** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**x Quarterly Report Pursuant to Section 13or 15(d)**

**of the SecuritiesExchange Act of 1934**

** **

**For the quarterly periodended March 31, 2006**

** **

**or**

** **

**o Transition Report Pursuant to Section 13or 15(d)**

**of the SecuritiesExchange Act of 1934**

** **

**For the transition periodfrom                    to                     **

** **

**Commission File Number: 0-24557**

** **

** **

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrantas specified in its charter)

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

 

**(703) 584-3400**(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o                    Accelerated filer x                             Non-accelerated filer o

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:

24,367,075 shares of common stock, par value $1.00 per share,outstanding as of April 30, 2006

 

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**CARDINAL FINANCIAL CORPORATION**

**INDEX TO FORM 10-Q**

**PART I — FINANCIALINFORMATION**

Item 1.   Financial Statements:
| Consolidated Statements of  Condition                                                                           |   |   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| At March 31, 2006  (unaudited) and December 31, 2005                                                  |   | 3      |   |
|                                                                                                            |   |   |   |
| Consolidated Statements of Income                                                                               |   |   |   |
| For the three months ended  March 31, 2006 and 2005 (unaudited)                                            |   | 4      |   |
|                                                                                                            |   |   |   |
| Consolidated Statements of Comprehensive Income                                                                 |   |   |   |
| For the three months ended  March 31, 2006 and 2005 (unaudited)                                            |   | 5      |   |
|                                                                                                            |   |   |   |
| Consolidated Statements of Changes In Shareholders’  Equity                                                |   |   |   |
| For the three months ended  March 31, 2006 and 2005 (unaudited)                                            |   | 6      |   |
|                                                                                                            |   |   |   |
| Consolidated Statements of Cash Flows                                                                           |   |   |   |
| For the three months ended  March 31, 2006 and 2005 (unaudited)                                            |   | 7      |   |
|                                                                                                            |   |   |   |
| Notes to Consolidated Financial Statements (unaudited)                                                          |   | 8      |   |
|                                                                                                            |   |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of  Operations  |   | 17     |   |
|                                                                                                            |   |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                             |   | 38     |   |
|                                                                                                            |   |   |   |
| Item 4. Controls and Procedures                                                                                 |   | 39     |   |
| ** **                                                                                                      |   |   |   |
| **PART II — OTHER INFORMATION**                                                                       |   | 40     |   |
|                                                                                                            |   |   |   |
| Item  1. Legal Proceedings                                                                                      |   | 40     |   |
| Item 1A. Risk Factors                                                                                           |   | 40     |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                            |   | 40     |   |
| Item 3. Defaults Upon Senior Securities                                                                         |   | 40     |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                    |   | 40     |   |
| Item 5. Other Information                                                                                       |   | 40     |   |
| Item  6. Exhibits                                                                                               |   | 40     |   |
| ** **                                                                                                      |   |   |   |
| **SIGNATURES**                                                                                                  |   | 41     |   |

 

2

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**PART I — FINANCIALINFORMATION**

**Item 1. FinancialStatements**

**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCONDITION

March 31, 2006 and December 31,2005

(In thousands, except sharedata)
| ** **                                                                                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **Assets**                                                                                                                                            | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                            | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| Cash and due  from banks                                                                                                                              |       | $                  | 29,757     |                  | $          | 16,514 |   |
| Federal funds  sold                                                                                                                                   |       | 32,760             |       | 20,075                |       |
| Total cash and cash equivalents                                                                                                                       |       | 62,517             |       | 36,589                |       |
|                                                                                                                                                  |       |               |       |                  |       |
| Investment  securities available-for-sale                                                                                                             |       | 220,813            |       | 178,955               |       |
| Investment  securities held-to-maturity (market value of $106,879 and $112,025 at  March 31, 2006 and December 31, 2005, respectively) |       | 110,541            |       | 115,269               |       |
| Total investment securities                                                                                                                           |       | 331,354            |       | 294,224               |       |
|                                                                                                                                                  |       |               |       |                  |       |
| Other  investments                                                                                                                                    |       | 7,783              |       | 7,092                 |       |
| Loans held for  sale, net                                                                                                                             |       | 300,194            |       | 361,668               |       |
| Loans  receivable, net of deferred fees and costs                                                                                                     |       | 730,003            |       | 705,644               |       |
| Allowance for  loan losses                                                                                                                            |       | (8,520             | )          | (8,301                | )          |
| Loans receivable, net                                                                                                                                 |       | 721,483            |       | 697,343               |       |
|                                                                                                                                                  |       |               |       |                  |       |
| Premises and equipment,  net                                                                                                                          |       | 18,046             |       | 18,201                |       |
| Deferred tax  asset                                                                                                                                   |       | 5,072              |       | 4,399                 |       |
| Goodwill and  intangibles, net                                                                                                                        |       | 20,696             |       | 20,502                |       |
| Accrued interest  receivable and other assets                                                                                                         |       | 14,574             |       | 12,269                |       |
| Total assets                                                                                                                                          |       | $                  | 1,481,719  |                  | $          | 1,452,287 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Non-interest  bearing deposits                                                                                                                        |       | $                  | 114,618    |                  | $          | 114,915 |   |
| Interest bearing  deposits                                                                                                                            |       | 957,339            |       | 954,957               |       |
| Other borrowed  funds                                                                                                                                 |       | 173,543            |       | 155,421               |       |
| Mortgage funding  checks                                                                                                                              |       | 52,077             |       | 41,635                |       |
| Escrow  liabilities                                                                                                                                   |       | 6,297              |       | 11,013                |       |
| Accrued interest  payable and other liabilities                                                                                                       |       | 28,016             |       | 26,467                |       |
| Total liabilities                                                                                                                                     |       | 1,331,890          |       | 1,304,408             |       |
| Common stock, $1 par  value                                                                                                                           | **2006**   | **2005**           |       |                  |       |   |   |
| Shares authorized                                                                                                                                     | 50,000,000 | 50,000,000         |       |                  |       |   |   |
| Shares issued and outstanding                                                                                                                         | 24,367,075 | 24,362,685         |       |                  |       |   |   |
|                                                                                                                                                  |       |               |       |                  |       |
|                                                                                                                                                  |       | 24,367             |       | 24,363                |       |
| Additional  paid-in capital                                                                                                                           |       | 132,184            |       | 132,150               |       |
| Accumulated  deficit                                                                                                                                  |       | (2,918             | )          | (5,269                | )          |
| Accumulated  other comprehensive loss                                                                                                                 |       | (3,804             | )          | (3,365                | )          |
| Total shareholders’ equity                                                                                                                       |       | 149,829            |       | 147,879               |       |
| Total  liabilities and shareholders’ equity                                                                                                      |       | $1,481,719         |       | $1,452,287            |       |

 

See accompanying notes to consolidated financial statements.

3

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATED STATEMENTS OFINCOME

Three months ended March 31,2006 and 2005(In thousands, except per share data)(Unaudited)
| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Interest income:                                      |       |     |       |     |       |
| Loans receivable                                      |       | $        | 11,505     |     | $          | 7,280 |   |
| Loans held for sale                                   |       | 4,278    |       | 3,358    |       |
| Federal funds sold                                    |       | 649      |       | 61       |       |
| Investment securities available-for-sale              |       | 2,064    |       | 1,431    |       |
| Investment securities held-to-maturity                |       | 1,125    |       | 1,307    |       |
| Other investments                                     |       | 89       |       | 54       |       |
| Total interest income                                 |       | 19,710   |       | 13,491   |       |
|                                                  |       |     |       |     |       |
| Interest expense:                                     |       |     |       |     |       |
| Deposits                                              |       | 7,792    |       | 4,677    |       |
| Other borrowed funds                                  |       | 1,523    |       | 992      |       |
| Total interest expense                                |       | 9,315    |       | 5,669    |       |
| Net interest income                                   |       | 10,395   |       | 7,822    |       |
|                                                  |       |     |       |     |       |
| Provision for  loan losses                            |       | 250      |       | 549      |       |
| Net interest income after provision for loan losses   |       | 10,145   |       | 7,273    |       |
|                                                  |       |     |       |     |       |
| Non-interest income:                                  |       |     |       |     |       |
| Service charges on deposit accounts                   |       | 369      |       | 280      |       |
| Loan service charges                                  |       | 623      |       | 626      |       |
| Investment fee income                                 |       | 681      |       | 159      |       |
| Net gain on sales of loans                            |       | 2,776    |       | 3,581    |       |
| Management fee income                                 |       | 418      |       | 524      |       |
| Other income                                          |       | 337      |       | 13       |       |
| Total non-interest income                             |       | 5,204    |       | 5,183    |       |
|                                                  |       |     |       |     |       |
| Non-interest expense:                                 |       |     |       |     |       |
| Salary and benefits                                   |       | 5,931    |       | 4,870    |       |
| Occupancy                                             |       | 1,208    |       | 1,046    |       |
| Professional fees                                     |       | 507      |       | 474      |       |
| Depreciation                                          |       | 749      |       | 680      |       |
| Data processing                                       |       | 325      |       | 508      |       |
| Telecommunications                                    |       | 310      |       | 333      |       |
| Amortization of intangibles                           |       | 145      |       | 49       |       |
| Other operating expenses                              |       | 2,257    |       | 2,135    |       |
| Total non-interest expense                            |       | 11,432   |       | 10,095   |       |
| Net income before income taxes                        |       | 3,917    |       | 2,361    |       |
|                                                  |       |     |       |     |       |
| Provision for  income taxes                           |       | 1,323    |       | 749      |       |
| Net income                                            |       | $        | 2,594      |     | $          | 1,612 |   |
| Earnings per  common share - basic                    |       | $        | 0.11       |     | $          | 0.09 |   |
| Earnings per  common share - diluted                  |       | $        | 0.10       |     | $          | 0.09 |   |
| Weighted-average  common shares outstanding - basic   |       | 24,387   |       | 18,525   |       |
| Weighted-average common  shares outstanding - diluted |       | 25,042   |       | 18,830   |       |

 

See accompanying notes to consolidated financial statements.

4

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEThree months ended March 31, 2006 and 2005(In thousands)(Unaudited)
| ** **                                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| Net income                                                                                                             |       | $        | 2,594      |     | $          | 1,612 |   |
| Other comprehensive  income:                                                                                           |       |     |       |     |       |
| Unrealized loss  on available-for-sale investment securities:                                                          |       |     |       |     |       |
| Unrealized holding loss arising during the period,  net of tax benefit of $383 in 2006 and $728 in 2005 |       | (723     | )          | (1,447   | )          |
|                                                                                                                   |       |     |       |     |       |
| Unrealized gain on derivative instruments designated  as cash flow hedges, net of tax of $146 in 2006   |       | 284      |       | —   |       |
|                                                                                                                   |       |     |       |     |       |
| Comprehensive  income                                                                                                  |       | $        | 2,155      |     | $          | 165 |   |

 

See accompanyingnotes to consolidated financial statements.

5

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYThree months ended March 31, 2006 and 2005(In thousands)(Unaudited)
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2004                |       | 18,463     |       | $          | 18,463     |           | $          | 92,868          |       | $                 | (15,145    | )          | $          | (1,081 | ) | $ | 95,105 |   |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Stock options  exercised                        |       | 68         |       | 68         |       | 392            |       | —          |       | —            |       | 460        |       |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Change in  accumulated other comprehensive loss |       | —     |       | —     |       | —         |       | —          |       | (1,447            | )          | (1,447     | )          |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Net income                                      |       | —     |       | —     |       | —         |       | 1,612           |       | —            |       | 1,612      |       |
| Balance,  March 31, 2005                   |       | 18,531     |       | $          | 18,531     |           | $          | 93,260          |       | $                 | (13,533    | )          | $          | (2,528 | ) | $ | 95,730 |   |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Balance,  December 31, 2005                |       | 24,363     |       | $          | 24,363     |           | $          | 132,150         |       | $                 | (5,269     | )          | $          | (3,365 | ) | $ | 147,879 |   |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Stock options  exercised                        |       | 4          |       | 4          |       | 34             |       | —          |       | —            |       | 38         |       |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Dividends on  common stock                      |       | —     |       | —     |       | —         |       | (243            | )          | —            |       | (243       | )          |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Change in  accumulated other comprehensive loss |       | —     |       | —     |       | —         |       | —          |       | (439              | )          | (439       | )          |
|                                            |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Net income                                      |       | —     |       | —     |       | —         |       | 2,594           |       | —            |       | 2,594      |       |
| Balance, March 31,  2006                   |       | 24,367     |       | $          | 24,367     |           | $          | 132,184         |       | $                 | (2,918     | )          | $          | (3,804 | ) | $ | 149,829 |   |

 

See accompanying notes to consolidated financial statements.

