**4**

 

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

** **

**FORM 10-QSB**

** **

| **ý****Quarterly Report Under Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                   |
| **For  the quarterly period ended March 31, 2003**                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                   |
| **o****Transition Report under Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                   |
| **For the transition period from                         to                       ** |
|                                                                                                                                                                                                                                                                                                   |
| **Commission file number:  0-24557**                                                                                                                                                                                                                                                              |

 

**CARDINAL FINANCIAL CORPORATION**

(Exact Name of Small Business Issuer as Specified in its Charter)

 

| **Virginia**                                                    |   | **54-1874630**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

** **

| **8270  Greensboro Drive, Suite 500**                 |
|-------------------------------------------------------|
| **McLean,  Virginia  22102**                     |
| (Address of Principal Executive Offices)              |
|                                                  |
| **(703)  584-3400**                                   |
| (Issuer’s Telephone Number, Including Area Code) |

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  ý    No o

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:

 

10,047,362 shares of common stock, par value $1.00 per share,outstanding as of May 2, 2003

 

 

----

 

**CARDINAL FINANCIAL CORPORATION**

 

**INDEX TO FORM 10-QSB**

 
| **PART I – FINANCIAL INFORMATION**                                                             |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| Item 1.  Financial Statements:                                                                 |
|                                                                                                |
|                                                                                                | Consolidated  Statements of Condition  March 31, 2003 and December 31, 2002 |
|                                                                                                |   |
|                                                                                                | Consolidated  Statements of Operations  For the three months ended March 31, 2003 and 2002 |
|                                                                                                |   |
|                                                                                                | Consolidated  Statements of Comprehensive Income (Loss)  For the three months ended March 31, 2003 and 2002 |
|                                                                                                |   |
|                                                                                                | Consolidated  Statements of Changes In Shareholders’ Equity  For the three months ended March 31, 2003 and 2002 |
|                                                                                                |   |
|                                                                                                | Consolidated  Statements of Cash Flows  For the three months ended March 31, 2003 and 2002 |
|                                                                                                |   |
|                                                                                                | Notes  to Consolidated Financial Statements |
|                                                                                                |   |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                                                                                |   |
| Item 3. Controls and  Procedures                                                                    |
|                                                                                                |   |
| **PART  II – OTHER INFORMATION**                                                               |
|                                                                                                |   |
| Item  1. Legal Proceedings                                                                          |
| Item 2.  Changes in Securities and Use of Proceeds                                                  |
| Item 3. Defaults Upon  Senior Securities                                                            |
| Item  4. Submission of Matters to a Vote of Security Holders                                        |
| Item  5. Other Information                                                                          |
| Item 6. Exhibits and  Reports on Form 8-K                                                           |
|                                                                                                |   |
| **SIGNATURES AND  CERTIFICATIONS**                                                                  |

 

2

----

 

**Part I****- Financial Information**

**Item 1****.  Financial Statements**

** **

**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCONDITION

 

As of March 31, 2003 and December 31, 2002

 

(Dollars in thousands, except share data)

** **
|                                                                                                                                                                                       |   | **(Unaudited)  March 31,  2003** |       | **December  31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                                                                 |   |                             | ** ** |                    | ** ** |
| Cash and due from banks                                                                                                                                                                    |   | $                                | 9,831      |                    | $          | 27,465 |   |
| Federal funds sold                                                                                                                                                                         |   | 15,896                           |       | 35,906                  |       |
| Total cash and cash  equivalents                                                                                                                                                           |   | 25,727                           |       | 63,371                  |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Investment securities  available-for-sale                                                                                                                                                  |   | 198,452                          |       | 163,665                 |       |
| Other investments                                                                                                                                                                          |   | 2,638                            |       | 1,615                   |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Loans receivable, net of  fees                                                                                                                                                             |   | 252,038                          |       | 249,106                 |       |
| Allowance for loan losses                                                                                                                                                                  |   | (3,431                           | )          | (3,372                  | )          |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Loans receivable, net                                                                                                                                                                      |   | 248,607                          |       | 245,734                 |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Premises and equipment,  net                                                                                                                                                               |   | 5,194                            |       | 4,942                   |       |
| Goodwill and other  intangibles, net                                                                                                                                                       |   | 646                              |       | 646                     |       |
| Accrued interest and other  assets                                                                                                                                                         |   | 2,931                            |       | 6,350                   |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Total assets                                                                                                                                                                               |   | $                                | 484,195    |                    | $          | 486,323 |   |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                             |   |                             |       |                    |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Deposits                                                                                                                                                                                   |   | $                                | 417,096    |                    | $          | 423,479 |   |
| Other borrowed funds                                                                                                                                                                       |   | 25,000                           |       | 2,000                   |       |
| Accrued interest and other  liabilities                                                                                                                                                    |   | 2,717                            |       | 20,132                  |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Total liabilities                                                                                                                                                                          |   | 444,813                          |       | 445,611                 |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Preferred stock, $1 par  value, 10,000,000 shares authorized: Series A preferred stock, cumulative convertible,  1,364,662 and 1,364,684 shares outstanding in 2003 and 2002, respectively |   | 1,365                            |       | 1,365                   |       |
| Common stock, $1 par  value, 50,000,000 shares authorized, 10,047,362 and 10,044,345 shares  outstanding in 2003 and 2002, respectively                                                    |   | 10,047                           |       | 10,044                  |       |
| Additional paid-in capital                                                                                                                                                                 |   | 51,238                           |       | 51,231                  |       |
| Accumulated deficit                                                                                                                                                                        |   | (23,907                          | )          | (24,273                 | )          |
| Accumulated other  comprehensive income                                                                                                                                                    |   | 639                              |       | 2,345                   |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Total shareholders’ equity                                                                                                                                                            |   | 39,382                           |       | 40,712                  |       |
|                                                                                                                                                                                       |   |                             |       |                    |       |
| Total liabilities and  shareholders’ equity                                                                                                                                           |   | $                                | 484,195    |                    | $          | 486,323 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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** **

**CARDINAL FINANCIAL CORPORATION ANDSUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF OPERATIONS 

 

For the three months ended March 31, 2003 and 2002 

 (Inthousands, except per share data) 

 (Unaudited)

 
|                                                           |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|
| Interest  income:                                              |   |     |   |     |   |
| Loans  receivable                                              |   | $        | 4,031  |     | $      | 3,627 |   |
| Federal  funds sold                                            |   | 39       |   | 154      |   |
| Investment  securities available-for-sale                      |   | 1,678    |   | 595      |   |
| Other  investments                                             |   | 24       |   | 19       |   |
|                                                           |   |     |   |     |   |
| Total  interest income                                         |   | 5,772    |   | 4,395    |   |
|                                                           |   |     |   |     |   |
| Interest  expense:                                             |   |     |   |     |   |
| Deposits                                                       |   | 2,240    |   | 1,924    |   |
| Other  borrowed funds                                          |   | 73       |   | 97       |   |
|                                                           |   |     |   |     |   |
| Total  interest expense                                        |   | 2,313    |   | 2,021    |   |
|                                                           |   |     |   |     |   |
| Net  interest income                                           |   | 3,459    |   | 2,374    |   |
|                                                           |   |     |   |     |   |
| Provision  for loan losses                                     |   | 80       |   | —   |   |
|                                                           |   |     |   |     |   |
| Net  interest income after provision for loan losses           |   | 3,379    |   | 2,374    |   |
|                                                           |   |     |   |     |   |
| Non-interest  income:                                          |   |     |   |     |   |
| Service  charges on deposit accounts                           |   | 134      |   | 116      |   |
| Loan  service charges                                          |   | 113      |   | 88       |   |
| Investment  fee income                                         |   | 126      |   | 349      |   |
| Net  gain on sales of loans                                    |   | 9        |   | 24       |   |
| Net  realized gain on investment securities available-for-sale |   | 493      |   | —   |   |
| Net  gain on sales of assets                                   |   | —   |   | 39       |   |
| Other  income                                                  |   | 101      |   | 92       |   |
|                                                           |   |     |   |     |   |
| Total  non-interest income                                     |   | 976      |   | 708      |   |
|                                                           |   |     |   |     |   |
| Non-interest  expense:                                         |   |     |   |     |   |
| Salary  and benefits                                           |   | 1,649    |   | 1,462    |   |
| Occupancy                                                      |   | 480      |   | 273      |   |
| Professional  fees                                             |   | 369      |   | 308      |   |
| Depreciation                                                   |   | 196      |   | 194      |   |
| Amortization  and write down of intangibles                    |   | —   |   | 15       |   |
| Other  operating expenses                                      |   | 1,171    |   | 768      |   |
|                                                           |   |     |   |     |   |
| Total  non-interest expense                                    |   | 3,865    |   | 3,020    |   |
|                                                           |   |     |   |     |   |
| Net  income before income taxes                                |   | 490      |   | 62       |   |
|                                                           |   |     |   |     |   |
| Provision  for income taxes                                    |   | —   |   | —   |   |
|                                                           |   |     |   |     |   |
| Net  income                                                    |   | $        | 490    |     | $      | 62 |   |
|                                                           |   |     |   |     |   |
| Dividends  to preferred shareholders                           |   | 124      |   | 124      |   |
|                                                           |   |     |   |     |   |
| Net  income (loss) to common shareholders                      |   | $        | 366    |     | $      | (62 | ) |
|                                                           |   |     |   |     |   |
| Basic  and diluted income (loss) per common share              |   | $        | 0.04   |     | $      | (0.01 | ) |
|                                                           |   |     |   |     |   |
| Weighted-average  common shares outstanding                    |   | 10,046   |   | 4,294    |   |
|                                                                |        |          |        |          |        |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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** **

**CARDINAL FINANCIAL CORPORATION ANDSUBSIDIARIES**

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the three months ended March 31, 2003 and 2002

(Dollars in thousands)

(Unaudited)

 
|                                                                |   | **2003** |   | **2002** |   |
|---------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                |   |     |   |     |   |
| Net income                                                          |   | $        | 490    |     | $      | 62 |   |
| Other comprehensive loss:                                           |   |     |   |     |   |
| Unrealized loss on available-for-sale investment  securities:       |   |     |   |     |   |
| Unrealized holding loss arising during the quarter                  |   | (2,199   | )      | (805     | )      |
| Less: reclassification adjustment for gains included  in net income |   | 493      |   | -        |   |
|                                                                |   |     |   |     |   |
| Comprehensive loss                                                  |   | $        | (1,216 | )        | $      | (743 | ) |

 

See accompanying notes toconsolidated financial statements.

