,935


13,256


4.97
%

226,011


10,483


4.64
%Investment securities held-to-maturity


58,915


2,521


4.28
%

88,803


3,722


4.19
%

106,938


4,351


4.07
%Other investments


15,307


567


3.70
%

10,626


635


5.98
%

6,409


378


5.90
%Federal funds sold


32,077


569


1.77
%

25,217


1,318


5.23
%

25,675


1,206


4.70
%Total interest-earning assets and interest income(2)


1,563,997


89,129


5.70
%

1,547,660


99,060


6.40
%

1,392,956


87,610


6.29
%Noninterest-earning assets:Cash and due from banks


7,833








8,122








6,813Premises and equipment, net


17,523








19,565








19,758Goodwill and other intangibles, net


16,404








17,371








19,763Accrued interest and other assets


51,300








48,586








24,532Allowance for loan losses


(12,568
)







(10,322
)







(8,853
)Total assets

$
1,644,489







$
1,630,982







$
1,454,969Liabilities and Shareholders' EquityInterestbearing liabilities:Interestbearing deposits:Interest checking

$
121,537

$
2,732


2.25
%
$
122,806

$
3,691


3.01
%
$
136,368

$
3,796


2.78
%Money markets


41,586


982


2.36
%

56,229


1,437


2.56
%

117,527


2,881


2.45
%Statement savings


341,059


9,987


2.93
%

352,078


16,354


4.64
%

154,643


7,272


4.70
%Certificates of deposit


480,408


18,390


3.83
%

515,182


24,215


4.70
%

598,187


25,142


4.20
%Total interestbearing deposits


984,590


32,091


3.26
%

1,046,295


45,697


4.37
%

1,006,725


39,091


3.88
%Other borrowed funds


350,889


13,547


3.86
%

281,417


12,627


4.49
%

165,501


6,956


4.20
%Total interest-bearing liabilities and interest expense


1,335,479


45,638


3.42
%

1,327,712


58,324


4.39
%

1,172,226


46,047


3.93
%Noninterest-bearing liabilities:Demand deposits


131,197








123,493








116,041Other liabilities


17,645








22,382








15,018Common shareholders' equity


160,168








157,395








151,684Total liabilities and shareholders' equity

$
1,644,489







$
1,630,982







$
1,454,969Net interest income and net interest margin(2)




$
43,491


2.78
%



$
40,736


2.63
%



$
41,563


2.98
%


---

47

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Table of Contents

Rate and Volume AnalysisYears Ended December 31, 2008, 2007 and 2006
(In thousands)

2008 Compared to 2007

2007 Compared to 2006Average
Volume(3)

Average
Rate

Increase
(Decrease)

Average
Volume(3)

Average
Rate

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

$
1,660

$
(1,904
)
$
(244
)
$
1,740

$
209

$
1,949Real estatecommercial


5,009


(702
)

4,307


5,132


384


5,516Real estateconstruction


1,732


(4,634
)

(2,902
)

2,184


(147
)

2,037Real estateresidential


615


313


928


1,515


502


2,017Home equity lines


1,686


(2,193
)

(507
)

(228
)

106


(122
)Consumer


(299
)

(38
)

(337
)

116


25


141Total loans


10,403


(9,158
)

1,245


10,459


1,079


11,538Loans held for sale


(7,752
)

(1,794
)

(9,546
)

(1,952
)

(650
)

(2,602
)Investment securitiestrading


(1
)




(1
)

1





1Investment securities available-for-sale


(265
)

654


389


1,898


875


2,773Investment securities held-to-maturity


(1,253
)

52


(1,201
)

(738
)

109


(629
)Other investments


280


(348
)

(68
)

249


8


257Federal funds sold


359


(1,108
)

(749
)

(22
)

134


112Total interest income(2)


1,771


(11,702
)

(9,931
)

9,895


1,555


11,450Interest expense:Interestbearing deposits:Interest checking


(38
)

(921
)

(959
)

(378
)

273


(105
)Money markets


(374
)

(81
)

(455
)

(1,503
)

59


(1,444
)Statement savings


(512
)

(5,855
)

(6,367
)

9,284


(202
)

9,082Certificates of deposit


(1,634
)

(4,191
)

(5,825
)

(3,489
)

2,562


(927
)Total interestbearing deposits


(2,558
)

(11,048
)

(13,606
)

3,914


2,692


6,606Other borrowed funds


3,117


(2,197
)

920


4,872


799


5,671Total interest expense


559


(13,245
)

(12,686
)

8,786


3,491


12,277Net interest income(2)

$
1,212

$
1,543

$
2,755

$
1,109

$
(1,936
)
$
(827
)


---

48

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Table of Contents

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.

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 collectibility.

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.

2007 Compared to 2006

Net interest income on a tax equivalent basis for the year ended December 31, 2007 was $40.7 million, compared to
$41.6 million for the year ended December 31, 2006, a decrease of $827,000, or 2.0%. The decrease in net interest income was primarily a result of increases in the interest rates and
average volume of deposits and other borrowed funds, net of the impact of increased average volume and yield on earning assets during 2007, compared with 2006. The increase in funding costs was
primarily attributable to an increase in rates paid on average interest-bearing liabilities. Net increases in loans receivable and investment securities were funded through the increase in other
borrowed funds and a decrease in loans held for sale.

Our
net interest margin, on a tax equivalent basis, for the years ended December 31, 2007 and 2006 was 2.63% and 2.98%, respectively, the decrease for which was primarily a result
of a 46 basis point increase in the rates paid on interest-bearing liabilities offset by an 11 basis point increase in the yield on average earning assets. The average yield on interest-earning assets
increased to 6.40% in 2007 from 6.29% in 2006, and our cost of interest-bearing liabilities increased to 4.39% in 2007 from 3.93% in 2006. The cost of other borrowed funds, which generally are shorter
term fundings and which we

49

---



Table of Contents

continued
to utilize in 2007 to help fund our balance sheet growth, increased 29 basis points to 4.49% in 2007 from 4.20% in 2006. The cost of deposit liabilities increased 49 basis points to 4.37% in
2007 from 3.88% for 2006.

Total
average earning assets increased by 11.1% to $1.55 billion at December 31, 2007 compared to $1.39 billion at December 31, 2006. The increase in our
average earnings assets were primarily driven by the increase in average loans receivable of $154.4 million and an increase in investment securities $22.8 million offset by the decrease
in our average inventory of loans held for sale of $26.3 million. These increases were funded by an increase in average total deposits of $47.0 million and other borrowed funds of
$115.9 million during 2007.

Average
loans receivable increased $154.4 million to $922.6 million during 2007 from $768.2 million in 2006. 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 2007 and 2006. Additional interest income of
approximately $5,000 for 2007 and $15,000 for 2006 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 $39.6 million to $1.05 billion in 2007 from $1.01 billion in 2006. The largest increase in average interest-bearing
deposit balances was in statement savings, which increased $197.4 million compared to 2006, a result of our advertised Simply Savings product which was introduced during 2006. This savings
product allows new customers to earn a yield of 4.21% on funds deposited with us as of December 31, 2007. The increase in our statement savings was offset by decreases in our money market
balances of $61.3 million and decreases in our certificates of deposit of $83.0 million for the year ended December 31, 2007 compared to the year ended December 31, 2006.

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 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.

50

---



Table of Contents

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, 2008, 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 out 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 3.2% for the one year period and by not more than
5.5% 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 be nearly unchanged from the base case over the one
year period and 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 $5.5 million and $2.5 million for the years ended December 31, 2008 and 2007, respectively. The allowance for loan losses at
December 31, 2008 was $14.5 million compared to $11.6 million at December 31, 2007. Our allowance for loan loss ratio at December 31, 2008 was 1.27% compared to
1.12% at December 31, 2007. The increase in the allowance for loan loss ratio is primarily reflective of our evaluation of our loan portfolio and the qualitative factors we use to determine the
adequacy of our loan loss reserve. We recorded net loan charge-offs of $2.6 million for the year ended December 31, 2008 compared to $545,000 for the same period of 2007. We
charged-off $1.2 million in commercial and industrial loans, of which $1.1 million was related to our one nonaccrual loan at December 31, 2008. Consumer loans of
$1.5 million were charged off during 2008, most of which were balances in our home equity lines of credit where the borrower was unable to make payments and undercollateralized due to decreases
in real estate values. Annualized net charged-off loans was 0.24% of average loans receivable for the year ended December 31, 2008, compared to 0.06% for the year ended
December 31, 2007. Non-accrual loans totaled $4.7 million at December 31, 2008 compared to none at December 31, 2007.

While
our loan growth was strong during the fourth quarter of 2008, continued negative economic conditions are likely to 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 real estate values 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. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular
entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level or our credit exposure to individual entities and
industries, may not function as we have anticipated.

The
provision for loan losses was $1.2 million for 2006.

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

51

---



Table of Contents

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.

Allowance for Loan LossesYears Ended December 31, 2008, 2007, 2006, 2005 and 2004  (In thousands)

2008

2007

2006

2005

2004Beginning balance, January 1

$
11,641

$
9,638

$
8,301

$
5,878

$
4,344Provision for loan losses


5,498


2,548


1,232


2,456


1,626Loans charged off:Commercial and industrial


(1,188
)

(449
)

(42
)

(120
)

(100
)Consumer


(1,468
)

(103
)

(1
)

(9
)

(8
)Total loans charged off


(2,656
)

(552
)

(43
)

(129
)

(108
)Recoveries:Commercial and industrial


8


7


148


82


14Consumer


27








14


2Total recoveries


35


7


148


96


16Net (charge offs) recoveries


(2,621
)

(545
)

105


(33
)

(92
)Ending balance, December 31,

$
14,518

$
11,641

$
9,638

$
8,301

$
5,8782008

2007

2006

2005

2004Loans:Balance at year end

$
1,139,348

$
1,039,684

$
845,449

$
705,644

$
489,896Allowance for loan losses to loans receivable, net of fees


1.27
%

1.12
%

1.14
%

1.18
%

1.20
%Net charge-offs to average loans receivable


0.24
%

0.06
%

0.00
%

0.01
%

0.02
%


52

---



Table of Contents

Allocation of the Allowance for Loan LossesAt December 31, 2008, 2007, 2006, 2005 and 2004  (In thousands)

2008

2007

2006Allocation

% of
Total*

Allocation

% of
Total*

Allocation

% of
Total*Commercial and industrial

$
2,129


14.12
%
$
1,956


13.51
%
$
1,670


12.09
%Real estatecommercial


6,110


41.41
%

5,225


39.95
%

3,687


37.50
%Real estateconstruction


3,118


16.53
%

2,217


17.93
%

1,764


18.27
%Real estateresidential


2,138


18.57
%

1,402


20.50
%

2,025


23.80
%Home equity lines


965


9.16
%

772


7.81
%

384


7.75
%Consumer


58


0.21
%

69


0.30
%

108


0.59
%Total allowance for loan losses

$
14,518


100.00
%
$
11,641


100.00
%
$
9,638


100.00
%2005

2004Allocation

% of
Total*

Allocation

% of
Total*Commercial and industrial

$
1,153


9.83
%
$
963


11.53
%Real estatecommercial


3,338


39.01
%

2,732


44.88
%Real estateconstruction


1,432


18.13
%

768


14.18
%Real estateresidential


1,490


21.65
%

692


15.69
%Home equity lines


721


10.63
%

612


12.32
%Consumer


167


0.75
%

111


1.40
%Total allowance for loan losses

$
8,301


100.00
%
$
5,878


100.00
%


---

Non-Interest Income

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, 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 is directly related to the ongoing deterioration in the residential real
estate market. Included in realized and unrealized gains on mortgage banking activities are any origination, underwriting, and discount points and other funding fees received and deferred at loan
origination. Costs include direct costs associated with loan origination, such as commissions and salaries that are deferred at the time of origination. In
addition, we adopted SFAS No. 157 and SAB No. 109 during 2008. Additional information on the adoption of these standards can be found in Note 20 to the notes to the consolidated
financial statements. Management fees 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, decreased $307,000 during 2008 as compared to 2007, again due to the deterioration of the real estate market.

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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. 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. 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 $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
income for the years ended December 31, 2007 and 2006 was $19.5 million and $21.7 million, respectively. The decrease in
non-interest income for the year ended December 31, 2007, compared to the same period of 2006, is primarily the result of decreased realized and unrealized gains on mortgage banking
activities at George Mason of $1.3 million and a decrease in management fee income of $1.1 million. The decrease in realized and unrealized gains on mortgage banking activities and
management fee income is due to the slowdown in the regional housing market.

Service
charges on deposit accounts increased $395,000 to $2.0 million for the year ended December 31, 2007, compared to $1.6 million for the year ended
December 31, 2006. Deposit service charges increased primarily as a result of an increased number of transaction accounts in 2007 compared to 2006. Loan service charges decreased $675,000 to
$1.5 million for the year ended December 31, 2007, compared to $2.2 million in 2006. Loan service charges decreased due to decreases in loan originations at George Mason during
2007, compared to originations during 2006 because of the aforementioned slowdown in the regional housing market. Investment fee income increased $957,000 to $4.3 million for the year ended
December 31, 2007, compared to $3.3 million for the year ended December 31, 2006. The increase in investment fee income is primarily attributable to a full year of operations of
the trust division in 2007 and higher monthly fee income. For the year ended December 31, 2007, the increase in the cash surrender value of our bank-owned life insurance was
$1.7 million, an increase of $1.0 million when compared to the same period of 2006. This is primarily due to having our investment in bank-owned life insurance for a full
twelve month period in 2007 compared to only five months of 2006.