6

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCASH FLOWS

Three Months Ended March 31, 2006 and2005

(In thousands)

(Unaudited)
| ** **                                                                                                                                                                                                                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from  operating activities:                                                                                                                                                                                                                   |       |       |       |       |       |
| Net income                                                                                                                                                                                                                                               |       | $          | 2,594      |       | $          | 1,612 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities:                                                                                                                                                             |       |       |       |       |       |
| Depreciation                                                                                                                                                                                                                                             |       | 749        |       | 680        |       |
| Amortization of premiums, discounts and intangibles                                                                                                                                                                                                      |       | 365        |       | 450        |       |
| Provision for loan losses                                                                                                                                                                                                                                |       | 250        |       | 549        |       |
| Loans held for sale originated and acquired                                                                                                                                                                                                              |       | (673,469   | )          | (883,678   | )          |
| Proceeds from the sale of loans held for sale                                                                                                                                                                                                            |       | 737,719    |       | 885,931    |       |
| Gain on sale of loans held for sale                                                                                                                                                                                                                      |       | (2,776     | )          | (3,581     | )          |
| Loss on sale of other assets                                                                                                                                                                                                                             |       | 2          |       | —     |       |
| Increase in accrued interest receivable, other  assets, and deferred tax asset                                                                                                                                                                           |       | (2,222     | )          | (4,014     | )          |
| Increase (decrease) in accrued interest payable,  escrow liabilities and other liabilities                                                                                                                                                               |       | (7,787     | )          | 10,238     |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Net cash provided by operating activities                                                                                                                                                                                                                |       | 55,425     |       | 8,187      |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Cash flows from  investing activities:                                                                                                                                                                                                                   |       |       |       |       |       |
| Purchase of premises and equipment                                                                                                                                                                                                                       |       | (558       | )          | (2,532     | )          |
| Proceeds from sale of other investments                                                                                                                                                                                                                  |       | —     |       | 3,609      |       |
| Purchase of investment securities available-for-sale                                                                                                                                                                                                     |       | (17,794    | )          | (12,964    | )          |
| Purchase of mortgage-backed securities  available-for-sale                                                                                                                                                                                               |       | (26,545    | )          | (8,432     | )          |
| Purchase of other investments                                                                                                                                                                                                                            |       | (691       | )          | (3,120     | )          |
| Redemptions of investment securities  available-for-sale                                                                                                                                                                                                 |       | 5,767      |       | 7,183      |       |
| Redemptions of investment securities  held-to-maturity                                                                                                                                                                                                   |       | 4,612      |       | 4,319      |       |
| Net cash paid in acquisition                                                                                                                                                                                                                             |       | (342       | )          | —     |       |
| Net increase in loans receivable, net of deferred  fees and costs                                                                                                                                                                                        |       | (24,390    | )          | (42,406    | )          |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Net cash used in investing activities                                                                                                                                                                                                                    |       | (59,941    | )          | (54,343    | )          |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Cash flows from  financing activities:                                                                                                                                                                                                                   |       |       |       |       |       |
| Net increase in deposits                                                                                                                                                                                                                                 |       | 2,085      |       | 70,661     |       |
| Net increase (decrease) in other borrowed funds                                                                                                                                                                                                          |       | 13,122     |       | (10,745    | )          |
| Net decrease in warehouse financing                                                                                                                                                                                                                      |       | —     |       | (30,245    | )          |
| Net increase in mortgage funding checks                                                                                                                                                                                                                  |       | 10,442     |       | 27,871     |       |
| Proceeds from FHLB advances - long term                                                                                                                                                                                                                  |       | 5,000      |       | —     |       |
| Repayments of FHLB advances - long term                                                                                                                                                                                                                  |       | —     |       | (1,625     | )          |
| Stock options exercised                                                                                                                                                                                                                                  |       | 38         |       | 460        |       |
| Dividends on common stock                                                                                                                                                                                                                                |       | (243       | )          | —     |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Net cash provided by financing activities                                                                                                                                                                                                                |       | 30,444     |       | 56,377     |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Net increase in  cash and cash equivalents                                                                                                                                                                                                               |       | 25,928     |       | 10,221     |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Cash and cash  equivalents at beginning of period                                                                                                                                                                                                        |       | 36,589     |       | 23,408     |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| Cash and cash  equivalents at end of period                                                                                                                                                                                                              |       | $          | 62,517     |       | $          | 33,629 |   |
| ** **                                                                                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplemental disclosure of cash  flow information:**                                                                                                                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during the period for interest                                                                                                                                                                                                                 |       | $          | 9,490      |       | $          | 5,659 |   |
| Cash paid for income taxes                                                                                                                                                                                                                               |       | 3,090      |       | 50         |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |
| **Supplemental schedule of  noncash investing and financing activities:**                                                                                                                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unsettled purchased investment securities  available-for-sale                                                                                                                                                                                            |       | $          | 12,668     |       | —     |   |
| ** **                                                                                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| On February 9,  2006, the Company acquired certain fiduciary and other assets and assumed the  liabilities of FBR National Trust Company. In conjunction with the  acquisition, the following noncash changes to our financial condition  occurred: |       |       |       |       |       |
| Fair value of non-cash assets acquired                                                                                                                                                                                                                   |       | $          | 507        |       |       |   |
| Fair value of liabilities assumed                                                                                                                                                                                                                        |       | 127        |       |       |       |
|                                                                                                                                                                                                                                                     |       |       |       |       |       |

 

See accompanying notes to consolidated financial statements.

7

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CARDINAL FINANCIALCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2006(Unaudited)

Note 1

*Organization*

Cardinal FinancialCorporation (the ”Company”) is incorporated under the laws of theCommonwealth of Virginia as a financial holding company whose activitiesconsist of investment in its wholly-owned subsidiaries. The principal operatingsubsidiary of the Company is Cardinal Bank (the “Bank”), a state-charteredinstitution. On July 7, 2004, the Bank acquired George Mason Mortgage, LLC(“George Mason”), a mortgage banking company based in Fairfax, Virginia. On June 9,2005, the Company acquired Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”),an asset management firm based in Alexandria, Virginia. The Company also ownsCardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.As described in Note 4, on February 9, 2006, the Bank acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.

*Basis ofPresentation*

In the opinion ofmanagement, the accompanying consolidated financial statements have beenprepared in accordance with the requirements of Regulation S-X, Article 10.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements. However, all adjustments that are, in the opinion of management,necessary for a fair presentation have been included. The results of operationsfor the three months ended March 31, 2006 are not necessarily indicativeof the results to be expected for the full year ending December 31, 2006. Theunaudited interim financial statements should be read in conjunction with theaudited financial statements and notes to financial statements that areincluded in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005 (the “2005 Form 10-K”).

Note 2

*Summary of Significant Accounting Policies*

As a result of the acquisition of certain fiduciary and other assetsand the assumption of certain liabilities of FBR National Trust Company asdescribed in Note 4, the Company adopted an accounting policy for recognitionof trust services revenue as follows:

Trust services revenue isrecognized in the period earned in accordance with contractual rates and isrecognized in the consolidated statements of income as a component ofinvestment fee income. Revenue is generally determined based upon the fairvalue of assets under management or custody at the end of the period.

8

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Note 3

*Stock-Based Compensation*

On January 1, 2006,the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R,Shared-Based Payment. * *This statement requires that companiesrecognize in the income statement the grant-date fair value of stock optionsand other equity-based compensation. The statement also requires stock awardsto be classified as either an equity award or a liability award. Equityclassified awards are valued as of the grant date using either an observablemarket price or a valuation methodology. Liability classified awards are valuedat fair value at each reporting date. All of the Company’s stock options areclassified as equity awards.

The Company has adopted SFAS No. 123R using themodified prospective application method, which requires, among other things,recognition of compensation costs for all awards outstanding at January 1,2006 for which the requisite service had not been rendered. Total compensationcost charged against income as a result of the adoption of SFAS No. 123Rfor the three months ended March 31, 2006 was $62,000. The total incometax benefit recognized in the income statement for share-based compensationarrangements was $22,000 for the three months ended March 31, 2006.

The Company estimates that this new standard willresult in an increase in pretax expense of approximately $304,000 in 2006 basedon the current number of stock options outstanding. Additional expense would berecorded for any future stock option grants and expense would be reduced byestimated option forfeitures.

AtMarch 31, 2006, the Company had two stock-based employee compensationplans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 EquityCompensation Plan (the “Equity Plan”).

In 1998, the Company adopted the Option Plan pursuantto which the Company may grant stock options with respect to up to 625,000shares of the Company’s common stock to employees and members of the Company’sand its subsidiaries’ boards of directors.

In 2002, the Company adopted the Equity Plan.The Equity Plan authorizes the granting of options, which may be incentivestock options, non-qualified stock options, stock appreciation rights,restricted stock awards, phantom stock awards or performance share awards todirectors, eligible officers and key employees of the Company. During 2006, theshareholders approved an amendment to the Equity Plan to increase the number ofshares of common stock reserved for issuance under it from 1,970,000 to 2,420,000.See also Note 10.

Stock options are granted with an exercise price equalto the common stock’s fair market value at the date of grant. Director stockoptions have ten year terms and vest and become fully exercisable at the grant date.Certain employee stock options have ten year terms and vest and become fullyexercisable after three years. Other employee stock options have ten year termsand vest and become fully exercisable in 20% increments beginning as of thegrant date. In addition, the Company has granted stock options to employees ofthe Company that have ten year terms and vest and become fully exercisable in20% increments beginning after their first year of vesting. During 2005,certain stock options granted to employees had ten year terms and vested andbecame fully exercisable immediately.

Thefollowing table illustrates the effect on net income and earnings per share ofcommon stock as if the Company had applied the fair value recognitionprovisions of SFAS No. 123R to stock-based employee compensation for thethree months ended:

9

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| (In thousands, except per share data)                                                                     | ** ** | ** **         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** |
| ** **                                                                                                                         | ** ** | **2005**           | ** ** |
| Net income, as reported                                                                                                            |       | $                  | 1,612      |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method for all awards, net of tax |       | (2,212             | )          |
| Pro forma net loss                                                                                                                 |       | $                  | (600       | ) |
|                                                                                                                               |       |               |       |
| Earnings (loss) per share:                                                                                                         |       |               |       |
| Basic - as reported                                                                                                                |       | $                  | 0.09       |   |
| Basic - pro forma                                                                                                                  |       | (0.03              | )          |
| Diluted - as reported                                                                                                              |       | 0.09               |       |
| Diluted - pro forma                                                                                                                |       | (0.03              | )          |

 

There were options to purchase 494,735 shares ofcommon stock granted during the three months ended March 31, 2005. Of thosegrants, 486,735 immediately vested on the grant date. Total pro formastock-based employee compensation expense for the three months ended March 31,2005 reflects the immediate vesting attributes of these stock option grants.

The weighted average pershare fair values of stock option grants made during the three months ended March 31,2006 and 2005 were $5.80 and $6.48, respectively. The fair values of theoptions granted for these periods were estimated as of the grant date using theBlack-Scholes option-pricing model based on the following weighted averageassumptions:

|                          | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Estimated option  life   |       | 6.5 years                        |       | 10 years |   |
| Risk free  interest rate |       | 4.44 - 4.69%                     |       | 4.29% |   |
| Expected  volatility     |       | 43.20%                           |       | 43.11% |   |
| Expected dividend yield  |       | 0.50%                            |       | 0.00% |   |

 

Expected volatility is based upon the average annual historicalvolatility of the Company’s common stock. The estimated option life is derivedfrom the “simplified method” formula as described within Staff AccountingBulletin 107 (“SAB 107”). The risk free rate is based upon the five-year U.S.Treasury note rate in effect at the time of grant.  The expected dividend yield is based uponimplied and historical dividend declarations.

Stockoption activity during the three months ended March 31, 2006 is presentedas follows:
| ** **                                  | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|---------------------------------------------|------------|--------------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                  | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**     | ** ** | **Aggregate** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Intrinsic** | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Value**     | ** ** |
| ** **                                  | ** ** | **Shares**         | ** ** | **Price**    | ** ** | **Term**        | ** ** | **($000)**    | ** ** |
| Outstanding at  December 31, 2005      |       | 2,269,221          |       | $            | 8.29       |            |       |          |       |   |
| Granted                                     |       | 145,500            |       | 12.12        |       |            |       |          |       |
| Exercised                                   |       | 4,150              |       | 8.80         |       |            |       |          |       |
| Forfeited                                   |       | 900                |       | 6.41         |       |            |       |          |       |
| Expired                                     |       | —             |       | —       |       |            |       |          |       |
| Outstanding at  March 31, 2006         |       | 2,409,671          |       | $            | 8.52       |            | 8.12       |          | $          | 12,004 |   |
| Options exercisable at  March 31, 2006 |       | 2,096,363          |       | $            | 8.53       |            | 7.19       |          | $          | 10,481 |   |

 

Total intrinsic value of options exercised during the three monthsended March 31, 2006 was $53,000.

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A summary of the status of the Company’s non-vested stock options andchanges during the three months ended March 31, 2006 is as follows:

|                                    | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                         | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                         | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Balance at  December 31, 2005 |       | 240,107            |       | $                   | 2.10       |   |
| Granted                            |       | 145,500            |       | 5.80                |       |
| Vested                             |       | (71,400            | )          | 2.23                |       |
| Forfeited                          |       | (900               | )          | 2.37                |       |
| Balance at  March 31, 2006    |       | 313,307            |       | $                   | 3.79       |   |

 

At March 31, 2006,there were $1.2 million of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the plans. Thecost is expected to be recognized over a weighted average period of 3.6 years.The total fair value of shares that vested during the three months ended March 31,2006 was $211,000.

On October 19, 2005, the Company’s board ofdirectors authorized that any outstanding, unvested options that were or became“underwater” (i.e., their per share exercise price is greater than the marketprice) on or before December 31, 2005 be amended to become fully vested. Thismodification resulted in the immediate vesting of 54,000 stock options thatwere held by employees of the Company. The options that vested had exerciseprices ranging from $9.58 to $11.15. On October 19, 2005, the market valueof the Company’s common stock was $9.81. This modification did not result inthe recognition of expense in 2005 because the options had no intrinsic valueat the grant date or on the date of modification. Vesting of these options wasaccelerated to eliminate the need to recognize the remaining fair valuecompensation expense associated with these options following the adoption ofSFAS No. 123R. The amount of compensation expense related to these optionsthat would have been recognized in the financial statements after the Company’simplementation of SFAS No. 123R, assuming no forfeitures, was $127,000.