 

 

5

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** **

**CARDINAL FINANCIAL CORPORATION ANDSUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY

For the three months ended March 31, 2003 and 2002

(In thousands)

(Unaudited)

 
|                                                                          |   | **Preferred  Shares** |   | **Preferred  Stock** |   | **Common********Shares** |   | **Common********Stock** |   | **Additional  Paid-in********Capital** |   | **Accumulated  Deficit** |   | **Accumulated    Other   Comprehensive  Income (Loss)** |   | **Total** |   |
|-------------------------------------------------------------------------------|--------|-----------------------|--------|----------------------|--------|--------------------------|--------|-------------------------|--------|----------------------------------------|--------|--------------------------|--------|---------------------------------------------------------|--------|-----------|--------|
|                                                                          |
|                                                                          |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Balance, December 31, 2001                                                    |   | 1,365                 |   | $                    | 1,365  |                     | 4,294  |                    | $      | 4,294                                  |   | $                        | 38,488 |                                                    | $      | (23,249   | )      | $ | (274 | ) | $ | 20,624 |   |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Dividends on preferred  stock                                                 |   | —                |   | —               |   | —                   |   | —                  |   | —                                 |   | (124                     | )      | —                                                  |   | (124      | )      |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Change in unrealized gain  (loss) on investment securities available-for-sale |   | —                |   | —               |   | —                   |   | —                  |   | —                                 |   | —                   |   | (805                                                    | )      | (805      | )      |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Net income                                                                    |   | —                |   | —               |   | —                   |   | —                  |   | —                                 |   | 62                       |   | —                                                  |   | 62        |   |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Balance, March 31, 2002                                                       |   | 1,365                 |   | $                    | 1,365  |                     | 4,294  |                    | $      | 4,294                                  |   | $                        | 38,488 |                                                    | $      | (23,311   | )      | $ | (1,079 | ) | $ | 19,757 |   |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Balance, December 31, 2002                                                    |   | 1,365                 |   | $                    | 1,365  |                     | 10,044 |                    | $      | 10,044                                 |   | $                        | 51,231 |                                                    | $      | (24,273   | )      | $ | 2,345 |   | $ | 40,712 |   |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Stock options exercised                                                       |   | —                |   | —               |   | 3                        |   | 3                       |   | 7                                      |   | —                   |   | —                                                  |   | 10        |   |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Dividends on preferred  stock                                                 |   | —                |   | —               |   | —                   |   | —                  |   | —                                 |   | (124                     | )      | —                                                  |   | (124      | )      |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Change in unrealized gain  (loss) on investment securities available-for-sale |   | —                |   | —               |   | —                   |   | —                  |   | —                                 |   | —                   |   | (1,706                                                  | )      | (1,706    | )      |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Net income                                                                    |   | —                |   | —               |   | —                   |   | —                  |   | —                                 |   | 490                      |   | —                                                  |   | 490       |   |
|                                                                          |   |                  |   |                 |   |                     |   |                    |   |                                   |   |                     |   |                                                    |   |      |   |
| Balance, March 31, 2003                                                       |   | 1,365                 |   | $                    | 1,365  |                     | 10,047 |                    | $      | 10,047                                 |   | $                        | 51,238 |                                                    | $      | (23,907   | )      | $ | 639 |   | $ | 39,382 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

6

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

 

For the three months ended March 31, 2003 and2002

 

(Dollars in thousands)

 

(Unaudited)

 
|                                                                                       |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                       |   |     |   |     |   |
| Cash flows from operating  activities:                                                     |   |     |   |     |   |
| Net income                                                                                 |   | $        | 490    |     | $      | 62 |   |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities: |   |     |   |     |   |
| Depreciation                                                                               |   | 196      |   | 194      |   |
| Amortization and writedown  of intangibles, premiums and discounts                         |   | 427      |   | 118      |   |
| Provision for loan losses                                                                  |   | 80       |   | —   |   |
| Originations of loans held  for sale                                                       |   | (172     | )      | (4,369   | )      |
| Proceeds from the sale of  loans held for sale                                             |   | 172      |   | 7,359    |   |
| Gain on sale of loans held  for sale                                                       |   | (9       | )      | (24      | )      |
| Gain on sale of investment  securities available-for-sale                                  |   | (493     | )      | —   |   |
| Gain on sale of other  assets                                                              |   | —   |   | (39      | )      |
| (Increase) decrease in  accrued interest and other assets                                  |   | 3,419    |   | (294     | )      |
| Decrease in accrued  interest and other liabilities                                        |   | (17,415  | )      | (1,117   | )      |
|                                                                                       |   |     |   |     |   |
| Net cash provided by (used  in) operating activities                                       |   | (13,305  | )      | 1,890    |   |
|                                                                                       |   |     |   |     |   |
| Cash flows from investing  activities:                                                     |   |     |   |     |   |
| Purchase of premises and  equipment                                                        |   | (448     | )      | (14      | )      |
| Proceeds from sale,  maturity and call of investment securities available-for-sale         |   | 22,890   |   | 250      |   |
| Proceeds from sale of  other investments                                                   |   | —   |   | 188      |   |
| Purchase of investment  securities available-for-sale                                      |   | (71,017  | )      | (37,664  | )      |
| Purchase of other  investments                                                             |   | (1,023   | )      | (183     | )      |
| Redemptions of investment  securities available-for-sale                                   |   | 11,537   |   | 1,420    |   |
| Net (increase) decrease in  loans receivable                                               |   | (2,781   | )      | 5,204    |   |
|                                                                                       |   |     |   |     |   |
| Net cash used in investing  activities                                                     |   | (40,842  | )      | (30,799  | )      |
|                                                                                       |   |     |   |     |   |
| Cash flows from financing  activities:                                                     |   |     |   |     |   |
| Net increase (decrease) in  deposits                                                       |   | (6,383   | )      | 53,625   |   |
| Net increase (decrease) in  other borrowed funds                                           |   | 23,000   |   | (2,824   | )      |
| Dividends on preferred  stock                                                              |   | (124     | )      | (124     | )      |
| Stock options exercised                                                                    |   | 10       |   | —   |   |
|                                                                                       |   |     |   |     |   |
| Net cash provided by  financing activities                                                 |   | 16,503   |   | 50,677   |   |
|                                                                                       |   |     |   |     |   |
| Net increase (decrease) in  cash and cash equivalents                                      |   | (37,644  | )      | 21,768   |   |
|                                                                                       |   |     |   |     |   |
| Cash and cash equivalents  at beginning of the quarter                                     |   | 63,371   |   | 34,459   |   |
|                                                                                       |   |     |   |     |   |
| Cash and cash equivalents  at end of the quarter                                           |   | $        | 25,727 |     | $      | 56,227 |   |
|                                                                                       |   |     |   |     |   |
| **Supplemental  disclosure of cash flow information:**                                     |   |     |   |     |   |
| Cash paid during the  quarter for interest                                                 |   | $        | 2,275  |     | $      | 1,942 |   |

 

Seeaccompanying notes to consolidated financial statements.

7

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)

 

### **Note 1**

 

*Organization*

 

Cardinal Financial Corporation (the “Company”)was incorporated November 24, 1997 under the laws of the Commonwealth ofVirginia as a holding company whose activities consist of investment in itswholly-owned subsidiaries.  The Companyopened Cardinal Bank, N.A. in 1998 and Cardinal *Wealth Services, Inc.,* aninvestment advisor subsidiary, in 1999. In 1999, the Company opened two additional banking subsidiaries and, inlate 2000, completed an acquisition of Heritage Bancorp, Inc. and its bankingsubsidiary, The Heritage Bank.  Thesebanking subsidiaries were consolidated into Cardinal Bank, N.A. as of March 1,2002.

 

*Basisof Presentation*

 

In the opinion of management, the accompanyingconsolidated financial statements have been prepared in accordance with therequirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. However, all adjustments that are, in the opinion of management,necessary for a fair presentation have been included.  The results of operations for the three months ended March 31,2003 are not necessarily indicative of the results to be expected for the fullyear ending December 31, 2003.  Theunaudited interim financial statements should be read in conjunction with theaudited financial statements and notes to financial statements that arepresented in the Company’s Annual Report on Form 10-KSB for the year endedDecember 31, 2002 (the “2002 Form 10-KSB”).

 

*Stock Based Compensation*

 

At March 31, 2003,the Company had two stock-based employee compensation plans, the 1999 StockOption Plan and the 2002 Equity Compensation Plan.  These plans are described more fully in Footnote 14 of the 2002Form 10-KSB.

