Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****      Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended March 31,2010**

 

**or**

 

**o****         Transition ReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from                to           **

 

**Commission File Number:  0-24557**

 

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Virginia**

(State or other jurisdiction of

incorporation or organization) | ** ** | **54-1874630**

(I.R.S. Employer

Identification No.) |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------|

 

| **8270 Greensboro Drive, Suite 500** |       |       |
|-------------------------------------------|------------|------------|
| **McLean, Virginia**                      | ** ** | **22102**  |
| (Address of principal executive offices)  |       | (Zip Code) |

 

**(703) 584-3400**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes x  No o

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large accelerated filer o                |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

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

 

28,724,989 shares of common stock, par value$1.00 per share,outstanding as of April 27, 2010

 

 

 

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Table of Contents

 

**CARDINALFINANCIAL CORPORATION**

 

**INDEX TO FORM 10-Q**

 
| **PART I – FINANCIAL  INFORMATION**                                                                                       |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                          |   |
| Item 1. Financial Statements:                                                                                                       |   |
|                                                                                                                                |   |
| Consolidated  Statements of ConditionAt March 31, 2010 (unaudited) and December 31, 2009                                  | 3      |
|                                                                                                                                |   |
| Consolidated  Statements of IncomeFor the three months ended March 31, 2010 and 2009 (unaudited)                               | 4      |
|                                                                                                                                |   |
| Consolidated  Statements of Comprehensive IncomeFor the three months ended March 31, 2010 and 2009 (unaudited)                 | 5      |
|                                                                                                                                |   |
| Consolidated  Statements of Changes in Shareholders’ EquityFor the three months ended March 31, 2010 and 2009 (unaudited) | 6      |
|                                                                                                                                |   |
| Consolidated  Statements of Cash FlowsFor the three months ended March 31, 2010 and 2009 (unaudited)                           | 7      |
|                                                                                                                                |   |
| Notes to  Consolidated Financial Statements (unaudited)                                                                             | 8      |
|                                                                                                                                |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations                                  | 28     |
|                                                                                                                                |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                                 | 57     |
|                                                                                                                                |   |
| Item  4. Controls and Procedures                                                                                                    | 59     |
|                                                                                                                                |   |
| **PART II  – OTHER INFORMATION**                                                                                          | 60     |
| ** **                                                                                                                          |   |
| Item  1. Legal Proceedings                                                                                                          | 60     |
| Item  1A. Risk Factors                                                                                                              | 60     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                                | 60     |
| Item 3. Defaults Upon Senior Securities                                                                                             | 60     |
| Item  4. (Removed and Reserved)                                                                                                     | 60     |
| Item  5. Other Information                                                                                                          | 60     |
| Item 6. Exhibits                                                                                                                    | 60     |
|                                                                                                                                |   |
| **SIGNATURES**                                                                                                                      | 61     |

 

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Table ofContents

 

**PART I – FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATED STATEMENTS OF CONDITION

 

March 31,2010 and December 31, 2009

 

(Inthousands, except share data)

 
| ** **                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                     |       |               |       |                  |       |
| Cash  and due from banks                                                                                                                       |       | $                  | 17,576     |                  | $          | 19,804 |   |
| Federal  funds sold                                                                                                                            |       | 9,980              |       | 5,037                 |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total  cash and cash equivalents                                                                                                               |       | 27,556             |       | 24,841                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Investment  securities available-for-sale                                                                                                      |       | 340,091            |       | 343,569               |       |
| Investment  securities held-to-maturity (market value of $28,958 and $31,436 at  March 31, 2010 and December 31, 2009, respectively) |       | 32,686             |       | 35,184                |       |
| Investment  securities-trading                                                                                                                 |       | 1,699              |       | 3,724                 |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total  investment securities                                                                                                                   |       | 374,476            |       | 382,477               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other  investments                                                                                                                             |       | 16,467             |       | 16,467                |       |
| Loans  held for sale                                                                                                                           |       | 143,961            |       | 179,469               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Loans  receivable, net of deferred fees and costs                                                                                              |       | 1,307,657          |       | 1,293,432             |       |
| Allowance  for loan losses                                                                                                                     |       | (19,287            | )          | (18,636               | )          |
|                                                                                                                                           |       |               |       |                  |       |
| Loans  receivable, net                                                                                                                         |       | 1,288,370          |       | 1,274,796             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Premises  and equipment, net                                                                                                                   |       | 15,770             |       | 15,743                |       |
| Deferred  tax asset, net                                                                                                                       |       | 7,290              |       | 7,691                 |       |
| Goodwill  and intangibles, net                                                                                                                 |       | 13,875             |       | 13,935                |       |
| Bank-owned  life insurance                                                                                                                     |       | 33,861             |       | 33,712                |       |
| Prepaid  FDIC insurance premiums                                                                                                               |       | 5,711              |       | 6,683                 |       |
| Other  real estate owned                                                                                                                       |       | 4,485              |       | 4,991                 |       |
| Accrued  interest receivable and other assets                                                                                                  |       | 17,446             |       | 15,380                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total  assets                                                                                                                                  |       | $                  | 1,949,268  |                  | $          | 1,976,185 |   |
| ** **                                                                                                                                     |       |               |       |                  |       |
| **Liabilities and Shareholders’  Equity**                                                                                                 |       |               |       |                  |       |
|                                                                                                                                           |       |               |       |                  |       |
| Non-interest  bearing deposits                                                                                                                 |       | $                  | 164,142    |                  | $          | 166,019 |   |
| Interest  bearing deposits                                                                                                                     |       | 1,161,996          |       | 1,130,986             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total  deposits                                                                                                                                |       | 1,326,138          |       | 1,297,005             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other  borrowed funds                                                                                                                          |       | 376,034            |       | 427,579               |       |
| Mortgage  funding checks                                                                                                                       |       | 8,619              |       | 13,918                |       |
| Escrow  liabilities                                                                                                                            |       | 1,439              |       | 2,079                 |       |
| Accrued  interest payable and other liabilities                                                                                                |       | 28,448             |       | 31,097                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total  liabilities                                                                                                                             |       | 1,740,678          |       | 1,771,678             |       |
| ** **                                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common  stock, $1 par value                                                                                                                    |       |               |       |                  |       |   |   |   |   |
| Shares  authorized                                                                                                                             |       | 50,000,000         |       | 50,000,000            |       |   |   |   |   |
| Shares  issued and outstanding                                                                                                                 |       | 28,720,789         |       | 28,717,839            |       | 28,721 |   | 28,718 |   |
| Additional  paid-in capital                                                                                                                    |       |               |       |                  |       | 159,873 |   | 159,798 |   |
| Retained  earnings                                                                                                                             |       |               |       |                  |       | 15,930 |   | 12,705 |   |
| Accumulated  other comprehensive income, net                                                                                                   |       |               |       |                  |       | 4,066 |   | 3,286 |   |
|                                                                                                                                           |       |               |       |                  |       |   |   |   |   |
| Total  shareholders’ equity                                                                                                               |       |               |       |                  |       | 208,590 |   | 204,507 |   |
|                                                                                                                                           |       |               |       |                  |       |   |   |   |   |
| Total  liabilities and shareholders’ equity                                                                                               |       |               |       |                  |       | $ | 1,949,268 |   | $ | 1,976,185 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF INCOME

 

Three months ended March 31,2010 and 2009

(In thousands, except pershare data)

(Unaudited)

 
| ** **                                                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Interest  income:                                              |       |     |       |     |       |
| Loans  receivable                                              |       | $        | 17,615     |     | $          | 15,329 |   |
| Loans  held for sale                                           |       | 1,305    |       | 1,825    |       |
| Federal  funds sold                                            |       | 23       |       | 13       |       |
| Investment  securities available-for-sale                      |       | 3,683    |       | 2,886    |       |
| Investment  securities held-to-maturity                        |       | 287      |       | 484      |       |
| Other  investments                                             |       | 10       |       | (19      | )          |
|                                                           |       |     |       |     |       |
| Total  interest income                                         |       | 22,923   |       | 20,518   |       |
|                                                           |       |     |       |     |       |
| Interest  expense:                                             |       |     |       |     |       |
| Deposits                                                       |       | 4,635    |       | 6,757    |       |
| Other  borrowed funds                                          |       | 3,021    |       | 3,142    |       |
|                                                           |       |     |       |     |       |
| Total  interest expense                                        |       | 7,656    |       | 9,899    |       |
|                                                           |       |     |       |     |       |
| Net  interest income                                           |       | 15,267   |       | 10,619   |       |
|                                                           |       |     |       |     |       |
| Provision  for loan losses                                     |       | 2,425    |       | 1,216    |       |
|                                                           |       |     |       |     |       |
| Net  interest income after provision for loan losses           |       | 12,842   |       | 9,403    |       |
|                                                           |       |     |       |     |       |
| Non-interest  income:                                          |       |     |       |     |       |
| Service  charges on deposit accounts                           |       | 479      |       | 472      |       |
| Loan  fees                                                     |       | 418      |       | 833      |       |
| Investment  fee income                                         |       | 1,009    |       | 810      |       |
| Realized  and unrealized gains on mortgage banking activities  |       | 2,822    |       | 3,343    |       |
| Net  realized gain on investment securities available-for-sale |       | 264      |       | 552      |       |
| Net  realized gain (loss) on investment securities-trading     |       | 56       |       | (631     | )          |
| Management  fee income                                         |       | 577      |       | 331      |       |
| Increase  in cash surrender value of bank-owned life insurance |       | 148      |       | 75       |       |
| Other  income (loss)                                           |       | 8        |       | (29      | )          |
|                                                           |       |     |       |     |       |
| Total  non-interest income                                     |       | 5,781    |       | 5,756    |       |
|                                                           |       |     |       |     |       |
| Non-interest  expense:                                         |       |     |       |     |       |
| Salary  and benefits                                           |       | 6,143    |       | 5,486    |       |
| Occupancy                                                      |       | 1,453    |       | 1,377    |       |
| Professional  fees                                             |       | 468      |       | 483      |       |
| Depreciation                                                   |       | 560      |       | 540      |       |
| Data  communications                                           |       | 895      |       | 744      |       |
| FDIC  insurance premiums                                       |       | 549      |       | 415      |       |
| Mortgage  loan repurchases and settlements                     |       | 563      |       | 581      |       |
| Amortization  of intangibles                                   |       | 60       |       | 60       |       |
| Other  operating expenses                                      |       | 2,404    |       | 2,351    |       |
|                                                           |       |     |       |     |       |
| Total  non-interest expense                                    |       | 13,095   |       | 12,037   |       |
|                                                           |       |     |       |     |       |
| Net  income before income taxes                                |       | 5,528    |       | 3,122    |       |
|                                                           |       |     |       |     |       |
| Provision  for income taxes                                    |       | 1,728    |       | 953      |       |
|                                                           |       |     |       |     |       |
| Net  income                                                    |       | $        | 3,800      |     | $          | 2,169 |   |
|                                                           |       |     |       |     |       |
| Earnings  per common share - basic                             |       | $        | 0.13       |     | $          | 0.09 |   |
|                                                           |       |     |       |     |       |
| Earnings  per common share - diluted                           |       | $        | 0.13       |     | $          | 0.09 |   |
|                                                           |       |     |       |     |       |
| Weighted-average  common shares outstanding - basic            |       | 29,085   |       | 24,374   |       |
|                                                           |       |     |       |     |       |
| Weighted-average  common shares outstanding - diluted          |       | 29,534   |       | 24,805   |       |

 

Seeaccompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION ANDSUBSIDIARIES**

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended March 31, 2010 and 2009

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                   |       |     |       |     |       |
| Net income                                                                                                                                                             |       | $        | 3,800      |     | $          | 2,169 |   |
| Other comprehensive  income:                                                                                                                                           |       |     |       |     |       |
| Unrealized gain on  available-for-sale investment securities:                                                                                                          |       |     |       |     |       |
| Unrealized holding gain  arising during the period, net of tax expense of $442 thousand in 2010 and  tax expense of $778 thousand in 2009                              |       | 1,031    |       | 1,814    |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Less: reclassification  adjustment for net gains included in net income net of tax expense of $91  thousand in 2010 and $188 thousand in 2009                          |       | (173     | )          | (364     | )          |
|                                                                                                                                                                   |       |     |       |     |       |
|                                                                                                                                                                   |       | 858      |       | 1,450    |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Unrealized loss on  derivative instruments designated as cash flow hedges, net of tax benefit of  $41 thousand in 2010 and net of tax benefit of $109 thousand in 2009 |       | (78      | )          | (210     | )          |
|                                                                                                                                                                   |       |     |       |     |       |
| Comprehensive income                                                                                                                                                   |       | $        | 4,580      |     | $          | 3,409 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Threemonths ended March 31, 2010 and 2009

(Inthousands)

(Unaudited)