#### Note 4

*Acquisitions*

On February 9, 2006,the Bank acquired certain fiduciary and other assets and assumed certainliabilities of FBR National Trust Company, formerly a subsidiary of Friedman,Billings, Ramsey Group, Inc. The Bank acts as trustee or custodian forassets under management in excess of $5 billion as a result of this transaction.This transaction diversifies the Bank’s sources of non-interest income andallows it to provide additional services to its customers.

This transaction was accounted for as a purchase and the acquiredassets and assumed liabilities were recorded at fair value as of the purchasedate. This acquisition did not have a significant impact on operating resultsfor the quarter ended March 31, 2006 and is not expected to have amaterial impact on the Company’s financial condition or operating results in2006.

The operating results of the trust division are included in the Company’sconsolidated operating results and its trust and investment services segmentinformation since the date of acquisition.

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The acquisition resulted in the recognition of an intangible asset forpurchased customer relationships of $161,000, which is being amortized on astraight-line basis over nine years.

The fair value of the net assets acquired was $380,000. The transactionresulted in the recognition of goodwill of $178,000. The Company used theassistance of an independent valuation consultant to determine the valueassigned to identifiable intangible assets. Goodwill will not be amortized butwill be reviewed for impairment when evidence of impairment exists or, at aminimum, on an annual basis.

Note 5

# *Segment Information*

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

The commercial bankingsegment includes both commercial and consumer lending and provides customerswith such products as commercial loans, real estate loans, and other businessfinancing and consumer loans. In addition, this segment also provides customerswith several choices of deposit products including demand deposit accounts,savings accounts and certificates of deposit. The mortgage banking segment engages primarily in the origination andacquisition of residential mortgages for sale into the secondary market on abest efforts basis. The trust and investment services segment providesinvestment and financial advisory services to businesses and individuals,including financial planning, retirement/estate planning, trust, estates,custody, investment management, escrows, and retirement plans.

Wilson/Bennett isincluded in the trust and investment services segment since the date ofacquisition, June 9, 2005. Results related to the assets acquired, andliabilities assumed, from FBR National Trust Company are reflected in the trustand investment services segment since the date of their acquisition, andassumption, February 9, 2006.

Information about thereportable segments and reconciliation of this information to the consolidatedfinancial statements at and for the three months ended March 31, 2006 and2005, is as follows:

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**Atand for the Three Months Ended March 31, 2006:**
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Trust and** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|--------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment**     | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| **(In  thousands)**         | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**       | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 9,528      |         | $          | 1,137              |       | $          | —     |             | $          | (270             | )          | $ | — |   | $ | 10,395 |   |
| Provision for  loan losses  |       | 250            |       | —       |       | —             |       | —     |       | —           |       | 250              |       |
| Non-interest  income        |       | 925            |       | 3,587        |       | 681                |       | 11         |       | —           |       | 5,204            |       |
| Non-interest  expense       |       | 6,199          |       | 4,077        |       | 654                |       | 502        |       | —           |       | 11,432           |       |
| Provision for  income taxes |       | 1,356          |       | 228          |       | 9                  |       | (270       | )          | —           |       | 1,323            |       |
| Net income  (loss)          |       | $              | 2,648      |         | $          | 419                |       | $          | 18         |             | $          | (491             | )          | $ | — |   | $ | 2,594 |   |
|                        |       |           |       |         |       |               |       |       |       |             |       |             |       |
| Total Assets                |       | $              | 1,408,884  |         | $          | 318,583            |       | $          | 6,922      |             | $          | 159,932          |       | $ | (412,602 | ) | $ | 1,481,719 |   |

 

**At and for the Three Months Ended March 31, 2005:**
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Trust and** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|--------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment**     | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| **(In  thousands)**         | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**       | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 6,742      |         | $          | 1,311              |       | $          | —     |             | $          | (231             | )          | $ | — |   | $ | 7,822 |   |
| Provision for  loan losses  |       | 549            |       | —       |       | —             |       | —     |       | —           |       | 549              |       |
| Non-interest  income        |       | 374            |       | 4,642        |       | 159                |       | 8          |       | —           |       | 5,183            |       |
| Non-interest  expense       |       | 5,593          |       | 3,952        |       | 221                |       | 329        |       | —           |       | 10,095           |       |
| Provision for  income taxes |       | 379            |       | 579          |       | (21                | )          | (188       | )          | —           |       | 749              |       |
| Net income  (loss)          |       | $              | 595        |         | $          | 1,422              |       | $          | (41        | )                | $          | (364             | )          | $ | — |   | $ | 1,612 |   |
|                        |       |           |       |         |       |               |       |       |       |             |       |             |       |
| Total Assets                |       | $              | 1,192,690  |         | $          | 379,403            |       | $          | 691        |             | $          | 116,798          |       | $ | (411,226 | ) | $ | 1,278,356 |   |

 

At March 31, 2006,the Company did not have any operating segments other than those reported. Parentcompany financial information is included in the “Other” category andrepresents an overhead function rather than an operating segment. The parentcompany’s most significant assets are its net investments in its subsidiaries. Theparent company’s net interest income is comprised of interest income fromshort-term investments and interest expense on trust preferred securities. Theparent company’s non-interest expense is primarily non-allocable executivesalaries and professional services related to the Company’s regulatoryrequirements.

#### Note 6

##### *Earnings Per Share*

The following is thecalculation of basic and diluted earnings per share for the three months ended March 31,2006 and 2005. Stock options outstanding at March 31, 2006 and 2005 were2,409,671 and 1,661,055, respectively. Stock options issued that were notincluded in the calculation of diluted earnings per share because the exerciseprices were greater than the average market price were 487 and 7,094 for thethree months ended March 31, 2006 and 2005, respectively.

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| ** **                                                                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **March 31,**               | ** ** |
| **(In thousands, except share and per share data)** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                                   |       |                             |       |   |   |
| Net income  available to common shareholders                                           |       | $                                | 2,594      |   | $ | 1,612 |   |
|                                                                                   |       |                             |       |   |   |
| Weighted average  common shares - basic                                                |       | 24,387,203                       |       | 18,524,847 |   |
|                                                                                   |       |                             |       |   |   |
| Weighted average  common shares - diluted                                              |       | 25,041,694                       |       | 18,830,265 |   |
|                                                                                   |       |                             |       |   |   |
| Earnings per  common share - basic                                                     |       | $                                | 0.11       |   | $ | 0.09 |   |
|                                                                                   |       |                             |       |   |   |
| Earnings per  common share - diluted                                                   |       | $                                | 0.10       |   | $ | 0.09 |   |

 

#### Note 7

##### *Derivatives and Hedging Activities*

The Company is a party to forward loan salescontracts, which are utilized to mitigate exposure to fluctuations in interestrates related to loan commitments and closed mortgage loans that are held forsale.

Beginning on October 1, 2005, theCompany designated these derivatives as cash flow hedges in accordance with SFASNo. 133, Accounting for Derivatives Instruments and Hedging Activities, asamended. These hedges are recorded at fair value in the statement of conditionas an other asset or other liability with a corresponding offset to accumulatedother comprehensive income in shareholders’ equity. Amounts are reclassifiedfrom accumulated other comprehensive income to the income statement in theperiod or periods that the loan sale is reflected in income.

At March 31, 2006, accumulated othercomprehensive income included an after-tax unrealized loss of $4,000 related toforward loan sale contracts. Loans held for sale are generally sold withinsixty days of closing and, therefore, substantially all of the amount recordedin accumulated other comprehensive income at March 31, 2006 which isrelated to the Company’s cash flow hedges will be recognized in earnings duringthe second quarter of 2006. For the quarter ended March 31, 2006, theCompany recorded a charge to earnings of $0.7 thousand due to hedgeineffectiveness.

At March 31, 2006, the derivative assetwas $2.8 million and the derivative liability was $1.6 million. The Company had$141.6 million in loan commitments and $137.4 million in associatedforward loan sales. The Company also had $234.0 million in forward loan salescontracts hedging the majority of its loans held for sale.

#### Note 8

*Goodwilland Other Intangibles*

Information concerning total amortizable other intangible assets at March 31,2006 is as follows:

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| ** **                         | ** ** | ** **                  | ** ** | **Trust and**            | ** ** | ** **                  | ** ** | ** **                    | ** ** |
|------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Mortgage Banking**   | ** ** | **Investment Services**  | ** ** | **Total**                   | ** ** |
| **(In thousands)**            | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross**

**Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  December 31, 2005 |       | $                           | 1,781      |                          | $          | 247                         |       | $                             | 2,602      |   | $ | 211 |   | $ | 4,383 |   | $ | 458 |   |
| 2006 activity:                     |       |                        |       |                          |       |                        |       |                          |       |   |   |   |   |
| Customer relationship intangibles  |       | —                      |       | 49                            |       | 161                         |       | 48                            |       | 161 |   | 97 |   |
| Employment/non-compete agreement   |       | —                      |       | —                        |       | —                      |       | 44                            |       | — |   | 44 |   |
| Trade name                         |       | —                      |       | —                        |       | —                      |       | 4                             |       | — |   | 4 |   |
| Balance at  March 31, 2006    |       | $                           | 1,781      |                          | $          | 296                         |       | $                             | 2,763      |   | $ | 307 |   | $ | 4,544 |   | $ | 603 |   |

 

The aggregate amortization expense for the three months ended March 31,2006 and 2005 was $145,000 and $49,000, respectively.

The estimated amortization expense for the next five years is asfollows:

|                                    | ** ** | **(In thousands)** | ** ** |
|------------------------------------|------------|-------------------------|------------|
| 2006  (April — December) |       | $                       | 444        |   |
| 2007                               |       | 591                     |       |
| 2008                               |       | 583                     |       |
| 2009                               |       | 478                     |       |
| 2010                               |       | 402                     |       |
| 2011                               |       | 402                     |       |
|                                    |            |                         |            |  |

 

The changes in the carrying amount of goodwill foryear to date March 31, 2006 are as follows:
| **(In thousands)**            | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Trust and  Investment  Services** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------------------------|------------|-----------|------------|
| Balance at  December 31, 2005 |       | $                       | 22         |                  | $          | 12,941                                   |       | $         | 3,614      |   | $ | 16,577 |   |
| 2006 activity:                     |       |                    |       |                  |       |                                     |       |      |       |
| Trust division acquisition         |       | $                       | —     |                  | $          | —                                   |       | $         | 178        |   | $ | 178 |   |
| Balance at  March 31, 2006    |       | $                       | 22         |                  | $          | 12,941                                   |       | $         | 3,792      |   | $ | 16,755 |   |

 

Note 9

*Commitmentsand Contingencies*

In the normal course of business, the Company is a party to financialinstruments with off-balance sheet risk to meet the financing needs of itscustomers. These financial instruments include commitments to extend credit andstandby letters of credit. These instruments involve, to varying degrees,elements of credit risk in excess of the amount recognized on the balancesheet.

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

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At March 31, 2006, commitments to extend credit were $368.1million and standby letters of credit were $6.9 million.

Commitments to extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the agreement. Commitments generally have expirationdates or other termination clauses and may require payment of a fee. Since manyof the commitments are expected to expire without being drawn upon, the totalcommitment amounts do not necessarily represent future funding requirements. TheBank evaluates each customer’s credit worthiness on a case-by-casebasis. The amount of collateral obtained is based on management’s creditevaluation of the counterparty. Collateral held varies but may include accountsreceivable, inventory, property and equipment, and income-producingcommercial properties.

Unfunded commitments under lines of credit are commitments for possiblefuture extensions of credit to existing customers. Those lines of credit may ormay not be drawn upon to the total extent of funding to which the Bank hascommitted.

Standbyletters of credit are conditional commitments the Bank issues to guarantee theperformance of a customer to a third party. Those guarantees are primarilyissued to support public and private borrowing arrangements, includingcommercial paper, bond financing, and similar transactions. The credit riskinvolved in issuing standby letters of credit is essentially the same as thatinvolved in extending loan facilities to customers. The Bank holds certificatesof deposit, deposit accounts, and real estate as collateral supporting thosecommitments when collateral is deemed necessary.

Note 10

*SubsequentEvents*

At the Annual Meeting of Shareholders held on April 21, 2006, theCompany’s shareholders approved an amendment to the Equity Plan, increasing thenumber of common shares issuable under the plan from 1,970,000 to 2,420,000.Shareholders also approved an amendment to the Company’s deferred income plansso that any participant’s benefits attributable to an investment in the Companycommon stock fund in each plan would be payable in shares of the Company’scommon stock. The plans previously specified that such benefits would be paidin cash.

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

Thefollowing presents management’s discussion and analysis of our consolidatedfinancial condition at March 31, 2006 and December 31, 2005 and theunaudited results of our operations for the three months ended March 31,2006 and 2005. This discussion should be read in conjunction with our unauditedconsolidated financial statements and the notes thereto appearing elsewhere inthis report, the audited consolidated financial statements and the notes toconsolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

**CautionAbout Forward-Looking Statements**

We make forward-looking statements in this Form 10-Qthat are subject to risks and uncertainties. These forward looking statementsinclude statements regarding our profitability, liquidity, allowance for loanlosses, interest rate sensitivity, market risk, growth strategy, and financialand other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,”“contemplates,” “anticipates,” “forecasts,” “intends,” or other similar wordsor terms are intended to identify forward-looking statements.

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

·                  the ability tosuccessfully manage our growth or implement our growth strategies if we areunable to identify attractive markets, locations or opportunities to expand inthe future;

·                  changes ininterest rates and the successful management of interest rate risk;

·                  risks inherentin making loans such as repayment risks and fluctuating collateral values;

·                  maintaining costcontrols and asset quality as we open or acquire new branches;

·                  maintainingcapital levels adequate to support our growth;

·                  reliance on ourmanagement team, including the ability to attract and retain key personnel;

·                  competition withother banks and financial institutions, and companies outside of the bankingindustry, including those companies that have substantially greater access tocapital and other resources;

·                  changes ingeneral economic and business conditions in our market area;

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

·                  problems withtechnology utilized by us;

·                  changing trendsin customer profiles and behavior; and

·                  changes inbanking and other laws and regulations applicable to us.