 

As permitted underStatement of Financial Accounting Standards (“SFAS”) No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure*, which amended SFAS No. 123, *Accounting for Stock-Based Compensation,*theCompany has elected to continue to follow the intrinsic value method inaccounting for its stock-based employee compensation arrangements as defined byAccounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations including Financial Accounting Standards Board InterpretationNo. 44*, Accounting for Certain TransactionsInvolving Stock Compensation,*an interpretation of APB No. 25.  The following table illustrates the effecton net income (loss) and earnings (loss) per common share if the 

 

8

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Company hadapplied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation.

 
|                                              |   | **Three Months Ended March 31,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|
| **(Dollars in thousands, except per share data)** |   | **2003**                         |   | **2002** |   |
|                                              |   |                             |   |   |   |
| Net  income (loss) to common shareholders         |   | $                                | 366    |   | $ | (62 | ) |
| Deduct:  Total stock based employee               |   |                             |   |   |   |
| compensation  expense                             |   |                             |   |   |   |
| determined  under fair value-                     |   |                             |   |   |   |
| based  method for all awards                      |   | (223                             | )      | (16 | ) |
| Pro  forma net income (loss)                      |   | $                                | 143    |   | $ | (78 | ) |
|                                              |   |                             |   |   |   |
| Earnings  (loss) per common share:                |   |                             |   |   |   |
| Basic  - as reported                              |   | $                                | 0.04   |   | $ | (0.01 | ) |
| Basic  - as pro forma                             |   | 0.01                             |   | (0.02 | ) |
| Diluted  - as reported                            |   | 0.04                             |   | (0.01 | ) |
| Diluted  - as pro forma                           |   | 0.01                             |   | (0.02 | ) |

 

The fair values of the options granted wereestimated on the grant date using the Black - Scholes option - pricing modelbased on the following weighted average assumptions:

 
|                     |   | **Three Months Ended March 31,** |   |
|--------------------------|--------|----------------------------------|--------|
|                     |   | **2003**                         |   | **2002** |   |
| Estimated  option life   |   | 10  years                        |   | 10  years |   |
| Risk  free interest rate |   | 4.25                             | %      | 4.25 | % |
| Expected  volatility     |   | 20.40                            | %      | 20.40 | % |
| Expected  dividend yield |   | 0.00                             | %      | 0.00 | % |

 

There were 351,500options granted during the three months ended March 31, 2003.  Of those grants issued, 91,100 optionsimmediately vested on the grant date.

 

9

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**Note2**

** **

### ***Segment Disclosures***

* *

The Companyoperates and reports in two business segments, banking and investment advisoryservices.  The banking segment includesboth commercial and consumer lending and provides customers such products ascommercial loans, real estate loans, and other business financing and consumerloans.  In addition, this segment alsoprovides customers with several choices of deposit products including demanddeposit accounts, savings accounts and certificates of deposit.  The investment advisory services segmentprovides advisory services to businesses and individuals including financialplanning and retirement/estate planning.

 

Information aboutreportable segments, and reconciliation of such information to the consolidatedfinancial statements as of and for the three months ended March 31, 2003 and2002, follows:

 

**Forthe Three Months Ended March 31, 2003:**

** **
|                       |   |        |    | **Investment   Advisory** |   | **Intersegment   Elimination** |   |             |    |   |   |
|----------------------------|--------|-------------|---------|---------------------------|--------|--------------------------------|--------|------------------|---------|--------|--------|
| **(Dollars in thousands)** |   | **Banking** |    |                      |   | **Other**                      |   | **Consolidated** |    |
| Net interest income        |   | $           | 3,432   |                      | $      | —                         |   | $                | —  |   | $      | 27 |   | $ | 3,459 |   |
| Provision for loan losses  |   | 80          |    | —                    |   | —                         |   | —           |    | 80     |   |
| Non-interest income        |   | 850         |    | 126                       |   | —                         |   | —           |    | 976    |   |
| Non-interest expense       |   | 3,389       |    | 168                       |   | —                         |   | 308              |    | 3,865  |   |
| Net income (loss)          |   | $           | 813     |                      | $      | (42                            | )      | $                | —  |   | $      | (281 | ) | $ | 490 |   |
| Total assets               |   | $           | 481,081 |                      | $      | 241                            |   | $                | (36,866 | )      | $      | 39,739 |   | $ | 484,195 |   |

 

**Forthe Three Months Ended March 31, 2002:**

** **
|                       |   |        |    | **Investment   Advisory** |   | **Intersegment   Elimination** |   |             |    |   |   |
|----------------------------|--------|-------------|---------|---------------------------|--------|--------------------------------|--------|------------------|---------|--------|--------|
| **(Dollars in thousands)** |   | **Banking** |    |                      |   | **Other**                      |   | **Consolidated** |    |
| Net interest income        |   | $           | 2,372   |                      | $      | —                         |   | $                | —  |   | $      | 2 |   | $ | 2,374 |   |
| Provision for loan losses  |   | —      |    | —                    |   | —                         |   | —           |    | — |   |
| Non-interest income        |   | 320         |    | 350                       |   | —                         |   | 38               |    | 708    |   |
| Non-interest expense       |   | 2,244       |    | 467                       |   | —                         |   | 309              |    | 3,020  |   |
| Net income (loss)          |   | $           | 448     |                      | $      | (117                           | )      | $                | —  |   | $      | (269 | ) | $ | 62 |   |
| Total assets               |   | $           | 326,785 |                      | $      | 341                            |   | $                | (21,013 | )      | $      | 22,288 |   | $ | 328,401 |   |

 

The Company doesnot have operating segments other than those reported.  Parent company financial information isincluded in the “Other” category above and represents the overhead functionrather than an operating segment.  Theparent company’s net interest income is comprised of interest income fromfederal funds sold and investment securities.

 

10

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**Note 3**

 

*Earnings (Loss) Per Common Share*

 

The followingtable discloses the calculation of basic and diluted earnings (loss) per commonshare for the three months ended March 31, 2003 and 2002. Stock optionsoutstanding as of March 31, 2003 and 2002 were 873,412 and 361,538,respectively.  Stock options issued,which were not included in the calculation of diluted earnings per sharebecause the exercise prices were greater than the average market price, were291,677 for the three months ended March 31, 2003.  Because the Company reported a net loss to common shareholdersfor the three months ended March 31, 2002, all stock options issued as of thatdate have an anti-dilutive effect and, therefore, have been excluded from theearnings (loss) per common share calculation for that respective period.

 
|                                                        |   | **Three  Months Ended March 31,** |   |
|-------------------------------------------------------------|--------|-----------------------------------|--------|
| **(Dollars in thousands, except share and per share data)** |   | **2003**                          |   | **2002** |   |
|                                                        |   |                              |   |   |   |
| Net income                                                  |   | $                                 | 490    |   | $ | 62 |   |
|                                                        |   |                              |   |   |   |
| Dividends to preferred shareholders                         |   | 124                               |   | 124 |   |
|                                                        |   |                              |   |   |   |
| Net income (loss) to common shareholders                    |   | 366                               |   | (62 | ) |
|                                                        |   |                              |   |   |   |
| Weighted average common shares for basic                    |   | 10,046,065                        |   | 4,294,323 |   |
|                                                        |   |                              |   |   |   |
| Weighted average common shares for diluted                  |   | 10,170,827                        |   | — |   |
|                                                        |   |                              |   |   |   |
| Basic and diluted earnings (loss) per common share          |   | $                                 | 0.04   |   | $ | (0.01 | ) |

 

### **Note 4**

 

*Goodwill and Other Intangible Assets*

 

At March 31, 2003,goodwill of $646,000 represented the remaining balance attributable to thepurchase of Heritage Bancorp, Inc.  In2002, the Company evaluated impairment of goodwill under SFAS No. 142, *Goodwill and Other Intangible Assets.*

 

At March 31, 2003,the Company had no other intangible assets.

 

11

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** **

**Item 2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

The following presentsmanagement’s discussion and analysis of our consolidated financial condition asof March 31, 2003 and December 31, 2002 and the results of our operations forthe three months ended March 31, 2003 and 2002.  This discussion should be read in conjunction with our unauditedconsolidated financial statements and the notes thereto appearing elsewhere inthis report.

** **

**CompanyOverview**

** **

Cardinal FinancialCorporation is a locally owned and managed financial services organizationheadquartered in Northern Virginia and is committed to providing top qualitycustomer service, a diversified product mix and convenient avenues for bankingto consumers and businesses.  During thefirst quarter of 2003, total assets decreased slightly by 0.4% to $484.2million.  During the same quarter, netloans receivable increased 1.2% to $248.6 million.  Total deposits decreased 1.5% to $417.1 million as of March 31,2003.  Our investment advisorysubsidiary, Cardinal *Wealth Services, Inc.*,ended the quarter with over 2,000 customers and assets under managementexceeding $84.6 million.

** **

**CriticalAccounting Policies**

** **

*Allowance for Loan Losses*

** **

We maintain theallowance for loan losses at a level that represents management’s best estimateof known and inherent losses in the loan portfolio.  Both the amount of the provision expense and the level of the allowancefor loan losses are impacted by many factors, including general economicconditions, actual and expected credit losses, historical trends and specificconditions of the individual borrower. As a part of our analysis, we use comparative peer group data, durationfactors and qualitative factors such as levels of and trends in delinquenciesand nonaccrual loans, national and local economic trends and conditions andconcentrations of loans exhibiting similar risk profiles to support ourestimates.  The loan loss provision forthe three months ended March 31, 2003 and 2002 was $80,000 and none,respectively.  The allowance for loanloss was $3.4 million as of each of March 31, 2003 and December 31, 2002.  The ratio of the allowance for loan lossesto total loans, net of fees, was 1.36% at March 31, 2003 compared to 1.35% atDecember 31, 2002.  Additionalinformation on the allowance for loan losses and provision expense can be foundlater in this discussion.