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For
the year ended December 31, 2006 gains related to the extinguishment of two borrowings totaling $769,000. There were no similar transactions for the year ended
December 31, 2007.

During
the year ended December 31, 2006, we received a litigation settlement from a previously charged off investment of $855,000. For the year ended December 31, 2007, an
additional amount of $83,000 was recovered for this same impaired investment.

The
following table provides additional detail on non-interest income for the years ended December 31, 2008, 2007, and 2006.

Non-Interest IncomeYears Ended December 31, 2008, 2007 and 2006
(In thousands)

2008

2007

2006Insufficient funds fee income

$
665

$
704

$
729Service charges on deposit accounts


463


312


207Other fee income on deposit accounts


283


381


131ATM transaction fees


655


579


463Loan service charges


1,643


1,502


2,177Investment fee income


528


813


1,341Trust adminstration fee income


2,949


3,474


1,989Bank-owned life insurance income


860


1,670


646Realized and unrealized gains on mortgage banking activities


7,752


8,779


10,059Management fee income


765


1,072


2,221Net realized gains on investment securities available-for-sale


913





61Net gain (loss) on sales of assets


(9
)

(2
)

15Credit card fees


67


61


63Litigation recovery on previously impaired investment


190


83


855Gain on debt extinguishments


275





769Other income (loss)


(187
)

52


(42
)Total non-interest income

$
17,812

$
19,480

$
21,684


Non-Interest Expense

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 $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

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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.

Non-interest
expense was $51.9 million and $51.2 million for the years ended December 31, 2007 and 2006, respectively, an increase of $639,000, or 1.3%.
The marginal increase in non-interest expense for the year ended December 31, 2007, compared to 2006, was primarily the result of the increase in our FDIC insurance assessment of
$629,000 compared to 2006 (see Table 7 for information on FDIC insurance assessments for all years presented). Other expenses decreased or increased slightly as a result of expense control
measures put in place at George Mason, offset by non-interest expense increases related to the Bank's branch expansion that has occurred over the past two years and our acquisition of the
trust division in February 2006. In addition, for the year ended December 31, 2006, we recorded an impairment charge of $2.9 million related to Wilson/Bennett. See the "Financial
Overview" section above for additional information.

The
following table reflects the components of non-interest expense for the years ended December 31, 2008, 2007 and 2006.

Non-Interest ExpenseYears Ended December 31, 2008, 2007 and 2006
(In thousands)

2008

2007

2006Salary and benefits

$
21,939

$
23,815

$
24,616Occupancy


5,547


5,348


5,242Professional fees


2,225


2,095


2,149Depreciation


2,390


3,035


3,172Amortization of intangibles


245


254


420Impairment of Fannie Mae perpetual preferred stock


4,408





Impairment of goodwill


2,821





2,927Loss related to escrow arrangement





3,500


Settlement with mortgage correspondent


1,800





Data processing


1,683


1,450


1,358Stationary and supplies


881


1,091


1,374Advertising and marketing


2,116


2,058


2,026Telecommunications


1,002


1,182


1,247Other taxes


1,880


1,701


1,572Travel and entertainment


460


492


776Bank operations


2,203


1,234


719Premises and equipment


1,965


1,771


1,675FDIC insurance assessments


721


768


139Miscellaneous


1,627


2,090


1,833Total non-interest expense

$
55,913

$
51,884

$
51,245


Income Taxes

We recorded an income tax benefit of $912,000 for the year ended December 31, 2008, compared to a provision for income tax
expense of $885,000 for the year ended December 31, 2007. 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. On October 3, 2008,
the Emergency Economic Stabilization Act was enacted which included a provision permitting banks to recognize the

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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 the year ended December 31, 2007 was 16.5%.

We
recorded a provision for income tax expense of $885,000 for the year ended December 31, 2007, a decrease of $2.3 million compared to 2006. Our effective tax rate for the
years ended December 31, 2007 and 2006 was 16.5% and 30.0%, respectively. The decrease in our effective tax rate from 2006 to 2007 is primarily the result of our tax-exempt income
from investments being a larger portion of our overall net income for the year ended December 31, 2007 compared to 2006.

For
more information, see "Critical Accounting Policies" above. In addition, Note 9 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 $1.14 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 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" as defined in SFAS No. 15,Accounting by Debtors and Creditors for Troubled Debt Restructurings.

Interest
income on non-accrual loans, if recognized, is recorded using the cash basis method of accounting. When a loan is placed 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, 2008, the one loan on nonaccrual status did not have a valuation allowance
as we charged-off $1.1 million, a portion 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.

Total
loans receivable, net of deferred fees and costs, were $1.04 billion at December 31, 2007, an increase of $194.2 million, or 23%, compared to
$845.4 million at December 31, 2006. We achieved growth in all our loan categories with the exception of our consumer loans. Consumer loans decreased

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$1.8 million
to $3.1 million at December 31, 2007 from $4.9 million at December 31, 2006, primarily as a result of repayments during 2007 and decreased originations.
Loans held for sale decreased $168.2 million to $170.5 million at December 31, 2007 compared to $338.7 million at December 31, 2006, a result of the slowdown in the
regional housing market during 2007.

Loans
accounted for on a non-accrual basis at December 31, 2006 was $82,000. There were no loans which were past due 90 days or more as to principal or interest
still accruing as of December 31, 2006. There were no loans at December 31, 2006, 2005 and 2004 that were "troubled debt restructurings" as defined in SFAS No. 15. 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 2006 was $15,000. The interest income realized prior to the loans being placed on non-accrual status for the year ended December 31, 2006 was $9,000.

The
ratio of non-performing loans to total loans was 0.41%, 0.00%, and 0.01% at December 31, 2008, 2007 and 2006, respectively.

The
following tables present the composition of our loans receivable portfolio at the end of each of the five years ended December 31, 2008 and additional information on
non-performing loans receivable.

Loans ReceivableAt December 31, 2008, 2007, 2006, 2005 and 2004
(In thousands)

2008

2007

2006Commercial and industrial

$
160,989


14.12
%
$
140,531


13.51
%
$
102,284


12.09
%Real estatecommercial


472,131


41.41
%

415,471


39.95
%

317,201


37.50
%Real estateconstruction


188,484


16.53
%

186,514


17.93
%

154,525


18.27
%Real estateresidential


211,651


18.57
%

213,197


20.50
%

201,320


23.80
%Home equity lines


104,370


9.16
%

81,247


7.81
%

65,557


7.75
%Consumer


2,393


0.21
%

3,129


0.30
%

4,904


0.59
%Gross loans


1,140,018


100.00
%

1,040,089


100.00
%

845,791


100.00
%Net deferred (fees) costs


(670
)




(405
)




(342
)Less: allowance for loan losses


(14,518
)




(11,641
)




(9,638
)Loans receivable, net

$
1,124,830




$
1,028,043




$
835,811




2005

2004Commercial and industrial

$
69,392


9.83
%
$
56,512


11.53
%Real estatecommercial


275,381


39.01
%

220,012


44.88
%Real estateconstruction


128,009


18.13
%

69,535


14.18
%Real estateresidential


152,818


21.65
%

76,932


15.69
%Home equity lines


75,048


10.63
%

60,408


12.32
%Consumer


5,255


0.75
%

6,816


1.40
%Gross loans


705,903


100.00
%

490,215


100.00
%Net deferred (fees) costs


(259
)




(319
)Less: allowance for loan losses


(8,301
)




(5,878
)Loans receivable, net

$
697,343




$
484,018


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Table of Contents

Nonperforming LoansAt December 31, 2008, 2007, 2006, 2005 and 2004
(In thousands)

2008

2007

2006

2005

2004Nonaccruing loans

$
4,671

$


$
82

$
214

$
547Loans contractually past-due 90 days or more


379


963





33


Total nonperforming loans

$
5,050

$
963

$
82

$
247

$
547


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

Loan Maturities and Interest Rate SensitivityAt December 31, 2008
(Dollars in thousands)

One Year
or Less

Between
One and
Five Years

After
Five Years

TotalCommercial and industrial

$
90,620

$
50,513

$
19,856

$
160,989Real estatecommercial


107,270


262,597


102,264


472,131Real estateconstruction


155,638


21,526


11,320


188,484Real estateresidential


91,348


116,283


4,020


211,651Home equity lines


103,273


1,097





104,370Consumer


1,425


406


562


2,393Total loans receivable

$
549,574

$
452,422

$
138,022

$
1,140,018Fixedrate loans




$
181,172

$
116,672

$
297,844Floatingrate loans





271,250


21,350


292,600Total loans receivable




$
452,422

$
138,022

$
590,444


---

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 and investment securities held-to-maturity. 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 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%.

We
complete reviews for other-than-temporary impairment at least quarterly. As of December 31, 2008, 92% 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

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the
smallest degree of investment risk. At December 31, 2008, 94% 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). During the third quarter of 2008, FNMA and FHLMC were placed into conservatorship by federal
regulators. We expect to receive full payment of interest and principal on the securities in the investment portfolio.

We
have $12.4 million in non-government non-agency mortgage-backed securities. These securities are rated AAA. 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, 2008 and 2007, certain of our investment grade securities were in an unrealized loss position. Investment securities with unrealized losses have interest rates
that are less than current market interest rates and, therefore, the indicated decrease in values are not a result of permanent credit impairment. Municipal securities, which totaled
$33.3 million and $33.7 million at December 31, 2008 and 2007, respectively, are the primary component of the unrealized losses in the available-for-sale
investment securities portfolio at December 31, 2008. Our municipal securities are AAA rated except for approximately $19.4 million of par value which was downgraded during 2008 to AA or
single A status due to the downgrades of the monoline insurance companies that insured those bonds. At December 31, 2007, $31.2 million of the $33.7 million in municipal
securities were AAA rated. The downgraded bonds remain general obligations of the municipalities and while prices for these municipal securities are generally below book value, we expect to receive
payment of all principal amounts due to us. There is no other-than-temporary impairment on these municipal securities or any other securities in our investment portfolio.

In
addition, our held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million at December 31,
2008. 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 AAA. One of the securities has a composite rating of AA, and one has a composite rating of A+. 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 and concluded that these securities are not other-than-temporarily impaired.

During
the third quarter of 2008, we recorded an other-than-temporary impairment of $4.4 million related to an investment in Fannie Mae perpetual preferred
stock. The impairment was due to the shares being traded well below their par value following the placement of Fannie Mae into conservatorship by federal regulators in September 2008. The market value
of this investment was $166,000 as of December 31, 2008.

We
hold $15.6 million in FHLB stock at December 31, 2008. In September 2008, the FHLB 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. It was
announced that the fourth quarter dividend would be declared and paid at the end of January 2009. On January 30, 2009, the FHLB announced that in light of the
other-than-temporary impairment analysis it was still completing for the fourth quarter of 2008, the FHLB deferred the declaration of the fourth quarter dividend. Upon
completion of their other-than-temporary analysis, the Board of Directors will make a decision regarding the fourth quarter dividend. Based on current available information,
the FHLB

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expects
to pay an annualized dividend in the range of 0.00 to 1.00 percent for the quarter ending December 31, 2008. 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. We do not expect the above changes to materially impact our liquidity position.

Investment
securities increased to $364.9 million at December 31, 2007, from $329.3 million at December 31, 2006. At December 31, 2007,
$78.9 million were classified as held-to-maturity, and $286.0 million were classified as available-for-sale. The yield on the
available-for-sale investment portfolio was 5.14%, and the yield on the held-to-maturity portfolio was 4.45% at December 31, 2007.

At
December 31, 2007, investment securities with unrealized losses were investment grade securities. Mortgage-backed investment securities, which were the primary component of the
unrealized losses in the investment securities portfolio at December 31, 2007, were primarily comprised of securities issued by the Federal National Mortgage Association (FNMA), Federal Home
Loan Mortgage Corporation (FHLMC) and Government National Mortgage Association (GNMA).

The
following table reflects the composition of the investment portfolio at December 31, 2008, 2007, and 2006.