 
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  December 31, 2008                  |       | 24,014     |       | $          | 24,014     |           | $          | 130,709      |       | $                 | 3,437      |       | $          | (154 | ) | $ | 158,006 |   |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  options exercised                          |       | 2          |       | 2          |       | 5              |       | —       |       | —            |       | 7          |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  compensation expense, net of tax benefits  |       | —     |       | —     |       | 66             |       | —       |       | —            |       | 66         |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Shares  issued for deferred compensation plan     |       | 287        |       | 287        |       | 1,278          |       | —       |       | —            |       | 1,565      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Dividends  on common stock of $0.01 per share     |       | —     |       | —     |       | —         |       | (240         | )          | —            |       | (240       | )          |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Change  in accumulated other comprehensive income |       | —     |       | —     |       | —         |       | —       |       | 1,240             |       | 1,240      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Net  income                                       |       | —     |       | —     |       | —         |       | 2,169        |       | —            |       | 2,169      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  March 31, 2009                     |       | 24,303     |       | $          | 24,303     |           | $          | 132,058      |       | $                 | 5,366      |       | $          | 1,086 |   | $ | 162,813 |   |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  December 31, 2009                  |       | 28,718     |       | $          | 28,718     |           | $          | 159,798      |       | $                 | 12,705     |       | $          | 3,286 |   | $ | 204,507 |   |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  options exercised                          |       | 3          |       | 3          |       | 15             |       | —       |       | —            |       | 18         |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  compensation expense, net of tax benefit   |       | —     |       | —     |       | 60             |       | —       |       | —            |       | 60         |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Dividends  on common stock of $0.02 per share     |       | —     |       | —     |       | —         |       | (575         | )          | —            |       | (575       | )          |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Change  in accumulated other comprehensive income |       | —     |       | —     |       | —         |       | —       |       | 780               |       | 780        |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Net  income                                       |       | —     |       | —     |       | —         |       | 3,800        |       | —            |       | 3,800      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  March 31, 2010                     |       | 28,721     |       | $          | 28,721     |           | $          | 159,873      |       | $                 | 15,930     |       | $          | 4,066 |   | $ | 208,590 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

 

Three Months Ended March 31,2010 and 2009

 

(In thousands)

 

(Unaudited)

 
| ** **                                                                                    | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                                        |       |       |       |       |       |
| Net  income                                                                                   |       | $          | 3,800      |       | $          | 2,169 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |       |       |       |       |
| Depreciation                                                                                  |       | 560        |       | 540        |       |
| Amortization  of premiums, discounts and intangibles                                          |       | 152        |       | 75         |       |
| Provision  for loan losses                                                                    |       | 2,425      |       | 1,216      |       |
| Loans  held for sale originated                                                               |       | (461,534   | )          | (616,167   | )          |
| Proceeds  from the sale of loans held for sale                                                |       | 499,864    |       | 564,449    |       |
| Realized  and unrealized gains on mortgage banking activities                                 |       | (2,822     | )          | (3,343     | )          |
| Proceeds  from sale of investment securities-trading                                          |       | 140        |       | 1,809      |       |
| Purchase  of investment securities-trading                                                    |       | (188       | )          | (6,100     | )          |
| Realized  loss on sale of investments securities-trading                                      |       | —     |       | 619        |       |
| Unrealized  (gain) loss on investment securities-trading                                      |       | (56        | )          | 12         |       |
| Gain  on sale of investment securities available-for-sale                                     |       | (264       | )          | (769       | )          |
| Loss  on sale of investment securities available-for-sale                                     |       | —     |       | 217        |       |
| Gain  on sale of other assets                                                                 |       | (3         | )          | —     |       |
| Gain  on sale of other real estate owned                                                      |       | (31        | )          | 36         |       |
| Stock  compensation expense, net of tax benefits                                              |       | 60         |       | 66         |       |
| Increase  in cash surrender value of bank-owned life insurance                                |       | (149       | )          | (75        | )          |
| Decrease  in accrued interest receivable and other assets                                     |       | (674       | )          | (2,238     | )          |
| Increase  in accrued interest payable, escrow liabilities and other liabilities               |       | 226        |       | 5,233      |       |
|                                                                                          |       |       |       |       |       |
| Net  cash provided by (used in) operating activities                                          |       | 41,506     |       | (52,251    | )          |
|                                                                                          |       |       |       |       |       |
| Cash  flows from investing activities:                                                        |       |       |       |       |       |
| Net  purchases of premises and equipment                                                      |       | (587       | )          | (105       | )          |
| Proceeds  from maturity and call of investment securities available-for-sale                  |       | 5,100      |       | 19,180     |       |
| Proceeds  from sale of investment securities available-for-sale                               |       | —     |       | 219        |       |
| Proceeds  from sale of mortgage-backed securities available-for-sale                          |       | 13,318     |       | 43,589     |       |
| Purchase  of investment securities available-for-sale                                         |       | (10,088    | )          | —     |       |
| Purchase  of mortgage-backed securities available-for-sale                                    |       | (17,664    | )          | —     |       |
| Purchase  of other investments                                                                |       | —     |       | (97        | )          |
| Redemptions  of investment securities available-for-sale                                      |       | 12,917     |       | 10,962     |       |
| Redemptions  of investment securities held-to-maturity                                        |       | 2,480      |       | 3,309      |       |
| Net  increase in loans receivable, net of deferred fees and costs                             |       | (15,999    | )          | (33,764    | )          |
|                                                                                          |       |       |       |       |       |
| Net  cash provided by (used in) investing activities                                          |       | (10,523    | )          | 43,293     |       |
|                                                                                          |       |       |       |       |       |
| Cash  flows from financing activities:                                                        |       |       |       |       |       |
| Net  increase in deposits                                                                     |       | 29,133     |       | 30,219     |       |
| Net  increase (decrease) in other borrowed funds - short term                                 |       | (51,545    | )          | 1,423      |       |
| Net  increase (decrease) in mortgage funding checks                                           |       | (5,299     | )          | 7,967      |       |
| Stock  options exercised                                                                      |       | 18         |       | 7          |       |
| Shares  issued for deferred compensation plan                                                 |       | —     |       | 1,565      |       |
| Dividends  on common stock                                                                    |       | (575       | )          | (240       | )          |
|                                                                                          |       |       |       |       |       |
| Net  cash provided by (used in) financing activities                                          |       | (28,268    | )          | 40,941     |       |
|                                                                                          |       |       |       |       |       |
| Net  increase in cash and cash equivalents                                                    |       | 2,715      |       | 31,983     |       |
|                                                                                          |       |       |       |       |       |
| Cash  and cash equivalents at beginning of the year                                           |       | 24,841     |       | 45,928     |       |
|                                                                                          |       |       |       |       |       |
| Cash  and cash equivalents at end of the period                                               |       | $          | 27,556     |       | $          | 77,911 |   |
|                                                                                          |       |       |       |       |       |
| **Supplemental disclosure of cash flow information:**                                         |       |       |       |       |       |
| Cash  paid during the period for interest                                                     |       | $          | 7,698      |       | $          | 9,876 |   |
| Cash  paid for income taxes                                                                   |       | 255        |       | —     |       |
|                                                                                          |       |       |       |       |       |
| **Supplemental schedule of noncash investing and financing  activities:**                     |       |       |       |       |       |
| Unsettled  purchases of investment securities available-for-sale                              |       | 8,613      |       | —     |       |
| Transfer  of loans to other real estate owned                                                 |       | —     |       | 291        |       |

 

Seeaccompanying notes to consolidated financial statements.

 

7

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

March 31, 2010

(Unaudited)

 

Note1

 

*Organization*

 

CardinalFinancial Corporation (the “Company”) is incorporated under the laws ofthe Commonwealth 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 and its subsidiary, George Mason Mortgage, LLC (“George Mason”), amortgage banking company based in Fairfax, Virginia. In January 2009, theBank organized a second mortgage subsidiary, Cardinal First Mortgage, LLC (“CardinalFirst”) also based in Fairfax, Virginia. The Bank has a trust division, Cardinal Trust and InvestmentServices.  In addition to the Bank, theCompany has two nonbank subsidiaries; Wilson/Bennett Capital Management, Inc.(“Wilson/Bennett”), an asset management firm, and Cardinal Wealth Services, Inc.(“CWS”), an investment services subsidiary.

 

*Basisof Presentation*

 

Inthe opinion of management, the accompanying consolidated financial statementshave been prepared 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, 2010 are not necessarily indicativeof the results to be expected for the full year ending December 31, 2010.The unaudited interim financial statements should be read in conjunction withthe audited financial statements and notes to financial statements that areincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2009.

 

**Note 2**

** **

***Stock-Based Compensation***

** **

AtMarch 31, 2010, the Company had two stock-based employee compensationplans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 EquityCompensation Plan (the “Equity Plan”).

 

In1998, the Company adopted the Option Plan pursuant to which the Company maygrant stock options for up to 625,000 shares of the Company’s common stock toemployees and members of the Company’s and its subsidiaries’ boards ofdirectors. As of November 23, 2008, the Option Plan expired, andtherefore, there are no shares of common stock available to grant under thisplan.

 

In2002, the Company adopted the Equity Plan. The Equity Plan authorizes thegranting of options, which may be incentive stock options or non-qualifiedstock options, stock appreciation rights, restricted stock awards, phantomstock awards and performance share awards to directors, eligible officers andkey employees of the Company.  The EquityPlan currently authorizes grants and awards with respect to 2,420,000 shares ofthe Company’s common stock.  There were452,168 shares of the Company’s common stock available for future grants andawards in the Equity Plan as of March 31, 2010.

 

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Stockoptions are granted with an exercise price equal to the common stock’s fairmarket value at the date of grant. Director stock options have ten year termsand vest and become fully exercisable at the grant date. Certain employee stockoptions have ten year terms and vest and become fully exercisable after threeyears.  Other employee stock options haveten year terms and vest and become fully exercisable in 20% increments beginningas of the grant date.  In addition, theCompany has granted stock options to employees of the Company that have tenyear terms and vest and become fully exercisable in 20% increments beginningafter their first year of service.

 

TheCompany has only made awards of stock options under the Option Plan and theEquity Plan.

 

Totalexpense related to the Company’s share-based compensation plans for the threemonths ended March 31, 2010 and 2009 were $60,000 and $66,000,respectively. The total income tax benefit recognized in the income statement forshare-based compensation arrangements was $20,700 and $22,000 for the threemonths ended March 31, 2010 and 2009, respectively.

 

Optionsgranted for the three months ended March 31, 2010 and 2009 were 5,000 and68,150, respectively.  The weightedaverage per share fair value of stock option grants for the three months ended March 31,2010 and 2009 was $4.08 and $2.60, respectively.  The fair values of the options granted duringthe three months ended March 31, 2010 and 2009 were estimated as of thegrant date using the Black-Scholes option-pricing model based on the followingweighted average assumptions:

 
| ** **              | ** ** | **Three Months Ended********March 31,** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|
| ** **              | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Estimated option life   |       | 6.5 Years                                    |       | 6.5 Years |   |
| Risk free interest rate |       | 3.14                                         | %          | 2.10 | % |
| Expected volatility     |       | 45.90                                        | %          | 44.60 | % |
| Expected dividend yield |       | 0.89                                         | %          | 0.67 | % |

 

Expectedvolatility is based upon the average annual historical volatility of theCompany’s common stock. The estimated option life is derived from the “simplifiedmethod” formula as described in Staff Accounting Bulletin No. 110. Therisk free interest rate is based upon the seven-year U.S. Treasury note rate ineffect 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, 2010 is summarizedas follows:

 

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| ** **                                  | ** ** | ** **    | ** ** | ** **   | ** ** | **Weighted**     | ** ** | ** **    | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|------------------|------------|---------------|------------|
| ** **                                  | ** ** | ** **    | ** ** | **Weighted** | ** ** | **Average**      | ** ** | **Aggregate** | ** ** |
| ** **                                  | ** ** | ** **    | ** ** | **Average**  | ** ** | **Remaining**    | ** ** | **Intrinsic** | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual**  | ** ** | **Value**     | ** ** |
| ** **                                  | ** ** | **Shares**    | ** ** | **Price**    | ** ** | **Term (Years)** | ** ** | **($000)**    | ** ** |
| Outstanding  at December 31, 2009      |       | 2,139,433     |       | $            | 8.43       |             |       |          |       |   |
| Granted                                     |       | 5,000         |       | 8.97         |       |             |       |          |       |
| Exercised                                   |       | (2,950        | )          | 6.13         |       |             |       |          |       |
| Forfeited                                   |       | (10,610       | )          | 9.97         |       |             |       |          |       |
| Expired                                     |       | —        |       | —       |       |             |       |          |       |
| Outstanding  at March 31, 2010         |       | 2,130,873     |       | $            | 8.43       |             | 4.71       |          | $          | 4,794,592 |   |
| Options  exercisable at March 31, 2010 |       | 1,970,073     |       | $            | 8.41       |             | 4.45       |          | $          | 4,468,626 |   |

 

The intrinsic value of options exercised during the three months ended March 31,2010 and 2009 was $18,259 and $6,000, respectively.