 

Credit losses are an inherent part of our businessand, although we believe the methodologies for determining the allowance forloan losses and the current level of the allowance are adequate, it is possiblethat there may be unidentified losses in the portfolio that may become evidentonly at a future date.  Additionalprovisions for such losses, if necessary, would negatively impact earnings andwould be recorded in the banking business segment.

 

We categorize our loans into one of five pools:  commercial and industrial, commercial realestate, home equity lines of credit, residential mortgages, and consumerloans.  Peer group 

 

12

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annual loss factors (in the absence of historicalresults) are applied to all pools and are adjusted by the projected duration ofthe loan pool and by the qualitative factors mentioned above.  The indicated loss factors resulting fromthis analysis are applied to each of the loan pools to determine a reservelevel for each of the five pools of loans. In addition, we individually assign loss factors to all loans that havebeen identified as having loss attributes, as indicated by deterioration in thefinancial condition of the borrower or a decline in underlying collateralvalues.  Since we have limitedhistorical data on which to base loss factors for classified loans, we apply a5% loss factor to all special mention loans and a 15% loss factor to allsubstandard loans (in accordance with regulatory guidelines).

** **

*Valuation Allowance for Deferred TaxAssets*

 

Deferred income taxes reflect temporary differences inthe recognition of revenue and expenses for tax reporting and financialstatement purposes, principally because certain items, such as depreciation andamortization, are recognized in different periods for financial reporting andtax return purposes.  A valuationallowance of $4.5 million at December 31, 2002, has been established fordeferred tax assets, as realization is dependent upon generating future taxableincome.

 

**FinancialCondition**

 

Total assets were $484.2 million at March 31, 2003compared to $486.3 million at December 31, 2002, a decrease of $2.1 million or0.4% due primarily to the decrease in total deposits.  Investment securities available-for-sale were $198.4 million atMarch 31, 2003 compared to $163.7 million at December 31, 2002, an increase of$34.8 million or 21.3% (see Table 1 for details of the investment securitiesavailable-for-sale portfolio). During the first quarter of 2003, we modifiedthe methodology we use to calculate our reserve requirement for certain depositaccounts, which resulted in a significant decline in the reserve balance wemaintain at the Federal Reserve Bank. As a result, we were able to decrease ourcash and due from bank balances by $17.6 million, or 64.2% to $9.8 million atMarch 31, 2003 compared to $27.5 million at December 31, 2002.  These funds were invested in the investmentsecurities available-for-sale portfolio during the quarter, allowing us to earninterest on balances that were formerly non-interest earning assets. Loansreceivable, net of fees, increased by $2.9 million to $252.0 million at March31, 2003 from $249.1 million at December 31, 2002 (see Table 2 for details onthe loans receivable portfolio).

 

Total deposits decreased $6.4 million to $417.1million at March 31, 2003 compared to $423.5 million at December 31, 2002 (seeTable 3 for details on certificates of deposit with balances of $100,000 ormore).  The slight decrease in totaldeposits reflects minimized marketing efforts during the first quarter andinterest rate decreases in our various deposit products. Other borrowed fundsincreased $23.0 million to $25.0 million at March 31, 2003 compared to $2.0million at December 31, 2002. Due to the interest rates on FHLB advances beingat their lowest levels in several years, we borrowed $23.0 million during thequarter.  These funds were invested ininvestment securities available-for-sale, allowing us to increase our netinterest margin by 51 basis points from the fourth quarter of 2002 and tightenour gap position.

 

13

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Shareholders’ equity at March 31, 2003 was $39.4million, a decrease of $1.3 million, or 3.3%, compared to $40.7 million atDecember 31, 2002.  The decrease of $1.3million during the first quarter was driven by an unfavorable $1.7 millionmark-to-market adjustment on our primarily mortgage-backed investmentsecurities available-for-sale portfolio. This decrease was offset by net income of $366,000 to commonshareholders.  Book value per commonshare at March 31, 2003 was $3.24 as compared to $3.37 at December 31, 2002.

 

**Results of Operations**

 

Net income to common shareholders for the three monthsended March 31, 2003 was $366,000, an improvement of $428,000 when compared tothe same period of 2002.  For the sameperiod of 2002, we recorded a net loss to common shareholders of $62,000.  The increase in net income to commonshareholders is a result of increased net interest income and non-interestincome.  Earnings per common shareincreased to $0.04 per common share compared to a loss per common share of$0.01 reported in the same period of 2002. Weighted average common shares outstanding at March 31, 2003 were10,046,000 compared to 4,294,000 for the same period of 2002 due to thesuccessful rights and public offerings completed during the second quarter of2002. These quarterly results are presented after the effect of dividends paidin each quarter to preferred shareholders. Dividends to preferred shareholders were $124,000 for the each of thethree months ended March 31, 2003 and 2002.

 

Return on average assets for the three months endedMarch 31, 2003 and 2002 was 0.42% and 0.08%, respectively.  Return on average equity for the threemonths ended March 31, 2003 and 2002 was 4.81% and 1.19%, respectively.

 

Net interest income is our primary source of revenue,representing the difference between interest and fees earned on interestearning assets and the interest paid on deposits and other interest bearingliabilities.  The level of net interestincome is impacted primarily by variations in the volume and mix of theseassets and liabilities, as well as changes in interest rates when compared toprevious periods of operations.  Netinterest income for the three months ended March 31, 2003 was $3.5 millioncompared to $2.4 million for the same three months period in 2002, an increaseof $1.1 million, or 45.7%.  The increasein net interest income is a result of the increase in average volume of loansand investment securities available-for-sale, net of the impact of thedecreased yields, in the first quarter of 2003, compared with the same periodof 2002, funded through the increase in deposits and other borrowed funds.

 

Our net interest margin for the three months endedMarch 31, 2003 was 3.11%, compared to 3.31% for the three months ended March31, 2002.  The decrease in the netinterest margin was a result of the change in the mix of earning assets towardslower yielding investments and the decreased interest rate environmentexperienced during the last two quarters of 2002.  When compared to the fourth quarter of 2002, our net interestmargin increased 51 basis points.  Theincrease in net interest margin was due primarily to the transfer of cashbalances and lower yielding federal funds sold into higher yielding investmentsecurities.    Tables 4 and 5 present ananalysis of average earning assets, interest bearing liabilities and demanddeposits with related components of interest income and interest expense.

 

14

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Provision for loan losses for the three months endedMarch 31, 2003 was $80,000 compared to none for the same period in 2002.  The reserve for loan loss at each of March31, 2003 and December 31, 2002 was $3.4 million.  Our allowance for loan loss ratio rose slightly to 1.36% at March31, 2003 compared to 1.35% at December 31, 2002.  We continued to experience strong loan quality with annualizednet charged-off loans equal to .03% of total loans as of March 31, 2003 andnon-performing loans equal to .33% of total loans as of March 31, 2003.  Additional information on the allowance forloan loss and its allocation to the total loans receivable portfolio can befound in Tables 6 and 7 to this discussion.

 

Non-interest income for the three months ended March31, 2003 was $976,000, an increase of $268,000, or 37.9%, compared to $708,000for the same period of 2002.  Theincrease in non-interest income is primarily attributable to the $493,000realized gains on sales of a portion of our investment securitiesavailable-for-sale portfolio.  Thesegains were recorded on sales of mortgage-backed securities with rapidpre-payment qualities, which were a result of the lower interest rateenvironment experienced during the quarter. These gains were offset by decreases in investment fee income during thefirst quarter of 2003 compared to the same period of 2002.

 

Non-interest expense for the three months ended March31, 2003 was $3.9 million, compared to $3.0 million for the same period of2002, an increase of $845,000, or 28%. The increase in non-interest expense is partially a result of the onetime expense of $310,000 recognized for our headquarters move to Tysons Corner,Virginia.  This expense includes thewrite off of our remaining lease obligation at our former Fairfax, Virginialocation in addition to move related costs. In addition, we experienced increases in salaries and benefits expense,professional fees and loan expenses, which are directly related to our strongasset growth over the past year.

 

We have not recorded income tax expense or benefit dueto the existence of net losses in all prior years of operations.  We have net deferred tax assets, includingnet operating loss carryforwards, all of which have a full valuation allowanceas of March 31, 2003.  A valuationallowance is established against deferred tax assets when, in the judgment ofmanagement, it is more likely than not that such deferred tax assets will notbe realized.  The benefit of ourdeferred tax assets will only be recognized when it becomes more likely thannot that they will be realized.  Formore information, see “Critical Accounting Policies” above in this discussion.

 

**Business Segment Operations**

 

We provide bankingand non-banking financial services and products through our subsidiaries.  Management operates and reports on theresults of our operations through two business segments, banking and investmentadvisory services.

 

*Banking*

 

The bankingsegment provides comprehensive banking services to small businesses and individualsthrough multiple delivery channels. Services offered include commercial and consumer lending, depositproducts and banking via the Internet or telephone.

 

15

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For the three months ended March 31, 2003, thecommercial banking segment recorded net income of $812,000, compared to$448,000 during the same period of 2002, an increase of $364,000 or 81.3%.  The improvement in earnings is a result ofincreased net interest income, due to increased volume of earning assets, andnon-interest income, due to realized gains on investment securities availablefor sale, for this segment.  As of March31, 2003, total assets were $481.1 million, loans receivable, net of fees, were$252.0 million and total deposits were $420.9 million.  As of March 31, 2002, total assets were$326.8 million, loans receivable, net of fees were $195.7 million and totaldeposits were $299.6 million.

 

*Investment Advisory Services*

 

The investment advisory services segment offersfinancial and estate planning services, centered on a group of productsprovided through a strategic alliance with Raymond James Financial Services,Inc.