Investment SecuritiesAt December 31, 2008, 2007 and 2006
(In thousands)

Available-for-sale at December 31, 2008

Amortized
Cost

Fair
Value

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

$
24,917

$
24,962


5.28
%After ten years


436


166


8.25
%Total U.S. government-sponsored agencies


25,353


25,128


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


4,263


4,277


4.19
%Five to ten years


42,503


43,626


4.45
%After ten years


158,969


160,301


5.27
%Total mortgage-backed securities


205,735


208,204


5.08
%Municipal securities(2)After ten years


33,265


31,424


4.09
%Total municipal securities


33,265


31,424


4.09
%U.S. treasury securitiesOne to five years


598


600


1.02
%Total U.S. treasury securities


598


600


1.02
%Total investment securities available-for-sale

$
264,951

$
265,356


4.97
%


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Held-to-maturity at December 31, 2008

Amortized
Cost

Fair
Value

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

$
2,001

$
2,025


4.30
%Total U.S. government-sponsored agencies


2,001


2,025


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


1,836


1,867


4.26
%Five to ten years


9,267


9,463


4.45
%After ten years


29,075


29,142


4.39
%Total mortgage-backed securities


40,178


40,472


4.40
%Corporate bondsAfter ten years


8,004


3,262


4.09
%Total corporate bonds


8,004


3,262


4.09
%Total investment securities held-to-maturity


50,183


45,759


4.34
%Total investment securities

$
315,134

$
311,115


4.87
%




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


5.99
%Total U.S. government-sponsored agencies


83,276


84,011


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


3,552


3,526


4.25
%Five to ten years


10,902


10,746


3.89
%After ten years


154,435


153,912


5.13
%Total mortgage-backed securities


168,889


168,184


5.03
%Municipal securities(2)After ten years


33,671


33,219


4.09
%Total municipal securities


33,671


33,219


4.09
%U.S. treasury securitiesOne to five years


592


584


4.09
%Total U.S. treasury securities


592


584


4.09
%Total investment securities available-for-sale

$
286,428

$
285,998


5.14
%


62

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Table of Contents



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


4.52
%After ten years


2,000


2,002


5.30
%Total U.S. government-sponsored agencies


19,511


19,468


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


379


383


4.71
%Five to ten years


7,618


7,555


4.29
%After ten years


43,436


43,133


4.52
%Total mortgage-backed securities


51,433


51,071


4.49
%Corporate bondsAfter ten years


8,004


7,629


4.56
%Total corporate bonds


8,004


7,629


4.56
%Total investment securities held-to-maturity


78,948


78,168


4.45
%Total investment securities

$
365,376

$
364,166


4.99
%




Available-for-sale at December 31, 2006

Amortized
Cost

Fair
Value

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

$
51,973

$
51,517


4.90
%Five to ten years


15,520


15,480


5.72
%Total U.S. government-sponsored agencies


67,493


66,997


5.09
%Mortgage-backed securities(1)One to five years


4,406


4,312


4.18
%Five to ten years


10,599


10,291


3.76
%After ten years


127,197


124,511


4.76
%Total mortgage-backed securities


142,202


139,114


4.67
%Municipal securities(2)After ten years


25,047


25,031


4.10
%Total municipal securities


25,047


25,031


4.10
%U.S. treasury securitiesOne to five years


489


489


5.14
%Total U.S. treasury securities


489


489


5.14
%Total investment securities available-for-sale

$
235,231

$
231,631


4.73
%


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Table of Contents



Held-to-maturity at December 31, 2006

Amortized
Cost

Fair
Value

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

$
8,967

$
8,734


3.50
%Five to ten years


13,018


12,777


4.44
%After ten years


2,000


1,971


5.30
%Total U.S. government-sponsored agencies


23,985


23,482


4.16
%Mortgage-backed securities(1)Five to ten years


6,702


6,544


4.21
%After ten years


58,974


57,560


4.35
%Total mortgage-backed securities


65,676


64,104


4.34
%Corporate bondsAfter ten years


8,004


7,864


4.21
%Total corporate bonds


8,004


7,864


4.21
%Total investment securities held-to-maturity


97,665


95,450


4.28
%Total investment securities

$
332,896

$
327,081


4.60
%


---

Deposits and Other Borrowed Funds

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. In addition, during
2008, we joined 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, 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. Advances
taken during 2008 and 2007 were utilized primarily to leverage some of our larger commercial real estate fundings and to assist in financing the George Mason inventory of loans held for sale.

Other
borrowed funds at each of December 31, 2008 and 2007, included $20.6 million payable to Cardinal Statutory Trust I, the issuer of our trust preferred securities. This
debt had an interest rate of 4.40% and 7.39% at December 31, 2008 and 2007, respectively. In accordance with FIN No. 46,Consolidation of Variable Interest
Entities,Cardinal Statutory Trust I is an unconsolidated entity as we are not the primary beneficiary of the trust.

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At
December 31, 2008, other borrowed funds also included $65.9 million in customer repurchase agreements and $692,000 borrowed under the Federal Reserve Treasury,
Tax & Loan note option.

The
following table reflects the short-term borrowings and other borrowed funds outstanding at December 31, 2008.

Short-Term Borrowings and Other Borrowed FundsAt December 31, 2008
(In thousands)

Short-term borrowed funds:



AmountTT&L note option


1.94
%
$
692Customer repurchase agreements


2.05
%

65,887Total short-term borrowed funds and weighted average rate


2.05
%
$
66,579Other borrowed funds:Trust preferred


5.80
%
$
20,619FHLB advanceslong term


3.98
%

280,000Other borrowed funds and weighted average rate


4.10
%
$
300,619Total other borrowed funds and weighted average rate


3.73
%
$
367,198


Total
deposits were $1.10 billion at December 31, 2007, a decrease of $122.0 million, or 10.0%, from $1.22 billion at December 31, 2006. The decrease
in our total deposit balances is primarily a result of losing high cost deposit balances of certain customers who were looking for increased yields on their funds. At December 31, 2007, we had
$10.0 million of brokered certificates of deposit, compared to $5.0 million at December 31, 2006.

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Table of Contents

Other borrowed funds were $400.1 million at December 31, 2007, an increase of $205.4 million, from $194.6 million at
December 31, 2006. The primary reason for the increase in other borrowed funds at December 31, 2007 was an increase in funding from advances from the Federal Home Loan Bank of Atlanta.
Advances from the Federal Home Loan Bank of Atlanta were $233.5 million at December 31, 2007, compared to $122.7 million at December 31, 2006.

At
December 31, 2007, other borrowed funds also included $68.0 million in fed funds purchased, $66.8 million in customer repurchase agreements and
$11.2 million borrowed under the Federal Reserve Treasury, Tax & Loan note option.

The
following table reflects the maturities of the certificates of deposit of $100,000 or more as of December 31, 2008, 2007 and 2006.

Certificates of Deposit of $100,000 or MoreAt December 31, 2008, 2007 and 2006  (In thousands)

2008Maturities:

Fixed Term

No-Penalty*

TotalThree months or less

$
35,561

$
68,190

$
103,751Over three months through six months


19,705


12,089


31,794Over six months through twelve months


27,095


5,614


32,709Over twelve months


71,433


1,585


73,018$
153,794

$
87,478

$
241,272




2007Maturities:

Fixed Term

No-Penalty*

TotalThree 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




2006Maturities:

Fixed Term

No-Penalty*

TotalThree months or less

$
116,204

$
23,220

$
139,424Over three months through six months


24,608


10,974


35,582Over six months through twelve months


22,601


20,869


43,470Over twelve months


43,530


774


44,304$
206,943

$
55,837

$
262,780


---

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.

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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. On February 9, 2006, we acquired certain fiduciary and other assets and assumed certain liabilities of FBR
National Trust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.

Information
about the reportable segments, and reconciliation of this information to the consolidated financial statements at December 31, 2008, 2007 and 2006 follows.

Segment ReportingDecember 31, 2008, 2007 and 2006
(In thousands)

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

$
178,625

$
(312,397
)
$
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


67

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Table of Contents

At and for the Year Ended December 31, 2006:



Commercial
Banking

Mortgage
Banking

Wealth
Management and
Trust Services

Other

Intersegment
Elimination

ConsolidatedNet interest income

$
38,091

$
4,344

$


$
(1,081
)
$


$
41,354Provision for loan losses


1,232














1,232Non-interest income


4,415


13,892


3,330


47





21,684Non-interest expense


27,127


15,241


6,591


2,286





51,245Provision (benefit) for income taxes


4,571


1,060


(1,307
)

(1,151
)




3,173Net income (loss)

$
9,576

$
1,935

$
(1,954
)
$
(2,169
)
$


$
7,388Total Assets

$
1,572,051

$
360,470

$
5,500

$
163,879

$
(463,471
)
$
1,638,429


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 a 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.

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.

During
the third quarter of 2006, we recorded a non-cash impairment loss of $2.9 million pretax ($1.9 million after tax) 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, 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.

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Table of Contents

Shareholders'
equity at December 31, 2007 was $159.5 million, an increase of $3.6 million, compared to $155.9 million at December 31, 2006. The
increase in shareholders' equity was primarily attributable to net income of $4.5 million for the year ended December 31, 2007 and increases in other comprehensive income of
$1.8 million for the year ended December 31, 2007. These increases were offset by repurchases of our common stock totaling $2.7 million for the year. Total shareholders' equity to
total assets at December 31, 2007 and 2006 was 9.4% and 9.5%, respectively. Book value per share at December 31, 2007 and 2006 was $6.59 and $6.37, respectively. Total
risk-based capital to risk-weighted assets was 12.98% at December 31, 2007 compared to 14.06% at December 31, 2006. Accordingly, we were considered "well
capitalized" for regulatory purposes at December 31, 2007, as we were at December 31, 2006.

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.

The
following table shows the minimum capital requirement and our capital position at December 31, 2008, 2007, and 2006, for the Company and for the Bank.

Capital ComponentsAt December 31, 2008, 2007 and 2006
(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, 2008Total risk-based capital/Total capital to risk-weighted assets

$
178,420


12.72
%
$
112,207

3


8.00
%
$
140,259

3


10.00
%Tier I capital/Tier I capital to risk-weighted assets


163,716


11.67
%

56,104

3


4.00
%

84,156

3


6.00
%Tier I capital/Total capital to average assets


163,716


9.90
%

66,168

3


4.00
%

82,711

3


5.00
%At December 31, 2007Total risk-based capital/Total capital to risk-weighted assets

$
174,523


12.98
%
$
107,569

3


8.00
%
$
134,461

3


10.00
%Tier I capital/Tier I capital to risk-weighted assets


162,691


12.10
%

53,785

3


4.00
%

80,677

3


6.00
%Tier I capital/Total capital to average assets


162,691


10.26
%

63,456

3


4.00
%

79,320

3


5.00
%At December 31, 2006Total risk-based capital/Total capital to risk-weighted assets

$
170,457


14.06
%
$
97,010

3


8.00
%
$
121,263

3


10.00
%Tier I capital/Tier I capital to risk-weighted assets


160,656


13.25
%

48,505

3


4.00
%

72,758

3


6.00
%Tier I capital/Total capital to average assets


160,656


10.68
%

60,180

3


4.00
%

75,225

3


5.00
%


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Table of Contents

Cardinal Bank:



Actual

For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount



Ratio

Amount



RatioAt December 31, 2008Total risk-based capital/Total capital to risk-weighted assets

$
168,513


12.04
%
$
111,957

3


8.00
%
$
139,946

3


10.00
%Tier I capital/Tier I capital to risk-weighted assets


153,810


10.99
%

55,978

3


4.00
%

83,968

3


6.00
%Tier I capital/Total capital to average assets


153,810


9.32
%

66,018

3


4.00
%

82,523

3


5.00
%At December 31, 2007Total risk-based capital/Total capital to risk-weighted assets

$
159,745


11.91
%
$
107,308

3


8.00
%
$
134,135

3


10.00
%Tier I capital/Tier I capital to risk-weighted assets


147,913


11.03
%

53,654

3


4.00
%

80,481

3


6.00
%Tier I capital/Total capital to average assets


147,913


9.34
%

63,331

3


4.00
%

79,163

3


5.00
%At December 31, 2006Total risk-based capital/Total capital to risk-weighted assets

$
141,885


11.73
%
$
96,742

3


8.00
%
$
120,927

3


10.00
%Tier I capital/Tier I capital to risk-weighted assets


132,084


10.92
%

48,371

3


4.00
%

72,556

3


6.00
%Tier I capital/Total capital to average assets


132,084


8.80
%

60,038

3


4.00
%

75,048

3


5.00
%


Liquidity

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

In
addition to deposits, we have access to 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

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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 $311.3 million at December 31, 2008, or 17.9%
of total assets. We held investments that are classified as held-to-maturity in the amount of $50.2 million at December 31, 2008. 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, 2008 was approximately $51 million. Borrowing capacity with the Federal Reserve Bank of Richmond was
approximately $389 million at December 31, 2008. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all
regulatory requirements.

Contractual Obligations

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

Contractual ObligationsAt December 31, 2008
(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

$
517,378

$
343,799

$
113,740

$
59,686

$
153Brokered certificates of deposit


89,177


84,494


4,683





Advances from the Federal Home Loan Bank of Atlanta


280,000





10,000


115,000


155,000Trust preferred securities


20,619











20,619Operating lease obligations


16,981


4,954


3,000


5,382


3,645Total

$
924,155

$
433,247

$
131,423

$
180,068

$
179,417


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.

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Table of Contents

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 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, 2008 and 2007 was $9,000 and $23,000, 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 have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor. During 2008 and 2007, George
Mason either repurchased from or settled with investors, excluding the mortgage correspondent settlement discussed below, on such loans for a total of $523,000 and $347,000, respectively. At
December 31, 2008 and 2007,
this reserve had a balance of $1.6 million and $100,000, 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.

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, 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. 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, 2008 or 2007 as management expects to fully recover
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 as "Settlement with mortgage correspondent" in the non-interest expense section of the statement of operations.

72

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Table of Contents

A
summary of the contract amount of the Bank's exposure to off-balance-sheet risk as of December 31, 2008 and 2007, is as follows:

2008

2007(In thousands)Financial instruments whose contract amounts represent potential credit risk:Commitments to extend credit

$
413,457

$
424,996Standby letters of credit


10,811


10,166


Commitments
to extend credit of $81.6 million as of December 31, 2008 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 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, 2008 and 2007. 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 a 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.

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.

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Table of Contents

Quarterly DataYears ended December 31, 2008 and 2007
(In thousands, except per share data)

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 before income taxes


785


(5,226
)

1,012


2,803Provision for income taxes


(995
)

(816
)

138


761Net income

$
1,780

$
(4,410
)
$
874

$
2,042Earnings per sharebasic

$
0.07

$
(0.18
)
$
0.04

$
0.08Earnings per sharediluted

$
0.07

$
(0.18
)
$
0.04

$
0.08




2007Fourth
Quarter

Third
Quarter

Second
Quarter

First
QuarterInterest income

$
24,105

$
25,545

$
25,048

$
23,945Interest expense


14,187


15,212


14,816


14,109Net interest income


9,918


10,333


10,232


9,836Provision for loan losses


(878
)

(915
)

(475
)

(280
)Net interest income after provision for loan losses


9,040


9,418


9,757


9,556Non-interest income


4,119


4,743


5,309


5,309Non-interest expense


11,743


15,469


12,308


12,364Net income before income taxes


1,416


(1,308
)

2,758


2,501Provision for income taxes


34


(702
)

816


737Net income

$
1,382

$
(606
)
$
1,942

$
1,764Earnings per sharebasic

$
0.06

$
(0.02
)
$
0.08

$
0.07Earnings per sharediluted

$
0.06

$
(0.02
)
$
0.08

$
0.07


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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, 2008, 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 out 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 3.2% for the one year period and by not more than
5.5% 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 be nearly unchanged from the base case over the one
year period and the 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 a continuous basis. We do not expect these third parties to fail to meet their obligations.