 

A summary of the status of the Company’s non-vested stock options andchanges during the three months ended March 31, 2010 is as follows:

 
| ** **                         | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                         | ** ** | ** **    | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**    | ** ** | **Fair Value** | ** ** |
| Balance  at December 31, 2009 |       | 193,700       |       | $              | 4.00       |   |
| Granted                            |       | 5,000         |       | 4.08           |       |
| Vested                             |       | (37,900       | )          | 4.39           |       |
| Forfeited                          |       | —        |       | —         |       |
| Balance  at March 31, 2010    |       | 160,800       |       | $              | 3.91       |   |

 

AtMarch 31, 2010, there was $723,000 of total unrecognized compensation costrelated to non-vested share-based compensation arrangements granted under theplans. The cost is expected to be recognized over a weighted average period of2.4 years. The total fair value of shares that vested during the three monthsended March 31, 2010 and 2009 were $166,000 and $170,000, respectively.

 

Note3

 

*Segment Information*

 

TheCompany operates in three business segments: commercial banking, mortgagebanking, and wealth management and trust services.

 

Thecommercial banking segment includes both commercial and consumer lending andprovides customers with such products as commercial loans, real estate loans,business financing and consumer loans. In addition, this segment providescustomers with several choices of deposit products including demand depositaccounts, savings accounts and certificates of deposit. The mortgage bankingsegment engages primarily in the origination and acquisition of residentialmortgages for sale into the secondary market on a best efforts basis. Thewealth management and trust services segment provides investment and financialadvisory services to businesses and individuals, including financial planning,retirement/estate planning, trust, estates, custody, investment management,escrows, and retirement plans.

 

Informationabout the reportable segments and reconciliation of this information to theconsolidated financial statements at and for the three months ended March 31,2010 and 2009 is as follows:

 

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**At and for the Three Months Ended March 31, 2010 (inthousands):**

 
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth  Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust  Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net  interest income        |       | $              | 14,983     |         | $          | 484                    |       | $          | —     |             | $          | (200             | )          | $ | — |   | $ | 15,267 |   |
| Provision  for loan losses  |       | 2,425          |       | —       |       | —                 |       | —     |       | —           |       | 2,425            |       |
| Non-interest  income        |       | 1,027          |       | 3,697        |       | 1,014                  |       | 59         |       | (16              | )          | 5,781            |       |
| Non-interest  expense       |       | 8,344          |       | 3,326        |       | 819                    |       | 622        |       | (16              | )          | 13,095           |       |
| Provision  for income taxes |       | 1,611          |       | 296          |       | 68                     |       | (247       | )          | —           |       | 1,728            |       |
| Net  income (loss)          |       | $              | 3,630      |         | $          | 559                    |       | $          | 127        |             | $          | (516             | )          | $ | — |   | $ | 3,800 |   |
|                        |       |           |       |         |       |                   |       |       |       |             |       |             |       |
| Total  Assets               |       | $              | 1,923,066  |         | $          | 160,359                |       | $          | 3,500      |             | $          | 231,843          |       | $ | (369,500 | ) | $ | 1,949,268 |   |
| Average  Assets             |       | $              | 1,907,211  |         | $          | 108,065                |       | $          | 3,396      |             | $          | 232,892          |       | $ | (339,586 | ) | $ | 1,911,978 |   |

 

**At and for the Three Months Ended March 31, 2009 (inthousands):**

 
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth  Management**  | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|-------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                 | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services** | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net  interest income        |       | $              | 10,129     |         | $          | 731                     |       | $          | —     |             | $          | (241             | )          | $ | — |   | $ | 10,619 |   |
| Provision  for loan losses  |       | 1,190          |       | 26           |       | —                  |       | —     |       | —           |       | 1,216            |       |
| Non-interest  income        |       | 1,338          |       | 4,237        |       | 821                     |       | (624       | )          | (16              | )          | 5,756            |       |
| Non-interest  expense       |       | 7,946          |       | 2,957        |       | 806                     |       | 344        |       | (16              | )          | 12,037           |       |
| Provision  for income taxes |       | 676            |       | 683          |       | 5                       |       | (411       | )          | —           |       | 953              |       |
| Net  income (loss)          |       | $              | 1,655      |         | $          | 1,302                   |       | $          | 10         |             | $          | (798             | )          | $ | — |   | $ | 2,169 |   |
|                        |       |           |       |         |       |                    |       |       |       |             |       |             |       |
| Total  Assets               |       | $              | 1,746,756  |         | $          | 224,577                 |       | $          | 3,463      |             | $          | 185,789          |       | $ | (367,142 | ) | $ | 1,793,443 |   |
| Average  Assets             |       | $              | 1,711,584  |         | $          | 169,795                 |       | $          | 3,476      |             | $          | 180,774          |       | $ | (345,250 | ) | $ | 1,720,379 |   |

 

TheCompany 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.The parent company’s net interest expense is comprised of interest income fromshort-term investments and interest expense on trust preferred securities.

 

Note 4

 

*Earnings Per Share*

 

Thefollowing is the calculation of basic and diluted earnings per share for thethree months ended March 31, 2010 and 2009.  Antidilutive outstanding stock options excludedfrom the weighted average shares outstanding for the diluted earnings per sharecalculation were 69,514 and 787,721 at March 31, 2010 and 2009,respectively.  These stock options haveexercise prices that were greater than the average market price of the Company’scommon stock for the periods presented.

 
| **(In  thousands,**                          | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| **except per  share data)**                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net income available to  common shareholders |       | $                      | 3,800      |   | $ | 2,169 |   |
| Weighted average common  shares - basic      |       | 29,085                 |       | 24,374 |   |
| Weighted average common  shares - diluted    |       | 29,534                 |       | 24,805 |   |
| Earnings per common  share - basic           |       | $                      | 0.13       |   | $ | 0.09 |   |
| Earnings per common  share - diluted         |       | $                      | 0.13       |   | $ | 0.09 |   |

 

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Weightedaverage shares for the basic earnings per share calculation in increased by thenumber of shares required to be issued under the Company’s various deferredcompensation plans.  These plans providefor a Company match, such match must be in the common stock of theCompany.  Employees who participate inthe Company’s deferred compensation plans can allocate, at their discretion,their contributions to various investment options, including an option toinvest in Company Common Stock.  Theincremental weighted average shares attributable to the deferred compensationplans included in diluted outstanding shares assumes the participants opt toinvest all of their contributions into the Company’s Common Stock investmentoption.

 

Thefollowing shows the composition of basic outstanding shares for the threemonths ended March 31, 2010 and 2009:

 
| **(in  thousands)**                                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Weighted  average common shares outstanding                              |       | 28,720   |       | 24,103   |       |
| Weighted  average shares attributable to the deferred compensation plans |       | 365      |       | 271      |       |
| Total  weighted average shares - basic                                   |       | 29,085   |       | 24,374   |       |

 

Thefollowing shows the composition of diluted outstanding shares for the threemonths ended March 31, 2010 and 2009:

 
| **(in thousands)**                                                               | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |
| Weighted  average shares outstanding - basic (from above)                        |       | 29,085   |       | 24,374   |       |
| Incremental  weighted average shares attributable to deferred compensation plans |       | 232      |       | 354      |       |
| Weighted  average shares attributable to vested stock options                    |       | 217      |       | 77       |       |
| Total  weighted average shares - diluted                                         |       | 29,534   |       | 24,805   |       |

 

Note 5

 

*Investment Securities*

 

Thefair value and amortized cost of investment securities at March 31, 2010and December 31, 2009 are shown in the table below.

 

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| ** **                                 | ** ** | **March 31, 2010** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **Gross**               | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                         | ** ** | **cost**                | ** ** | **Gains** | ** ** | **Losses** | ** ** | **value** | ** ** |
| *Investment Securities Available-for-Sale* | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  government-sponsored agencies        |       | $                       | 50,919     |   | $ | 487 |   | $ | (114 | ) | $ | 51,292 |   |
| Mortgage-backed  securities                |       | 214,441                 |       | 6,573 |   | (510 | ) | 220,504 |   |
| Municipal  securities                      |       | 63,317                  |       | 565 |   | (527 | ) | 63,355 |   |
| U.S.  treasury securities                  |       | 4,906                   |       | 34 |   | — |   | 4,940 |   |
| Total                                      |       | $                       | 333,583    |   | $ | 7,659 |   | $ | (1,151 | ) | $ | 340,091 |   |
|                                       |       |                    |       |   |   |   |   |   |   |
| *Investment Securities Held-to-Maturity*   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage-backed  securities                |       | 24,682                  |       | 918 |   | (4 | ) | 25,596 |   |
| Corporate  bonds                           |       | 8,004                   |       | — |   | (4,642 | ) | 3,362 |   |
| Total                                      |       | $                       | 32,686     |   | $ | 918 |   | $ | (4,646 | ) | $ | 28,958 |   |

 
| ** **                                 | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **Gross**             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Amortized**         | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                         | ** ** | **cost**              | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| *Investment Securities Available-for-Sale* | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  government-sponsored agencies        |       | $                     | 56,048     |   | $ | 178 |   | $ | (567 | ) | $ | 55,659 |   |
| Mortgage-backed  securities                |       | 217,723               |       | 6,451 |   | (769 | ) | 223,405 |   |
| Municipal  securities                      |       | 59,691                |       | 486 |   | (569 | ) | 59,608 |   |
| U.S.  treasury securities                  |       | 4,901                 |       | — |   | (4 | ) | 4,897 |   |
| Total                                      |       | $                     | 338,363    |   | $ | 7,115 |   | $ | (1,909 | ) | $ | 343,569 |   |
|                                       |       |                  |       |   |   |   |   |   |   |
| *Investment Securities Held-to-Maturity*   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage-backed  securities                |       | 27,180                |       | 917 |   | (4 | ) | 28,093 |   |
| Corporate  bonds                           |       | 8,004                 |       | — |   | (4,661 | ) | 3,343 |   |
| Total                                      |       | $                     | 35,184     |   | $ | 917 |   | $ | (4,665 | ) | $ | 31,436 |   |

 

Thefair value and amortized cost of investment securities by contractual maturityat March 31, 2010 and December 31, 2009 are shown below.  Expected maturities may differ fromcontractual maturities because many issuers have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                         | ** ** | **March 31, 2010**     | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Available-for-Sale** | ** ** | **Held-to-Maturity** | ** ** |
| ** **                         | ** ** | **Amortized**          | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                 | ** ** | **cost**               | ** ** | **Value** | ** ** | **cost** | ** ** | **Value** | ** ** |
| After  1 year but within 5 years   |       | $                      | 4,906      |   | $ | 4,940 |   | $ | — |   | $ | — |   |
| After  5 years but within 10 years |       | 27,984                 |       | 28,489 |   | — |   | — |   |
| After  10 years                    |       | 86,252                 |       | 86,158 |   | 8,004 |   | 3,362 |   |
| Mortgage-backed  securities        |       | 214,441                |       | 220,504 |   | 24,682 |   | 25,596 |   |
| Total                              |       | $                      | 333,583    |   | $ | 340,091 |   | $ | 32,686 |   | $ | 28,958 |   |

 
| ** **                         | ** ** | **December 31, 2009**  | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Available-for-Sale** | ** ** | **Held-to-Maturity** | ** ** |
| ** **                         | ** ** | **Amortized**          | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                 | ** ** | **cost**               | ** ** | **Value** | ** ** | **cost** | ** ** | **Value** | ** ** |
| After  1 year but within 5 years   |       | $                      | 4,901      |   | $ | 4,897 |   | $ | — |   | $ | — |   |
| After  5 years but within 10 years |       | 32,164                 |       | 32,186 |   | — |   | — |   |
| After  10 years                    |       | 83,575                 |       | 83,081 |   | 8,004 |   | 3,343 |   |
| Mortgage-backed  securities        |       | 217,723                |       | 223,405 |   | 27,180 |   | 28,093 |   |
| Total                              |       | $                      | 338,363    |   | $ | 343,569 |   | $ | 35,184 |   | $ | 31,436 |   |

 

Thefollowing table shows the Company’s investment securities’ gross unrealizedlosses and their fair value, aggregated by investment category and the lengthof time that individual securities have been in a continuous unrealized lossposition at March 31, 2010 and December 31, 2009.