 

For the three months ended March 31, 2003, theinvestment advisory services segment recorded a net loss of $42,000, comparedto a loss of $117,000 during the same period of 2002, a decrease of $75,000 or64.1%.  The improvement in the net lossis a result of decreased operating expenses in excess of decreased operatingrevenues for this segment.  Thedecreased revenues and expenses from this business segment during the firstquarter of 2003 is a result of the conversion from Legg Mason, Inc. to RaymondJames Financial Services, Inc., which caused a temporary decline in transactionactivity and the accumulation of assets under management.  As of March 31, 2003, total assets were$241,000 and total assets under management were $84.6 million.  As of March 31, 2002, total assets were$341,000 and total assets under management were $130.4 million.

 

Informationpertaining to both business segments can be found in Footnote 2 to the Notes toConsolidated Financial Statements.

 

**Capital Resources**

** **

Capital adequacy is an important measure of financialstability and performance.  Ourobjectives are to maintain a level of capitalization that is sufficient tosustain asset growth and promote depositor and investor confidence.

 

Regulatory agencies measure capital adequacy utilizinga formula that takes into account the individual risk profile of financialinstitutions.  The guidelines definecapital as both Tier 1 (primarily common shareholders’ equity, defined toinclude certain debt obligations) and Tier 2 (to include certain other debtobligations and a portion of the allowance for loan losses and 45% ofunrealized gains in equity securities).

 

At March 31, 2003, shareholders’ equity was $39.4million compared to $40.7 million at December 31, 2002.  The decrease in shareholders’ equity isprimarily the result of the change in 

 

16

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unrealized gains on investment securitiesavailable-for-sale of $1.7 million during the three months ended March 31,2003.  This decrease in equity wasoffset by net income to common shareholders of $366,000 for the first quarterof 2003.  At March 31, 2003, our tier 1and total risk-based capital ratios were 12.2% and 13.3%, respectively.  At December 31, 2002, our tier 1 and totalrisk-based capital ratios were 12.3% and 13.4%, respectively.  Our regulatory capital levels for the bankand bank holding company meet those established for well-capitalizedinstitutions. Table 8 provides additional information pertaining to our capitalratios.

** **

**Liquidity**

** **

The objective of liquidity management is to ensure thecontinuous availability of funds to meet the demands of depositors, investorsand borrowers.  Stable core deposits anda strong capital position are the current components of a solid foundation forour liquidity position.  In addition,the availability of regional and national wholesale funding sources includingfederal funds purchased, negotiable certificates of deposit, securities soldunder agreements to repurchase, and borrowings from the Federal Home Loan Bankenhance our liquidity.  Cash flows fromoperations, such as loan payments and payoffs are also a significant source ofliquidity.  We have a contingency planthat provides for continued monitoring of liquidity needs and available sourcesof liquidity.  We believe we have theability to meet our increased liquidity needs. Liquid assets, which include cash and due from banks, federal funds soldand investment securities available-for-sale, at March 31, 2003, totaled $224.2million, or 46.3% of total assets.  Ofthat, $138.2 million in investment securities available-for-sale were availableas collateral for additional Federal Home Loan Bank borrowings.  Management is committed to maintainingliquidity at a level sufficient to protect depositors, provide for reasonablegrowth and fully comply with all regulatory requirements.

 

**Interest Rate Sensitivity**

 

Asset/Liability management involves the monitoring ofour sensitivity to interest rate movements. In order to measure the effect of interest rates on our net interestincome, management takes into consideration the expected cash flows from theloan and securities portfolios and the expected magnitude of the repricing ofspecific asset and liability categories. Management evaluates interest sensitivity risk and then formulatesguidelines to manage this risk based upon its outlook regarding the economy,forecasted interest rate movements and other business factors.  Management’s goal is to maximize andstabilize the net interest margin by limiting exposure to interest ratechanges.

 

The data in Table 9 reflects the reprising or expectedmaturities of various assets and liabilities as of March 31, 2003.  This “gap” analysis represents thedifference between interest sensitive assets and liabilities in a specific timeinterval.  The interest sensitivity gapanalysis presents a position that existed at one particular point in time, andassumes that assets and liabilities with similar repricing characteristics willreprice at the same time and to the same degree.

 

17

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** **

**Forward-Looking Statements**

 

This Quarterly Report contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Theseforward-looking statements are not historical facts, but rather are predictionsand generally can be identified by use of statements that include phrases suchas “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan, “ “foresee”or other words or phrases of similar import. Similarly, statements that describe our future financial condition orresults of operations, objectives, strategies, plans, goals or futureperformance and business also are forward-looking statements.  These forward-looking statements involveknown and unknown risks, uncertainties and other factors, including those describedin the 2002 Form 10-KSB under “Forward-Looking Statements and Risk Factors,”that could cause our actual results to differ materially from those currentlyanticipated in these forward-looking statements.  In light of these risks and uncertainties, the forward-lookingevents might or might not occur.

 

18

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**Table 1.**

**Investment Securities Available-for-Sale**

As of March 31, 2003 and December 31, 2002

(Dollars in thousands)

 
| **As of March 31, 2003**                       |   | **Par Value** |    | **Amortized  Cost** |   | **Fair  Value** |   | **Unrealized  Gain/(Loss)** |    | **Average  Yield** |   |
|------------------------------------------------|--------|---------------|---------|---------------------|--------|-----------------|--------|-----------------------------|---------|--------------------|--------|
| U.S. government agencies and enterprises       |   |          |    |                |   |            |   |                        |    |               |   |
| One to five years                              |   | $             | 32,750  |                | $      | 32,740          |   | $                           | 33,033  |               | $      | 293 |   | 3.45 | % |
| Five to ten years                              |   | 10,000        |    | 10,029              |   | 10,022          |   | (7                          | )       | 3.85               | %      |
| Total U.S. government agencies                 |   | $             | 42,750  |                | $      | 42,769          |   | $                           | 43,055  |               | $      | 286 |   | 3.54 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |   |
| Mortgage-backed securities                     |   |          |    |                |   |            |   |                        |    |               |   |
| Within one year                                |   | $             | 14,635  |                | $      | 14,717          |   | $                           | 14,933  |               | $      | 216 |   | 3.99 | % |
| One to five years                              |   | 46,417        |    | 47,386              |   | 48,145          |   | 759                         |    | 4.71               | %      |
| Five to ten years                              |   | 40,970        |    | 42,003              |   | 41,782          |   | (221                        | )       | 4.47               | %      |
| After ten years                                |   | 37,848        |    | 39,042              |   | 38,933          |   | (109                        | )       | 4.50               | %      |
| Total mortgage-backed securities               |   | $             | 139,870 |                | $      | 143,148         |   | $                           | 143,793 |               | $      | 645 |   | 4.51 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |   |
| Other bonds                                    |   |          |    |                |   |            |   |                        |    |               |   |
| After ten years                                |   | 7,000         |    | 7,000               |   | 6,990           |   | (10                         | )       | 3.58               | %      |
| Total other bonds                              |   | $             | 7,000   |                | $      | 7,000           |   | $                           | 6,990   |               | $      | (10 | )  | 3.58 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |   |
| Treasury bonds                                 |   |          |    |                |   |            |   |                        |    |               |   |
| One to five years                              |   | $             | 4,500   |                | $      | 4,566           |   | $                           | 4,614   |               | $      | 48 |   | 2.65 | % |
| Total treasury bonds                           |   | $             | 4,500   |                | $      | 4,566           |   | $                           | 4,614   |               | $      | 48 |   | 2.65 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |   |
| Total investment securities available-for-sale |   | $             | 194,120 |                | $      | 197,483         |   | $                           | 198,452 |               | $      | 969 |   | 4.22 | % |

 
| **As of December  31, 2002**                   |   | **Par Value** |    | **Amortized  Cost** |   | **Fair  Value** |   | **Unrealized  Gain/(Loss)** |    | **Average  Yield** | ** ** |
|------------------------------------------------|--------|---------------|---------|---------------------|--------|-----------------|--------|-----------------------------|---------|--------------------|------------|
| U.S. government agencies and enterprises       |   |          |    |                |   |            |   |                        |    |               |       |
| One to five years                              |   | $             | 26,750  |                | $      | 26,739          |   | $                           | 26,988  |               | $          | 249 |   | 3.47 | % |
| Five to ten years                              |   | 12,000        |    | 12,048              |   | 12,048          |   | —                      |    | 3.68               | %          |
| Total U.S. government agencies                 |   | $             | 38,750  |                | $      | 38,787          |   | $                           | 39,036  |               | $          | 249 |   | 3.53 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |       |
| Mortgage-backed securities                     |   |          |    |                |   |            |   |                        |    |               |       |
| Within one year                                |   | $             | 15,325  |                | $      | 15,478          |   | $                           | 15,750  |               | $          | 272 |   | 3.61 | % |
| One to five years                              |   | 69,265        |    | 70,552              |   | 72,342          |   | 1,790                       |    | 4.82               | %          |
| Five to ten years                              |   | 13,385        |    | 13,695              |   | 13,686          |   | (9                          | )       | 4.43               | %          |
| After ten years                                |   | 13,940        |    | 15,301              |   | 15,301          |   | —                      |    | 5.20               | %          |
| Total mortgage-backed securities               |   | $             | 111,915 |                | $      | 115,026         |   | $                           | 117,079 |               | $          | 2,053 |   | 4.65 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |       |
| Other bonds                                    |   |          |    |                |   |            |   |                        |    |               |       |
| After ten years                                |   | 5,000         |    | 5,000               |   | 5,000           |   | —                      |    | 3.39               | %          |
| Total other bonds                              |   | $             | 5,000   |                | $      | 5,000           |   | $                           | 5,000   |               | $          | — |   | 3.39 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |       |
| Treasury bonds                                 |   |          |    |                |   |            |   |                        |    |               |       |
| One to five years                              |   | $             | 2,500   |                | $      | 2,507           |   | $                           | 2,550   |               | $          | 43 |   | 2.67 | % |
| Total treasury bonds                           |   | $             | 2,500   |                | $      | 2,507           |   | $                           | 2,550   |               | $          | 43 |   | 2.67 | % |
|                                           |   |          |    |                |   |            |   |                        |    |               |       |
| Total investment securities available-for-sale |   | $             | 158,165 |                | $      | 161,320         |   | $                           | 163,665 |               | $          | 2,345 |   | 4.32 | % |