Because of these uncertainties, our actual future results maybe materially different from the results indicated by these forward-lookingstatements. In addition, our past results of operations do not necessarilyindicate our future results.

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In addition, this section should be read in conjunction withthe description of our “Risk Factors” in Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2005.

**Overview**

**We are a locally managedfinancial holding company headquartered in Tysons Corner, Virginia, committedto providing superior customer service, a diversified mix of financial productsand services, and convenient banking to our retail and business consumers. Weown Cardinal Bank (the “Bank”), a Virginia state-chartered community bank,Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary,and Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), anAlexandria, Virginia based asset management firm acquired in June 2005. Throughthese three subsidiaries and George Mason Mortgage, LLC (“George Mason”), amortgage banking subsidiary of the Bank, we offer a wide range of traditionalbanking products and services to both our commercial and retail customers. Ourcommercial relationship managers focus on attracting small and medium-sizedbusinesses as well as government contractors, commercial real estate developersand builders and professionals, such as physicians, accountants and attorneys. Wehave 22 branch office locations and nine mortgage banking office locations andprovide competitive products and services. We complement our core bankingoperations by offering a full range of investment products and services to ourcustomers through our third-party brokerage relationship with Raymond JamesFinancial Services, Inc. and asset management services throughWilson/Bennett.**

On February 9, 2006, we acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.Our new trust division acts as trustee or custodian for assets in excess of $5billion. Services provided by this division include trust, estates, custody,investment management, escrows, and retirement plans. This acquisition did nothave a significant impact on operating results for the quarter ended March 31,2006 and is not expected to have a material impact on our financial conditionor operating results in 2006. The trust division is included, along with CWSand Wilson/Bennett, in the trust and investment services segment. In priorperiods, this segment was called investment services.

On June 9, 2005, weacquired Wilson/Bennett for a total consideration of $6.5 million, whichconsisted of a payment of $1.5 million in cash and the issuance of 611,111shares of our common stock, which we valued at $4.9 million. Wilson/Bennett’sassets and liabilities were recorded at fair value as of the purchase date. Thistransaction resulted in the recognition of $3.6 million of goodwill and $2.6million of other intangible assets. We believe that the Wilson/Bennettacquisition furthers our strategies of enhancing fee income and diversifyingour revenue stream and the services we deliver to our customers. Wilson/Bennettuses a value-oriented approach that focuses on large capitalization stocks. Wilson/Bennett’sprimary source of revenue is management fees earned on the assets it managesfor its customers. These management fees are generally based upon the marketvalue of assets under management and, accordingly, revenues from Wilson/Bennettwill be assuming a consistent base, more when appropriate indices, such as theS&P 500, are higher and lower when such indices are depressed.

When we acquiredWilson/Bennett, it had approximately $225.0 million of assets under management.At March 31, 2006, assets under management by Wilson/Bennett wereapproximately $159.7 million. While we anticipated an initial decline in theassets under management at the time of the acquisition, significant furtherdeclines in the assets managed by Wilson/Bennett may result in an impairmentcondition, which would require an impairment

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charge if we determine the carrying value of thissubsidiary is greater than its fair value. We will complete our analysis of thefair value of the goodwill associated with our acquisition of Wilson/Bennettduring the second quarter of 2006.

Netinterest income is our primary source of revenue. We define revenue as netinterest income plus non-interest income. As discussed further in the interestrate sensitivity section, we manage our balance sheet and interest rate riskexposure to maximize, and concurrently stabilize, net interest income. We dothis by monitoring our liquidity position and the spread between the interestrates earned on interest-earning assets and the interest rates paid oninterest-bearing liabilities. We attempt to minimize our exposure to interestrate risk, but are unable to eliminate it entirely.  In addition to management of interest raterisk, we also analyze our loan portfolio for exposure to credit risk. Loandefaults and foreclosures are inherent risks in the banking industry and weattempt to limit our exposure to these risks by carefully underwriting and thenmonitoring our extensions of credit. In addition to net interest income,non-interest income is an increasingly important source of revenue for us andincludes, among other things, service charges on deposits and loans, investmentfee income, which includes trust revenues, net gains on sales of investmentsecurities available-for-sale, gains on sales of mortgage loans, and managementfee income. Our acquisition of George Mason in July 2004 has resulted innon-interest income becoming a larger component of our total revenues, and theacquisition of Wilson/Bennett in June 2005 and the trust  division in February 2006 have furthercontributed to this trend.

**Our business strategy is to growthrough geographic expansion while maintaining strong asset quality andachieving increasing profitability. We completed a secondary common stockoffering that raised $39.8 million in capital during the second quarter of 2005.This capital is being used to support the continuing expansion of our branchoffice network and balance sheet growth. As a result of this increased capitaland retained earnings, our legal lending limit increased to $19.8 million as ofMarch 31, 2006, which allowed us to expand our commercial and real estatelending loan portfolios.**

**CriticalAccounting Policies**

*General*

U. S. generally accepted accounting principles are complex and requiremanagement to apply significant judgment to various accounting, reporting, anddisclosure matters. Management must use assumptions, judgments and estimateswhen applying these principles where precise measurements are not possible orpractical. These policies are critical because they are highly dependent uponsubjective or complex judgments, assumptions and estimates. Changes in suchjudgments, assumptions and estimates may have a significant impact on theconsolidated financial statements. Actual results, in fact, could differ frominitial estimates.

The accounting policies we view as critical are those relating tojudgments, assumptions and estimates regarding the determination of theallowance for loan losses, accounting for economic hedging activities,accounting for business combinations and the valuation of deferred tax assets.

#### *Allowance for LoanLosses*

**We maintain the allowance for loan losses at a level thatrepresents management’s best estimate of known and inherent losses in our loanportfolio. Both the amount of the provision expense and the level of theallowance for loan losses are impacted by many factors, including general andindustry-specific economic conditions, actual and expected credit losses,historical**

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**trendsand specific conditions of individual borrowers. Unusual and infrequentlyoccurring events, such as hurricanes and other weather-related disasters, mayimpact our assessment of possible credit losses. As a part of our analysis, weuse comparative peer group data and qualitative factors such as levels of andtrends in delinquencies and nonaccrual loans, national and local economictrends and conditions and concentrations of loans exhibiting similar riskprofiles to support our estimates.**

Forpurposes of our analysis, we categorize loans into one of five categories:  commercial and industrial, commercial realestate (including construction), home equity lines of credit, residentialmortgages, and consumer loans. In the absence of meaningful historical lossfactors, peer group loss factors are applied and are adjusted by thequalitative factors mentioned above. The indicated loss factors resulting fromthis analysis are applied for each of the five categories of loans. Inaddition, we individually assign loss factors to all loans that have beenidentified as having loss attributes, as indicated by deterioration in thefinancial condition of the borrower or a decline in underlying collateral valueif the loan is collateral dependent. Since we have limited historical data onwhich to base loss factors for classified loans, we apply, in accordance withregulatory guidelines, a 5% loss factor to all loans classified as specialmention, a 15% loss factor to all loans classified as substandard and a 50%loss factor to all loans classified as doubtful. Loans classified as loss loansare fully reserved or charged off.

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

*Derivative Instruments and Hedging Activities*

We account for our derivatives and hedgingactivities in accordance SFAS No. 133, as amended, which requires that allderivative instruments be recorded on the statement of condition at their fairvalues*.*

In the normal course of business, we enter intocontractual commitments, including rate lock commitments, to financeresidential mortgage loans. These commitments, which contain fixed expirationdates, offer the borrower an interest rate guarantee provided the loan meetsunderwriting guidelines and closes within the time frame established by us. Interestrate risk arises on these commitments and subsequently closed loans if interestrates change between the time of the interest rate lock and the delivery of theloan to the investor. Loan commitments related to residential mortgage loansintended to be sold are considered derivatives.

To mitigate the effect of the interest rate riskinherent in providing rate lock commitments, we economically hedge ourcommitments by entering into a best efforts delivery forward loan salescontracts. During the rate lock commitment period, these forward loan salescontracts are marked to market through earnings and are not designated asaccounting hedges under SFAS No. 133, as amended. Changes in the fairvalues of loan commitments and changes in the fair values of forward loan sales

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contracts generally move in opposite directions, and the net impact ofchanges of these valuations on net income during the loan commitment period isgenerally inconsequential. At the closing of the loan, the loan commitmentderivative expires and we record a loan held for sale and continue to be obligatedunder the same forward loan sales contract. Loans held for sale are accountedfor at the lower of cost or market in accordance with SFAS No. 65, *Accounting for Certain Mortgage Banking Activities.*Prior toOctober 1, 2005, the changes in value of the forward loan sales contractsfrom the date the loan closed to the date it was sold to an investor weremarked to market through earnings.

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

We discontinue hedge accounting prospectively whenit is determined that the derivative is no longer highly effective inoffsetting changes in anticipated cash flows of the loans held for sale.

In situations in which hedge accounting isdiscontinued, we continue to carry the derivative at its fair value on thebalance sheet and recognize any subsequent changes in fair value in earnings. Whenhedge accounting is discontinued because it is probable an anticipated loansale will not occur, we recognize immediately in earnings any gains and lossesthat were accumulated in other comprehensive income.

*Accounting for Business Combinations*

We account foracquisitions of other businesses in accordance with SFAS No. 141, *Business Combinations*. This statement mandates the use ofpurchase accounting and, accordingly, assets and liabilities, includingpreviously unrecorded assets and liabilities, are recorded at fair values as ofthe acquisition date. We utilize a variety of valuation methods to estimatefair value of acquired assets and liabilities. These methodologies are oftenbased upon assumptions and estimates which may change at a future date and requirethat the carrying amount of assets and liabilities acquired be adjusted. Tosupport our purchase allocations, we have utilized independent consultants toidentify and value identifiable purchased intangibles. The difference betweenthe fair value of assets acquired and the liabilities assumed is recorded asgoodwill. Goodwill and any other intangible assets are accounted for inaccordance with SFAS No. 142, *Goodwill and OtherIntangible Assets*. In accordance with this statement, goodwill willnot be amortized but will be tested on at least an annual basis for impairment.

To test goodwill for impairment, we perform ananalysis to compare the fair value of the reporting unit to which the goodwillis assigned to the carrying value of the reporting unit. We make estimates ofthe discontinued cash flows from the expected future operations of thereporting unit. If the analysis indicates that the fair value of the reportingunit is less than its carrying value, we do an analysis to compare the impliedfair value of the reporting unit’s goodwill with the carrying amount of thatgoodwill. The implied fair value of the goodwill is determined by allocatingthe fair value of the reporting unit to all its assets and liabilities. If theimplied fair value of the goodwill is less than the carrying value, animpairment loss is recognized.

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#### *Valuation ofDeferred Tax Assets*

We record a provision for income tax expense based on theamounts of current taxes payable or refundable and the change in net deferredtax assets or liabilities during the year. Deferred tax assets and liabilitiesare recognized for the tax effects of differing carrying values of assets andliabilities for tax and financial statement purposes that will reverse infuture periods. When substantial uncertainty exists concerning therecoverability of a deferred tax asset, the carrying value of the asset isreduced by a valuation allowance. The amount of any valuation allowanceestablished is based upon an estimate of the deferred tax asset that is more likelythan not to be recovered. Increases or decreases in the valuation allowanceresult in increases or decreases to the provision for income taxes.

###### **NewFinancial Accounting Standards**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, *Share-BasedPayment.*This statement requires that companies recognize in theincome statement the grant-date fair value of stock options and otherequity-based compensation. We applied this standard beginning January 1,2006. This statement requires that stock awards be classified as either anequity award or a liability award. Equity classified awards are valued as ofthe grant date using either an observable market price or a valuationmethodology. Liability classified awards are valued at fair value as of eachreporting date. We adopted SFAS No. 123R using the modified prospectiveapplication method which requires, among other things, that we recognizecompensation cost for all awards outstanding at January 1, 2006 for whichthe requisite service has not been rendered. All of our unvested stock optionsare classified as equity awards.

##### **Statements of Income**

Net income for the three months ended March 31, 2006 and 2005 was$2.6 million and $1.6 million, respectively, an increase of $1.0 million, or61%. The increase in net income for the three months ended March 31, 2006compared to same period of 2005 is primarily a result of an increase in netinterest income after provision for loan losses of $2.9 million, partiallyoffset by increased non-interest expense of $1.3 million and an increase in ourprovision for income taxes of $574,000. The Commercial Banking segment had netincome of $2.6 million for the three months ended March 31, 2006 comparedto $595,000 for the same period of 2005. The increase in net income in theCommercial Banking segment is attributable to an increase in the volume ofaverage earning assets and the increased yields on those assets. Net incomeattributable to the Mortgage Banking segment for the three months ended March 31,2006 and 2005 was $419,000 and $1.4 million, respectively. The decrease in theMortgage Banking segment’s net income was due to a slowdown in the regionalhousing market caused in part by rising interest rates. The trust andinvestment services segment, which includes CWS, Wilson/Bennett and the newtrust division of the Bank, recorded net income of $18,000 for the three monthsended March 31, 2006. The trust division of the Bank is included in theresults of operations since the date of acquisition, February 9, 2006. Thisbusiness segment reported a net loss of $41,000 for the three months ended March 31,2005, and it did not include the trust division or Wilson/Bennett, which wasacquired during the second quarter of 2005.