 
| ** **                                    | ** ** | **March 31, 2010**      | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| **Investment  Securities Available-for-Sale** | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| **(In thousands)**                            | ** ** | **Fair Value**          | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| U.S. treasury  securities                     |       | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   | — |   | — |   |
| U.S. government -  sponsored agencies         |       | 15,183                  |       | (114 | ) | — |   | — |   | 15,183 |   | (114 | ) |
| Mortgage-backed  securities                   |       | 20,969                  |       | (179 | ) | 7,822 |   | (331 | ) | 28,791 |   | (510 | ) |
| Municipal securities                          |       | 16,710                  |       | (238 | ) | 9,472 |   | (289 | ) | 26,182 |   | (527 | ) |
| Total temporarily  impaired securities        |       | $                       | 52,862     |   | $ | (531 | ) | $ | 17,294 |   | $ | (620 | ) | $ | 70,156 |   | $ | (1,151 | ) |
|                                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Investment  Securities Held-to-Maturity** | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**      | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
| **(In thousands)**                          | ** ** | **Fair Value**          | ** ** | **Unrealized loss**   | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| Mortgage-backed  securities                 |       | $                       | 40         |                  |       |           | $          | 39 |   | $ | (4 | ) | $ | 79 |   | $ | (4 | ) |
| Corporate bonds                             |       | —                  |       | —                |       | 3,362          |       | (4,642 | ) | 3,362 |   | (4,642 | ) |
| Total temporarily  impaired securities      |       | $                       | 40         |                  | $          | —         |       | $ | 3,401 |   | $ | (4,646 | ) | $ | 3,441 |   | $ | (4,646 | ) |
|                                             |            |                         |            |                       |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **December 31, 2009**   | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| **Investment Securities  Available-for-Sale** | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| **(In thousands)**                            | ** ** | **Fair Value**          | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| U.S  treasury securities                      |       | $                       | 4,897      |   | $ | (4 | ) | $ | — |   | $ | — |   | $ | 4,897 |   | $ | (4 | ) |
| U.S.  government - sponsored agencies         |       | 34,816                  |       | (567 | ) | — |   | — |   | 34,816 |   | (567 | ) |
| Mortgage-backed  securities                   |       | 28,665                  |       | (372 | ) | 8,258 |   | (397 | ) | 36,923 |   | (769 | ) |
| Municipal  securities                         |       | 22,504                  |       | (317 | ) | 8,147 |   | (252 | ) | 30,651 |   | (569 | ) |
| Total  temporarily impaired securities        |       | $                       | 90,882     |   | $ | (1,260 | ) | $ | 16,405 |   | $ | (649 | ) | $ | 107,287 |   | $ | (1,909 | ) |

 
| **Investment Securities  Held-to-Maturity** | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**      | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
| **(In thousands)**                          | ** ** | **Fair Value**          | ** ** | **Unrealized loss**   | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| Mortgage-backed  securities                 |       | $                       | 56         |                  | $          | —         |       | $ | 39 |   | $ | (4 | ) | $ | 95 |   | $ | (4 | ) |
| Corporate  bonds                            |       | —                  |       | —                |       | 3,343          |       | (4,661 | ) | 3,343 |   | (4,661 | ) |
| Total  temporarily impaired securities      |       | $                       | 56         |                  | $          | —         |       | $ | 3,382 |   | $ | (4,665 | ) | $ | 3,438 |   | $ | (4,665 | ) |

 

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TheCompany completes reviews for other-than-temporary impairment at leastquarterly.  As of March 31, 2010,the majority of the investment securities portfolio consisted of securitiesrated AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of thebest quality and carry the smallest degree of investment risk.  At March 31, 2010, 96% of the Company’smortgage-related securities are guaranteed by the Federal National MortgageAssociation (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and theGovernment National Mortgage Association (GNMA).

 

TheCompany has $8.7 million in non-government non-agency mortgage-relatedsecurities.  These securities are ratedfrom AAA to AA.  The various protectiveelements on the non agency securities may change in the future if marketconditions or the financial stability of credit insurers changes, which couldimpact the ratings of these securities.

 

AtMarch 31, 2010, certain of the Company’s investment grade securities werein an unrealized loss position. Investment securities with unrealized losses are a result of pricingchanges due to recent and negative conditions in the current market environmentand not as a result of permanent credit impairment.  Contractual cash flows for the agencymortgage-backed securities are guaranteed and/or funded by the U.S.government.  Other mortgage-backedsecurities and municipal securities have third party protective elements andthere are no negative indications that the contractual cash flows will not bereceived when due.  The Company does notintend to sell nor does the Company believe it is probable that it will berequired to sell any of the temporarily impaired securities prior to therecovery of the amortized cost.

 

Theheld-to-maturity portfolio includes investments in four pooled trust preferredsecurities, totaling $8.0 million of par value at March 31, 2010 (eachsecurity has a par value of $2.0 million). These securities are presented as corporate bonds in the abovetable.  The collateral underlying thesestructured securities are instruments issued by financial institutions orinsurers.  The Company owns the A-3tranches in each issuance.  Each of thebonds is rated by more than one rating agency. Two of the securities have a composite rating of AA, one of thesecurities has a composite rating of BBB and the other security has a compositerating of BB.  These ratings areconsistent with the grades from the other rating agencies.  There is minimal observable trading activityfor these types of securities.  TheCompany has estimated the fair value of the securities through the use ofinternal calculations and through information provided by external pricingservices.  Given the level ofsubordination below the A-3 tranches, and the actual and expected performanceof the underlying collateral, the Company expects to receive all contractualinterest and principal payments recovering the amortized cost basis of each ofthe four securities, and concluded that these securities are notother-than-temporarily impaired.

 

Inone of the pooled trust preferred securities issues, 40% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 47% of the performing collateraldefaulted or deferred payment.  Inanother of the pooled trust preferred securities issues, 38% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 31% of the performing collateraldefaulted or deferred payment.  In thethird of the pooled trust preferred securities issues, 66% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 84% of the performing collateraldefaulted or deferred payment.  In thefourth of the pooled trust preferred securities issues, 50% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 73% of the performing collateraldefaulted or deferred payment.

 

Noother-than-temporary impairment has been recognized on the securities in theCompany’s investment portfolio for the three months ended March 31, 2010.

 

Relatedto the Company’s deferred compensation plan and for amounts invested in theCompany’s common stock, the Company reclassified trading securities of $2.0million to shareholders’ equity with a corresponding reclassification of the $2.0million deferred compensation liability also to equity.

 

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Note 6

 

*Derivative Instruments andHedging Activities*

 

TheCompany enters into rate lock commitments with its mortgage customers.  The Company is also a party to forwardmortgage loan sales contracts to sell loans servicing released.  The rate lock commitment and forward saleagreement are undesignated derivatives and marked to fair value throughearnings.  On the date the mortgage loancloses, the loan held for sale is designated as the hedged item in a cash flowhedge relationship and the forward loan sale is designated as the hedginginstrument.

 

AtMarch 31, 2010, accumulated other comprehensive income included anunrealized loss, net of tax, of $1,000 related to forward loan sales contractsdesignated as the hedging instrument in the cash flow hedge. Loans held forsale are generally sold within sixty days of closing and, therefore,substantially all of the amount recorded in accumulated other comprehensiveincome at March 31, 2010 that is related to the Company’s cash flow hedgeswill be recognized in earnings during the second quarter of 2010.

 

AtMarch 31, 2010, the Company had $110.6 million in residential mortgagerate lock commitments and associated forward sales and $129.8****million in forward loan sales associated with $144.0million of loans that had closed and presented as held for sale. 

 

TheCompany has interest rate swaps to mitigate its exposure to interest raterisk.  These interest rate swaps have anaggregate notional amount of $10.0 million to hedge against changes in cashflows caused by movement in interest rates related to the Company’s issuance of$20.0 million in trust preferred securities. In addition, the Company has an interest rate swap to mitigate thevariability in the fair value for one loan receivable.  At March 31, 2010, accumulated othercomprehensive income included an after-tax unrealized loss of $78,000 relatedto these interest rate swaps.  

 

Note 7

 

*Fair Value of DerivativeInstruments and Hedging Activities*

 

Thefollowing tables disclose the derivative instruments’ location on the Company’sstatement of condition and the fair value of those instruments at March 31,2010 and December 31, 2009.  Inaddition, the gains and losses related to these derivative instruments isprovided for the three months ended March 31, 2010 and 2009.

 

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**DerivativeInstruments and Hedging Activities**

**At of March 31, 2010**

**(in thousands)**

 
| ** **                                                  | ** ** | **Asset  Derivatives**                        | ** ** | **Liability  Derivatives** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                                  | ** ** | **Balance  Sheet**                            | ** ** | ** **                 | ** ** | **Balance  Sheet** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Location**                                  | ** ** | **Fair  Value**            | ** ** | **Location** | ** ** | **Fair  Value** | ** ** |
| **Derivatives Designated as Hedging Instruments**           |       |                                          |       |                       |       |   |   |   |   |
| Interest  Rate Swaps                                        |       | Accrued Interest Receivable  and Other Assets |       | $                          | —     |   | Accrued Interest Payable  and Other Liabilities |   | $ | 1,612 |   |
| Forward  Loan Sales Commitments                             |       | Accrued Interest Receivable  and Other Assets |       | 789                        |       | Accrued Interest Payable  and Other Liabilities |   | 363 |   |
| **Total Derivatives Designated as Hedging Instruments**     |       |                                          |       | 789                        |       |   |   | 1,975 |   |
|                                                        |       |                                          |       |                       |       |   |   |   |   |
| **Derivatives Not Designated as Hedging Instruments**       |       |                                          |       |                       |       |   |   |   |   |
| Forward  Loan Sales Commitments                             |       | Accrued Interest Receivable  and Other Assets |       | 3,138                      |       | Accrued Interest Payable  and Other Liabilities |   | 6 |   |
|                                                        |       |                                          |       |                       |       |   |   |   |   |
| Rate  Lock Commitments                                      |       | Accrued Interest Receivable  and Other Assets |       | 6                          |       | Accrued Interest Payable  and Other Liabilities |   | 196 |   |
| **Total Derivatives Not Designated as Hedging Instruments** |       |                                          |       | 3,144                      |       |   |   | 202 |   |
|                                                        |       |                                          |       |                       |       |   |   |   |   |
| **Total Derivatives**                                       |       |                                          |       | $                          | 3,933      |   |   |   | $ | 2,177 |   |

 

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**DerivativeInstruments and Hedging Activities**

**At of December 31, 2009**

**(in thousands)**

 
| ** **                                                  | ** ** | **Asset  Derivatives**                        | ** ** | **Liability  Derivatives** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                                  | ** ** | **Balance  Sheet**                            | ** ** | ** **                 | ** ** | **Balance  Sheet** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Location**                                  | ** ** | **Fair  Value**            | ** ** | **Location** | ** ** | **Fair  Value** | ** ** |
| **Derivatives Designated as Hedging Instruments**           |       |                                          |       |                       |       |   |   |   |   |
| Interest  Rate Swaps                                        |       | Accrued Interest Receivable  and Other Assets |       | $                          | 5          |   | Accrued Interest Payable  and Other Liabilities |   | $ | 1,437 |   |
| Forward  Loan Sales Commitments                             |       | Accrued Interest Receivable  and Other Assets |       | 2,163                      |       | Accrued Interest Payable  and Other Liabilities |   | 1,194 |   |
| **Total Derivatives Designated as Hedging Instruments**     |       |                                          |       | 2,168                      |       |   |   | 2,631 |   |
|                                                        |       |                                          |       |                       |       |   |   |   |   |
| **Derivatives Not Designated as Hedging Instruments**       |       |                                          |       |                       |       |   |   |   |   |
| Forward  Loan Sales Commitments                             |       | Accrued Interest Receivable  and Other Assets |       | 2,444                      |       | Accrued Interest Payable  and Other Liabilities |   | 3 |   |
| Rate  Lock Commitments                                      |       | Accrued Interest Receivable  and Other Assets |       | 3                          |       | Accrued Interest Payable  and Other Liabilities |   | 407 |   |
| **Total Derivatives Not Designated as Hedging Instruments** |       |                                          |       | 2,447                      |       |   |   | 410 |   |
|                                                        |       |                                          |       |                       |       |   |   |   |   |
| **Total Derivatives**                                       |       |                                          |       | $                          | 4,615      |   |   |   | $ | 3,041 |   |

 

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**Impact ofDerivative Instruments on the Statement of Income**