 

19

----

 

**Table 2.**

**LoansReceivable**

As of March 31, 2003 andDecember 31, 2002

(Dollars in thousands)

 
|                             |   | **March 31,  2003** |    | **December  31, 2002** |   |
|----------------------------------|--------|---------------------|---------|------------------------|--------|
|                             |   |                |    |                   |   |   |   |   |   |
| Commercial                       |   | $                   | 48,604  |                   | 19.28  | % | $ | 58,292 |   | 23.40 | % |
| Real estate -  commercial        |   | 116,398             |    | 46.17                  | %      | 116,135 |   | 46.63 | % |
| Real estate -  construction      |   | 11,001              |    | 4.36                   | %      | 5,781 |   | 2.32 | % |
| Real estate -  residential       |   | 35,990              |    | 14.28                  | %      | 31,808 |   | 12.77 | % |
| Home equity  lines               |   | 31,020              |    | 12.30                  | %      | 26,831 |   | 10.77 | % |
| Consumer                         |   | 9,085               |    | 3.61                   | %      | 10,235 |   | 4.11 | % |
|                             |   |                |    |                   |   |   |   |   |   |
| Gross loans                      |   | $                   | 252,098 |                   | 100.00 | % | $ | 249,082 |   | 100.00 | % |
|                             |   |                |    |                   |   |   |   |   |   |
| Add: unearned  income, net       |   | (60                 | )       |                   |   | 24 |   |   |   |
| Less: allowance  for loan losses |   | (3,431              | )       |                   |   | (3,372 | ) |   |   |
|                             |   |                |    |                   |   |   |   |   |   |
| Loans  receivable, net           |   | $                   | 248,607 |                   |   |   | $ | 245,734 |   |   |   |

 

20

----

 

**Table 3.**

**Certificatesof Deposit of $100,000 or More**

As of March 31, 2003

(Dollars in thousands)

 
| **Maturities:**                        |   |   |   |
|----------------------------------------|--------|--------|--------|
| Three months or  less                  |   | $      | 8,751  |   |
| Over three  months through six months  |   | 8,851  |   |
| Over six months  through twelve months |   | 15,113 |   |
| Over twelve  months                    |   | 45,076 |   |
|                                   |   | $      | 77,791 |   |

 

21

----

** **

**Table 4.**

** **

**Average Balance Sheets and Interest Rates on Earning Assetsand Interest-Bearing Liabilities**As of and for the Three Months Ended March 31, 2003, 2002 and 2001

(Dollarsin thousands)

** **
|                                                       |   | **2003**             |    | **2002**                       |   | **2001** |   |
|------------------------------------------------------------|--------|----------------------|---------|--------------------------------|--------|----------|--------|
|                                                       |   | **Average  Balance** |    | **Interest  Income/  Expense** |   | **Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Rate** |   |
| **Assets**                                                 |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                   |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                 |   | $                    | 53,060  |                           | $      | 833      |   | 6.28 | % | $ | 54,760 |   | $ | 964 |   | 7.04 | % | $ | 47,488 |   | $ | 1,109 |   | 9.34 | % |
| Real estate - commercial                                   |   | 115,685              |    | 2,064                          |   | 7.14     | %      | 86,345 |   | 1,744 |   | 8.08 | % | 58,030 |   | 1,286 |   | 8.86 | % |
| Real estate - construction                                 |   | 8,955                |    | 137                            |   | 6.12     | %      | 5,967 |   | 93 |   | 6.23 | % | 5,086 |   | 126 |   | 9.91 | % |
| Real estate - residential                                  |   | 34,284               |    | 577                            |   | 6.73     | %      | 17,655 |   | 357 |   | 8.08 | % | 17,227 |   | 352 |   | 8.17 | % |
| Home equity lines                                          |   | 28,352               |    | 241                            |   | 3.40     | %      | 21,615 |   | 226 |   | 4.24 | % | 15,628 |   | 319 |   | 8.16 | % |
| Consumer                                                   |   | 9,639                |    | 179                            |   | 7.43     | %      | 13,605 |   | 243 |   | 7.14 | % | 14,293 |   | 280 |   | 7.84 | % |
| Total loans                                                |   | 249,975              |    | 4,031                          |   | 6.45     | %      | 199,947 |   | 3,627 |   | 7.26 | % | 157,752 |   | 3,472 |   | 8.80 | % |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities  available-for-sale                  |   | 180,044              |    | 1,678                          |   | 3.73     | %      | 47,731 |   | 595 |   | 4.99 | % | 5,575 |   | 105 |   | 7.53 | % |
| Other investments                                          |   | 1,853                |    | 24                             |   | 5.18     | %      | 1,194 |   | 19 |   | 6.37 | % | 1,460 |   | 22 |   | 6.03 | % |
| Federal funds sold                                         |   | 13,503               |    | 39                             |   | 1.16     | %      | 37,961 |   | 154 |   | 1.63 | % | 27,244 |   | 372 |   | 5.54 | % |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets and interest income         |   | 445,375              |    | 5,772                          |   | 5.18     | %      | 286,833 |   | 4,395 |   | 6.13 | % | 192,031 |   | 3,971 |   | 8.27 | % |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest earning assets:                               |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                    |   | 14,720               |    |                           |   |     |   | 13,280 |   |   |   |   |   | 8,834 |   |   |   |   |   |
| Premises and equipment, net                                |   | 5,007                |    |                           |   |     |   | 5,015 |   |   |   |   |   | 5,629 |   |   |   |   |   |
| Goodwill and other  intangibles                            |   | 646                  |    |                           |   |     |   | 663 |   |   |   |   |   | 9,516 |   |   |   |   |   |
| Accrue dinterest and other  assets                         |   | 4,467                |    |                           |   |     |   | 1,173 |   |   |   |   |   | 1,663 |   |   |   |   |   |
| Allowance for loan losses                                  |   | (3,397               | )       |                           |   |     |   | (3,103 | ) |   |   |   |   | (1,962 | ) |   |   |   |   |
| Total assets                                               |   | $                    | 466,818 |                           |   |     |   |   | $ | 303,861 |   |   |   |   |   | $ | 215,711 |   |   |   |   |   |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders' Equity**                  |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  liabilities:                           |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:                               |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                          |   | 139,080              |    | 638                            |   | 1.83     | %      | 69,762 |   | 516 |   | 3.00 | % | 12,783 |   | 63 |   | 1.98 | % |
| Money markets                                              |   | 26,131               |    | 69                             |   | 1.06     | %      | 25,947 |   | 133 |   | 2.08 | % | 23,268 |   | 235 |   | 4.05 | % |
| Statement savings                                          |   | 4,493                |    | 9                              |   | 0.80     | %      | 4,294 |   | 13 |   | 1.24 | % | 4,251 |   | 31 |   | 2.92 | % |
| Certificates of deposit                                    |   | 173,249              |    | 1,524                          |   | 3.52     | %      | 115,538 |   | 1,262 |   | 4.44 | % | 93,338 |   | 1,464 |   | 6.29 | % |
| Total interest - bearing  deposits                         |   | 342,953              |    | 2,240                          |   | 2.61     | %      | 215,541 |   | 1,924 |   | 3.62 | % | 133,640 |   | 1,793 |   | 5.37 | % |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                                       |   | 14,957               |    | 73                             |   | 1.95     | %      | 9,398 |   | 97 |   | 4.12 | % | 7,550 |   | 113 |   | 5.99 | % |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest - bearing  liabilities and interest expense |   | 357,910              |    | 2,313                          |   | 2.59     | %      | 224,939 |   | 2,021 |   | 3.64 | % | 141,190 |   | 1,906 |   | 5.47 | % |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bearing - bearing  liabilities:                            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                            |   | 66,638               |    |                           |   |     |   | 55,985 |   |   |   |   |   | 38,126 |   |   |   |   |   |
| Other liabilities                                          |   | 1,588                |    |                           |   |     |   | 2,308 |   |   |   |   |   | 2,593 |   |   |   |   |   |
| Preferred shareholders'  equity                            |   | 6,825                |    |                           |   |     |   | 6,825 |   |   |   |   |   | 7,057 |   |   |   |   |   |
| Common shareholders' equity                                |   | 33,857               |    |                           |   |     |   | 13,804 |   |   |   |   |   | 26,745 |   |   |   |   |   |
| Total liabilities and  shareholders' equity                |   | $                    | 466,818 |                           |   |     |   |   | $ | 303,861 |   |   |   |   |   | $ | 215,711 |   |   |   |   |   |
|                                                       |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income and net  interest margin               |   |                 |    | $                              | 3,459  |     | 3.11   | % |   |   | $ | 2,374 |   | 3.31 | % |   |   | $ | 2,065 |   | 4.30 | % |

** **

22

----

 

**Table 5.**

**Rate and Volume Analysis (Tax Equivalent Basis)**

Forthe Three Months Ended March 31, 2003, 2002 and 2001

(Dollarsin thousands)