Basic earnings per share were $0.11 and $0.09 for thethree months ended March 31, 2006 and 2005, respectively. For the threemonths ended March 31, 2006 and 2005, diluted earnings per share were$0.10 and $0.09, respectively. Weighted average fully diluted shares

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outstanding for the three months ended March 31,2006 were 25,041,694 compared to 18,830,265 for the three months ended March 31,2005.

Return on average assetsfor the three months ended March 31, 2006 and 2005 was 0.76% and 0.57%,respectively. Return on average equity for the three months ended March 31,2006 and 2005 was 6.94% and 6.61%, respectively.

Net interest incomerepresents the difference between interest and fees earned on interest earningassets and the interest paid on deposits and other interest bearing liabilities.The level of net interest income is impacted primarily by variations in thevolume and mix of these assets and liabilities, as well as changes in interestrates. Net interest income for the three months ended March 31, 2006 and2005 was $10.4 million and $7.8 million, respectively, a period-to-periodincrease of $2.6 million, or 33%. The increase in net interest income isprimarily the result of an increase in the average volume of loans receivableand investment securities compared with the same period of 2005. Theseincreases were funded through increases in total deposits and other borrowedfunds. Net interest income for the quarters ended March 31, 2006 and 2005represented 67% and 60% of our total revenues, respectively.

Our net interest marginfor the three months ended March 31, 2006 and 2005 was 3.16% and 2.84%,respectively. This compares to a net interest margin of 2.92% for the yearended December 31, 2005. The increase in the net interest margin for thethree months ended March 31, 2006 compared to the same period of 2005 is aresult of a higher volume of loans receivable and investment securities and anincreased rate of interest earned compared with the interest rate paid on theincreased volume of deposits and other borrowed funds. We remain assetsensitive and therefore anticipate that net interest margin will improve in arising rate environment. Tables 1 and 2 present an analysis of average earningassets and interest bearing liabilities with related components of interestincome and interest expense.

**Table1.Average Balance Sheets and Interest Rates on Earning Assets and Interest -Bearing Liabilities**Three Months Ended March 31, 2006, 2005 and 2004(In thousands)
| ** **                                               | ** ** | **2006**    | ** ** | **2005**     | ** ** | **2004**   | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | ** ** | ** ** | **Average** | ** ** | **Income/** | ** ** | ** ** | ** ** | **Average** | ** ** | **Income/** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning assets:                                 |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Loans (1):                                         |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $           | 73,098     |         | $          | 1,305      |       | 7.14 | % | $ | 60,873 |   | $ | 856 |   | 5.62 | % | $ | 59,327 |   | $ | 796 |   | 5.37 | % |
| Real estate - commercial                                 |       | 271,044     |       | 4,392        |       | 6.48       |       | 223,879 |   | 3,380 |   | 6.04 |   | 137,776 |   | 2,223 |   | 6.45 |   |
| Real estate - construction                               |       | 129,026     |       | 2,539        |       | 7.87       |       | 68,969 |   | 1,117 |   | 6.48 |   | 41,609 |   | 567 |   | 5.45 |   |
| Real estate - residential                                |       | 158,040     |       | 2,005        |       | 5.07       |       | 84,962 |   | 1,143 |   | 5.38 |   | 42,871 |   | 617 |   | 5.76 |   |
| Home equity lines                                        |       | 76,449      |       | 1,172        |       | 6.22       |       | 61,268 |   | 684 |   | 4.53 |   | 44,829 |   | 363 |   | 3.24 |   |
| Consumer                                                 |       | 4,999       |       | 92           |       | 7.36       |       | 5,909 |   | 100 |   | 6.77 |   | 10,373 |   | 162 |   | 6.25 |   |
| Total loans                                              |       | 712,656     |       | 11,505       |       | 6.46       |       | 505,860 |   | 7,280 |   | 5.76 |   | 336,785 |   | 4,728 |   | 5.62 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Loans held for sale, net                           |       | 233,560     |       | 4,278        |       | 7.33       |       | 289,024 |   | 3,358 |   | 4.65 |   | — |   | — |   | 0.00 |   |
|  Investment securities - available-for-sale (2)     |       | 192,106     |       | 2,072        |       | 4.32       |       | 153,907 |   | 1,431 |   | 3.72 |   | 142,128 |   | 1,271 |   | 3.58 |   |
|  Investment securities held-to-maturity             |       | 113,294     |       | 1,125        |       | 3.97       |       | 135,945 |   | 1,307 |   | 3.85 |   | 150,016 |   | 1,350 |   | 3.60 |   |
|  Other investments                                  |       | 6,563       |       | 89           |       | 5.43       |       | 5,172 |   | 54 |   | 4.19 |   | 3,634 |   | 38 |   | 4.18 |   |
|  Federal funds sold                                 |       | 59,569      |       | 649          |       | 4.42       |       | 11,162 |   | 61 |   | 2.20 |   | 12,146 |   | 28 |   | 0.92 |   |
|  Total interest-earning assets and interest  income |       | 1,317,748   |       | 19,718       |       | 5.99       |       | 1,101,070 |   | 13,491 |   | 4.90 |   | 644,709 |   | 7,415 |   | 4.60 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest earning  assets:                            |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | $           | 7,278      |         |       |       |       |   | $ | 2,519 |   |   |   |   |   | $ | 10,256 |   |   |   |   |   |
| Premises and equipment, net                              |       | 18,157      |       |         |       |       |       | 17,000 |   |   |   |   |   | 6,833 |   |   |   |   |   |
| Goodwill and other intangibles, net                      |       | 20,471      |       |         |       |       |       | 14,501 |   |   |   |   |   | 22 |   |   |   |   |   |
| Accrued interest  and other assets                       |       | 11,269      |       |         |       |       |       | 7,804 |   |   |   |   |   | 7,212 |   |   |   |   |   |
| Allowance for loan losses                                |       | (8,425      | )          |         |       |       |       | (5,988 | ) |   |   |   |   | (4,408 | ) |   |   |   |   |
| Total assets                                             |       | $           | 1,366,498  |         |       |       |       |   | $ | 1,136,906 |   |   |   |   |   | $ | 664,624 |   |   |   |   |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’  Equity**           | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest - bearing  liabilities:                         |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:                            |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | $           | 125,284    |         | $          | 722        |       | 2.34 | % | $ | 139,160 |   | $ | 429 |   | 1.25 | % | $ | 155,523 |   | $ | 529 |   | 1.36 | % |
| Money markets                                            |       | 185,874     |       | 1,186        |       | 2.55       |       | 43,021 |   | 170 |   | 1.58 |   | 24,470 |   | 36 |   | 0.59 |   |
| Statement savings                                        |       | 9,476       |       | 32           |       | 1.36       |       | 8,688 |   | 22 |   | 1.01 |   | 7,191 |   | 9 |   | 0.50 |   |
| Certificates of deposit                                  |       | 620,123     |       | 5,852        |       | 3.77       |       | 553,079 |   | 4,056 |   | 2.93 |   | 237,562 |   | 1,708 |   | 2.88 |   |
| Total interest - bearing deposits                        |       | 940,757     |       | 7,792        |       | 3.36       |       | 743,948 |   | 4,677 |   | 2.55 |   | 424,746 |   | 2,282 |   | 2.15 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                                     |       | 145,102     |       | 1,523        |       | 4.25       |       | 153,580 |   | 992 |   | 2.59 |   | 73,545 |   | 300 |   | 1.63 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities and interest expense |       | 1,085,859   |       | 9,315        |       | 3.48       |       | 897,528 |   | 5,669 |   | 2.56 |   | 498,291 |   | 2,582 |   | 2.07 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 110,321     |       |         |       |       |       | 103,883 |   |   |   |   |   | 72,399 |   |   |   |   |   |
| Other liabilities                                        |       | 20,842      |       |         |       |       |       | 37,980 |   |   |   |   |   | 2,204 |   |   |   |   |   |
| Preferred shareholders’ equity                      |       | —      |       |         |       |       |       | — |   |   |   |   |   | 6,391 |   |   |   |   |   |
| Common  shareholders’ equity                        |       | 149,476     |       |         |       |       |       | 97,515 |   |   |   |   |   | 85,339 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity         |       | $           | 1,366,498  |         |       |       |       |   | $ | 1,136,906 |   |   |   |   |   | $ | 664,624 |   |   |   |   |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income and  net interest margin (2)         |       |        |       | $            | 10,403     |       | 3.16       | % |   |   | $ | 7,822 |   | 2.84 | % |   |   | $ | 4,833 |   | 3.00 | % |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |

 

(1) Non-accrualloans are included in average balances and do not have a material effect on theaverage yield. Interest income on non-accruing loans was not material for thequarters presented.

(2) Interest incomefor investment securities available-for-sale is reported on a fullytaxable-equivalent basis at a rate of 35%.

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**Table2.Rate and Volume Analysis**Three Months Ended March 31, 2006, 2005 and 2004(In thousands)
| ** **                                            | ** ** | **2006 Compared to 2005** | ** ** | **2005 Compared to 2004** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **Change Due to**              | ** ** | ** **                               | ** ** | **Change Due to** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Average**                              | ** ** | **Average**                              | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
|                                                  | ** ** | **Volume**                               | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** |   | **(Decrease)** |   |
| **Interest  income:**                                 | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|  Loans (1):                                      |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial and  industrial                            |       | $                                        | 172        |                                     | $          | 277 |   | $ | 449 |   | $ | 21 |   | $ | 39 |   | $ | 60 |   |
| Real estate -  commercial                             |       | 712                                      |       | 300                                      |       | 1,012 |   | 1,389 |   | (232 | ) | 1,157 |   |
| Real estate -  construction                           |       | 973                                      |       | 449                                      |       | 1,422 |   | 373 |   | 177 |   | 550 |   |
| Real estate -  residential                            |       | 983                                      |       | (121                                     | )          | 862 |   | 606 |   | (80 | ) | 526 |   |
| Home equity lines                                     |       | 168                                      |       | 320                                      |       | 488 |   | 128 |   | 193 |   | 321 |   |
| Consumer                                              |       | (15                                      | )          | 7                                        |       | (8 | ) | (70 | ) | 8 |   | (62 | ) |
| Total loans                                           |       | 2,993                                    |       | 1,232                                    |       | 4,225 |   | 2,447 |   | 105 |   | 2,552 |   |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|  Loans held for sale, net                        |       | (644                                     | )          | 1,564                                    |       | 920 |   | 3,358 |   | — |   | 3,358 |   |
|  Investment securities - available-for-sale  (2) |       | 355                                      |       | 286                                      |       | 641 |   | 105 |   | 55 |   | 160 |   |
|  Investment securities held-to-maturity          |       | (218                                     | )          | 36                                       |       | (182 | ) | (127 | ) | 84 |   | (43 | ) |
|  Other investments                               |       | 15                                       |       | 20                                       |       | 35 |   | 16 |   | 0 |   | 16 |   |
|  Federal funds sold                              |       | 262                                      |       | 326                                      |       | 588 |   | (2 | ) | 35 |   | 33 |   |
| Total interest  income                                |       | 2,763                                    |       | 3,464                                    |       | 6,227 |   | 5,797 |   | 279 |   | 6,076 |   |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                                | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:                         |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest checking                                     |       | (42                                      | )          | 335                                      |       | 293 |   | (59 | ) | (41 | ) | (100 | ) |
| Money markets                                         |       | 564                                      |       | 452                                      |       | 1,016 |   | 27 |   | 107 |   | 134 |   |
| Statement savings                                     |       | 2                                        |       | 8                                        |       | 10 |   | 2 |   | 11 |   | 13 |   |
| Certificates of  deposit                              |       | 497                                      |       | 1,299                                    |       | 1,796 |   | 2,252 |   | 96 |   | 2,348 |   |
| Total interest -  bearing deposits                    |       | 1,021                                    |       | 2,094                                    |       | 3,115 |   | 2,222 |   | 173 |   | 2,395 |   |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                 |       | (58                                      | )          | 589                                      |       | 531 |   | 318 |   | 374 |   | 692 |   |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total interest  expense                               |       | 963                                      |       | 2,683                                    |       | 3,646 |   | 2,540 |   | 547 |   | 3,087 |   |
|                                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net interest  income (2)                              |       | $                                        | 1,800      |                                     | $          | 781 |   | $ | 2,581 |   | $ | 3,257 |   | $ | (268 | ) | $ | 2,989 |   |

 

(1)             Non-accrualloans are included in average balances and do not have a material effect on theaverage yield. Interest income on non-accruing loans was not material for thequarters presented.

(2)             Interest income forinvestment securities available-for-sale is reported on a fullytaxable-equivalent basis at a rate of 35%.

Theprovision for loan losses for the three months ended March 31, 2006 and2005 was $250,000 and $549,000, respectively. The decrease in provision expensefor the three months ended March 31, 2006 compared to the three monthsended March 31, 2005 is primarily the result of our valuation of thecredit quality in our loan portfolio and the qualitative factors we use todetermine the adequacy of our loan loss reserves as described above in“Critical Accounting Policies—Allowance for Loan Losses.” The allowance forloan losses at March 31, 2006 and December 31, 2005 was $8.5 millionand $8.3 million, respectively.   Ourallowance for loan losses ratio to loans receivable, net was 1.17% at March 31,2006 and 1.18% at December 31, 2005. Annualized net charged-off loansequaled 0.02% of average loans for the three months ended March 31, 2006.There were net recoveries of $5,000 in the first quarter of 2005. Non-performingloans were equal to 0.04% and 0.03% of total loans receivable at March 31,2006 and December 31, 2005, respectively.