75

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Table of Contents

Item 8.    Financial Statements and Supplementary Data



PageReport of Independent Registered Public Accounting Firm

77Consolidated Statements of Condition

79Consolidated Statements of Income

80Consolidated Statements of Comprehensive Income

81Consolidated Statements of Changes in Shareholders' Equity

82Consolidated Statements of Cash Flows

83Notes to Consolidated Financial Statements

84


76

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Cardinal Financial Corporation:

We
have audited the accompanying consolidated statements of condition of Cardinal Financial Corporation and subsidiaries (the Company) as of December 31, 2008 and 2007, 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,
2008. We also have audited the Company's internal control over financial reporting as of December 31, 2008, 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.

77

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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, 2008 and
2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, 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, 2008, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.



McLean,
Virginia
March 13, 2009

78

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Table of Contents

PART II

Item 8.    Financial Statements and Supplementary Data.



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CONDITION        December 31, 2008 and 2007        (In thousands, except share data)

2008

2007AssetsCash and due from banks

$
14,919

$
20,622Federal funds sold


31,009


1,799Total cash and cash equivalents


45,928


22,421Investment securities available-for-sale


265,356


285,998Investment securities held-to-maturity (market value of $45,759 and $78,168 at December 31, 2008 and December 31, 2007, respectively)


50,183


78,948Total investment securities


315,539


364,946Other investments


16,370


14,188Loans held for sale


157,009


170,487Loans receivable, net of deferred fees and costs


1,139,348


1,039,684Allowance for loan losses


(14,518
)

(11,641
)Loans receivable, net


1,124,830


1,028,043Premises and equipment, net


16,463


18,463Deferred tax asset, net


8,799


6,638Goodwill and intangibles, net


14,173


17,239Bank-owned life insurance


33,176


32,316Accrued interest receivable and other assets


11,470


15,290Total assets

$
1,743,757

$
1,690,031Liabilities and Shareholders' EquityNon-interest bearing deposits

$
147,529

$
123,994Interest bearing deposits


1,032,315


972,931Total deposits


1,179,844


1,096,925Other borrowed funds


367,198


400,060Mortgage funding checks


19,178


9,403Escrow liabilities


1,832


1,016Accrued interest payable and other liabilities


17,699


23,164Total liabilities


1,585,751


1,530,568Common stock, $1 par value

2008

2007Shares authorized


50,000,000


50,000,000Shares issued and outstanding


24,013,663


24,201,561


24,014


24,202Additional paid-in capital


130,709


131,516Retained earnings


3,437


4,213Accumulated other comprehensive loss, net


(154
)

(468
)Total shareholders' equity


158,006


159,463Total liabilities and shareholders' equity

$
1,743,757

$
1,690,031


See
accompanying notes to consolidated financial statements.

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Table of Contents



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME        Years Ended December 31, 2008, 2007, and
2006        (In thousands, except per share data)

2008

2007

2006Interest income:Loans receivable

$
64,619

$
63,392

$
51,872Loans held for sale


7,140


16,686


19,288Federal funds sold


569


1,303


1,206Investment securities available-for-sale


13,195


12,905


10,306Investment securities held-to-maturity


2,521


3,722


4,351Other investments


567


635


378Total interest income


88,611


98,643


87,401Interest expense:Deposits


32,091


45,697


39,091Other borrowed funds


13,547


12,627


6,956Total interest expense


45,638


58,324


46,047Net interest income


42,973


40,319


41,354Provision for loan losses


5,498


2,548


1,232Net interest income after provision for loan losses


37,475


37,771


40,122Non-interest income:Service charges on deposit accounts


2,132


1,988


1,593Loan service charges


1,643


1,502


2,177Investment fee income


3,477


4,287


3,330Realized and unrealized gains on mortgage banking activities


7,752


8,779


10,059Net realized gains on investment securities available-for-sale


913





61Net realized loss on investment securities-trading


(9
)




Management fee income


765


1,072


2,221Increase in cash surrender value of bank-owned life insurance


860


1,670


646Litigation recovery on previously impaired investment


190


83


855Other income


89


99


742Total non-interest income


17,812


19,480


21,684Non-interest expense:Salary and benefits


21,939


23,815


24,616Occupancy


5,547


5,348


5,242Professional fees


2,225


2,095


2,149Depreciation


2,390


3,035


3,172Data processing


1,683


1,450


1,358Telecommunications


1,002


1,182


1,247Amortization of intangibles


245


254


420Impairment of Fannie Mae perpetual preferred stock


4,408





Impairment of goodwill and intangible assets


2,821





2,927Loss related to escrow arrangement





3,500


Settlement with mortgage correspondent


1,800





Other operating expenses


11,853


11,205


10,114Total non-interest expense


55,913


51,884


51,245Net income (loss) before income taxes


(626
)

5,367


10,561Provision (benefit) for income taxes


(912
)

885


3,173Net income

$
286

$
4,482

$
7,388Earnings per common sharebasic

$
0.01

$
0.18

$
0.30Earnings per common sharediluted

$
0.01

$
0.18

$
0.30Weighted-average common shares outstandingbasic


24,370


24,606


24,424Weighted-average common shares outstandingdiluted


24,837


25,012


24,987


See accompanying notes to consolidated financial statements.

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Table of Contents



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        Years Ended December 31,
2008, 2007 and 2006        (In thousands)

2008

2007

2006Net income

$
286

$
4,482

$
7,388Other comprehensive income:Unrealized gain on available-for-sale investment securities:Unrealized holding gain arising during the year, net of tax expense of $289 in 2008, $1,107 in 2007 and $390 in 2006


1,180


2,084


741Less: reclassification adjustment for gains included in net income net of tax expense of $310 in 2008 and $21 in 2006


(602
)




(40
)578


2,084


701Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $43 in 2008, net of tax benefit of $123 in 2007, net
of tax expense of $105 in 2006


(264
)

(276
)

348Comprehensive income

$
600

$
6,290

$
8,437


See
accompanying notes to consolidated financial statements.

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Table of Contents



CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY        Years Ended
December 31, 2008, 2007 and 2006        (In thousands)

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings
(Deficit)

Accumulated
Other
Comprehensive
Income (Loss)

TotalBalance, December 31, 2005


24,363

$
24,363

$
132,150

$
(5,269
)
$
(3,365
)
$
147,879Cumulative effect at January 1, 2006, of change in method of quantifying errors








25


(438
)




(413
)Stock options exercised


96


96


813








909Payment of deferred compensation shares








(3
)







(3
)Dividends on common stock of $0.04 per share











(976
)




(976
)Change in accumulated other comprehensive loss














1,089


1,089Net income











7,388





7,388Balance, 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 benefits








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 SFAS No. 157











(96
)




(96
)Stock options exercised


11


11


47








58Stock compensation expense, net of tax benefits








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
)
$
158,006


See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2008, 2007,
and 2006        (In thousands)

2008

2007

2006Cash flows from operating activities:Net income

$
286

$
4,482

$
7,388Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


2,390


3,035


3,172Amortization of premiums, discounts and intangibles


330


533


1,073Impairment of goodwill and intangible assets


2,821





2,927Provision for loan losses


5,498


2,548


1,232Loans held for sale originated


(1,354,047
)

(2,180,476
)

(2,982,830
)Proceeds from the sale of loans held for sale


1,375,277


2,357,499


3,015,826Realized and unrealized gains on mortgage banking activities


(7,752
)

(8,779
)

(10,059
)Proceeds from sale, maturity and call of investment securities trading


7,847


10,099


Purchase of investment securities trading


(7,856
)

(10,109
)

Loss on sale of investments securities trading


9


10


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


(913
)




(61
)(Gain) loss on sale of other assets


10


2


(15
)Gain from early extinguishment of long term FHLB advance


(275
)




(769
)Stock compensation expense, net of tax benefits


343


338


394Provision for deferred income taxes


(2,493
)

223


2,016Impairment of Fannie Mae perpetual preferred stock


4,408





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


(860
)

(1,670
)

(646
)(Increase) decrease in accrued interest receivable, other assets and deferred tax asset


3,535


(2,286
)

(6,490
)Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities


1,534


(3,903
)

(6,991
)Net cash provided by operating activities


30,092


171,546


26,167Cash flows from investing activities:Net purchases of premises and equipment


(400
)

(1,461
)

(4,957
)Proceeds from sale, maturity and call of investment securities available-for-sale


165,165


146,147


12,000Proceeds from sale, maturity and call of mortgage-backed securities available-for-sale


22,610





9,701Proceeds from maturity and call of investment securities held-to-maturity


17,492


4,467


1,533Proceeds from sale of other investments


1,365


3,666


4,005Purchase of investment securities available-for-sale


(110,813
)

(164,880
)

(51,772
)Purchase of mortgage-backed securities available-for-sale


(92,969
)

(50,286
)

(54,250
)Purchase of other investments


(3,547
)

(8,696
)

(6,071
)Purchase of bank-owned life insurance








(30,000
)Redemptions of investment securities available-for-sale


27,867


23,450


24,787Redemptions of investment securities held-to-maturity


11,127


14,018


15,709Net cash paid in acquisition








(339
)Net increase in loans receivable, net of deferred fees and costs


(102,285
)

(194,780
)

(139,700
)Net cash used in investing activities


(64,388
)

(228,355
)

(219,354
)Cash flows from financing activities:Net increase (decrease) in deposits


82,919


(121,957
)

149,010Net increase (decrease) in other borrowed fundsshort term


(81,129
)

85,679


15,960Net increase (decrease) in mortgage funding checks


9,775


(36,756
)

4,524Proceeds from FHLB advanceslong term


90,000


155,000


65,000Repayments of FHLB advanceslong term


(41,458
)

(35,250
)

(41,750
)Stock options exercised


58


112


819Purchase and retirement of common stock


(1,396
)

(2,724
)

Deferred compensation payments





4


(3
)Excess tax benefit from stock option exercises





20


90Dividends on common stock


(966
)

(974
)

(976
)Net cash provided by financing activities


57,803


43,154


192,674Net (decrease) increase in cash and cash equivalents


23,507


(13,655
)

(513
)Cash and cash equivalents at beginning of year


22,421


36,076


36,589Cash and cash equivalents at end of year

$
45,928

$
22,421

$
36,076Supplemental disclosure of cash flow information:Cash paid during the year for interest

$
45,437

$
57,743

$
45,973Cash paid for income taxes


3,039


3,925


4,976Supplemental schedule of noncash investing and financing activities:Unsettled purchases of investment securities available-for-sale




$
6,183

$
460On February 9, 2006, the Company acquired certain fiduciary and other assets and assumed the liabilities of FBR National Trust Company. In conjunction
with the acquisition, the following noncash changes to our financial condition occurred:Fair value of non-cash assets acquired







$
507Fair value of liabilities assumed








127


See accompanying notes to consolidated financial statements.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIESNotes 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. On June 9, 2005, the Company acquired Wilson/Bennett Capital Management, Inc. ("Wilson/Bennett"), an asset management
firm. The Company also owns Cardinal Wealth Services, Inc. ("CWS"), an investment services subsidiary. On February 9, 2006, the Bank acquired certain fiduciary and other assets and
assumed certain liabilities of FBR National Trust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.

(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, derivative instruments and hedging activities, accounting for impairment of intangible assets, the valuation of the deferred tax assets, fair value measurements of certain assets and
liabilities, fair values of certain 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 pursuant to Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. 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 held for trading. Held-to-maturity securities are those securities for which the Company has the ability and intent to hold until maturity. Held for trading securities are
those

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Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

securities
for which the 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 held for 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 held for trading securities are reported in non-interest income. At December 31, 2008 and 2007, the Company did not have any
investment securities as held for trading.

Gains
and losses on the sale of securities are determined using the specific identification method. Declines in the fair value of individual securities below their cost that are deemed
other than temporary are treated as realized losses, resulting in the establishment of a new cost basis for the security. 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 the assessments of the aforementioned factors. It is at least
reasonably probable that such factors could change in the future, which may result in other-than-temporary impairments.

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.



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.

The
Company accounts for the sale of mortgage loans to third-party investors pursuant to SFAS No. 140,Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125because the loan assets have been legally isolated from the Company; the Company has no ability
to restrict or constrain the ability of third-party investors to pledge or exchange the mortgage loans; and, because 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.

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Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)



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
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.

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

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Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

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, 2008 and 2007 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 22 discusses the impairment charges recorded during
the years ended December 31, 2008 and 2006. No impairment was indicated in 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 recoverable.



Under the Company's bank-owned life insurance policy, executives or other key individuals are the insureds and the Company is the owner and
beneficiary of the policy. As such, the insured has no claim to the insurance policy, the policy's cash value, or a portion of the policy's death proceeds. The Company accounts for its
bank-owned life insurance under Financial Accounting Standards Board

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Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

("FASB")
Technical Bulletin 85-4,Accounting for Financial Purchases of Life Insurance.The increase in the cash surrender value over time
is recorded as other non-interest income.



Realized and unrealized gains on the sales of loans include income earned by George Mason 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.