**For theThree Months Ended March 31, 2010**

**(in thousands)**

 
| **Derivatives in Fair Value Hedging  Relationships** | ** ** | **Locations  of Gain   (Loss) Recognized   in Income on  Derivative** | ** ** | **Amount  of Gain   (Loss) Recognized in  Income on Derivative** | ** ** | **Location  of Gain   (Loss) Recognized   in Income on  Hedged Item** | ** **   | **Amount  of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |    |   |
|------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------------|--------------|-------------------------------------------------------------------|------------|---------|--------|
|                                                 |       |                                                                  |       |                                                             |       |                                                                  |         |                                                              |       |    |   |
| Interest  Rate Swaps                                 |       | Other Income                                                          |       | $                                                                | 61         |                                                                  | Other Income |                                                              | $          | (61     | )      |   |   |
| **Total**                                            | ** ** | ** **                                                            | ** ** | **$**                                                            | **61**     |                                                                  |         |                                                              | **$**      | **(61** | **)**  |   |   |

 
| **Derivatives in Cash Flow Hedging  Relationships** | ** ** | **Amount  of Gain  (Loss) Recognized  in Other  Comprehensive  Income on  Derivative (Effective  Portion)** | ** ** | **Location  of Gain  (Loss) Reclassified  from Accumulated  Other Comprehensive  Income into Income  (Effective Portion)** | ** **   | **Amount  of Gain  (Loss) Reclassified from Accumulated  Other  Comprehensive  Income into Income  (Effective Portion)** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                     |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Interest Rate Swaps                                 |       | $                                                                                                           | (78        | )                                                                                                                          | Other Income |                                                                                                                     | $          | —                                                                                                                                       |       | Other Income                                                                                                                               |       | $ | — |   |
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                     |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Forward Loan Sales  Commitments                     |       | (1                                                                                                          | )          | Other Income                                                                                                               |         | (2,205                                                                                                                   | )          | Other Income                                                                                                                                 |       | 1                                                                                                                                          |       |
| **Total**                                           | ** ** | **$**                                                                                                       | **(79**    | **)**                                                                                                                      | ** **   | ** **                                                                                                               | **$**      | **(2,205**                                                                                                                                   | **)**      |                                                                                                                                       |       | **$** | **1** |   |

 
| ** **                                                | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location  of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    |   |   |   |   |   |   |
|-----------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------------|---------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| **Derivatives Not Designated as****Hedging  Instruments** |       |                                                             |       |                                                              |                                                          |   |   |   |   |   |   |
| Forward Loan Sales Commitments                            |       | $                                                                | 2,941      |                                                              | Realized and unrealized gains on mortgage banking  activities |   |   |   |
| Forward Loan Sales Commitments                            |       | 190                                                              |       | Other Income                                                      |                                                          |   |   |   |   |   |   |
| Rate Lock Commitments                                     |       | (190                                                             | )          | Other Income                                                      |                                                          |   |   |   |   |   |   |
| **Total**                                                 | ** ** | **$**                                                            | **2,941**  |                                                              |                                                          |   |   |   |   |   |   |   |

 

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**Impact ofDerivative Instruments on the Statement of Income**

**For theThree Months Ended March 31, 2009**

**(in thousands)**

 
| **Derivatives in Fair Value Hedging  Relationships** | ** ** | **Locations  of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount  of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount  of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |    |   |
|------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------------|--------------|-------------------------------------------------------------------|------------|---------|--------|
|                                                 |       |                                                                |       |                                                            |       |                                                                |         |                                                              |       |    |   |
| Interest  Rate Swaps                                 |       | Other Income                                                        |       | $                                                               | (214       | )                                                                   | Other Income |                                                              | $          | 214     |   |   |   |
| **Total**                                            | ** ** |                                                                | ** ** | **$**                                                           | **(214**   | **)**                                                               |         |                                                              | **$**      | **214** |   |   |   |

 
| **Derivatives in Cash Flow Hedging  Relationships** | ** ** | **Amount  of Gain  (Loss) Recognized  in Other  Comprehensive  Income on  Derivative (Effective  Portion)** | ** ** | **Location  of Gain  (Loss) Reclassified  from Accumulated  Other Comprehensive  Income into Income  (Effective Portion)** | ** **   | **Amount  of Gain  (Loss) Reclassified  from Accumulated  Other  Comprehensive  Income into Income  (Effective Portion)** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** |   |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |   |
| Interest Rate Swaps                                 |       | $                                                                                                           | (202       | )                                                                                                                          | Other Income |                                                                                                                      | $          | —                                                                                                                                       |       | Other Income                                                                                                                               |   | $ | — |   |
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |   |
| Forward Loan Sales  Commitments                     |       | (431                                                                                                        | )          | Other Income                                                                                                               |         | (1,029                                                                                                                    | )          | Other Income                                                                                                                                 |       | 1                                                                                                                                          |   |
| **Total**                                           | ** ** | **$**                                                                                                       | **(633**   | **)**                                                                                                                      | ** **   | ** **                                                                                                                | **$**      | **(1,029**                                                                                                                                   | **)**      |                                                                                                                                       |   | **$** | **1** |   |

 
| ** **                                                | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location  of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    |   |   |   |   |   |   |
|-----------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------------|---------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| **Derivatives  Not Designated as****Hedging Instruments** |       |                                                             |       |                                                              |                                                          |   |   |   |   |   |   |
| Forward Loan Sales  Commitments                           |       | $                                                                | 2,037      |                                                              | Realized and unrealized gains on mortgage banking  activities |   |   |   |
| Forward Loan Sales  Commitments                           |       | 404                                                              |       | Other Income                                                      |                                                          |   |   |   |   |   |   |
| Rate Lock Commitments                                     |       | (404                                                             | )          | Other Income                                                      |                                                          |   |   |   |   |   |   |
| **Total**                                                 | ** ** | **$**                                                            | **2,037**  |                                                              |                                                          |   |   |   |   |   |   |   |

 

#### **Note 8**

#### ** **

*Goodwill and Other Intangibles*

 

Informationconcerning total amortizable other intangible assets at March 31, 2010 is asfollows:

 

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| ** **                         | ** ** | **Mortgage Banking**        | ** ** | **Wealth Management  and Trust Services** | ** ** | **Total**                   | ** ** |
|------------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| **(In  thousands)**                | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**             | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  December 31, 2009 |       | $                           | 1,781      |                                      | $          | 1,039                       |       | $ | 795 |   | $ | 576 |   | $ | 2,576 |   | $ | 1,615 |   |
| 2010 activity:                     |       |                        |       |                                      |       |                        |       |   |   |   |   |   |   |
| Customer relationship  intangibles |       | —                      |       | 50                                        |       | —                      |       | 10 |   | — |   | 60 |   |
| Balance at  March 31, 2010    |       | $                           | 1,781      |                                      | $          | 1,089                       |       | $ | 795 |   | $ | 586 |   | $ | 2,576 |   | $ | 1,675 |   |

 

Theaggregate amortization expense was $60,000 for each of the three months ended March 31,2009 and 2008.

 

Theestimated amortization expense for the next five years is as follows:

 
| **(In  thousands)**               |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2010 (April — December) |   | $      | 179    |   |
| 2011                              |   | 238    |   |
| 2012                              |   | 238    |   |
| 2013                              |   | 189    |   |
| 2014                              |   | 41     |   |
| 2015 and thereafter               |   | 16     |   |
|                                   |        |        |        |  |

 

Thecarrying amount of goodwill at March 31, 2010 was as follows:

 
| **(In  thousands)**                | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and Trust  Services** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at  December 31, 2009 |       | $                       | 22         |                  | $          | 10,120                                      |       | $         | 2,832      |   | $ | 12,974 |   |
| No activity                        |       | —                  |       | —                |       | —                                      |       | —    |       |
| Balance at  March 31, 2010    |       | $                       | 22         |                  | $          | 10,120                                      |       | $         | 2,832      |   | $ | 12,974 |   |

 

Goodwillof each of the Company’s business segments is tested for impairment on anannual basis or more frequently if events or circumstances warrant. 

 

Note9

 

*Commitmentsand Contingencies*

 

TheCompany is a party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit and financial guarantees. Commitments to extend credit are

 

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agreementsto lend to a customer so long as there is no violation of any conditionestablished in the contract.  Commitmentsusually have fixed expiration dates up to one year or other termination clausesand may require payment of a fee.  Sincemany of the commitments are expected to expire without being drawn upon, thetotal commitment amounts do not necessarily represent future cash requirements.  These instruments represent obligations ofthe Company to extend credit or guarantee borrowings and are not recorded onthe consolidated statements of financial condition.  The rates and terms of these instruments arecompetitive with others in the market in which the Company operates.

 

Standbyletters of credit are conditional commitments issued by the Company toguarantee the performance of the contractual obligations by a customer to athird party.  The majority of theseguarantees extend until satisfactory completion of the customer’s contractualobligations.  All standby letters ofcredit outstanding at March 31, 2010 are collateralized.

 

TheCompany uses the same credit policies in making commitments and conditionalobligations as it does for on-balance-sheet instruments.  The Company evaluates each customer’screditworthiness on a case-by-case basis and requires collateral to supportfinancial instruments when deemed necessary. The amount of collateral obtained upon extension of credit is based uponmanagement’s evaluation of the counterparty. Collateral held varies but may include deposits held by the Company,marketable securities, accounts receivable, inventory, property, plant andequipment, and income-producing commercial properties.

 

Commitmentsto extend credit of $112.3 million as of March 31, 2010 are related toGeorge Mason’s mortgage loan funding commitments and are of a short termnature.  Commitments to extend credit totaling$365.5 million primarily have floating rates as of March 31, 2010.  At March 31, 2010, standby letters ofcredit were $13.2 million. 

 

Theseoff-balance sheet financial instruments may involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated statements of financial condition.  Credit risk is defined as the possibility ofsustaining a loss because the other parties to a financial instrument fail toperform in accordance with the terms of the contract.  The Company’s maximum exposure to credit lossunder standby letters of credit and commitments to extend credit is representedby the contractual amounts of those instruments. It is uncertain as to theamounts that we will be required to fund on these commitments as many sucharrangements expire with no amounts drawn.

 

GeorgeMason estimates a reserve (early pay-off reserve) for mortgage loans sold thatare repaid by the borrower within a certain number of days following the loansale, thereby requiring that George Mason refund part of the service releasepremium and/or premium pricing received from the investor pursuant to the loansale agreement.  The reserve as of March 31,2010 was $25,000.

 

GeorgeMason has a reserve for its estimated exposure to repurchase loans previouslysold to investors for which borrowers failed to provide full and accurateinformation on their loan application or for which appraisals have not beenacceptable or where the loan was not underwritten in accordance with the loanprogram specified by the loan investor. At March 31, 2010, this reserve had a balance of $796,000.  The Company evaluates the merits of eachclaim and estimates its reserve based on actual and expected claims receivedand considers the historical amounts paid to settle such claims.

 

Inaddition, George Mason, as part of the service it provides to its managedcompanies, purchases the loans originated by the managed companies at the timeof origination.  These loans are thensold by George Mason to investors. George Mason has agreements with its managed companies requiring that,for any loans that were originated by a managed company and for which investorshave requested George Mason to repurchase due to the borrowers’ failure toprovide full and accurate information on or related to their loan applicationor for which appraisals have not been acceptable or when the loan was notunderwritten in accordance with the loan program these loans from investorsspecified by the loan investor, the managed company be responsible for buyingback the loan.  In the event that themanaged company’s financial condition deteriorates and it is unable to fund therepurchase of such loans, George Mason may have to provide the funds torepurchase

 

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theseloans from investors.  In this instance,George Mason would establish an allowance on the receivable from the managedcompany.  There is no such allowance recordedat March 31, 2010 as management fully recovered all amounts owed bymanaged companies as of March 31, 2010.

 

TheCompany has derivative counter-party risk that may arise from the possibleinability of George Mason’s third party investors to meet the terms of theirforward sales contracts.  George Masonworks with third-party investors that are generally well-capitalized, areinvestment grade and exhibit strong financial performance to mitigate thisrisk.  The Company does not expect anythird-party investor to fail to meet its obligation.  In addition, the Company has derivativecounterparty risk relating to certain interest rate swaps it has with thirdparties.  This risk may arise from theinability of the third party to meet the terms of the contracts.  The Company monitors the financial conditionof these third parties on an annual basis. The Company does not expect any of these third parties to fail to meetits obligations.

 

Note10

 

*FairValue Measurements*

 

Thefair value framework under U.S. generally accepted accounting principlesdefines fair value as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date.  It also establishes a fair value hierarchywhich requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs when measuring the fair value.  There are three levels of inputs that may beused to measure fair value:

 

Level1 — Quoted prices in active markets for identical assets or liabilities as ofthe measurement date.

 

Level2 — Quoted prices for similar instruments in active markets; quoted prices for identicalor similar instruments in markets that are not active; and model-derivedvaluations in which all significant inputs and significant value drivers areobservable in active markets.

 

Level3 — Valuations derived from valuation techniques in which one or moresignificant inputs or significant value drivers are unobservable.

 

*RecurringFair Value Measurements*

 

Allclasses of the Company’s investment securities available-for-sale, with theexception of its treasury securities, the Company’s trading investmentsecurities, which include cash equivalents and mutual funds, and bank-ownedlife insurance are recorded at fair value using reliable and unbiasedevaluations by an industry-wide valuation service and therefore fall into theLevel 2 category.  This service usesevaluated pricing models that vary based on asset class and include availabletrade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models,vast descriptive terms and conditions databases, as well as extensive qualitycontrol programs.  The Company’s treasurysecurities are recorded at fair value using unadjusted quoted market prices andtherefore fall under the Level 1 category.

 

TheCompany has an interest rate swap to hedge against the change in fair value ofone fixed rate commercial loan.  Thisloan is recorded at fair value using published yield curve rates from anational valuation service.  These observablerates and inputs are applied to a third party industry-wide valuation model,and therefore, the valuations fall into a Level 2 category.  Commercial and residential loans areevaluated for impairment and the carrying value of such loans is recorded atfair value based on appraisals of the underlying collateral completed by thirdparties using Level 2 valuation inputs.