In 1999 and 2001, the Company purchased loanparticipations of approximately $12.3 million from a bank in New Orleans,Louisiana, which represented approximately 950 loans. At March 31, 2006,the total remaining balances on these participations were approximately $1.6million and represented approximately 240 loans secured by various types ofrecreational vehicles. The borrowers are located in several southern statesincluding Louisiana. Hurricane and other weather-related problems had disruptedthe operations of the New Orleans bank, curtailed mail delivery and othercommunications in the area and caused wide-spread destruction in the gulf coastregion. We have established an allowance of approximately $81,000 for theseloans as 

24

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of March 31, 2006. The majority of these loanscontinue to perform in accordance with their terms and we anticipate removingthem from our problem loan watch list in the second quarter of 2006.

Additional information on the allowance for loanlosses, its allocation to the loans receivable portfolio and information onnonperforming loans can be found in Tables 3, 4 and 5.

**Table 3.Allowance for Loan Losses**Three Months Ended March 31, 2006 and 2005(In thousands)
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Beginning  balance, January 1 |       | $        | 8,301      |     | $          | 5,878 |   |
|                               |       |     |       |     |       |
| Provision for  loan losses         |       | 250      |       | 549      |       |
|                               |       |     |       |     |       |
| Loans charged  off:                |       |     |       |     |       |
| Commercial and industrial          |       | (42      | )          | —   |       |
| Consumer                           |       | (1       | )          | (1       | )          |
| Total loans  charged off           |       | (43      | )          | (1       | )          |
|                               |       |     |       |     |       |
| Recoveries:                        |       |     |       |     |       |
| Commercial and industrial          |       | 12       |       | 2        |       |
|  Consumer                     |       | —   |       | 4        |       |
| Total recoveries                   |       | 12       |       | 6        |       |
|                               |       |     |       |     |       |
| Net (charge  offs) recoveries      |       | (31      | )          | 5        |       |
|                               |       |     |       |     |       |
| Ending balance,  March 31,    |       | $        | 8,520      |     | $          | 6,432 |   |

 
| ** **                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Loans:                                                      |       |               |       |                  |       |
| Balance at period end                                       |       | $                  | 730,003    |                  | $          | 705,644 |   |
| Allowance for loan losses to loans receivable, net  of fees |       | 1.17               | %          | 1.18                  | %          |
| Annualized net  charge-offs to average loans receivable     |       | 0.02               | %          | 0.01                  | %          |
|                                                             |            |                    |            |                       |            |  |  |

 

25

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**Table4.Allocation of the Allowance for Loan Losses**At March 31, 2006 and December 31, 2005(In thousands)
| ** **                       | ** ** | **March 31  2006** | ** ** | **December 31,   2005** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
|                             |       | **Allocation**          | ** ** | **% of Total***                   | ** ** | **Allocation** | ** ** | **% of Total*** |   |
| Commercial and  industrial       |       | $                       | 1,287      |                              | 10.12      | % | $ | 1,153 |   | 9.83 | % |
| Real estate -  commercial        |       | 3,234                   |       | 37.59                             |       | 3,338 |   | 39.01 |   |
| Real estate -  construction      |       | 1,511                   |       | 18.61                             |       | 1,432 |   | 18.13 |   |
| Real estate -  residential       |       | 1,608                   |       | 22.60                             |       | 1,490 |   | 21.65 |   |
| Home equity  lines               |       | 733                     |       | 10.45                             |       | 721 |   | 10.63 |   |
| Consumer                         |       | 147                     |       | 0.63                              |       | 167 |   | 0.75 |   |
| Total allowance for  loan losses |       | $                       | 8,520      |                              | 100.00     | % | $ | 8,301 |   | 100.00 | % |

* Percentage ofloan type to the total loan portfolio.

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**Table5.Nonperforming Loans Receivable**At March 31, 2006 and December 31, 2005(In thousands)
| ** **                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Nonaccruing  loans                            |       | $                  | 278        |                  | $          | 214 |   |
|                                          |       |               |       |                  |       |
| Loans  contractually past-due 90 days or more |       | —             |       | 33                    |       |
|                                          |       |               |       |                  |       |
| Troubled debt  restructurings                 |       | —             |       | —                |       |
| Total nonperforming  loans receivable         |       | $                  | 278        |                  | $          | 247 |   |

 

Non-interestincome includes, among other things, service charges on deposits and loans,gains on the sale of mortgage loans, investment fee income, and management feeincome, and continues to be an important factor in our operating results. Non-interestincome for each of the three months ended March 31, 2006 and 2005 was $5.2million. Net gains on sales of mortgage loans by George Mason for the threemonths ended March 31, 2006 and 2005 was $2.8 million and $3.6 million,respectively,  a decrease of $800,000, or22%, due to the slowdown in the regional housing market caused in part by risinginterest rates. Included in the net gains on sale of mortgage loans are anyorigination, underwriting, and discount points and other funding fees receivedand deferred at loan origination. Costs include direct costs associated withthe loan origination, such as commissions and salaries that are deferred at thetime of origination.  Management feeincome for the three months ended March 31, 2006 and 2005 was $418,000 and$524,000, respectively. Management fee income represents the income earned forservices provided by George Mason to other mortgage banking companies owned bylocal home builders and generally fluctuates based on the volume of loan sales.

Servicecharges on deposit accounts increased $89,000 to $369,000 for the three monthsended March 31, 2006 compared to $280,000 for the same period of 2005. Theincrease in service charges on deposit accounts is primarily the result of anincreased number of deposit accounts in 2006 compared to 2005. Loan servicecharge income decreased $3,000 to $623,000 for the three months ended March 31,2006, compared to $626,000 for the same period of 2005.

Investmentfee income increased to $681,000 for the three months ended March 31, 2006compared to $159,000 for the same three month period of 2005. The increase ininvestment fee income is primarily attributable to the acquisition ofWilson/Bennett in June 2005 and the addition of the trust division in February 2006.

Includedin other income for the three months ended March 31, 2006 is a $349,000gain related to the extinguishment of a Company borrowing. There was no similartransaction for the same period of 2005.

Non-interestincome for the quarters ended March 31, 2006 and 2005 represented 33% and40% of our total revenues, respectively.

Non-interestexpense includes, among other things, salaries and benefits, occupancy,professional fees, depreciation, data processing, telecommunications andmiscellaneous expenses. Non-interest expense for the three months ended March 31,2006 was $11.4 million, compared to $10.1 million for the same period of 2005,an increase of $1.3 million. The increases are primarily attributable to ourbranch office expansion during the past twelve months and the acquisitions ofWilson/Bennett and the trust division. Expenses related to the branch expansionare primarily represented in the increases in our salaries and benefitsexpense, occupancy expense and depreciation expense. We expect non-interestexpense to continue to increase as we continue our branch expansion in 2006. Wecurrently plan to open four branch offices during the remainder of 2006.

 

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The effective taxrate for the first quarter of 2006 was 33.8%, compared to 31.7% for the sameperiod of 2005. We recorded a provision for income tax expense of $1.3 millionand $749,000 for the three months ended March 31, 2006 and 2005,respectively. See also, “Critical Accounting Policies — Valuation of DeferredTax Assets.”

**Statementsof Condition**

Totalassets were $1.48 billion at March 31, 2006, compared to $1.45 billion at December 31,2005, an increase of $29.4 million, or 2%. This growth was driven primarily byincreases in loans receivable and the investment securities portfolio, whichwere funded by growth in our deposits and other borrowed funds.

Investmentsecurities were $331.4 million at March 31, 2006, compared to $294.2million at December 31, 2005, an increase of $37.2 million. The investmentportfolio consists of investment securities available-for-sale and investmentsecurities held-to-maturity. Investment securities available-for-sale are thosesecurities that we intend to hold for an indefinite period of time, but notnecessarily until maturity. These securities are carried at fair value and maybe sold as part of an asset/liability strategy, liquidity management orregulatory capital management.  Investment securities held-to-maturity arethose securities that we have the intent and ability to hold to maturity andare carried at amortized cost. At March 31, 2006, investment securitiesavailable-for-sale were $220.8 million and investment securitiesheld-to-maturity were $110.5 million. See Table 6 for additional information onour investment securities portfolio.

**Table 6.Investment Securities**At March 31, 2006 and December 31, 2005(In thousands)
| ** **                                                   | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Available-for-sale at March 31, 2006** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S. government-sponsored  agencies                          |       |          |       |      |       |        |       |
| One to five years                                            |       | $             | 51,962     |      | $          | 51,185      |       | 4.91 | % |
| Five to ten years                                            |       | 8,050         |       | 7,999     |       | 5.50        |       |
| Total U.S. government-sponsored agencies                     |       | 60,012        |       | 59,184    |       | 4.99        |       |
|                                                         |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                                 |       |          |       |      |       |        |       |
| One to five years                                            |       | 5,187         |       | 5,019     |       | 4.05        |       |
| Five to ten years                                            |       | 8,680         |       | 8,346     |       | 3.88        |       |
| After ten years                                              |       | 139,110       |       | 134,897   |       | 4.59        |       |
| Total mortgage-backed securities                             |       | 152,977       |       | 148,262   |       | 4.53        |       |
|                                                         |       |          |       |      |       |        |       |
| Municipal securities                                         |       |          |       |      |       |        |       |
| After ten years                                              |       | 11,668        |       | 11,384    |       | 4.05        |       |
| Total municipal securities                                   |       | 11,668        |       | 11,384    |       | 4.05        |       |
|                                                         |       |          |       |      |       |        |       |
| U. S. treasury  securities                                   |       |          |       |      |       |        |       |
| One to five years                                            |       | 2,011         |       | 1,983     |       | 2.63        |       |
| Total U.S. treasury securities                               |       | 2,011         |       | 1,983     |       | 2.63        |       |
| Total investment securities available-for-sale               |       | $             | 226,668    |      | $          | 220,813     |       | 4.61 | % |

 
| ** **                                                 | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Held-to-maturity at March 31, 2006** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies                        |       |          |       |      |       |        |       |
| One to five years                                          |       | $             | 9,500      |      | $          | 9,141       |       | 3.52 | % |
| Five to ten years                                          |       | 13,020        |       | 12,631    |       | 4.35        |       |
| After ten years                                            |       | 3,000         |       | 2,924     |       | 4.20        |       |
| Total U.S. government-sponsored agencies                   |       | 25,520        |       | 24,696    |       | 4.03        |       |
|                                                       |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                               |       |          |       |      |       |        |       |
| Five to ten years                                          |       | 7,054         |       | 6,820     |       | 4.23        |       |
| After ten years                                            |       | 69,962        |       | 67,561    |       | 4.26        |       |
| Total mortgage-backed securities                           |       | 77,016        |       | 74,381    |       | 4.26        |       |
|                                                       |       |          |       |      |       |        |       |
| Corporate bonds                                            |       |          |       |      |       |        |       |
| After ten years                                            |       | 8,005         |       | 7,802     |       | 4.21        |       |
| Total corporate bonds                                      |       | 8,005         |       | 7,802     |       | 4.21        |       |
| Total investment securities held-to-maturity               |       | 110,541       |       | 106,879   |       | 4.20        |       |
|                                                       |       |          |       |      |       |        |       |
| Total investment securities                                |       | $             | 337,209    |      | $          | 327,692     |       | 4.48 | % |
|                                                       |       |          |       |      |       |        |       |

 

28

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| ** **                                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Available-for-sale at December 31, 2005** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies                             |       |          |       |      |       |        |       |
| One to five years                                               |       | $             | 43,784     |      | $          | 43,264      |       | 4.79 | % |
| Five to ten years                                               |       | 15,175        |       | 15,147    |       | 5.42        |       |
| Total U.S. government-sponsored agencies                        |       | 58,959        |       | 58,411    |       | 4.88        |       |
|                                                            |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                                    |       |          |       |      |       |        |       |
| One to five years                                               |       | 5,441         |       | 5,269     |       | 4.02        |       |
| Five to ten years                                               |       | 8,980         |       | 8,678     |       | 3.88        |       |
| After ten years                                                 |       | 108,309       |       | 104,613   |       | 4.21        |       |
| Total mortgage-backed securities                                |       | 122,730       |       | 118,560   |       | 4.17        |       |
|                                                            |       |          |       |      |       |        |       |
| U. S. treasury  securities                                      |       |          |       |      |       |        |       |
| One to five years                                               |       | 2,015         |       | 1,984     |       | 2.63        |       |
| Total U.S. treasury securities                                  |       | 2,015         |       | 1,984     |       | 2.63        |       |
| Total investment securities available-for-sale                  |       | $             | 183,704    |      | $          | 178,955     |       | 4.38 | % |

 
| ** **                                                    | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|---------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Held-to-maturity at December 31, 2005** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies                           |       |          |       |      |       |        |       |
| One to five years                                             |       | $             | 9,500      |      | $          | 9,172       |       | 3.52 | % |
| Five to ten years                                             |       | 13,020        |       | 12,698    |       | 4.37        |       |
| After ten years                                               |       | 3,000         |       | 2,936     |       | 4.22        |       |
| Total U.S. government-sponsored agencies                      |       | 25,520        |       | 24,806    |       | 4.03        |       |
|                                                          |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                                  |       |          |       |      |       |        |       |
| Five to ten years                                             |       | 7,662         |       | 7,470     |       | 4.21        |       |
| After ten years                                               |       | 74,082        |       | 71,937    |       | 4.24        |       |
| Total mortgage-backed securities                              |       | 81,744        |       | 79,407    |       | 4.23        |       |
|                                                          |       |          |       |      |       |        |       |
| Corporate bonds                                               |       |          |       |      |       |        |       |
| After ten years                                               |       | 8,005         |       | 7,812     |       | 4.21        |       |
| Total corporate bonds                                         |       | 8,005         |       | 7,812     |       | 4.21        |       |
| Total investment securities held-to-maturity                  |       | 115,269       |       | 112,025   |       | 4.19        |       |
|                                                          |       |          |       |      |       |        |       |
| Total investment securities                                   |       | $             | 298,973    |      | $          | 290,980     |       | 4.31 | % |

 

* Based on contractualmaturities.