The
Company adopted the provisions of FASB Interpretation No. 48 ("FIN No. 48"),Accounting for Uncertainty in Income Taxes,
on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. As of December 31, 2008 and 2007, the

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Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

Company
had no unrecognized tax benefits. The Company also had no interest expense and/or tax penalties during the year ended December 31, 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 Company accounts for derivatives and hedging activities in accordance with SFAS No. 133,Accounting for Derivative Instruments
and Certain Hedging Activities, as amended, which requires that all derivative instruments be recorded on the statement of condition at their fair values. 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, 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 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 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.

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 contracts are marked to

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Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

market
through earnings and are not designated as accounting hedges under SFAS No. 133, as amended. The fair values of loan commitments and the fair values of forward sales contracts generally
move in opposite directions, and the net impact of the changes in these valuations on net income during the loan commitment period is generally inconsequential. See Note 20 for a description of
the fair value calculation for these instruments under SFAS No. 133, SFAS No. 157,Fair Value Measurementsand Staff Accounting Bulletin
No. 109,Written Loan Commitments Recorded at Fair Value through Earnings.At the closing of the loan, the loan commitment derivative expires and
the Company records a loan held for sale and continues to be obligated under the same forward loan sales contract. Loans held for sale are accounted for at the lower of cost or market in accordance
with SFAS No. 65,Accounting for Certain Mortgage Banking Activities.

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.



On January 1, 2006, the Company adopted SFAS No. 123R,Share-Based Payment. This statement requires
that companies recognize in the income statement the grant-date fair value of stock options and other equity-based compensation. The statement also requires stock awards to be
classified 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 has adopted SFAS No. 123R using the modified prospective application method, which requires, among other things, recognition of compensation costs for all awards
outstanding since January 1, 2006 for which the requisite service had not been rendered. 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 as a result of the adoption of SFAS No. 123R for the years ended
December 31, 2008, 2007, and 2006 was $343,000, $338,000, and $395,000, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements
was $117,000, $118,000 and $138,000 for the years ended December 31, 2008, 2007 and 2006.

At
December 31, 2008, the Company had two stock-based employee compensation plans, which are described more fully in Note 16.

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 2008, 2007, and 2006 were $3.10, $4.68, and $5.76, respectively. The fair values of the options granted were
estimated on the

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(2) Summary of Significant Accounting Policies (Continued)

grant
date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

2008

2007

2006Estimated option life


6.5 years


6.5 years


6.5 yearsRisk free interest rate


3.77  3.44
%

4.81  4.14
%

5.03  4.44
%Expected volatility


40.50
%

42.10
%

43.2
%Expected dividend yield


0.56
%

0.40
%

0.40
%


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 for 2006 were reclassified to conform to the presentation for 2007. At December 31, 2006, the Company had a liability of $524,000 related to stock-based
compensation. This liability was reclassified to additional paid-in-capital during 2007.

(3) Investment Securities and Other Investments

The fair value and amortized cost of investment securities at December 31, 2008 and 2007 are shown below.

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


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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities and Other Investments (Continued)

2007(In thousands)

Gross
Amortized
cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

$
83,276

$
753

$
(18
)
$
84,011Mortgage-backed securities


168,889


891


(1,596
)

168,184Municipal securities


33,671


67


(519
)

33,219U.S. treasury securities


592





(8
)

584Total

$
286,428

$
1,711

$
(2,141
)
$
285,998Investment Securities Held-to-MaturityU.S. government-sponsored agencies

$
19,511

$
14

$
(57
)
$
19,468Mortgage-backed securities


51,433


93


(455
)

51,071Corporate bonds


8,004





(375
)

7,629Total

$
78,948

$
107

$
(887
)
$
78,168


The
fair value and amortized cost of investment securities by contractual maturity at December 31, 2008 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

$
598

$
600

$
2,001

$
2,025After 5 years but within 10 years


24,917


24,962





After 10 years


33,701


31,590


8,004


3,262Mortgage-backed securities


205,735


208,204


40,178


40,472Total

$
264,951

$
265,356

$
50,183

$
45,759


For
the years ended December 31, 2008, 2007, and 2006, proceeds from sales of investment securities available-for-sale amounted to $37.5 million,
$0, and $9.8 million, respectively. Gross realized gains in 2008, 2007, and 2006, amounted to $913,000, $0, and $61,000, respectively. There were no realized losses in 2008, 2007, and 2006.

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Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities and Other Investments (Continued)

The
table below shows the Company's investment securities' gross unrealized losses and their fair value, aggregated by investment category and the length of time that individual
securities have been in a continuous unrealized loss position, at December 31, 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
)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, 2008, 92% 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, 2008,
94% 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). During the third quarter of 2008, FNMA and FHLMC were placed into conservatorship by federal regulators.

The
Company has $12.4 million in non-government non-agency mortgage-backed securities. These securities are rated AAA. 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, 2008, certain of the Company's mortgage-backed and municipal 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 has the intent and ability to hold these investments for a period of time sufficient to allow for an
anticipated recovery in value.

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Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities and Other Investments (Continued)

The
held-to-maturity portfolio includes investments in four pooled trust preferred securities, totaling $8.0 million at December 31, 2008. 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 composite ratings of AAA. One of the securities has a composite
rating of AA, and one has a composite rating of A+. 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 our A-3 tranches and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments
and concluded that these securities are not other-than-temporarily impaired.

During
the third quarter of 2008, the Company recorded other-than-temporary impairment of $4.4 million related to an investment in Fannie Mae perpetual
preferred stock. The impairment was due to the shares being traded well below their par value following the placement of Fannie Mae into conservatorship by federal regulators in September 2008. The
market value of this investment was $166,000 as of December 31, 2008.

Investment
securities that were pledged to secure borrowed funds and other balances as required at December 31, 2008 and 2007 had carrying values of $222.9 million and
$225.4 million, respectively.

(In thousands)

2008

2007FHLB advances

$
143,803

$
80,596Repurchase agreements


67,512


85,242Debtor in possession, public deposits, trust services division deposits and interest rate swap


7,196


7,143FRB discount window and TT&L note option


4,342


52,468$
222,853

$
225,449


Other
investments at December 31, 2008 include $15.6 million of Federal Home Loan Bank stock and $63,000 of Community Bankers' Bank stock. At December 31, 2007,
other investments included $13.4 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, 2008 and 2007 is the Company's $619,000 investment in Cardinal Statutory Trust I. At December 31, 2008 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
September 2008, the FHLB 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. It was announced that the fourth quarter dividend would be declared and paid
at the end of January 2009. On January 30, 2009, the FHLB announced that in light of the other-than-temporary impairment analysis it was still completing for the fourth
quarter of 2008, the

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(3) Investment Securities and Other Investments (Continued)

FHLB
deferred the declaration of the fourth quarter dividend. Upon completion of their other-than-temporary analysis, the Board of Directors will make a decision regarding the
fourth quarter dividend. Based on current available information, the FHLB expects to pay an annualized dividend in the range of 0.00 to 1.00 percent for the quarter ending December 31,
2008. 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 does not expect these changes to materially impact its
liquidity position.

There
were no held for trading securities for each of December 31, 2008 and 2007. The net loss on the sales of held for trading securities for the years ended December 31,
2008 and 2007 was $9,000 and $10,000, respectively. There were no such net gains or losses for the year ended December 31, 2006.

(4) Loans Receivable

The loan portfolio at December 31, 2008 and 2007 consists of the following:

(In thousands)

2008

2007Commercial and industrial

$
160,989

$
140,531Real estatecommercial


472,131


415,471Real estateconstruction


188,484


186,514Real estateresidential


211,651


213,197Home equity lines


104,370


81,247Consumer


2,393


3,1291,140,018


1,040,089Net deferred fees


(670
)

(405
)Loans receivable, net of fees


1,139,348


1,039,684Allowance for loan losses


(14,518
)

(11,641
)Loans receivable, net

$
1,124,830

$
1,028,043


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, 2008, the amount of credit
extended to any single borrower or group of related borrowers was limited to $25.3 million. Loans in process at December 31, 2008 and 2007 were $1,000 and $354,000, respectively.

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

(In thousands)

2008

2007

2006Balance, beginning of year

$
11,641

$
9,638

$
8,301Provision for loan losses


5,498


2,548


1,232Loans charged-off


(2,656
)

(552
)

(43
)Recoveries


35


7


148Balance, end of year

$
14,518

$
11,641

$
9,638


95

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(4) Loans Receivable (Continued)

At
December 31, 2008, 2007, and 2006, the Company had impaired loans on non-accrual status of $4.7 million, $0, and $82,000, respectively. At
December 31, 2008, the Company had one impaired loan which did not have a valuation allowance as the Company charged-off $1.1 million, a portion of the outstanding principal
balance which was unsecured based on the estimated values of the underlying collateral. At December 31, 2006, the impaired loan had a valuation allowance of $11,000. The average balance of
impaired loans was $13,000, $132,000, and $293,000 for 2008, 2007 and 2006, respectively. Interest income that would have been recorded had these loans been performing for the years ended
December 31, 2008, 2007 and 2006 would have been $348,000, $5,000, and $15,000, respectively. The interest income realized prior to these loans being placed on non-accrual status
for December 31, 2008, 2007 and 2006 was $348,000, $38,000 and $9,000, respectively. At December 31, 2008 and 2007, the Company had accruing loans past due 90 days or more as to
principal or interest payments of $379,000 and $963,000, respectively, all of which were determined to be well-secured and in the process of collection.

Loans
totaling $310.4 million serve as collateral for Federal Home Loan Bank advances at December 31, 2008.

(5) Loans Held for Sale

The loans held for sale portfolio at December 31, 2008 and 2007, consisted of the following:

(In thousands)

2008

2007Residential

$
114,095

$
119,708Construction-to-permanent


42,162


50,321156,257


170,029Net deferred costs


752


458Loans held for sale, net

$
157,009

$
170,487


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.

(6) Premises and Equipment

Components of premises and equipment at December 31, 2008 and 2007 were as follows:

(In thousands)

2008

2007Land

$
4,350

$
4,350Buildings


6,667


6,667Furniture and equipment


15,109


14,823Leasehold improvements


6,556


6,531Total cost


32,682


32,371Less accumulated depreciation and amortization


16,219


13,908Premises and equipment, net

$
16,463

$
18,463


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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(6) Premises and Equipment (Continued)

Depreciation
expense for the years ended December 31, 2008, 2007, and 2006 was $2.4 million, $3.0 million, and $3.2 million, respectively.

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

Minimum
future rental payments under the noncancelable operating leases, as of December 31, 2008 were as follows:

Year ending December 31,

Amount(In thousands)2009


4,9542010


3,0002011


2,0262012


1,7682013


1,588Thereafter


3,645$
16,981


The
total rent expense was $5.6 million, $5.3 million, and $5.2 million in 2008, 2007, and 2006, 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 noncancellable subleasing arrangements as of December 31, 2008 were as follows:

Year ending December 31,

Amount(In thousands)2009

$
4142010


3432011


1872012


1102013


105Thereafter


63$
1,222


The
total rent income was $434,000, $409,000, and $412,000 in 2008, 2007, and 2006, respectively, and is recorded as a reduction of occupancy expense in the consolidated statements of
income.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(7) Deposits

Deposits consist of the following at December 31, 2008 and 2007:

(In thousands)

2008

2007Non-interest-bearing demand deposits

$
147,529

$
123,994Interest-bearing deposits:Interest checking


118,868


124,405Money market and statement savings


306,892


395,356Certificates of deposit


606,555


453,170Total interest-bearing deposits


1,032,315


972,931Total deposits

$
1,179,844

$
1,096,925


Interest
expense by deposit categories is as follows:

(In thousands)

2008

2007

2006Interest checking

$
2,732

$
3,691

$
3,796Money market and statement savings


10,969


17,791


10,153Certificates of deposit


18,390


24,215


25,142Total interest expense

$
32,091

$
45,697

$
39,091


The
aggregate amount of time deposits, each with a minimum denomination of $100,000 was $241.3 million and $207.6 million at December 31, 2008 and 2007,
respectively. At December 31, 2008, the scheduled maturities of time deposits with a minimum denomination of $100,000 were as follows:

Maturities:

Fixed Term

2008
No-Penalty*

TotalThree months or less

$
35,561

$
68,190

$
103,751Over three months through six months


19,705


12,089


31,794Over six months through twelve months


27,095


5,614


32,709Over twelve months


71,433


1,585


73,018$
153,794

$
87,478

$
241,272


---

Brokered
certificates of deposits at December 31, 2008 and 2007 were $89.2 million and $10.0 million, respectively.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(7) Deposits (Continued)

At
December 31, 2008, the scheduled maturities of certificates of deposit were as follows:

(In thousands)2009


428,2932010


118,4232011


46,0032012


9,7372013


3,9462014


153$
606,555


(8) Other Borrowed Funds

At December 31, 2008 and 2007, other borrowed funds consisted of the following:

(In thousands)

2008

2007Fixed rate FHLB advances

$
280,000

$
221,458Variable rate FHLB advances





12,000Federal Funds Purchased





68,000Repurchase agreements


65,887


66,808Payable to Statutory Trust I


20,619


20,619Treasury, Tax & Loan note option


692


11,175$
367,198

$
400,060


The
Company had fixed rate advances from the FHLB of $280.0 million at December 31, 2008. 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.