 

TheCompany’s interest rate swap derivatives in a cash flow hedge are recorded atfair value using published yield curve rates from a national valuationservice.  These observable rates andinputs are applied to a third party industry-wide valuation model, andtherefore, the valuations fall into a Level 2 category.

 

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TheCompany records its interest rate lock commitments and forward loan salescommitments at fair value.  The fairvalue of its interest rate lock commitments considers the expected premium(discount) to par and with applicable fallout rates for those rate lock commitmentsfor which a mortgage loan does not close. In addition, the Company calculates the effects of the changes ininterest rates from the date of the commitment through loan origination, andthen period end, using applicable published mortgage-backed investment securityprices.  The fair value of the forwardsales contracts to investors considers the market price movement of the sametype of security between the trade date and the balance sheet date.  These valuations fall into a Level 2category.

 

Therewere no significant transfers into or out of Level 1, Level 2 and Level 3 measurementsin the fair value hierarchy during the three months ended March 31, 2010.  Transfers between levels are recognized atthe end of each reporting period.  Thevaluation technique used for fair value measurements using significant otherobservable inputs (Level 2) is the market approach for each class of assets andliabilities.

 

Assetsand liabilities measured at fair value on a recurring basis as of March 31,2010 and December 31, 2009 are shown below:

 

**At March 31, 2010 (in thousands)**

 
| ** **                                                  | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                     | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------------------------------------------------------------------|------------|
| **Description**                                             | ** ** | **Balance** | ** ** | **Quoted Prices in  Active markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Investment securities available-for-sale:                   |       |        |       |                                                                  |       |   |   |   |   |
| U.S. treasury securities                                    |       | $           | 4,940      |                                                                  | $          | 4,940 |   |   |   |   |   |
| U.S. government- sponsored agencies                         |       | 51,292      |       |                                                                  |       | $ | 51,292 |   |   |   |
| Mortgage-backed securities                                  |       | 220,504     |       |                                                                  |       | 220,504 |   |   |   |
| Municipal securities                                        |       | 63,355      |       |                                                                  |       | 63,355 |   |   |   |
| Investment securities — trading                        |       | 1,699       |       |                                                                  |       | 1,699 |   |   |   |
| Loans receivable                                            |       | 13,093      |       |                                                                  |       | 13,093 |   |   |   |
| Bank-owned life insurance                                   |       | 33,861      |       |                                                                  |       | 33,861 |   |   |   |
| Derivative liability - interest rate swaps                  |       | 1,612       |       |                                                                  |       | 1,612 |   |   |   |
| Derivative asset - forward loan sales commitments           |       | 3,927       |       |                                                                  |       | 3,927 |   |   |   |
| Derivative asset — interest rate lock commitments      |       | 6           |       |                                                                  |       | 6 |   |   |   |
| Derivative liability - forward loan sales  commitments      |       | 369         |       |                                                                  |       | 369 |   |   |   |
| Derivative liability — interest rate lock  commitments |       | 196         |       |                                                                  |       | 196 |   |   |   |
|                                                             |            |             |            |                                                                       |            |  |  |  |  |  |  |  |

 

**At December 31, 2009 (in thousands)**

 
| ** **                                                 | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                     | ** ** |
|------------------------------------------------------------|------------|-------------|------------|-----------------------------------------------------------------------|------------|
| **Description**                                            | ** ** | **Balance** | ** ** | **Quoted Prices in  Active markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Investment securities available-for-sale                   |       | $           | 343,569    |                                                                  | $          | 4,897 |   | $ | 338,672 |   |   |   |
| Trading assets                                             |       | 3,724       |       |                                                                  |       | 3,724 |   |   |   |
| Loans receivable                                           |       | 13,078      |       |                                                                  |       | 13,078 |   |   |   |
| Bank-owned life insurance                                  |       | 33,712      |       |                                                                  |       | 33,712 |   |   |   |
| Derivative liability - interest rate swaps                 |       | 1,437       |       |                                                                  |       | 1,437 |   |   |   |
| Derivative asset -   interest rate swaps              |       | 5           |       |                                                                  |       | 5 |   |   |   |
| Derivative asset - forward loan sales commitments          |       | 4,607       |       |                                                                  |       | 4,607 |   |   |   |
| Derivative asset — interest rate lock commitments     |       | 3           |       |                                                                  |       | 3 |   |   |   |
| Derivative liability - forward loan sales  commitments     |       | 1,197       |       |                                                                  |       | 1,197 |   |   |   |
| Derivative liability — forward loan sale  commitments |       | 407         |       |                                                                  |       | 407 |   |   |   |
|                                                            |            |             |            |                                                                       |            |  |  |  |  |  |  |  |

 

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Thefair value of the Company’s interest rate lock commitments and forward loansale commitments are included in the above table.  In the normal course of business, GeorgeMason and Cardinal First (collectively, the “mortgage companies”) enter intocontractual interest rate lock commitments to extend credit to borrowers withfixed expiration dates.  The commitmentsbecome effective when the borrowers “lock-in” a specified interest rate withinthe time frames established by the mortgage companies.  All borrowers are evaluated for creditworthiness prior to the extension of the commitment.  Market risk arises if interest rates moveadversely between the time of the interest rate lock by the borrower and thesale date of the loan to an investor.  Tomitigate the effect of the interest rate risk inherent in providing rate lockcommitments to borrowers, the mortgage companies enter into best effortsforward sales contracts to sell loans to investors.  The forward sales contracts lock in aninterest rate and price for the sale of loans similar to the specific rate lockcommitments.  Both the rate lockcommitments to the borrowers and the forward sales contracts to investorsthrough to the date the loan closes are undesignated derivatives andaccordingly, are marked to fair value through earnings.

 

*Nonrecurring Fair ValueMeasurements*

 

Certainassets and liabilities are measured at fair value on a nonrecurring basis andare not included in the tables above. These assets include the valuation of the Company’s corporate bonds heldin its held-to-maturity investment securities portfolio, nonaccrual loans andother real estate owned.

 

**At March 31, 2010 (in thousands)**

 
| ** **                     | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                      | ** ** |
|--------------------------------|------------|-------------|------------|------------------------------------------------------------------------|------------|
| **Description**                | ** ** | **Balance** | ** ** | **Quoted Prices  in Active  markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** |
| Corporate bonds                |       | $           | 3,362      |                                                                   |       |   |   |   | $ | 3,362 |   |
| Nonaccrual loans - commercial  |       | 3,065       |       |                                                                   |       | 3,065 |   |   |   |
| Nonaccrual loans - residential |       | 1,594       |       |                                                                   |       | 1,594 |   |   |   |
| Other real estate owned        |       | 4,485       |       |                                                                   |       | 4,485 |   |   |   |
|                                |            |             |            |                                                                        |            |  |  |  |  |  |  |

 

**At December 31, 2009 (in thousands)**

 
| ** **                           | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                      | ** ** |
|--------------------------------------|------------|-------------|------------|------------------------------------------------------------------------|------------|
| **Description**                      | ** ** | **Balance** | ** ** | **Quoted Prices  in Active  markets for  Identical Assets  (Level 1)** | ** ** | **Significant   Other  Observable  Inputs********(Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** |
| George Mason — Reporting Unit   |       | $           | 24,010     |                                                                   |       |   |   |   | $ | 24,010 |   |
| Wilson/Bennett — Reporting Unit |       | 3,551       |       |                                                                   |       |   |   | 3,551 |   |
| Corporate bonds                      |       | 3,343       |       |                                                                   |       |   |   | 3,343 |   |
| Nonaccrual loans                     |       | 696         |       |                                                                   |       | 696 |   |   |   |
| Other real estate owned              |       | 4,991       |       |                                                                   |       | 4,991 |   |   |   |
|                                      |            |             |            |                                                                        |            |  |  |  |  |  |  |

 

TheCompany’s corporate bond portfolio consists of four pooled trust preferredsecurities, with a total par value of $8.0 million at March 31, 2010 (eachsecurity has a par value of $2.0 million). The Company owns senior A-3 tranches of each of these pools and uses theservices of a consultant to estimate the projected cash flow of each investmentbased upon several scenarios regarding likely possible default rates of theunderlying issuers of each pool.  Theanalysis yielded a result that fell within the range of values provided byexternal pricing sources.

 

TheCompany’s nonaccrual loans are measured at the present value of its expectedfuture cash flows discounted at the loan’s coupon rate, or at the loan’sobservable market price or fair value of the collateral if the loan iscollateral dependent.  The Companymeasures the collateral value on impaired loans by obtaining an updatedappraisal of the underlying collateral and may discount further the appraisedvalue, if necessary, to an amount equal to the expected cash proceeds in theevent the loan is foreclosed upon and the collateral is sold.  In addition, an estimate of costs to sell thecollateral is assumed.  The Companyvalues other real estate owned by obtaining an updated appraisal of theproperty foreclosed upon, and discounts further the appraised value to anamount equal to the expected cash proceeds upon the sale of the property.  Both nonaccrual loans and other real estateowned are valued using adjusted market quotes and therefore fall into the Level2 category.

 

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Althoughmanagement uses its best judgment in estimating the fair value of financialinstruments, there are inherent limitations in any estimation technique.  Because of the wide range of valuationtechniques and the numerous estimates and assumptions which must be made, itmay be difficult to make reasonable comparisons between the Company’s fairvalue information and that of other banking institutions.  It is important that the many uncertaintiesbe considered when using the estimated fair value disclosures and that, becauseof these uncertainties, the aggregate fair value amount should not be construedas representative of the underlying value of the Company.

 

**Fair Value of Financial Instruments**

 

The assumptions used and the estimates disclosed represent management’sbest judgment of appropriate valuation methods for estimating the fair value offinancial instruments.  These estimatesare based on pertinent information available to management at the valuationdate.  In certain cases, fair values arenot subject to precise quantification or verification and may change aseconomic and market factors and management’s evaluation of those factors change.

 

Thefollowing summarizes the significant methodologies and assumptions used inestimating the fair values presented in the following table, and not disclosedelsewhere in this footnote.

 

*Cashand Cash Equivalents*

 

Thecarrying amount of cash and cash equivalents is used as a reasonable estimateof fair value.

 

*InvestmentSecurities Held-to-Maturity and Other Investments*

 

Fairvalues for investment securities held-to-maturity are based on quoted marketprices or prices quoted for similar financial instruments.

 

*LoansHeld for Sale*

 

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

 

*LoansReceivable, Net*

 

Inorder to determine the fair market value for loans receivable, the loanportfolio was segmented based on loan type, credit quality and maturities.  For certain variable rate loans with nosignificant credit concerns and frequent repricings, estimated fair values arebased on current carrying amounts.  Thefair values of other loans are estimated using discounted cash flow analyses,at interest rates currently being offered for loans with similar terms toborrowers of similar credit quality. This method of estimating fair value does not incorporate the exit-priceconcept of fair value which is appropriate for this disclosure.

 

*Deposits*

 

Thefair values for demand deposits are equal to the carrying amount since they arepayable on demand at the reporting date. The carrying amounts of variable rate, fixed-term money market accountsand certificates of deposit (CDs) approximate their fair value at the reportingdate.  Fair values for fixed-rate CDs areestimated using a discounted cash flow calculation that applies interest ratescurrently being offered on CDs to a schedule of aggregated expected monthlymaturities on time deposits.

 

*OtherBorrowed Funds*

 

Thefair value of other borrowed funds is estimated using a discounted cash flowcalculation that applies interest rates currently available for loans withsimilar terms.

 

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*AccruedInterest Receivable*

 

Thecarrying amount of accrued interest receivable approximates its fair value.