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Loansreceivable, net of deferred fees and costs, increased by $24.4 million, or 3%,to $730.0 million at March 31, 2006 from $705.6 million at December 31,2005. See Table 7 for details on the loans receivable portfolio. We experiencedgrowth in our commercial and industrial, real estate construction, residentialreal estate and home equity loan portfolios. We expect continued growth withinthese loan categories over the next nine months of 2006 due to our increasedlegal lending limit of $19.8 million and the volume of loans we have scheduledfor funding. In addition, we had $300.2 million in loans held for sale, net at March 31,2006, compared to $361.7 million at December 31, 2005, a decrease of $61.5million. Loans that are held for sale, net are valued at the lower of cost ormarket value. The decrease in our loans held for sale portfolio is a directresult of the slowdown in the regional housing market caused in part by  increases ininterest rates.

**Table 7.Loans Receivable**At March 31, 2006 and December 31, 2005(In thousands)
| ** **                       | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Commercial and  industrial       |       | $                            | 73,884     |                            | 10.12      | % | $ | 69,392 |   | 9.83 | % |
| Real estate -  commercial        |       | 274,431                      |       | 37.59                           |       | 275,381 |   | 39.01 |   |
| Real estate -  construction      |       | 135,840                      |       | 18.61                           |       | 128,009 |   | 18.13 |   |
| Real estate -  residential       |       | 164,973                      |       | 22.60                           |       | 152,818 |   | 21.65 |   |
| Home equity  lines               |       | 76,306                       |       | 10.45                           |       | 75,048 |   | 10.63 |   |
| Consumer                         |       | 4,658                        |       | 0.63                            |       | 5,255 |   | 0.75 |   |
|                             |       |                         |       |                            |       |   |   |   |   |
| Gross loans                      |       | $                            | 730,092    |                            | 100.00     | % | $ | 705,903 |   | 100.00 | % |
|                             |       |                         |       |                            |       |   |   |   |   |
| Net deferred  (fees) costs       |       | (89                          | )          |                            |       | (259 | ) |   |   |
| Less: allowance  for loan losses |       | (8,520                       | )          |                            |       | (8,301 | ) |   |   |
|                             |       |                         |       |                            |       |   |   |   |   |
| Loans  receivable, net           |       | $                            | 721,483    |                            |       |   | $ | 697,343 |   |   |   |

 

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Totaldeposits were  $1.07 billion at each of March 31,2006 and December 31, 2005. We experienced increases in our interestchecking deposit products, which offset decreases in our interest-bearing moneymarket deposits, savings deposits, and certificates of deposit. See Table 8 fordetails on certificates of deposit with balances of $100,000 or more. Theincrease in interest checking deposits is a result of new customers from ourbranch expansion and competitive deposit pricing, particularly with ourChairman’s Club interest checking relationship product, which we introduced inthe first quarter of 2006. Our Chairman’s Club interest checking depositpromotion is a relationship account that offered initially and continues tooffer an interest rate of 4.01% on balances over $25,000. Brokered certificatesof deposit decreased $9.0 million to $981,000 at March 31, 2006 comparedto $9.8 million at December 31, 2005.

**Table 8.Certificates of Deposit of $100,000 or More**At March 31, 2006(In thousands)
| **Maturities:**                        | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| Three months or  less                  |       | $                   | 24,325     |            | $          | 21,325    |       | $ | 45,650 |   |
| Over three  months through six months  |       | 37,170              |       | 23,720          |       | 60,890    |       |
| Over six months  through twelve months |       | 55,516              |       | 54,837          |       | 110,353   |       |
| Over twelve  months                    |       | 50,306              |       | 20,373          |       | 70,679    |       |
|                                   |       | $                   | 167,317    |            | $          | 120,255   |       | $ | 287,572 |   |

 

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

31

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Other borrowedfunds increased $18.1 million to $173.5 million at March 31, 2006,compared to $155.4 million at December 31, 2005, due primarily to a $26.5million increase in short term dealer repurchase agreement borrowings. Treasury, Tax & Loan Note optionborrowings decreased $5.0 million from December 31, 2005 to March 31,2006 and long term FHLB advances decreased $6.6 million in the same timeperiod. Short-term FHLB advances increased by $10.0 million from December 31,2005 to March 31, 2006. Table 9 provides information on ourborrowings.

**Table9.Short-Term Borrowings and Other Borrowed Funds**At March 31, 2006(In thousands)
| **Short-term FHLB advances:**                              | ** ** | **Term  of ** | ** ** | **Date**    | ** ** | **Interest** | ** ** | **Amount ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|-------------|------------|--------------|------------|------------------|------------|
| **Advance Date**                                                | ** ** | **Advance**        | ** ** | **Due**     | ** ** | **Rate**     | ** ** | **Outstanding**  | ** ** |
| Apr-04                                                               |       | 2  years           |       | May-06      |       | 2.58         | %          | $2,000           |       |
| Jul-03                                                               |       | 3  years           |       | Jul-06      |       | 2.07         |       | 6,250            |       |
| Mar-03                                                               |       | 4  years           |       | Mar-07      |       | 2.81         |       | 1,000            |       |
| Apr-04                                                               |       | 10 years           |       | Apr-14      |       | 3.33         |       | 10,000           |       |
| **Total  short-term FHLB advances and weighted average rate**        |       | **2.82**           | **%**      | **$19,250** |       |
| ** **                                                           |       |               |       |        |       |         |       |             |       |
| **Other short-term borrowed funds:**                                 |       |               |       |        |       | 4.44         |       | $162             |       |
| TT&L Note option                                                 |       |               |       |        |       | 4.94         |       | 26,490           |       |
| Dealer repurchase agreement borrowings                               |       |               |       |        |       | 1.71         |       | 34,439           |       |
| Customer repurchase agreements                                       |       |               |       |        |       |         |       |             |       |
| **Total other short-term borrowed funds and  weighted average rate** |       |               |       |        |       | **3.12**     | **%**      | **$61,091**      |       |
| **Other borrowed funds:**                                            |       |               |       |        |       |         |       |             |       |
| Trust preferred                                                      |       |               |       |        |       | 7.07         |       | $20,619          |       |
| FHLB advances - long term                                            |       |               |       |        |       | 3.46         |       | 72,583           |       |
| **Other borrowed funds and weighted average rate**                   |       |               |       |        |       | **4.26**     | **%**      | **$93,202**      |       |
| ** **                                                           |       |               |       |        |       | ** **   |       | ** **       |       |
| **Total other borrowed funds and weighted average  rate**            |       |               |       |        |       | **3.70**     | **%**      | **$173,543**     |       |

 

At March 31, 2006, mortgage funding checks increased by $10.4million to $52.1 million, compared to $41.6 million at December 31, 2005. Theseliabilities are related to George Mason and are used to fund the loans inprocess of being sold. George Mason has credit facilities with the Bank andalso has a third party facility of $250 million. There were no borrowingsoutstanding under this third party facility at March 31, 2006.

Shareholders’equity at March 31, 2006 was $149.8 million, an increase of $2.0 million,compared to $147.9 million at December 31, 2005. The increase from theprior year end was primarily net income of $2.6 million for the three monthsended March 31, 2006, and unrealized gains on derivative instrumentsdesignated as cash flow hedges of $284,000, partially offset by an unfavorablemarket value adjustment of $723,000 on investment securities available-for-saleas of March 31, 2006. Book value per share at March 31, 2006 was$6.15, compared to $6.07 at December 31, 2005. Tangible book value pershare at March 31, 2006 was $5.31 compared to $5.23 at December 31,2005.

**Business SegmentOperations**

**We provide banking and non-banking financial services andproducts through our subsidiaries.**

#### *Commercial Banking*

The commercialbanking segment includes both commercial and consumer lending and providescustomers such products as commercial loans, real estate loans, and otherbusiness financing and consumer loans. In addition, this segment also providescustomers with various deposit products including demand deposit accounts,savings accounts and certificates of deposit.

For the threemonths ended March 31, 2006, the commercial banking segment recorded netincome of $2.6 million compared to $595,000 for the three months ended March 31,2005, an increase of $2.1 million. The increase in net income for 2006 isprimarily related to the increased volume and interest rates in the Bank’s loanreceivable portfolio. At March 31, 2006, total assets for this segmentwere $1.41 billion, loans receivable, net of deferred fees and costs, were$730.0 million and total deposits were $1.07 billion. At March 31, 2005,total assets were $1.19 billion, loans receivable, net of deferred fees andcosts were $535.7 million and total deposits were $894.9 million.

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*MortgageBanking*

The operations ofthe mortgage banking segment are conducted through George Mason. George Masonengages primarily in the origination and acquisition of residential mortgagesfor sale into the secondary market on a best efforts basis.

For the threemonths ended March 31, 2006 and 2005, the mortgage banking segmentrecorded net income of $419,000 and $1.4 million, respectively. The decrease innet income for 2006 is directly related to the decreased volume of loansoriginated due to the slowdown in regional housing market caused in part byincreases in interest rates. At March 31, 2006, total assets for thissegment were $318.6 million, loans held for sale, net were $300.2 million andmortgage funding checks were $52.1 million. At March 31, 2005, totalassets were $379.4 million, loans held for sale, net were $364.1 million andmortgage funding checks were $74.3 million.

#### *Trust and InvestmentServices*

Thetrust and investment services segment provides investment and financialservices to business and individuals, including financial planning,retirement/estate planning, trusts, estates, custody, investment management,escrows, and retirement plans. Wilson/Bennett is included in this operatingsegment since the date of its acquisition, June 9, 2005. On February 9,2006, we acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.Our new trust division acts as trustee or custodian for assets in excess of $5billion.

Forthe three months ended March 31, 2006, the trust and investment servicessegment recorded net income of $18,000, compared to a net loss of $41,000 forthe same period of 2005, an increase in net income of $59,000. At March 31,2006, total assets were $6.9 million and total assets under management were$6.0 billion. At March 31, 2005, total assets for this segment were$691,000 and total assets under management were $135.7 million. The increase inassets under management from 2005 to 2006 is directly related to the additionof Wilson/Bennett in the second quarter of 2005 and the trust division in 2006.

Information pertaining toour business segments can be found in Note 5 to the Notes to ConsolidatedFinancial Statements.

## **Capital Resources**

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

Regulatoryagencies measure capital adequacy utilizing a formula that takes into accountthe individual risk profile of the financial institution. The guidelines definecapital as both Tier 1 (which includes common shareholders’ equity, defined toinclude certain debt obligations) and Tier 2 (which includes certain other debtobligations, a portion of the allowance for loan losses, and 45% of anyunrealized gains in equity securities).

At March 31,2006, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were15.03% and 15.88%, respectively. At December 31, 2005, our Tier 1 andtotal risk-based capital ratios were 14.83% and 15.65%, respectively. Theincrease in our regulatory capital ratios is a result of our net income for thefirst quarter of 2006. Our regulatory capital levels for the Bank and bankholding company meet those established for well-capitalized institutions. Table10 provides additional information pertaining to our capital ratios.

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**Table 10.Capital Components**At March 31, 2006 and December 31,2005(In thousands)

 
|                                                                  | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                       | ** ** | ** ** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | ** ** | ** ** | **Ratio** | ** ** |
| **At March 31, 2006**                                       | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk based capital/ Total capital to  risk-weighted assets |       | $161,707   |       | 15.88                                        | %          | $81,477                                                                                          |       | >  |   | 8.00 | % | $101,847 |   | >  |   | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets          |       | 153,076    |       | 15.03                                        | %          | 40,739                                                                                           |       | >  |   | 4.00 | % | 61,108 |   | >  |   | 6.00 | % |
| Tier I capital/ Total capital to average assets                  |       | 153,076    |       | 11.37                                        | %          | 53,841                                                                                           |       | >  |   | 4.00 | % | 67,301 |   | >  |   | 5.00 | % |
|                                                                  |       |       |       |                                         |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| **At December 31, 2005**                                    | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $159,155   |       | 15.65                                        | %          | $81,334                                                                                          |       | >  |   | 8.00 | % | $101,668 |   | >  |   | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets          |       | 150,742    |       | 14.83                                        | %          | 40,667                                                                                           |       | >  |   | 4.00 | % | 61,001 |   | >  |   | 6.00 | % |
| Tier I capital/ Total capital to average assets                  |       | 150,742    |       | 10.71                                        | %          | 56,308                                                                                           |       | >  |   | 4.00 | % | 70,386 |   | >  |   | 5.00 | % |

** **

**ContractualObligations**

Wehave entered into a number of long-term contractual obligations to support ourongoing business activities. These contractual obligations will be fundedthrough operating revenues and liquidity sources held or available to us. Therequired payments under such obligations are detailed in Table 11.

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**Table 11.Contractual Obligations**At March 31, 2006(In thousands)
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**                                 | ** ** | **Less than 1 Year** | ** ** | **1 - 2 Years** | ** ** | **3 - 5 Years** | ** ** | **More than 5 Years** | ** ** |
| Certificates of  deposit                             |       | $                                         | 629,754    |   | $ | 460,517 |   | $ | 103,517 |   | $ | 62,506 |   | $ | 3,214 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Brokered  certificates of deposit                    |       | 981                                       |       | 981 |   | — |   | — |   | — |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Advances from  the Federal Home Loan Bank of Atlanta |       | 81,833                                    |       | 9,250 |   | 21,750 |   | 35,833 |   | 15,000 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Trust preferred  securities                          |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations                         |       | 12,910                                    |       | 4,035 |   | 2,903 |   | 4,255 |   | 1,717 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                                         | 746,097    |   | $ | 474,783 |   | $ | 128,170 |   | $ | 102,594 |   | $ | 40,550 |   |

 

**Commitmentsand Contingencies**

Inthe normal course of business, we are a party to financial instruments withoff-balance sheet risk to meet the financing needs of our customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit. These instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized on the balance sheet.