** **
|                                      |   | **2003 Compared to 2002** |   | **2002 Compared to 2001** |   |
|-------------------------------------------|--------|---------------------------|--------|---------------------------|--------|
|                                      |   | **Average  Volume**       |   | **Average  Rate**         |   | **Increase  (Decrease)** |   | **Average  Volume** |   | **Average  Rate** |   | **Increase  (Decrease)** |   |
| **Interest  income****:**                 |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Loans:                                    |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Commercial                                |   | $                         | (30    | )                         | $      | (101 | ) | $ | (131 | ) | $ | 170 |   | $ | (315 | ) | $ | (145 | ) |
| Real estate - commercial                  |   | 593                       |   | (273                      | )      | 320 |   | 627 |   | (169 | ) | 458 |   |
| Real estate - construction                |   | 47                        |   | (3                        | )      | 44 |   | 22 |   | (55 | ) | (33 | ) |
| Real estate - residential                 |   | 335                       |   | (115                      | )      | 220 |   | 9 |   | (4 | ) | 5 |   |
| Home equity lines                         |   | 71                        |   | (56                       | )      | 15 |   | 122 |   | (215 | ) | (93 | ) |
| Consumer                                  |   | (71                       | )      | 7                         |   | (64 | ) | (13 | ) | (24 | ) | (37 | ) |
| Total loans                               |   | 945                       |   | (541                      | )      | 404 |   | 937 |   | (782 | ) | 155 |   |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Investment securities  available-for-sale |   | 1,649                     |   | (566                      | )      | 1,083 |   | 794 |   | (304 | ) | 490 |   |
| Other investments                         |   | 10                        |   | (5                        | )      | 5 |   | (4 | ) | 1 |   | (3 | ) |
| Federal funds sold                        |   | (98                       | )      | (17                       | )      | (115 | ) | 146 |   | (364 | ) | (218 | ) |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Total interest income                     |   | 2,506                     |   | (1,129                    | )      | 1,377 |   | 1,873 |   | (1,449 | ) | 424 |   |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| **Interest  expense:**                    |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:             |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Interest checking                         |   | 521                       |   | (399                      | )      | 122 |   | 278 |   | 175 |   | 453 |   |
| Money markets                             |   | 2                         |   | (66                       | )      | (64 | ) | 27 |   | (129 | ) | (102 | ) |
| Statement savings                         |   | 1                         |   | (5                        | )      | (4 | ) | 0 |   | (18 | ) | (18 | ) |
| Certificates of deposit                   |   | 656                       |   | (394                      | )      | 262 |   | 326 |   | (528 | ) | (202 | ) |
| Total interest - bearing  deposits        |   | 1,180                     |   | (864                      | )      | 316 |   | 631 |   | (500 | ) | 131 |   |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                      |   | 56                        |   | (80                       | )      | (24 | ) | 28 |   | (44 | ) | (16 | ) |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Total interest expense                    |   | 1,236                     |   | (944                      | )      | 292 |   | 659 |   | (544 | ) | 115 |   |
|                                      |   |                      |   |                      |   |   |   |   |   |   |   |   |   |
| Net interest income                       |   | $                         | 1,270  |                      | $      | (185 | ) | $ | 1,085 |   | $ | 1,214 |   | $ | (905 | ) | $ | 309 |   |

 

23

----

** **

**Table 6.**

**Allowancefor Loan Losses**

For the Three MonthsEnded March 31, 2003 and 2002

(Dollars in thousands)

** **
|                                                  |   | **March 31,  2003** |   | **March 31,  2002** |   |
|-------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| Beginning balance, January 1                          |   | $                   | 3,372  |                | $      | 3,104 |   |
|                                                  |   |                |   |                |   |
| Provision for loan losses                             |   | 80                  |   | —              |   |
|                                                  |   |                |   |                |   |
| Transfer to bank's liability on unfounded commitments |   | —              |   | (74                 | )      |
|                                                  |   |                |   |                |   |
|                                                  |   |                |   |                |   |
| Loans charged off:                                    |   |                |   |                |   |
| Commercial                                            |   | (60                 | )      | —              |   |
| Real estate - commercial                              |   | —              |   | —              |   |
| Real estate - construction                            |   | —              |   | —              |   |
| Real estate - residential                             |   | —              |   | —              |   |
| Home equity lines                                     |   | —              |   | —              |   |
| Consumer                                              |   | (3                  | )      | (11                 | )      |
| Total loans charged off                               |   | (63                 | )      | (11                 | )      |
|                                                  |   |                |   |                |   |
| Recoveries:                                           |   |                |   |                |   |
| Commercial                                            |   | 40                  |   | —              |   |
| Real estate - commercial                              |   | —              |   | —              |   |
| Real estate - construction                            |   | —              |   | —              |   |
| Real estate - residential                             |   | —              |   | —              |   |
| Home equity lines                                     |   | —              |   | —              |   |
| Consumer                                              |   | 2                   |   | —              |   |
| Total recoveries                                      |   | 42                  |   | —              |   |
|                                                  |   |                |   |                |   |
| Net (charge offs) recoveries                          |   | (21                 | )      | (11                 | )      |
|                                                  |   |                |   |                |   |
| Ending balance                                        |   | $                   | 3,431  |                | $      | 3,019 |   |

** **
|                                           |   | **March 31,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| Loans:                                         |   |                |    |                    |   |
| Balance at period end                          |   | $                   | 252,038 |                    | $      | 249,106 |   |
| Allowance for loan losses to quarter end loans |   | 1.36                | %       | 1.35                    | %      |
|                                                |        |                     |         |                         |        |  |  |

 

24

----

 

**Table 7.**

**Allocationof the Allowance for Loan Losses**

As of March 31, 2003 andDecember 31, 2002

(Dollars in thousands)

 
|                            |   | **March 31,  2003** |   | **December 31,  2002** |   |
|---------------------------------|--------|---------------------|--------|------------------------|--------|
|                            |   | **Allocation**      |   | **% Of  Total***       |   | **Allocation** |   | **% Of  Total*** |   |
| Commercial                      |   | $                   | 1,091  |                   | 19.28  | % | $ | 1,301 |   | 23.40 | % |
| Real estate - commercial        |   | 1,543               |   | 46.17                  | %      | 1,386 |   | 46.63 | % |
| Real estate - construction      |   | 46                  |   | 4.36                   | %      | 19 |   | 2.32 | % |
| Real estate - residential       |   | 274                 |   | 14.28                  | %      | 241 |   | 12.77 | % |
| Home equity lines               |   | 279                 |   | 12.30                  | %      | 201 |   | 10.77 | % |
| Consumer                        |   | 198                 |   | 3.61                   | %      | 224 |   | 4.11 | % |
|                            |   |                |   |                   |   |   |   |   |   |
| Total allowance for loan losses |   | $                   | 3,431  |                   | 100.00 | % | $ | 3,372 |   | 100.00 | % |

 

----

* Percentage of loan typeto the total loan portfolio.

 

25

----

 

**Table 8.**

**Capital Components**

Asof March 31, 2003 and December 31, 2002

(Dollarsin thousands)

** **
|                                                             |   | **Actual** |   | **For Capital  Adequacy Purposes** |   | **To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** |   |
|------------------------------------------------------------------|--------|------------|--------|------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                                             |   | **Amount** |   | **Ratio**                          |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                                             |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| **As of  March 31, 2003**                                        |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total risk based capital/  Total capital to risk-weighted assets |   | $          | 41,528 |                               | 13.30  | %                                                                       | $      | 24,974 | > | 8.00 | % | $ | 31,217 | > | 10.00 | % |
| Tier I capital/ Tier I  capital to risk-weighted assets          |   | 38,097     |   | 12.20                              | %      | 12,487                                                                  | >   | 4.00 | % | 18,730 | > | 6.00 | % |
| Total risk based capital/  Total capital to average assets       |   | 41,528     |   | 8.90                               | %      | 18,673                                                                  | >   | 4.00 | % | 23,341 | > | 5.00 | % |
|                                                             |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| **As of  December 31, 2002**                                     |   |       |   |                               |   |                                                                    |   |   |   |   |   |   |   |
| Total risk based capital/  Total capital to risk-weighted assets |   | $          | 41,093 |                               | 13.35  | %                                                                       | $      | 24,625 | > | 8.00 | % | $ | 30,781 | > | 10.00 | % |
| Tier I capital/ Tier I  capital to risk-weighted assets          |   | 37,721     |   | 12.25                              | %      | 12,313                                                                  | >   | 4.00 | % | 18,469 | > | 6.00 | % |
| Total risk based capital/  Total capital to average assets       |   | 41,093     |   | 8.97                               | %      | 18,330                                                                  | >   | 4.00 | % | 22,913 | > | 5.00 | % |

 

26

----

** **

**Table9.**

 