 

Thefollowing summarizes the carrying amount of these financial assets andliabilities that the Company has not recorded at fair value on a recurringbasis at March 31, 2010 and December 31, 2009:

 
| ** **                                                    | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **Carrying**            | ** ** | **Estimated** | ** ** |
| **(In thousands)**                                            | ** ** | **Amount**              | ** ** | **Fair Value** | ** ** |
| Financial  assets:                                            |       |                    |       |   |   |
| Cash  and cash equivalents                                    |       | $                       | 27,556     |   | $ | 27,556 |   |
| Investment  securities held-to-maturity and other investments |       | 49,153                  |       | 45,425 |   |
| Loans  held for sale                                          |       | 143,961                 |       | 143,961 |   |
| Loans  receivable, net                                        |       | 1,289,905               |       | 1,291,564 |   |
| Accrued  interest receivable                                  |       | 6,641                   |       | 6,641 |   |
|                                                          |       |                    |       |   |   |
| Financial  liabilities:                                       |       |                    |       |   |   |
| Demand  deposits                                              |       | $                       | 164,142    |   | $ | 164,142 |   |
| Interest  checking                                            |       | 134,622                 |       | 129,795 |   |
| Money  market and statement savings                           |       | 386,972                 |       | 353,694 |   |
| Certificates  of deposit                                      |       | 640,402                 |       | 647,966 |   |
| Other  borrowed funds                                         |       | 376,034                 |       | 397,187 |   |
| Accrued  interest payable                                     |       | 1,327                   |       | 1,327 |   |

 
| ** **                                                    | ** ** | **December 31, 2009** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **Carrying**               | ** ** | **Estimated** | ** ** |
| **(In thousands)**                                            | ** ** | **Amount**                 | ** ** | **Fair Value** | ** ** |
| Financial  assets:                                            |       |                       |       |   |   |
| Cash  and cash equivalents                                    |       | $                          | 24,841     |   | $ | 24,841 |   |
| Investment  securities held-to-maturity and other investments |       | 51,651                     |       | 47,903 |   |
| Loans  held for sale                                          |       | 179,469                    |       | 179,469 |   |
| Loans  receivable, net                                        |       | 1,279,657                  |       | 1,279,515 |   |
| Accrued  interest receivable                                  |       | 6,151                      |       | 6,151 |   |
|                                                          |       |                       |       |   |   |
| Financial  liabilities:                                       |       |                       |       |   |   |
| Demand  deposits                                              |       | $                          | 166,019    |   | $ | 166,019 |   |
| Interest  checking                                            |       | 129,795                    |       | 129,795 |   |
| Money  market and statement savings                           |       | 353,694                    |       | 353,694 |   |
| Certificates  of deposit                                      |       | 647,497                    |       | 655,049 |   |
| Other  borrowed funds                                         |       | 427,579                    |       | 448,657 |   |
| Accrued  interest payable                                     |       | 1,368                      |       | 1,368 |   |

 

Note 11

 

*Allowance for Loan Losses*

 

Activity in the Company’sallowance for loan losses for the three months ended March 31, 2010 and2009 is shown below.

 

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| **(In thousands)**                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1 |       | $        | 18,636     |     | $          | 14,518 |   |
| Provision for loan  losses         |       | 2,425    |       | 1,216    |       |
| Loans charged off                  |       | (1,786   | )          | (435     | )          |
| Recoveries                         |       | 12       |       | 4        |       |
| Ending balance,  March 31     |       | $        | 19,287     |     | $          | 15,303 |   |

 

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

 

Thefollowing presents management’s discussion and analysis of our consolidatedfinancial condition at March 31, 2010 and December 31, 2009 and theunaudited results of our operations for the three months ended March 31,2010 and 2009. This discussion should be read in conjunction with our unauditedconsolidated financial statements and the notes thereto appearing elsewhere inthis report and 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, 2009.

 

**CautionAbout Forward-Looking Statements**

 

We makecertain forward-looking statements in this Form 10-Q that are subject torisks and uncertainties.  Theseforward-looking statements include statements regarding our profitability,liquidity, allowance for loan losses, interest rate sensitivity, market risk,growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,”“anticipates,” “forecasts,” “intends,” or other similar words or terms areintended to identify forward-looking statements.

 

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

 

·      the risks of changes in interest rates on levels,composition and costs of deposits, loan demand, and the values and liquidity ofloan collateral, securities, and interest sensitive assets and liabilities;

·      changes in assumptions underlying the establishment ofreserves for possible loan losses, reserves for repurchases of mortgage loanssold and other estimates;

·      changes in market conditions, specifically declines inthe residential and commercial real estate market, volatility and disruption ofthe capital and credit markets, soundness of other financial institutions we dobusiness with;

·      risks inherent in making loans such as repayment risksand fluctuating collateral values;

·      declines in the prices of assets and marketilliquidity may cause us to record an other-than-temporary impairment or otherlossses, specifically in our pooled trust preferred securities portfolioresulting from increases in underlying issuers’ defaulting or deferringpayments.

·      changes in operations of Wilson/Bennett Capital Management, Inc.,its customer base and assets under management and any associated impact on thefair value of goodwill in the future;

·      changes in operations of George Mason Mortgage, LLC asa result of the activity in the residential real estate market and anyassociated impact on the fair value of goodwill in the future;

·      exposure to repurchase loans sold to investors forwhich borrowers failed to provide full and accurate information on or relatedto their loan application or for which appraisals have not been acceptable orwhen the loan was not underwritten in accordance with the loan programspecified by the loan investor;

 

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·      the risks of mergers, acquisitions and divestitures,including, without limitation, the related time and costs of implementing suchtransactions, integrating operations as part of these transactions and possiblefailures to achieve expected gains, revenue growth and/or expense savings fromsuch transactions;

·      the ability to successfully manage our growth orimplement our growth strategies as we implement new or change internaloperating systems or if we are unable to identify attractive markets, locationsor opportunities to expand in the future; the effects of future economic,business and market conditions;

·      governmental monetary and fiscal policies;

·      legislative and regulatory changes, including changesin banking, securities, and tax laws and regulations and their application byour regulators, and changes in the scope and cost of FDIC insurance and othercoverages;

·      changes in accounting policies, rules andpractices;

·      maintaining cost controls and asset quality as we openor acquire new branches;

·      maintaining capital levels adequate to support ourgrowth;

·      reliance on our management team, including our abilityto attract and retain key personnel;

·      competition with other banks and financialinstitutions, and companies outside of the banking industry, including thosecompanies that have substantially greater access to capital and otherresources;

·      risks and uncertainties related to future trustoperations;

·      demand, development and acceptance of new products andservices;

·      problems with technology utilized by us;

·      changing trends in customer profiles and behavior; and

·      other factors described from time to time in ourreports filed with the SEC.

 

Because ofthese uncertainties, our actual future results may be materially different fromthe results indicated by these forward-looking statements.  In addition, our past results of operationsdo not necessarily indicate our future results.

 

Inaddition, this section should be read in conjunction with the description ofour “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Qand our Annual Report on Form 10-K for the year ended December 31,2009.

 

**Overview**

 

Weare a financial holding company formed in 1997 and headquartered in FairfaxCounty, Virginia.  We were formedprincipally in response to opportunities resulting from the consolidation ofseveral Virginia-based banks.  These bankconsolidations were typically accompanied by the dissolution of local boards ofdirectors and relocation or termination of management and customer serviceprofessionals and a general deterioration of personalized customer service.

 

Weown Cardinal Bank (the “Bank”), a Virginia state-chartered community bank with25 banking offices located in Northern Virginia and the greater Washington D.C.metropolitan area.  The Bank offers awide range of traditional bank loan and deposit products and services to bothour 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.

 

Additionally,we complement our core banking operations by offering a wide range of servicesthrough our various subsidiaries, including mortgage banking through GeorgeMason Mortgage, LLC (“George Mason”) and Cardinal First Mortgage, LLC, (“CardinalFirst”),

 

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collectivelythe “mortgage banking segment,” retail securities brokerage through CardinalWealth Services, Inc. (“CWS”), asset management through Wilson/Bennett CapitalManagement, Inc. (“Wilson/Bennett”), and trust, estate, custody, investmentmanagement and retirement planning through the trust division of Cardinal Bank.

 

Netinterest income is our primary source of revenue. We define revenue as netinterest income plus noninterest 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 tomanagement of interest rate risk, we analyze our loan portfolio for exposure tocredit risk. Loan defaults and foreclosures are inherent risks in the bankingindustry, and we attempt to limit our exposure to these risks by carefullyunderwriting and then monitoring our extensions of credit. In addition to netinterest income, noninterest income is an important source of revenue for usand includes, among other things, service charges on deposits and loans,investment fee income, which includes trust revenues, gains and losses on salesof investment securities available-for-sale, gains on sales of mortgage loans,and management fee income.

 

**CriticalAccounting Policies**

 

*General*

 

U. S. generally acceptedaccounting principles are complex and require management to apply significantjudgment to various accounting, reporting, and disclosure matters.  Management must use assumptions, judgmentsand estimates when applying these principles where precise measurements are notpossible or practical.  These policiesare critical because they are highly dependent upon subjective or complex judgments,assumptions and estimates.  Changes insuch judgments, assumptions and estimates may have a significant impact on theconsolidated financial statements. Actual results, in fact, could differ from initial estimates.

 

The accounting policieswe view as critical are those relating to judgments, assumptions and estimatesregarding the determination of the allowance for loan losses, the fair valuemeasurements of certain assets and liabilities, accounting for economic hedgingactivities, accounting for impairment testing of goodwill, accounting for theimpairment of amortizing intangible assets and other long-lived assets, and thevaluation of deferred tax assets.

 

#### ***Allowance for Loan Losses***

 

**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 theprovision expense and the level of the allowance for loan losses are impactedby many factors, including general and industry-specific economic conditions,actual and expected credit losses, historical trends and specific conditions ofindividual borrowers.  Unusual andinfrequently occurring events, such as weather-related disasters, may impactour assessment of possible credit losses. As a part of our analysis, we use comparative peer group data andqualitative factors such as levels of and trends in delinquencies andnonaccrual loans, national and local economic trends and conditions andconcentrations of loans exhibiting similar risk profiles to support ourestimates.**

** **

Forpurposes of our analysis, we categorize our loans into one of fivecategories:  commercial and industrial, commercial real estate (includingconstruction), home equity lines of

 

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credit,residential mortgages, and consumer loans. In the absence of meaningfulhistorical loss factors, peer group loss factors are applied and are adjustedby the qualitative factors mentioned above. The indicated loss factorsresulting from this analysis are applied for each of the five categories ofloans. In addition, we individually assign loss factors to all loans that havebeen identified as having loss attributes, as indicated by deterioration in thefinancial condition of the borrower or a decline in underlying collateral valueif the loan is collateral dependent. Since we have limited historical data onwhich to base loss factors for classified loans, we typically apply, inaccordance with regulatory guidelines, a 5% loss factor to loans classified asspecial mention, a 15% loss factor to loans classified as substandard and a 50%loss factor to loans classified as doubtful. Loans classified as loss loans arefully reserved or charged off.   Incertain instances, we evaluate the impairment of certain loans on a loan byloan basis.  For these loans, we analyzethe fair value of the collateral underlying the loan and consider estimatedcosts to sell the collateral.  If the netcollateral value is less than the loan balance (including accrued interest andany unamortized premium or discount associated with the loan) we recognize animpairment and establish a specific reserve for the impaired loan.

 

Creditlosses are an inherent part of our business and, although we believe themethodologies for determining the allowance for loan losses and the currentlevel of the allowance are adequate, it is possible that there may beunidentified losses in the portfolio at any particular time that may becomeevident at a future date pursuant to additional internal analysis or regulatorycomment. Additional provisions for such losses, if necessary, would be recordedin the commercial banking or mortgage banking segments, as appropriate, andwould negatively impact earnings.

 

*FairValue Measurements*

 

Wedetermine the fair values of financial instruments based on the fair valuehierarchy, which requires an entity to maximize the use of observable inputsand minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputsthat may be used to measure fair value. Our investment securities available-for-sale are recorded at fair valueusing reliable and unbiased evaluations by an industry-wide valuationservice.  This service uses evaluatedpricing models that vary based on asset class and include available trade, bid,and other market information.  Generally,the methodology includes broker quotes, proprietary models, vast descriptive termsand conditions databases, as well as extensive quality control programs.  For certain of our held-to-maturityinvestment securities where there is minimal observable trading activity, weuse a discounted cash flow approach to estimate fair value based on internalcalculations and compare our results to information provided by externalpricing sources.  Our interest rate swapderivatives are recorded at fair value using observable inputs from a nationalvaluation service.  These inputs areapplied to a third party industry-wide valuation model.

 

Wealso fair value our interest rate lock commitments and forward loan salescommitments.  The fair value of ourinterest rate lock commitments considers the expected premium (discount) to parand we apply certain fallout rates for those rate lock commitments for which wedo not close a mortgage loan.  Inaddition, we calculate the effects of the changes in interest rates from thedate of the commitment through loan origination, and then period end, usingapplicable published mortgage-backed investment security prices.  The fair value of the forward sales contractsto investors considers the market price movement of the same type of securitybetween the trade date and the balance sheet date.  At loan closing, the fair value of theinterest rate lock commitment is included in the cost basis of loans held forsale, which are carried at the lower of cost or fair value.

 

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*Accountingfor Economic Hedging Activities*

 

Werecord all derivative instruments on the statement of condition at their fairvalues*.*We do not enter into derivative transactions for speculative purposes.For derivatives designated as hedges, we contemporaneously document the hedgingrelationship, including the risk management objective and strategy forundertaking the hedge, how effectiveness will be assessed at inception and ateach reporting period and the method for measuring ineffectiveness.  We evaluate the effectiveness of thesetransactions at inception and on an ongoing basis.  Ineffectiveness is recorded through earnings.  For derivatives designated as cash flowhedges, the fair value adjustment is recorded as a component of othercomprehensive income, except for the ineffective portion which is recorded inearnings.  For derivatives designated asfair value hedges, the fair value adjustments for both the hedged item and thehedging instrument are recorded through the income statement with anydifference considered the ineffective portion of the hedge.