TheBank’s exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for commitments to extend credit and standbyletters of credit is represented by the contractual amount of those instruments.The Bank uses the same credit policies in making commitments and conditionalobligations as it does for on-balance sheet instruments.

At March 31,2006, commitments to extend credit were $368.1 million and standby letters ofcredit were $6.9 million.

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the agreement. Commitments generally haveexpiration dates or other termination clauses and may require payment of a fee.Since many of the commitments are expected to expire without being drawn upon,the total commitment amounts do not necessarily represent future fundingrequirements. We evaluate each customer’s credit worthiness on a case-by-casebasis. The amount of collateral obtained is based on management’s credit evaluationof the counterparty. Collateral held varies but may include accountsreceivable, inventory, property and equipment, and income-producingcommercial properties.

Unfundedcommitments under lines of credit are commitments for possible future extensionsof credit to existing customers. Those lines of credit may or may not be drawnupon to the total extent of funding to which we have committed.

**Standby letters of credit areconditional commitments we issued to guarantee the performance of a customer toa third party. Those guarantees are primarily issued to support public andprivate borrowing arrangements, including commercial paper, bond financing, andsimilar transactions. The credit risk involved in issuing standby letters ofcredit is essentially the same as that involved in extending loan facilities tocustomers. We hold certificates of deposit, deposit accounts, and real estateas collateral supporting those commitments when collateral is deemed necessary.**

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## **Liquidity**

Liquidity in the banking industryis defined as the ability to meet the demand for funds of both depositors andborrowers. We must be able to meet these needs with cash on hand by obtainingfunding from depositors or other lenders or by converting non-cash items tocash. The objective of our liquidity management program is to ensure that wealways have sufficient liquid resources to meet the demands of our depositorsand borrowers. Stable core deposits and a strong capital position provide thebase for our liquidity position. We have demonstrated our ability to attractretail deposits because of our convenient branch locations, personal serviceand deposit pricing.

In addition to retail deposits, wehave access to various wholesale funding markets. These markets include thebrokered CD market, the repurchase agreement market and the federal fundsmarket. We also maintain secured lines of credit with the Federal Reserve Bankof Richmond and the Federal Home Loan Bank of Atlanta. Having diverse fundingalternatives reduces our reliance on any one source for funding.

Cash flow from amortizing assets ormaturing assets can also provide funding to meet the needs of depositors andborrowers.

We have established a formalliquidity contingency plan which establishes a liquidity management team andprovides guidelines for liquidity management. For our liquidity managementprogram, we first determine our current liquidity position and then forecastliquidity based on anticipated changes in the balance sheet. In this forecast,we expect to maintain a liquidity cushion. We also stress test our liquidityposition under several different stress scenarios. Guidelines for theforecasted liquidity cushion and for liquidity cushions for each stressscenario have been established. In addition, one stress test combines all otherstress tests to see how liquidity would react to several negative scenariosoccurring at the same time. We believe that we have sufficient resources tomeet our liquidity needs.

George Mason and the Bank have aone year $150 million floating rate revolving credit and security agreementwith a third party. The purpose of this credit facility is to fund residentialmortgage loans at George Mason prior to their sale into the secondary market. Thecredit facility requires, among other things, that George Mason and the Bankhave positive quarterly net income and maintain specified minimum tangible andregulatory net worth levels. The Company has guaranteed repayment of this debt.The interest rate on this credit facility is LIBOR plus between 1.50% and1.875%. At March 31, 2006, this line was not utilized.

In addition to this facility, thissame lender has also provided a $100 million facility that is utilized byGeorge Mason to warehouse residential mortgage loans held for sale to thislender. The terms of this facility are substantially the same as theabove-referenced revolving credit and security agreement and the cost of thisfacility is netted against interest earned on the loans pending settlement withthe lender. Loans under this credit facility are considered sold when financed.

Liquid assets, which include cashand due from banks, federal funds sold and investment securities available forsale, totaled $283.3 million at March 31, 2006 or 19% of total assets. Weheld investments that are classified as held-to-maturity in the amount of$110.5 million at March 31, 2006. To maintain ready access to the Bank’ssecured lines of credit, the Bank has pledged the majority of its investmentsecurities to the Federal Home Loan Bank of Atlanta with additional investmentsecurities pledged to the Federal Reserve Bank of Richmond. Additionalborrowing capacity at the Federal Home Loan Bank of Atlanta at March 31,2006 was approximately $230.7 million. Borrowing capacity with the FederalReserve Bank of Richmond 

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was approximately $18.0 million at March 31, 2006.George Mason has $650 million of lines of credit available, including $400million with the Bank and $250 million described above. We anticipatemaintaining liquidity at a level sufficient to protect depositors, provide forreasonable growth and fully comply with all regulatory requirements.

##### **Interest Rate Sensitivity**

We are exposed to various business risks includinginterest rate risk. Our goal is to maximize net interest income without incurringexcessive interest rate risk. Management of net interest income and interestrate risk must be consistent with the level of capital and liquidity that wemaintain. We manage interest rate risk through an asset and liability committee(“ALCO”). ALCO is responsible for managing the interest rate risk for theCompany in conjunction with liquidity and capital management.

We use a net interest income simulation model as ourprimary tool to measure interest rate sensitivity. Many assumptions aredeveloped based on expected activity in the balance sheet. For maturing assets,assumptions are created for the redeployment of these assets. For maturingliabilities, assumptions are developed for the replacement of these fundingsources. Assumptions are also developed for assets and liabilities that couldreprice during the modeled time period. These assumptions also cover how weexpect rates to change on non-maturity deposits such as NOW, Money Market,savings accounts and no-penalty certificates of deposit. Based on inputs thatinclude the current balance sheet, the current level of interest rates and thedeveloped assumptions, the model then produces an expected level of netinterest income assuming that market rates remain unchanged. This is consideredthe base case. Next, the model determines what net interest income would begiven changes in interest rates. The rate simulations are performed for a twoyear period and include ramped rate changes of down 200 basis points and up 200basis points. In the ramped down rate change, the model moves rates graduallydown 200 basis points over the first year and then rates remain flat in thesecond year. For the up 200 basis point scenario, rates are gradually moved up200 basis points in the first year and then rates remain flat in the secondyear. In both the up and down scenarios, the model assumes a parallel shift inthe yield curve. The results of these simulations are then compared to the basecase.

At March 31, 2006, we were asset sensitive. Assetsensitive means that we had more assets maturing and repricing than liabilities.We have a significant portion of our assets as floating rate assets and we havetaken a significant amount of term funding through fixed rate, fixed term,certificates of deposit. In a rising rate environment, net interest incomeshould grow for an asset sensitive bank. In the up 200 basis point scenario forone year, net interest income improves by not more than 3.13% compared to thebase case and by not more than 2.50% over the two year time horizon. Beingasset sensitive, net interest income declines compared to the base case in thedown 200 basis point scenario. At March 31, 2006, net interest income hasa negative variance to the base case of less than -1.85% for the one yearperiod and a negative variance of less than -1.14% over the cumulativetwo year period.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

Our Asset/Liability Committee is responsible forreviewing our liquidity requirements and maximizing our net interest incomeconsistent with capital requirements, liquidity, interest rate and economicoutlooks, competitive factors and customer needs. Interest rate risk arisesbecause the assets of the Bank and the liabilities of the Bank have differentmaturities and characteristics. In order to measure this interest rate risk, weuse a simulation process that measures the impact of changing interest rates onnet interest income. This model is run for the Bank by an independentconsulting firm. The simulations incorporate assumptions related to expectedactivity in the balance sheet. For maturing assets, assumptions are developedfor the redeployment of these assets. For maturing liabilities, assumptions aredeveloped for the replacement of these funding sources. Assumptions are alsodeveloped for assets and liabilities that reprice during the modeled timeperiod. These assumptions also cover how we expect rates to change onnon-maturity deposits such as NOW, Money Market, savings accounts andno-penalty certificates of deposit. Based on inputs that include the mostrecent period end balance sheet, the current level of interest rates and thedeveloped assumptions, the model then produces an expected level of netinterest income assuming that interest rates remain unchanged. This becomes thebase case. Next, the model determines the impact on net interest income givencertain interest rate changes. The rate simulations are performed for a twoyear period and include ramped rate changes of down 200 basis points and up 200basis points. In the ramped down rate change, the model moves rates graduallydown 200 basis points over the first year and then rates remain flat in thesecond year. For the up 200 basis point scenario, rates are gradually increasedby 200 basis points in the first year and remain flat in the second year. Inboth the up and down scenarios, the model assumes a parallel shift in the yieldcurve. The results for net interest income are then compared to the base casewith a variance to the base case determined.

At March 31, 2006, we were asset sensitive. Assetsensitive means that we had more assets maturing or repricing than liabilities.We have a significant portion of our assets as floating rate assets and we havealso taken a significant amount of term funding through fixed rate, fixed term,certificates of deposit. In a rising rate environment, net interest incomeshould grow for an asset sensitive bank. In the up 200 basis point scenario forone year, net interest income improves by not more than 3.13% compared to thebase case and by not more than 2.50% over the two year cumulative time horizon.

Being an asset sensitive bank, net interest incomedeclines compared to the base case in the down 200 basis point simulation byless than -1.85% for one year and by -1.14% over the cumulative twoyear period.

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**Item 4. Controls and Procedures**

The Company maintains disclosure controls andprocedures that are designed to ensure that the information required to bedisclosed by it in the reports that it files or submits under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods required by the Securities and ExchangeCommission, including, without limitation, those controls and proceduresdesigned to ensure that such information is accumulated and communicated to theCompany’s management to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report,an evaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures was carried out under the supervision andwith the participation of the Company’s management, including its chiefexecutive officer and chief financial officer. Based on and as of the date ofsuch evaluation, these officers concluded that the Company’s disclosurecontrols and procedures were effective.

The Company also maintains a system of internalaccounting controls that is designed to provide assurance that assets aresafeguarded and that transactions are executed in accordance with management’sauthorization and are properly recorded. This system is continually reviewedand is augmented by written policies and procedures, the careful selection andtraining of qualified personnel and an internal audit program to monitor itseffectiveness. There were no changes in our internal controls over financialreporting identified in connection with our evaluation of it that occurredduring our last fiscal quarter that materially affected, or are likely tomaterially affect, our internal controls over financial reporting.

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**PART II— OTHER INFORMATION**

**Item 1. LegalProceedings**

In the ordinary course of our operations, we maybecome party to legal proceedings. Currently, we are not party to any materiallegal proceedings and no such proceedings are, to management’s knowledge,threatened against us.

**Item 1A. RiskFactors**

Ouroperations are subject to many risks that could adversely affect our futurefinancial condition and performance and, therefore, the market value of oursecurities. The risk factors that are applicable to us are outlined in ourAnnual Report on Form 10-K for the year ended December 31, 2005.These risk factors have not changed as of the date of this report.

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

(a)  None.

(b)  Not applicable.

(c)  None.

**Item 3. Defaults Upon SeniorSecurities**

(a)  None.

(b)  None.

**Item 4. Submission of Matters toa Vote of Security Holders**

(a)  None.

(b)  Not applicable.

(c)  Not applicable.

(d)  None.

**Item 5. Other Information**

(a)  None.

(b)  None.

**Item 6. Exhibits**

| 10.1   |   | Executive Employment Agreement, dated March 1,  2004, between Cardinal Financial Corporation and Kim C. Liddell. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                  |
| 31.1   |   | Rule 13a-14(a) Certification of  Chief Executive Officer                                                    |
|   |   |                                                                                                                  |
| 31.2   |   | Rule 13a-14(a) Certification of  Chief Financial Officer                                                    |
|   |   |                                                                                                                  |
| 32.1   |   | Statement of Chief Executive Officer Pursuant to 18  U.S.C. Section 1350                                         |
|   |   |                                                                                                                  |
| 32.2   |   | Statement of Chief Financial Officer Pursuant to 18  U.S.C. Section 1350                                         |

 

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**SIGNATURES**

**Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.**
|                    | ** ** | CARDINAL FINANCIAL  CORPORATION                       | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|
|                    | ** ** | (Registrant)                                          | ** ** |
|                    | ** ** |                                                  | ** ** |
|                    | ** ** |                                                  | ** ** |
| Date:  May 9, 2006 |       | /s/ Bernard H. Clineburg                              |       |
|                    |       | Bernard H. Clineburg                                  | ** ** |
|                    | ** ** | Chairman and  Chief Executive Officer                 | ** ** |
|                    | ** ** | (Principal  Executive Officer)                        | ** ** |
|                    | ** ** |                                                  | ** ** |
|                    | ** ** |                                                  | ** ** |
| Date:  May 9, 2006 |       | /s/ Robert A. Cern                                    |       |
|                    |       | Robert A. Cern                                        |       |
|                    | ** ** | Executive Vice  President and Chief Financial Officer | ** ** |
|                    | ** ** | (Principal  Financial Officer)                        | ** ** |
|                    | ** ** | ** **                                            | ** ** |
|                    | ** ** | ** **                                            | ** ** |
| Date:  May 9, 2006 |       | /s/ Jennifer L. Deacon                                |       |
|                    |       | Jennifer L. Deacon                                    |       |
|                    | ** ** | Senior Vice  President and Controller                 | ** ** |
|                    | ** ** | (Principal  Accounting Officer)                       | ** ** |

 

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