At
December 31, 2007, the Company had $221.5 million in fixed rate advances from the FHLB with maturities through 2017 and interest rates ranging from 2.29% to 5.00%. The
Company had two variable rate FHLB advances totaling $12.0 million at December 31, 2007.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Other Borrowed Funds (Continued)

The
contractual maturities of the fixed and variable rate advances at December 31, 2008 and 2007 were as follows:

(In thousands)At December 31, 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


(In thousands)At December 31, 2007Type of Advance

Interest Rate

Advance Term

Maturity Date

BalanceDaily Rate Credit (variable rate advance)

4.40%


12 months


2008

$
2,000Fixed Rate Credit

4.084.31%


36 months


2008


10,000Principal Reducing Credit

2.29%


60 months


2008


1,458Convertible

4.244.52%


60 months


2011


15,000Convertible

3.645.00%


60 months


2012


75,000Flipper Advance (variable rate advance)

4.38%


120 months


2016


10,000Convertible

3.934.55%


120 months


2016


40,000Convertible

3.104.85%


120 months


2017


80,000Total FHLB Advances

4.20%







$
233,458


The
average balances of FHLB advances for the years ended December 31, 2008 and 2007 were $273.2 million and $171.0 million, respectively. The maximum amount
outstanding at any month-end during the years ended December 31, 2008 and 2007 was $290.0 million and $234.2 million, respectively. Total interest expense on FHLB
advances for the years ended December 31, 2008, 2007, and 2006 was $11.0 million, $7.2 million, and $2.8 million, respectively.

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. For the year ended December 31, 2007 there were no extinguishments of FHLB
advances. During 2006, the Company extinguished two FHLB advances totaling $20.0 million. The gain on the extinguishment of these advances for the year ended December 31, 2006 was
$769,000 and was recorded in other income in the consolidated statements of income.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Other Borrowed Funds (Continued)

Securities
sold under agreements to repurchase generally mature within one to four days and are reflected in the consolidated statements of financial condition at the amount of cash
received. At December 31, 2008 and 2007 the Company had repurchase agreements of $65.9 million and $66.8 million, respectively. The weighted-average interest rate of these
repurchase agreements was 2.05% and 2.99% at December 31, 2008 and 2007, respectively. The average balances of the repurchase agreements during 2008 and 2007 were $58.6 million and
$57.7 million, respectively, and the maximum amount outstanding at any month-end during 2008 and 2007 was $70.0 million and $77.1 million, respectively. Interest
expense on repurchase agreements for 2008, 2007, and 2006 was $1.2 million, $1.7 million, and $870,000, respectively.

The
Company had no outstanding federal funds purchased at December 31, 2008. At December 31, 2007, the Company had federal funds purchased of $68.0 million. During
2008, the Company did have federal funds purchased outstanding at certain times during the year. Interest expense on federal funds purchased in 2008, 2007, and 2006 was $141,000, $1.0 million,
and $229,000, respectively. The Company had no outstanding short-term dealer repurchase agreements at December 31, 2008 and at December 31, 2007. However, the Company did
have short-term dealer repurchase agreements outstanding at other times during those years. Interest expense on short-term dealer repurchase agreements in 2008, 2007 and 2006
was $10,000, $822,000 and $711,000, respectively.

The
Company has a Treasury, Tax, & Loan ("TT&L") note option with the Federal Reserve. At December 31, 2008 and 2007, the outstanding balance in the TT&L
note option was $692,000 and $11.2 million, respectively. Interest expense related to the TT&L note option in 2008, 2007, and 2006 was $27,000, $206,000, and $142,000, respectively. The Company
has a line of credit at the Federal Reserve discount window in the amount of $388.8 million at December 31, 2008, none of which was drawn as of that date. There was no interest expense
related to the discount window in 2008, 2007 or 2006.

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, 2008, the interest rate on trust preferred securities was 4.40%. These securities are redeemable at par beginning September 2009. The Company has guaranteed
payment of these securities. The $20.6 million payable by the Company to the Trust is included in other borrowed funds. The Trust is an unconsolidated subsidiary since the Company is not the
primary beneficiary of this entity under FASB Interpretation No. 46RConsolidation of Variable Interest Entities. 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 2008, 2007, and 2006 was $1.2 million, $1.6 million and $1.6 million, respectively.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(8) Other Borrowed Funds (Continued)

The
scheduled maturities of other borrowed funds at December 31, 2008 were as follows:

(In thousands)

2009

2010

2011

2012

2013 and
thereafterFHLB advances

$


$
10,000

$
15,000

$
80,000

$
175,000Federal Funds Purchased














Repurchase agreements


65,887











Payable to Statutory Trust I














20,619TT&L note option


692











$
66,579

$
10,000

$
15,000

$
80,000

$
195,619


(9) Income Taxes

The Company and its subsidiaries file consolidated federal tax returns on a calendar-year basis. The Company recorded an income tax benefit of $912,000 and income tax expense
of $885,000 and $3.2 million for the years ended December 31, 2008, 2007, and 2006, respectively.

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)

2008

2007

2006Income tax at federal corporate rate

$
(213
)
$
1,852

$
3,591Change in valuation allowance


228


302


195Change in the carrying rate of deferred tax assets and liabilities


52


15


(67
)Expected state tax benefit of losses of nonbank entities


(228
)

(302
)

(195
)State tax expense, net of federal tax benefit


6


37


73Nontaxable income


(764
)

(976
)

(402
)Nondeductible expenses


103


17


26Other


(96
)

(60
)

(48
)$
(912
)
$
885

$
3,173


102

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(9) Income Taxes (Continued)

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

(In thousands)

2008

2007

2006Included in net incomeCurrentFederal

$
1,522

$
2,030

$
5,550State


59


62


116Total current


1,581


2,092


5,666DeferredFederal


(2,477
)

(1,201
)

(2,487
)State


(16
)

(6
)

(6
)Total deferred


(2,493
)

(1,207
)

(2,493
)Total included in net income

$
(912
)
$
885

$
3,173Included in shareholders' equity:Deferred tax expense (benefit) related to the change in the net unrealized gain (loss) on investment securities available for sale

$
289

$
1,107

$
390Deferred tax expense (benefit) related to the change in the net unrealized gain (loss) on derivative instruments designated as cash flow hedges


43


(123
)

105Total included in shareholders' equity

$
332

$
984

$
495


103

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(9) 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)

2008

2007Deferred tax assets:Allowance for loan losses

$
5,621

$
4,178Net operating state loss carryforwards


1,560


1,332Unrealized (gains) losses on investment securities available-for-sale


(139
)

150Unrealized losses on derivative instruments designated as cash flow hedges


122


165Deferred compensation


1,981


1,959Goodwill and intangibles, net


469


(103
)Depreciation


797


306Other


516


773Total gross deferred tax assets


10,927


8,454Less valuation allowance


(1,560
)

(1,332
)Net deferred tax assets


9,367


7,122Deferred tax liabilities:Prepaid expenses


(84
)

(134
)Loan origination costs


(484
)

(656
)Total gross deferred tax liabilities


(568
)

(484
)Net deferred tax asset

$
8,799

$
6,638


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 and $1.3 million at December 31, 2008 and 2007, respectively, 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. Management
believes that future operations of the Company will generate sufficient taxable income to realize the net deferred tax assets at December 31, 2008 and 2007.

The
Company adopted the provisions of FASB Interpretation No. 48 ("FIN No. 48"),Accounting for Uncertainty in Income Taxes,
on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.

As
of December 31, 2008 and 2007, the Company had no unrecognized tax benefits. The Company also had no interest expense and/or tax penalties during the year to date
December 31, 2008 and 2007. 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.

104

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(10) Derivative Instruments and Hedging Activities

Forward Loan Sales Commitments

The Company is a party to forward loan sales contracts, which are utilized to mitigate exposure to fluctuations in interest rates
related to closed loans which are held for sale and designated in a cash flow hedge relationship.

At
December 31, 2008 and 2007, accumulated other comprehensive income included an after tax unrealized loss of $264,000 and $276,000, respectively, related to forward loan sale
contracts. 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,
2008 which is related to the Company's cash flow hedges will be recognized in earnings during the first quarter of 2009. At December 31, 2008 the Company recognized a charge to earnings of
$2,000 due to hedge ineffectiveness.

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 $3.5 million.

At
December 31, 2007, the Company had $29.5 million in loan commitments and associated forward sales and had $123.9 million in forward loan sales associated with
$124.9 million of loans held for sale contracts. At December 31, 2007, the derivative asset was $1.5 million and the derivative liability was $1.9 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 two 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, 2008, the information pertaining to outstanding interest rate swap agreements used to hedge variable rate debt is as follows:

(Dollars in thousands)

2008Notional amount

$
10,000Weighted average pay rate


3.97
%Weighted average receive rate


3.20
%Weighted average maturity in years


5 yearsUnrealized loss relating to interest rate swaps

$
304


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

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(10) Derivative Instruments and Hedging Activities (Continued)

December 31,
2008, 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. As of December 31, 2008, approximately $199,000 of losses reported in other comprehensive income related to the interest rate swaps are expected to be reclassified into
interest expense as a yield adjustment of the hedged borrowings during the year ending December 31, 2009. The cash flow hedging relationships were highly effective during 2008 and the amount of
ineffectiveness was de minimus.

No
such interest rate swaps existed as of the year ended December 31, 2007.

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. 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. The Company 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.

At
December 31, 2008, the information pertaining to outstanding interest rate swap agreements used to hedge fixed-rate loans is as follows:

(Dollars in thousands)

2008Notional amount

$
12,000Weighted average pay rate


5.42
%Weighted average receive rate


3.02
%Weighted average maturity in years


5 yearsUnrealized loss relating to interest rate swaps

$
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, 2008, the unrealized loss relating to use of interest rate swaps was recorded in derivative liabilities.

(11) 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,

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Notes to Consolidated Financial Statements (Continued)

(11) Regulatory Matters (Continued)

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, 2008, there were approximately $32.0 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 2008.

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

The
regulatory capital of the Company at December 31, 2008 and 2007 is as follows:

Actual

For Capital Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

RatioAt December 31, 2008(In thousands)Total capital to risk weighted assets

$
178,420


12.72
%
$
112,207
3

8.00
%
$
140,259
3

10.00
%Tier I capital to risk weighted assets


163,716


11.67
%

56,104
3

4.00
%

84,156
3

6.00
%Tier I capital to average assets


163,716


9.90
%

66,168
3

4.00
%

82,711
3

5.00
%At December 31, 2007(In thousands)Total capital to risk weighted assets

$
174,523


12.98
%
$
107,569
3

8.00
%
$
134,461
3

10.00
%Tier I capital to risk weighted assets


162,691


12.10
%

53,785
3

4.00
%

80,677
3

6.00
%Tier I capital to average assets


162,691


10.26
%

63,456
3

4.00
%

79,320
3

5.00
%


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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(11) Regulatory Matters (Continued)

The
regulatory capital of the Bank at December 31, 2008 and 2007 is as follows:

Actual



For Capital
Adequacy Purposes

To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

RatioAt December 31, 2008(In thousands)Total capital to risk-weighted assets

$
168,513


12.04
%
$
111,957
3

8.00
%
$
139,946
3

10.00
%Tier I capital to risk-weighted assets


153,810


10.99
%

55,978
3

4.00
%

83,968
3

6.00
%Tier I capital to average assets


153,810


9.32
%

66,018
3

4.00
%

82,523
3

5.00
%At December 31, 2007(In thousands)Total capital to risk-weighted assets

$
159,745


11.91
%
$
107,308
3

8.00
%
$
134,135
3

10.00
%Tier I capital to risk-weighted assets


147,913


11.03
%

53,654
3

4.00
%

80,481
3

6.00
%Tier I capital to average assets


147,913


9.34
%

63,331
3

4.00
%

79,163
3

5.00
%


At
December 31, 2008 and 2007, 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, 2008 and 2007, George Mason
maintained capital in excess of these required guidelines.

(12) 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.

Analysis
of activity for loans to related parties follows:

(In thousands)

2008

2007Balance, beginning of year

$
39,137

$
40,482New loans


14,060


9,354Loans paid off or paid down


(2,490
)

(10,699
)Balance, end of year

$
50,707

$
39,137


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

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(12) Related-Party Transactions (Continued)

without
any option to extend. The rent that George Mason pays for the use of this space ranges from $737,000 to $982,000 per year during the term of the lease. Rent payments totaled $848,000 in 2008,
$792,000 in 2007 and $1.2 million in 2006.

(13) Earnings Per Common Share

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

(In thousands, except per share data)

2008

2007

2006Net income

$
286

$
4,482

$
7,388Weighted average shares for basic


24,370


24,606


24,424Weighted average shares for diluted


24,837


25,012


24,987Basic earnings per common share

$
0.01

$
0.18

$
0.30Diluted earnings per common share

$
0.01

$
0.18

$
0.30


The
following shows the composition of basic outstanding shares for the years ended December 31, 2008, 2007, and 2006:

(in thousands)

2008

2007

2006Weighted average shares outstandingbasic


24,127


24,333


24,391Weighted average shares attributable to deferred compensation plans


243


273


33Total weighted average sharesbasic


24,370


24,606


24,424


Basic
earnings per share is impacted by the number of shares required to be issued under the Company's various deferred compensation plans.

The
following shows the composition of diluted outstanding shares for the years ended December 31, 2008, 2007, and 2006:

(in thousands)

2008

2007

2006Weighted average shares outstandingbasic


24,127


24,333


24,391Weighted average shares attributable to deferred compensation plans


567


437


216Weighted average shares attributable to vested stock options


143


242


380Total weighted average sharesdiluted


24,837


25,012


24,987


Employees
who participate in the Company's deferred compensation plans can allocate their contributions to various investment options, including a Company Common Stock investment option.
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 were 319,509 at December 31, 2008 and
51,346 at December 31, 2007. There were no outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation at December 31,
2006. These stock

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(13) Earnings Per Common Share (Continued)

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, 2008, 2007, and 2006, there are no
incremental shares related to stock options as calculated under SFAS No. 123R because the addition of these shares to the diluted weighted average share calculation would be antidilutive.