**Interest Rate Sensitivity GapAnalysis**

As of March 31, 2003

(Dollars in thousands)

 
|                                                               |   | **Immediate  Reprising** |       | **2-90  Days** |   | **91-180  Days** |   | **181-365  Days** |       | **1-3  Years** |   | **Over 3  Years** |   | **TOTAL** |       |
|--------------------------------------------------------------------|--------|--------------------------|------------|----------------|--------|------------------|--------|-------------------|------------|----------------|--------|-------------------|--------|-----------|------------|
| **Assets**                                                         |   |                     |       |           |   |             |   |              |       |           |   |              |   |      |       |
| Investment securities  available-for-sale & other investments  |   | **$**                    | **—** |           | $      | 6,077            |   | $                 | 2,118      |           | $      | 6,738             |   | $         | 45,949     |   | $ | 140,208 |   | $ | 201,090 |   |
| Federal funds sold                                                 |   | 15,896                   |       | **—**     |   | **—**       |   | **—**        |       | **—**     |   | **—**        |   | 15,896    |       |
| **Loans Receivable,  net of fees**                                 |   |                     |       |           |   |             |   |              |       |           |   |              |   |      |       |
| Commercial & industrial                                        |   | 30,958                   |       | 5,900          |   | 3,968            |   | 9,388             |       | 46,980         |   | 67,808            |   | 165,002   |       |
| Residential                                                        |   | 587                      |       | 307            |   | 981              |   | 811               |       | 9,734          |   | 23,570            |   | 35,990    |       |
| Home equity lines                                                  |   | 4,768                    |       | 20,079         |   | 4,665            |   | 1,508             |       | **—**     |   | **—**        |   | 31,020    |       |
| Construction                                                       |   | 8,883                    |       | 447            |   | 6                |   | 247               |       | 57             |   | 1,361             |   | 11,001    |       |
| All other                                                          |   | 1,002                    |       | 406            |   | 299              |   | 681               |       | 2,133          |   | 4,564             |   | 9,085     |       |
| **Total  loans receivable, net of fees**                           |   | 46,198                   |       | 27,139         |   | 9,919            |   | 12,635            |       | 58,904         |   | 97,303            |   | 252,098   |       |
| **Total  earning assets**                                          |   | 62,094                   |       | 33,216         |   | 12,037           |   | 19,373            |       | 104,853        |   | 237,511           |   | 469,084   |       |
| **Cumulative  rate sensitive assets**                              |   | $                        | 62,094     |           | $      | 95,310           |   | $                 | 107,347    |           | $      | 126,720           |   | $         | 231,573    |   | $ | 469,084 |   |   |   |
|                                                               |   |                     |       |           |   |             |   |              |       |           |   |              |   |      |       |
| **Liabilities**                                                    |   |                     |       |           |   |             |   |              |       |           |   |              |   |      |       |
| **Deposits**                                                       |   |                     |       |           |   |             |   |              |       |           |   |              |   |      |       |
| Bearing - bearing demand                                           |   | $                        | **—** |           | $      | **—**       |   | $                 | **—** |           | $      | **—**        |   | $         | **—** |   | $ | 71,309 |   | $ | 71,309 |   |
| Interest - bearing  transaction accounts                           |   | 34,065                   |       | 17,033         |   | 17,033           |   | 17,033            |       | 17,033         |   | 68,131            |   | 170,328   |       |
| Certificates of deposit -  fixed                                   |   | 62                       |       | 10,448         |   | 13,209           |   | 13,893            |       | 56,754         |   | 15,207            |   | 109,573   |       |
| Certificates of deposit -  no penalty                              |   | 1,301                    |       | 4,483          |   | 7,222            |   | 17,706            |       | 35,174         |   | **—**        |   | 65,886    |       |
| **Total  deposits**                                                |   | 35,428                   |       | 31,964         |   | 37,464           |   | 48,632            |       | 108,961        |   | 154,647           |   | 417,096   |       |
| Other borrowed funds                                               |   | **—**               |       | 1,000          |   | 8,000            |   | 7,000             |       | 9,000          |   | **—**        |   | 25,000    |       |
| **Total  deposits & other borrowed funds**                     |   | 35,428                   |       | 32,964         |   | 45,464           |   | 55,632            |       | 117,961        |   | 154,647           |   | 442,096   |       |
| **Cumulative  rate sensitive liabilities**                         |   | $                        | 35,428     |           | $      | 68,392           |   | $                 | 113,856    |           | $      | 169,488           |   | $         | 287,449    |   | $ | 442,096 |   |   |   |
|                                                               |   |                     |       |           |   |             |   |              |       |           |   |              |   |      |       |
| **Gap**                                                            |   | $                        | 26,666     |           | $      | 252              |   | $                 | (33,427    | )              | $      | (36,259           | )      | $         | (13,108    | ) | $ | 82,864 |   |   |   |
| **Cumulative  gap**                                                |   | 26,666                   |       | 26,918         |   | (6,509           | )      | (42,768           | )          | (55,876        | )      | 26,988            |   |      |       |
| **Gap/ total  assets**                                             |   | 5.51                     | %          | 0.05           | %      | -6.90            | %      | -7.49             | %          | -2.71          | %      | 17.11             | %      |      |       |
| **Cumulative  gap/ total assets**                                  |   | 5.51                     | %          | 5.56           | %      | -1.34            | %      | -8.83             | %          | -11.54         | %      | 5.57              | %      |      |       |
| **Rate  sensitive assets/ rate sensitive liabilities**             |   | 1.75                     |       | 1.01           |   | 0.26             |   | 0.35              |       | 0.89           |   | 1.54              |   |      |       |
| **Cumulative  rate sensitive assets / rate sensitive liabilities** |   | 1.75                     |       | 1.39           |   | 0.94             |   | 0.75              |       | 0.81           |   | 1.06              |   |      |       |

 

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** **

** **

**Item 3****.  Controls andProcedures**

** **

Based upon an evaluation by ourChief Executive Officer and Chief Financial Officer within 90 days prior to thefiling date of this Quarterly Report, they have concluded that our disclosurecontrols and procedures, as defined in Rule 13a-14(c) under the SecuritiesExchange Act of 1934, as amended, are effective in ensuring that all materialinformation required to be filed in this Quarterly Report has been made knownto them in a timely fashion.

 

There were no significantchanges in our internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of the evaluation referred toabove.  

 

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** **

**Part II****- OtherInformation**

** **

**Item 1.  Legal Proceedings**

** **

From time to time, the Company is a party to legalproceedings in the ordinary course of business.  However, the Company is not engaged in any legal proceedings of amaterial nature at the present time.

 

**Item 2.  Changes in Securitiesand Use of Proceeds**

** **

(a)  None

(b)  None

(c)  None

(d)  Not applicable

 

**Item 3.  Defaults Upon SeniorSecurities**

 

(a)  None

(b)  None

 

**Item 4.  Submission of Mattersto a Vote of Security Holders**

** **

None

 

**Item 5.  Other Information**

 

None

 

**Item 6.  Exhibits and Reports on Form8-K**

** **

(a)   Exhibits:

 

99.1         Statement of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350

 

99.2         Statement of Chief Financial OfficerPursuant to 18 U.S.C. Section 1350

 

(b)   Reports on Form 8-K

 

On January 21, 2003, the Company filed a Current Report on Form 8-K datedJanuary 21, 2003 to report under Item 5, and to include as an exhibit a pressrelease announcing, its plans to relocate the corporate headquarters to TysonsCorner, Virginia.

 

On January 22, 2003, the Company filed a Current Report on Form 8-K datedJanuary 22, 2003 to report under Item 5, and to include as an exhibit a pressrelease announcing, that the Company entered into an agreement to acquirebranch office facilities located in Northern Virginia.

 

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** **

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis Report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

** **

** **
|               |   | **CARDINAL  FINANCIAL CORPORATION** |
|--------------------|--------|-------------------------------------|
|               |   | (Registrant)                        |   |   |
|               |   |                                |   |   |   |   |
|               |   |                                |   |   |   |   |
| Date: May 12, 2002 |   | /s/ Bernard H. Clineburg            |   |
|               |   | Bernard H. Clineburg                |   |
|               |   | Chairman, President and             |   |
|               |   | Chief Executive Officer             |   |
|               |   |                                |   |
|               |   |                                |   |
| Date: May 12, 2002 |   | /s/ Carl E. Dodson                  |   |
|               |   | Carl E. Dodson                      |   |
|               |   | Executive Vice President and        |   |
|               |   | Chief Financial Officer             |   |
|               |   | (Principal Financial  Officer)      |   |
|               |   |                                |   |
|               |   |                                |   |
| Date: May 12, 2002 |   | /s/ Jennifer L. Deacon              |   |
|               |   | Jennifer L. Deacon                  |   |
|               |   | Vice President and                  |   |
|               |   | Controller                          |   |
|               |   | (Principal Accounting  Officer)     |   |
|                    |        |                                     |  |  |  |  |  |

 

30

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**CERTIFICATION**

 

I, Bernard H.Clineburg, Chief Executive Officer of the registrant, certify that:

 

1.     I have reviewed thisquarterly report on Form 10-QSB of Cardinal Financial Corporation;

 

2.     Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.     Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.     The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)     designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b)    evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c)     presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.     The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)     all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)    any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

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6.     The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| May 12, 2003 |   |   |   | /s/ Bernard H. Clineburg |   |
|--------------|--------|--------|--------|--------------------------|--------|
|         |   |   |   | Bernard H. Clineburg,    |   |
|         |   |   |   | Chairman, President and  |   |
|         |   |   |   | Chief Executive Officer  |   |

 

32

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**CERTIFICATION**

 

I, Carl E. Dodson,Chief Financial Officer of the registrant, certify that:

 

1.     I havereviewed this quarterly report on Form 10-QSB of Cardinal FinancialCorporation;

 

2.     Based onmy knowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.     Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.     Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)     designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b)    evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c)     presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.     Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)     all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)    any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

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6.     Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| May 12, 2003 |   |   |   | /s/  Carl E.  Dodson     |   |
|--------------|--------|--------|--------|-------------------------------|--------|
|         |   |   |   | Carl E. Dodson,               |   |
|         |   |   |   | Executive Vice  President and |   |
|         |   |   |   | Chief Financial Officer       |   |

 

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EXHIBIT INDEX

 
| **Exhibit No.** |   | **Description**                                                          |
|-----------------|--------|--------------------------------------------------------------------------|
|            |   |                                                                     |
| 99.1            |   | Statement of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|            |   |                                                                     |
| 99.2            |   | Statement of Chief Financial Officer Pursuant to 18  U.S.C. Section 1350 |

 

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