(14) 401(k) Plan

Employees who work twenty (20) hours or more a week and have been employed by the Company for a month can elect to participate in and make contributions into a 401(k) Plan. The
Company contributes $0.50 for $1.00 of employee contributions up to a maximum of 3% of the employee's contribution. Expense related to the Company's match in 2008, 2007, and 2006 was $495,000,
$567,000, and $546,000, respectively. Employees are immediately vested in the Company's matching contribution.

(15) Deferred Compensation Plans

The Company has deferred compensation plans for its directors and certain employees. Under the directors' plan, a director may elect to defer all or a portion of any director-related
fees including fees for serving on board committees. Under the employees' plan, certain employees may defer all or a portion of their compensation including any bonus or commission compensation.
Director and employee deferrals, other than employees of George Mason, are matched 50% by the Company. Deferrals made by employees of George Mason are not eligible for the Company match. The amount of
the Company match is deemed invested in Company common stock which vests immediately for the directors and after four years for employees. The maximum Company match per employee is $50,000 per year
and $10,000 per year per director. Expense relating to the deferred compensation plans for the years ended December 31, 2008, 2007 and 2006 was $240,000, $149,000 and $136,000, 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.

(16) Director and Employee Stock-Based Compensation Plans

At December 31, 2008, 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 284,808 shares of the Company's common stock
available for future grants and awards in the Equity Plan as of December 31, 2008.

110

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

The
following tables present a summary of the Company's stock option activity for the years ended December 31, 2008, 2007, and 2006:

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

$
1,994,521Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value
($000)Outstanding at December 31, 2005


2,271,594

$
8.29Granted


286,000


11.83Exercised


(96,230
)

8.49Forfeited


(42,090
)

10.24Outstanding at December 31, 2006


2,419,274

$
8.70


7.62

$
3,754,056Options exercisable at December 31, 2006


2,008,668

$
8.44


7.46

$
3,632,572


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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Information
pertaining to stock options outstanding at December 31, 2008 is as follows:

At December 31, 2008

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


220,597

3.2 years

$
3.66


220,597

$
3.66$  4.50  $  5.50


300,704

3.9 years


4.96


300,704


4.96$  6.38  $  8.28


264,022

5.1 years


8.06


263,022


8.06$  8.64  $  9.59


628,676

6.1 years


8.96


628,076


8.96$  9.78  $10.91


507,000

6.2 years


10.59


503,700


10.59$11.05  $12.65


443,734

7.2 years


11.60


282,034


11.43Outstanding at year end


2,364,733

5.7 years


8.70


2,198,133


8.46


Total
intrinsic value of options exercised during the years ended December 31, 2008, 2007, and 2006 was $10,000, $80,000, and $169,000 respectively.

A
summary of the status of the Company's non-vested stock options and changes during the year ended December 31, 2008 is as follows:

Number of
Shares

Weighted
Average
Grant Date
Fair ValueBalance at December 31, 2007


292,028

$
5.30Granted


17,200


3.10Vested


(91,528
)

4.65Forfeited


(51,100
)

4.69Balance at December 31, 2008


166,600

$
5.62


At
December 31, 2008, there was $1.3 million 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 2.3 years. The total fair value of shares that vested during the years ended December 31,
2008, 2007, and 2006 was $337,000, $596,000, and $387,000, respectively.

At
the Board of Directors meeting held on December 13, 2006, the Board approved the re-pricing of 92,300 options with an exercise price of $3.25 per share to a new
exercise price of $4.12 per share to equal the fair market value price per share of the Company's common stock on the original grant date in 2002. SFAS No. 123R requires the
re-pricing of equity awards to be treated as a modification of the original award and provides that such a modification is an exchange of the original award for a new award. SFAS
No. 123R considers the modification to be the repurchase of the old award for a new award of equal or greater value, incurring additional compensation cost for any incremental value. This
incremental difference in value is measured as the excess, if any, of the fair value of the modified award determined in accordance with the provisions of SFAS No. 123R over the fair value of
the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. SFAS No. 123R provides that this incremental fair
value, plus the

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Notes to Consolidated Financial Statements (Continued)

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

remaining
unrecognized compensation cost from the original measurement of the fair value of the old option, must be recognized over the remaining vesting period. The modifications resulted in an
incremental compensation cost of $58,000. Of the 92,300 options affected by the re-pricing, 61,500 options were vested at December 13, 2006. Therefore, additional
compensation cost of $39,000 for the 61,500 stock options that were vested was recognized immediately and is included in the stock-based compensation expense for the year ended December 31,
2006.

(17) 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.

Wilson/Bennett
has been included in the wealth management and trust services segment since the date of its acquisition, June 9, 2005. Results related to the assets acquired, and
liabilities assumed, from FBR National Trust Company have been reflected in the wealth management and trust services segment since the date of their acquisition and assumption, February 9,
2006.

Information
about the reportable segments and reconciliation of this information to the consolidated financial statements as of and for the years ended December 31, 2008, 2007 and
2006 follows:

(In thousands)
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

$
178,625

$
(312,397
)
$
1,743,757


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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(17) Segment Reporting (Continued)

(In thousands)
At and for the Year Ended December 31, 2008:

Commercial
Banking

Mortgage
Banking

Wealth
Management
and Trust
Services

Other

Intersegment
Elimination

ConsolidatedWealth
Management
and Trust
ServicesAt and for the Year Ended December 31, 2007:

Commercial
Banking

Mortgage
Banking



Intersegment
EliminationOther

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
)
$
1,690,031Wealth
Management
and Trust
ServicesAt and for the Year Ended December 31, 2006:

Commercial
Banking

Mortgage
Banking



Intersegment
EliminationOther

ConsolidatedNet interest income

$
38,091

$
4,344

$


$
(1,081
)
$


$
41,354Provision for loan losses


1,232














1,232Non-interest income


4,415


13,892


3,330


47





21,684Non-interest expense


27,127


15,241


6,591


2,286





51,245Provision (benefit) for income taxes


4,571


1,060


(1,307
)

(1,151
)




3,173Net income (loss)

$
9,576

$
1,935

$
(1,954
)
$
(2,169
)
$


$
7,388Total Assets

$
1,572,051

$
360,470

$
5,500

$
163,879

$
(463,471
)
$
1,638,429


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.

During
the year ended December 31, 2006, the Company recorded a non-cash impairment loss totaling $2.9 million pretax ($1.9 million after tax) 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.

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(18) 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 and financial guarantees. 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. These 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, 2008 are collateralized.

Commitments
to extend credit of $81.6 million as of December 31, 2008 are related to George Mason's mortgage loan funding commitments and are of a short term nature.
Commitments to extend credit of $331.9 million primarily have floating rates as of December 31, 2008.

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, 2008 and 2007 is as follows:

(In thousands)2008

2007Financial instruments whose contract amounts represent potential credit risk:Commitments to extend credit

$
413,457

$
359,321Standby letters of credit


10,811


10,166


The
fair value of the liability associated with standby letters of credit at December 31, 2008 and 2007 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, 2008 and 2007 were $9,000 and $23,000, respectively.

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Notes to Consolidated Financial Statements (Continued)

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

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 2008 and 2007, George Mason
either repurchased from or settled with investors, excluding the mortgage correspondent settlement discussed below, on such loans for a total of $523,000 and $347,000, respectively. At
December 31, 2008 and 2007, this reserve had a balance of $1.6 million and $100,000, respectively. The expense related to this reserve for the years ended December 31, 2008 and
2007 was $2.0 million and $347,000, respectively. No such reserve existed at December 31, 2006. The Company evaluates the merits of each claim and estimates its reserve based on actual
and expected claims received and considering the historical amounts paid to settle such claims.

Also,
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 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 third party mortgage companies. The net amount of this settlement is reported as "Settlement with mortgage correspondent" in the
non-interest expense section of the statement of operations.

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
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, 2008 or 2007 as management expects to fully recover amounts owed by managed companies as of these same period end dates.

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

116

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

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 8 for further discussion of this debt.

(19) Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157,Fair Value Measurements,which established a framework for
measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. In addition, the Company adopted SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilitiesincluding an amendment of FAS 115.SFAS No. 159 allows
entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value.

SFAS
No. 157 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. SFAS No. 157 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:



Upon
adoption or at any point during the year ended December 31, 2008, the Company did not designate any asset or liability to be measured at fair value under SFAS No. 159.

Fair Value of Investment Securities Available-for-Sale and Interest Rate Swap Derivatives

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'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.

117

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(19) Fair Value Measurements (Continued)

Assets
and liabilities measured at fair value on a recurring basis are shown below:

At December 31, 2008 (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

$
265,356




$
265,356Loans receivable, net


13,839





13,839Derivative assetinterest rate swaps








Derivative liabilityinterest rate swaps


2,065





2,065Derivative assetforward loan sales commitments


2,102





2,102Derivative liabilityforward loan sales commitments


1,423





1,423


Fair Value of Interest Rate Lock Commitments and Forward Loan Sales

In the normal course of business, George Mason enters into contractual interest rate lock commitments to extend credit to borrowers
with fixed expiration dates. The
commitments become effective when the borrowers "lock-in" a specified interest rate within the time frames established by George Mason. 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, George Mason enters into best efforts forward sales contracts to sell loans to investors. The
forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. Both the rate lock commitments to the borrowers and the forward sales
contracts to investors are undesignated derivatives pursuant to the requirements of SFAS No. 133, and, accordingly, are marked to fair value through earnings.

Staff
Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value Through Earnings,("SAB No. 109") was
effective for written loan commitments initiated on or after January 1, 2008. SAB No. 109 requires that the expected cash flows related to the servicing of a loan be included in the fair
value measurement of a derivative loan commitment. SAB No. 109 replaces Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan
Commitments,which precluded the consideration of servicing cash flows in determining the fair value of a written loan commitment.

118

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(19) Fair Value Measurements (Continued)

The
effects of fair value measurements for the interest rate lock commitment derivatives and forward sales contract derivatives on earnings in the year ended December 31, 2008
were as follows and were all based on Level 2 inputs:

(in thousands)

Notional
or
Principal
Amount

Expected
Premium
(Discount)
to Par

Movement
of Interest
Rates

Security
Price
Change

Total Fair
Value
AdjustmentRate lock commitments

$
80,503

$
441

$
185

$


$
626Forward sales contracts


140,523


567


574


(759
)

382$
1,008

$
759

$
(759
)
$
1,008


The
expected premium (discount) to par considers two elements (a) the interest rate differential and (b) the servicing rights value. The interest rate differential is the
difference, if any, between the mortgage loan rates to be paid by the borrower in the retail market and mortgage loan pricing demanded by investors in the secondary or wholesale market. The Company
sells all of its loans on a servicing released basis, and receives a servicing release premium upon sale. The servicing rights value is based on contractual terms with investors and ranged from 0.17%
to 2.75% of the loan amount, depending on the loan type. The Company assumes an approximate 40% fallout rate based on recent historical experience when measuring the fair value of the rate lock
commitments for purchase loans and a 55% assumed fallout rate for the fair value of the rate lock commitments for refinance loans. Fallout is defined as interest rate lock commitments for which the
Company does not close a mortgage loan.

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. The market
price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

To
calculate the effects of the changes in interest rates from the date of the commitment through loan origination, and then period end, the Company utilizes applicable published
mortgage-backed
investment security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.

At
loan closing, the fair value of the interest rate lock commitment is included in the cost basis of loans held for sale. Loans held for sale are carried at the lower of cost or fair
value.

Prior
to the adoption of SAB No. 109 and SFAS No. 157, the fair value calculation for interest rate lock commitments and forward sales contracts only considered the effects
of interest rate changes between the date of the rate lock and either the loan closing date or the balance sheet date. For the three months ended December 31, 2008, the change in fair value of
the interest rate lock commitments, loans held for sale, and forward loan sales contracts based only on changes in market interest rates was $759,000. Interest rate movements have an offsetting impact
on the security prices that serve to measure the fair value of these instruments.

SFAS No. 157 Adoption Adjustment

The transition provisions of SFAS No. 157 provide for retrospective application to financial instruments that were measured at
fair value at initial recognition using a transaction pricing in

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(19) Fair Value Measurements (Continued)

accordance
with specific accounting literature. The Company's interest rate lock commitments were measured at inception at the transaction price. SFAS No. 157 provides that at the date of
adoption (January 1, 2008) a difference between the carrying amounts and the fair values of these instruments should be recognized as a cumulative effect adjustment to the opening balance of
retained earnings. The amount of this cumulative effect adjustment was $96,000.

Managed Company Loans

George Mason serves as a pass through conduit for the managed companies to sell loans to investors on the secondary market. Concurrent
with entering into a rate lock agreement with a borrower, the managed company loan is sold forward to an investor in the secondary market. After the managed company closes the loan, it is assigned to
George Mason. George Mason then facilitates the transfer of the loan to the investor. George Mason does not earn any spread or other fees from the loan assignment nor from the transfer to the
investor. All gains in the loan sale are
earned by the managed company. At December 31, 2008, loans held for sale includes $56.3 million of loans originated by the managed companies that will be delivered to the investors by
George Mason. Any change in the fair value of the loans held for sale originated by the managed company will result in an equal and offsetting change in liability to the managed company.

(20) Disclosures of Fair Value of Financial Instruments (SFAS No. 107 Disclosure)

SFAS No. 107,Disclosures About Fair Value of Financial Instruments,requires the disclosure of the estimated fair value of
financial instruments including those financial instruments for which the Company did not elect the fair value option. The assumptions used and the estimates disclosed represent management's best
judgment of appropriate valuation methods. 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.

Although
management uses its best judgment in estimating the fair value of financial instruments, there are inherent limitations in any estimation technique. Therefore, these fair value
estimates are not necessarily indicative of the amounts the Company would realize in a market transaction. 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 following summarizes the significant methodologies and assumptions used in estimating the fair values presented in the following
table.

Cash and Cash Equivalents

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

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(20) Disclosures of Fair Value of Financial Instruments (SFAS No. 107 Disclosure) (Continued)

Investment Securities Held-to-Maturity and Other Investments

Fair values for investment securities held-to-maturity are based on quoted market prices or prices quoted for similar financial
instruments. Fair value for other investments is estimated at their cost since no active trading markets exist.

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.

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 amounts are reasonable estimates of the
fair value of these financial instruments and are zero at December 31, 2008 and 2007.

Accrued Interest Receivable

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

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(20) Disclosures of Fair Value of Financial Instruments (SFAS No. 107 Disclosure) (Continued)

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

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 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


1,660Other:Commitments to extend credit

$


$



December 31, 2007(In thousands)

Carrying
Amount

Estimated
Fair ValueFinancial assets:Cash and cash equivalents

$
22,421

$
22,421Investment securities held-to-maturity and other investments


93,136


92,356Loans receivable, net


1,039,684


1,035,428Accrued interest receivable


6,134


6,134Financial liabilities:Demand deposits

$
123,994

$
123,994Interest checking


124,405


124,405Money market and statement savings


395,356


395,356Certificates of deposit


453,170


454,426Other borrowed funds


400,060


407,282Mortgage funding checks


9,403


9,403Accrued interest payable


1,459


1,459Other:Commitments to extend credit

$


$



122

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) 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, 2008 and 2007

(In thousands)

2008

2007AssetsCash and cash equivalents

$
7,579

$
9,333Other investments


113


113Investment in subsidiaries


167,813


164,362Premises and equipment, net


893


1,001Goodwill


134


134Other assets


2,093


5,139Total assets

$
178,625

$
180,082Liabilities and Shareholders' EquityDebt to Cardinal Statutory Trust I

$
20,619

$
20,619Other liabilities





Total liabilities


20,619


20,619Total shareholders' equity

$
158,006

$
159,463Total liabilities and shareholders' equity

$
178,625

$
180,082


123

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Parent Company Only Financial Statements (Continued)

PARENT COMPANY ONLY CONDENSED STATEMENTS OF OPERATIONS

Years Ended December 31, 2008, 2007, and 2006

(In thousands)

2008

2007

2006Income:Net interest expense

$
(1,192
)
$
(1,393
)
$
(1,081
)Other income


35


49


47Total income


(1,157
)

(1,344
)

(1,034
)Expensegeneral and administrative


2,535


2,885


2,286Net loss before income taxes and equity in undistributed earnings of subsidiaries


(3,692
)

(4,229
)

(3,320
)Income tax benefit


(1,287
)

(1,513
)

(1,151
)Equity in undistributed earnings of subsidiaries


2,691


7,198


9,557Net income

$
286

$
4,482

$
7,388


124

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(21) Parent Company Only Financial Statements (Continued)

PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2008, 2007, and 2006

(In thousands)

2008

2007

2006Cash flows from operating activities:Net income

$
286

$
4,482

$
7,388Adjustments to reconcile net income to net cash provided by (used in) operating activities:Equity in undistributed earnings of subsidiaries


(2,691
)

(7,198
)

(9,557
)Depreciation


108


113


116Increase in other assets and liabilities


2,847


9,134


(5,082
)Net cash provided by (used in) operating activities


550


6,531


(7,135
)Cash flows from investing activities:Capital investments in subsidiaries





(7,500
)

Dividends received from subsidiaries





300


Purchase of other investments








(50
)Net change in premises and equipment





(45
)

Net cash used in investing activities





(7,245
)

(50
)Cash flows from financing activities:Purchase and retirement of common stock


(1,396
)

(2,724
)

Distribution of deferred compensation balance





4


(3
)Dividends on common stock


(966
)

(974
)

(976
)Stock options exercised


58


132


909Net cash used in financing activities


(2,304
)

(3,562
)

(70
)Net decrease in cash and cash equivalents


(1,754
)

(4,276
)

(7,255
)Cash and cash equivalents at beginning of year


9,333


13,609


20,864Cash and cash equivalents at end of year

$
7,579

$
9,333

$
13,609


125

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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) 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.

In
accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,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.

For
the year ended December 31, 2008, the Company recorded an impairment of the goodwill associated with its acquisition of George Mason. Goodwill of $12.9 million was
recognized during 2004 as a result of this acquisition. The Company employed the services of a valuation consultant to assist with the goodwill evaluation, which was performed during the annual
impairment test. The analysis included certain valuation techniques, including a discounted cash flow approach. Following the acquisition date, George Mason has delivered excellent financial results
and returns on the Company's investment. Recent and ongoing challenges in the regional residential real estate market have negatively impacted the cash flows expected to be generated by George Mason
in the near term. The valuation analysis indicated that goodwill was impaired and the Company recorded a non-cash impairment charge of $2.8 million.

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 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 decreased $307,000 for the year ended December 31, 2008 as compared to the year ended
December 31, 2007, and $1.1 million for the year to date December 31, 2007 as compared to the same period of 2006. This continued adverse change in the business climate caused the
Company to evaluate the intangible 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.

126

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(22) Goodwill and Other Intangible Assets (Continued)

Information
concerning amortizable intangibles at December 31, 2008 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, 2006

$
1,781

$
445

$
795

$
433

$
2,576

$
8782007 activity:Customer relationship intangibles





198





38





236Trade name











18





18Balance 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

$
1,377


The
aggregate amortization expense for 2008, 2007, and 2006 was $245,000, $254,000, and $420,000, respectively. The estimated amortization expense for the next five years is as follows:

(In thousands)2009

$
2382010


2382011


2382012


2382013


247


The
changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007 were as follows:

(In thousands)

Commercial
Banking

Mortgage
Banking

Wealth
Management and
Trust Services

TotalBalance at December 31, 2006

$
22

$
12,941

$
2,832

$
15,7952007 activity:None











Balance 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

$
12,974


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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(23) Other Operating Expenses

The following shows the composition of other operating expenses for the years ended December 31, 2008, 2007, and 2006:

(In thousands)

2008

2007

2006Stationary and supplies

$
881

$
1,091

$
1,374Advertising and marketing


2,116


2,058


2,026Other taxes


1,880


1,701


1,572Travel and entertainment


460


492


776Bank operations


2,203


1,234


719Premises and equipment


1,965


1,771


1,675FDIC insurance assessments


721


768


139Miscellaneous


1,627


2,090


1,833Total other operating expense

$
11,853

$
11,205

$
10,114


(24) SAB 108 Cumulative Effect Adjustment

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 ("SAB 108"),Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements.

Traditionally,
there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the "roll-over" method and the "iron curtain"
method. The roll-over method focuses primarily on the impact of a misstatement on the income statementincluding the reversing effect of prior year
misstatementsbut its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to our application of the guidance in
SAB 108, the Company used the roll-over method for quantifying financial statement misstatements.

In
SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the
Company's financial statements and the related financial statement disclosures. This model is commonly referred to as a "dual approach" because it requires quantification of errors under both the iron
curtain and the roll-over methods.

SAB 108
permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the "dual approach" had always been
applied or (ii) recording the cumulative effect of initially applying the "dual approach" as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained earnings.

The
Company identified the following errors through the application of its internal controls over financial reporting and had concluded that the individual errors were immaterial under
the roll-over method for the periods indicated. However, when applying the dual approach, and after considering all relevant quantitative and qualitative factors, the Company concluded
that these misstatements are material to the 2006 financial statements when considering the aggregate impact. For this reason, the

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(24) SAB 108 Cumulative Effect Adjustment (Continued)

Company
corrected the errors through the recording of cumulative effect adjustments to retained earnings as of January 1, 2006:

Period in which misstatement originated(1)

Adjustment
Recorded as of
January 1,
2006(In thousands)

2002

2003

2004

2005Accounts receivable(2)

$


$


$


$
(72
)
$
(72
)Compensation expense(3)


(41
)

(38
)

(38
)

(38
)

(155
)Deferred loan fees and costs(4)








(31
)

(135
)

(166
)Deferred tax asset(5)


14


13


24


86


137Federal income taxes payable(6)





(69
)

(113
)




(182
)Impact on net income(7)

$
(27
)
$
(94
)
$
(158
)
$
(159
)
$
(438
)Non-net income impact:Additional paid-in capital(8)

$
5

$
7

$
6

$
7

$
25Net effect of adjustments(9)













$
(413
)


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Table of Contents

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(24) SAB 108 Cumulative Effect Adjustment (Continued)

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Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

No changes in the Company's independent accountants or disagreements on accounting and financial disclosure required to be reported
hereunder have taken place.

Item 9A.    Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be
disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the
Securities and Exchange Commission. An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this
report was carried out under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer. Based on the evaluation, the
aforementioned officers concluded that the Company's disclosure controls and procedures were effective as of the end of such period.

Management's Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of the Company's financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

Management
assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. 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, 2008, 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, 2008, 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 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

None.

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Table of Contents

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Pursuant to General Instruction G(3) of Form 10-K, the information contained in the "Election of Directors"
section and under the headings "Executive Officers," "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 2009 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 2009 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 2009
Annual Meeting of Shareholders is incorporated herein by reference.

Equity Compensation Plan Information.The following table sets forth information as of December 31, 2008, with respect to
compensation plans
under which shares of our Common Stock are authorized for issuance.

Plan Category

Number of Securities to
Be Issued upon Exercise
of Outstanding Options,
Warrants and Rights

Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans(1)Equity Compensation Plans Approved by Shareholders1999 Stock Plan


333,124

$
4.73


2002 Equity Compensation Plan


2,031,609

$
9.35


284,808Equity Compensation Plans Not Approved by Shareholders(2)








Total


2,364,733

$
8.70


284,808


---

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 2009 Annual Meeting of Shareholders is incorporated herein by reference.

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Table of Contents

Item 14.    Principal Accounting Fees and Services

Pursuant to General Instruction G(3) of Form 10-K, the information contained under the headings "Fees of
Independent Public Accountants" and "Audit Committee Pre-Approval Policies and Procedures," in the Company's Proxy Statement for the 2009 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 December 19, 2007) (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed December 21,
2007).4.1

Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Form SB-2).10.1

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

Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the
Form SB-2).*10.3

Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Form SB-2).*10.4

Cardinal Financial Corporation 2002 Equity Compensation Plan, as amended and restated April 21, 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8, Registration
No. 333-134923).*10.5

Cardinal Financial Corporation Executive Deferred Income Plan, as amended and restated October 21, 2008 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period
ended September 30, 2008).*10.6

Cardinal Financial Corporation Directors Deferred Income Plan, as amended and restated October 21, 2008 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period
ended September 30, 2008).*


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Table of Contents

10.7

George Mason Mortgage, LLC Executive Deferred Income Plan, as amended and restated October 21, 2008 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the period ended
September 30, 2008).*10.8

Executive Employment Agreement, dated March 1, 2004, between Cardinal Financial Corporation and Kim C. Liddell (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
period ended March 31, 2006).*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

Supplemental Executive Retirement Plan, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q for the period ended September 30, 2007).*10.11

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.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CARDINAL FINANCIAL CORPORATIONMarch 16, 2009

By:

/s/ BERNARD H. CLINEBURGName:

Bernard H. ClineburgTitle:

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 16, 2009.

Signatures

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

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

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

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

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

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

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

Director/s/ J. HAMILTON LAMBERT Name: J. Hamilton Lambert

Director


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Table of Contents

Signatures

Titles/s/ ALAN G. MERTEN Name: Alan G. Merten

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

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

Director/s/ JOHN H. RUST, JR. Name: John H. Rust, Jr.

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

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

Director


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Table of Contents

EXHIBIT INDEX

Number

Description3.1

Articles of Incorporation of Cardinal Financial Corporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2, Registration No. 333-82946 (the "Form SB-2")).3.2

Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series A Preferred Stock (incorporated by reference to Exhibit 3.2 to the
Form SB-2).3.3

Articles of Amendment to the Articles of Incorporation of Cardinal Financial Corporation, setting forth the designation for the Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed January 22, 2009).3.4

Bylaws of Cardinal Financial Corporation (restated in electronic format as of December 19, 2007) (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed December 21,
2007).4.1

Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Form SB-2).10.1

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

Executive Employment Agreement, dated as of February 12, 2002, between Cardinal Financial Corporation and Christopher W. Bergstrom (incorporated by reference to Exhibit 10.5 to the
Form SB-2).*10.3

Cardinal Financial Corporation 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.7 to the Form SB-2).*10.4

Cardinal Financial Corporation 2002 Equity Compensation Plan, as amended and restated April 21, 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8, Registration
No. 333-134923).*10.5

Cardinal Financial Corporation Executive Deferred Income Plan, as amended and restated October 21, 2008 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period
ended September 30, 2008).*10.6

Cardinal Financial Corporation Directors Deferred Income Plan, as amended and restated October 21, 2008 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period
ended September 30, 2008).*10.7

George Mason Mortgage, LLC Executive Deferred Income Plan, as amended and restated October 21, 2008 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the period
ended September 30, 2008).*10.8

Executive Employment Agreement, dated March 1, 2004, between Cardinal Financial Corporation and Kim C. Liddell (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
period ended March 31, 2006).*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).*


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Table of Contents

Number

Description10.10

Supplemental Executive Retirement Plan, dated November 7, 2007, between Cardinal Financial Corporation and Kendal E. Carson (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the period ended September 30, 2007).*10.11

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.


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138

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