 

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

 

Inthe normal course of business, we enter into contractual commitments, includingrate lock commitments, to finance residential mortgage loans. Thesecommitments, which contain fixed expiration dates, offer the borrower aninterest rate guarantee provided the loan meets underwriting guidelines andcloses within the time frame established by us. Interest rate risk arises onthese commitments and subsequently closed loans if interest rates changebetween the time of the interest rate lock and the delivery of the loan to theinvestor. Loan commitments related to residential mortgage loans intended to besold are considered derivatives and are marked to market through earnings.

 

Tomitigate the effect of the interest rate risk inherent in providing rate lockcommitments, we economically hedge our commitments by entering into best effortsdelivery forward loan sales contracts. During the rate lock commitment period,these forward loan sales contracts are marked to market through earnings andare not designated as accounting hedges. The fair values of loan commitmentsand the fair values of forward loan sales contracts generally move in oppositedirections, and the net impact of changes in these valuations on net incomeduring the loan commitment period is generally inconsequential. At the closingof the loan, the loan commitment derivative expires and we record a loan heldfor sale and continue to be obligated under the same forward loan salescontract.   The forward sales contract isthen designated as a hedge against the variability in cash to be received fromthe loan sale.  Loans held for sale areaccounted for at the lower of cost or fair value*.*

 

*Accounting for Impairment Testingof Goodwill*

 

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

 

Totest goodwill for impairment, we perform an analysis to compare the fair valueof the reporting unit to which the goodwill is assigned to the carrying valueof the reporting unit. We make estimates of the discounted cash flows from theexpected future operations of the reporting

 

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unit.This discounted cash flow analysis involves the use of unobservable inputsincluding:  estimated future cash flowsfrom operations; an estimate of a terminal value; a discount rate; and otherinputs.  Our estimated future cash flowsare largely based on our historical actual cash flows.  If the analysis indicates that the fair valueof the reporting unit is less than its carrying value, we do an analysis tocompare the implied fair value of the reporting unit’s goodwill with thecarrying amount of that goodwill. The implied fair value of the goodwill isdetermined by allocating the fair value of the reporting unit to all its assetsand liabilities. If the implied fair value of the goodwill is less than thecarrying value, an impairment loss is recognized.

 

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

 

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

 

Animpairment loss is then recorded for the excess of the carrying amount of theassets over their fair values. Fair value is usually determined based on thepresent value of estimated expected future cash flows using a discount ratecommensurate with the risks involved.

 

#### ***Valuation of Deferred Tax Assets***

 

Werecord a provision for income tax expense based on the amounts of current taxespayable or refundable and the change in net deferred tax assets or liabilitiesduring the year. Deferred tax assets and liabilities are recognized for the taxeffects of differing carrying values of assets and liabilities for tax andfinancial statement purposes that will reverse in future periods. Whensubstantial uncertainty exists concerning the recoverability of a deferred taxasset, the carrying value of the asset is reduced by a valuation allowance. Theamount of any valuation allowance established is based upon an estimate of thedeferred tax asset that is more likely than not to be recovered. Increases ordecreases in the valuation allowance result in increases or decreases to theprovision for income taxes.

 

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

 

In January 2010, weadopted Accounting Standards Update (“ASU”) 2009-16, *Transfers andServicing (Topic 860): Accounting for Transfers of Financial Assets*.  It eliminates the QSPE concept, creates morestringent conditions for reporting a transfer of a portion of a financial assetas a sale, clarifies the derecognition criteria, revises how retained interestsare initially measured, and removes the guaranteed mortgage securitizationrecharacterization provisions.  Thisstatement requires additional year-end and interim disclosures for publiccompanies.  The adoption of this standarddid not have a material impact on our consolidated financial condition orresults of operations.

 

In January 2010, weadopted ASU 2009-17, *Consolidations (Topic810): Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities.*  This ASUamends the guidance on variable interest entities (“VIE”) in ASC Topic 810related to the consolidation of variable interest entities.  It requires reporting entities to evaluateformer QSPEs for consolidation, changes the approach to determining a VIE’sprimary beneficiary from a

 

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quantitative assessment to aqualitative assessment designed to identify a controlling financial interest,and increases the frequency of required reassessments to determine whether acompany is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristicsthat identify a VIE.  This statementrequires additional year-end and interim disclosures for public companies.  The adoption of this standard did not have amaterial impact on our consolidated financial condition or results ofoperations.

 

In January 2010, weadopted ASU 2010-06, *Fair Value Measurementsand Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements*,which requires disclosures about recurring or nonrecurring fair valuemeasurements including significant transfers into and out of Level 1 and Level2 fair value measurements and information about purchases, sales, issuances andsettlements on a gross basis in the reconciliation of Level 3 fair valuemeasurements.  This standard alsoclarifies existing fair value measurement disclosure guidance about the levelof disaggregation, inputs, and valuation techniques.

 

In January 2010, theFinancial Accounting Standards Board issued ASU No. 2010-09, *Subsequent Events (Topic 855): Amendments to Certain Recognition andDisclosure Requirements,*so that SEC filers, as defined in the ASU,no longer are required to disclose the date through which subsequent eventshave been evaluated in originally issued and revised financial statements.  The adoption of this standard did not have amaterial impact on our consolidated financial condition or results ofoperations.

 

##### **2010 EconomicEnvironment**

 

Ourcredit quality remains strong despite the challenges we face during the currenteconomic environment.  At March 31,2010, we have non-accrual loans totaling $4.7 million and no loanscontractually past due 90 days or more as to principal or interest.  Annualized net charge-offs were 0.55% of ouraverage loans receivable for the three months ended March 31, 2010. Loanoriginations from our mortgage banking segment have decreased compared to thefirst quarter of 2009, even though the first-time home buyers credit wasextended to April 30, 2010.  Netincome from our mortgage banking segment decreased to $559,000 for the threemonths ended March 31, 2010, respectively, compared to net income of $1.3million for the same period of 2009.

 

Themarket disturbances that have been experienced in the financial markets overthe past two years continue to impact our results. Market illiquidity continuesto impact certain portions of our investment securities portfolio, specificallythe ratings of certain monoline insurance providers, which has affected thepricing of certain municipal securities in our portfolio. In addition, we holdinvestments of $8.0 million in par value of pooled trust preferred securities,which are significantly below book value as of March 31, 2010 due to thelack of liquidity in the market and investor apprehension for investing inthese types of investments.

 

Weexpect very challenging economic and operating conditions to continue for theforeseeable future and these conditions will continue to affect the markets inwhich we do business and could adversely impact our results for the remainderof 2010. The degree of the impact is dependent upon the duration and severityof the aforementioned conditions.

 

Whileour loan growth has continued to be strong, continued negative economicconditions could adversely affect our loan portfolio, including causingincreases in delinquencies and default rates, which we expect could impact ourcharge-offs and provision for loan losses. Continued deterioration in real estate values and household incomescould result in higher credit losses for us. Also, in the ordinary course of business, we may be subject to aconcentration of credit risk to a particular industry, counterparty, borroweror issuer.  A deterioration in thefinancial condition or prospects of a particular industry or a failure ordowngrade of, or default

 

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by, any particularentity or group of entities could negatively impact our businesses, perhapsmaterially. The systems by which we set limits and monitor the level of ourcredit exposure to individual entities and industries also may not function aswe have anticipated.

 

Liquidityis essential to our business.  Theprimary sources of funding for our Bank include customer deposits and wholesalefunding.  Our liquidity could be impairedby an inability to access the capital markets or by unforeseen outflows ofcash, including deposits.  This situationmay arise due to circumstances that we may be unable to control, such asgeneral market disruption, negative views about the financial services industrygenerally, or an operational problem that affects a third party or us.  Our ability to borrow from other financialinstitutions on favorable terms or at all could be adversely affected byfurther disruptions in the capital markets or other events.  While we believe we have a healthy liquidityposition, any of the above factors could materially impact our liquidityposition in the future.

 

Inaddition to Emergency Economic Stabilization Act of 2008 (“ESSA”) and theAmerican Recovery and Reinvestment Act (“ARRA”), the U.S. government hascontinued to respond to the economic slowdown by enacting new legislation andexpanding or establishing a number of programs and initiatives.  Congress and the U.S. government continue toevaluate and develop various programs and initiatives designed to stabilize thehousing markets and stimulate the economy, including the U.S. Treasury’sannounced Financial Stability Plan and the U.S. government’s announcedforeclosure prevention program.  Therecan be no assurance as to the impact these programs will have on the financialmarkets, including the levels of volatility and limited credit availabilitycurrently being experienced.  The failureof these efforts and a continuation or worsening of current financial marketconditions could materially and adversely affect our business, financialcondition, results of operations, access to credit, regulatory capital positionor the trading price of our common stock.

 

##### **Statements ofIncome**

 

*General*

 

Forthe three months ended March 31, 2010 and 2009, we reported net income of$3.8 million and $2.2 million, respectively. Net interest income after the provision for loan losses increased $3.4million to $12.8 million for the three months ended March 31, 2010compared to $9.4 million for the three months ended March 31, 2009.  Despite an increase in our provision for loanlosses, the increase in net interest income after provision for loan lossesincreased due to an increase in our net interest income of $4.6 million to$15.3 million for the three months ended March 31, 2010.  Provision for loan losses for the threemonths ended March 31, 2010 was $2.4 million, an increase of $1.2 million,compared to $1.2 million for the same period of 2009.  Noninterest income for each of the threemonths ended March 31, 2010 and 2009 was $5.8 million.  Realized and unrealized gains on mortgagebanking activities decreased $521,000 for the three months ended March 31,2010 as compared to the three months ended March 31, 2009, a result ofdecreased loan origination activity. This decrease was offset by increases in our investment fee income andmanagement fee income.  For the threemonths ended March 31, 2010, noninterest expense increased to $13.1million, compared to $12.0 million for the same period of 2009.  The increase in noninterest expense isattributable to increases in salary and benefits expense as we have addedpersonnel in our wealth management and mortgage banking operations.

 

Forthe three months ended March 31, 2010, basic and diluted income per commonshare were each $0.13.  Basic and dilutedearnings per common share for the three months ended

 

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March 31,2009 were each $0.09.  Weighted averagefully diluted shares outstanding for the three months ended March 31, 2010and 2009 were 29,534,387 and 24,805,337, respectively.

 

Returnon average assets for the three months ended March 31, 2010 and 2009 was0.79% and 0.50%, respectively. Return on average equity for the three monthsended March 31, 2010 and 2009 was 7.28% and 5.38%, respectively.

 

*General—Business Segments*

 

We operate in three businesssegments: commercial banking, mortgage banking, and wealth management and trustservices.  Net income attributable to thecommercial banking segment for the three months ended March 31, 2010 was$3.6 million compared to net income of $1.7 million for the three months ended March 31,2009.  Net interest income increased $4.9million to $15.0 million for the three months ended March 31, 2010,compared to $10.1 million for the same period of 2009.  Provision for loan losses increased $1.2million to $2.4 million for the three months ended March 31, 2010 comparedto $1.2 million for the same period of 2009. The increase in provision expense is related to current economic andmarket conditions and an increase in loan charge-offs during 2010.  Noninterest income decreased to $1.0 millionfor the three months ended March 31, 2010 compared to $1.3 million for thethree months ended March 31, 2009. During the first quarter of 2010, gains of $264,000 were recorded onsales of investment securities available-for-sale, compared to $552,000 for thethree months ended March 31, 2009. Noninterest expense was $8.3 million for the three months ended March 31,2010, compared to $7.9 million for the same period of 2009.  The increase in noninterest expense for thefirst quarter of 2010 as compared to the same period of 2009 is primarily dueto expenses related to our core system conversion and increases in our FDICinsurance premiums and bank franchise tax assessments.

 

Themortgage banking segment reported net income of $559,000 for the three monthsended March 31, 2010 compared to a net income of $1.3 million for thethree months ended March 31, 2009. The decrease in net income for the three months ended March 31, 2010 wasprimarily attributable to a decrease in loan origination volume as compared tothe same period of 2009.

 

Thewealth management and trust services segment, which includes CWS,Wilson/Bennett and the trust division of the Bank, recorded net income of$127,000 and $10,000 for the three month periods ended March 31, 2010 and2009, respectively.  The increase in netincome is primarily attributable to an increase in noninterest income of$193,000 during 2010 as compared to 2009, a result of an increase in feesearned through expanded customer relationships and increases in the marketvalues of managed and custodial assets in this business segment.

 

*NetInterest Income*

 

Netinterest income is our primary source of revenue, representing the differencebetween interest and fees earned on interest-earning assets and the interestpaid on deposits and other interest-bearing liabilities. The level of netinterest income is impacted primarily by variations in the volume and mix ofthese assets and liabilities, as well as changes in interest rates. We reportour net interest income on a tax equivalent basis as a result of certaintax-exempt investments we hold on our balance sheet.  Net interest income for the three monthsended March 31, 2010 and 2009 was $15.2 million and $10.6 million,respectively, a period-to-period increase of $4.6 million, or 44%. The net yieldson our assets increased as a result of our moderately increasinginterest-earning assets and lowering rates on our deposit liabilities.

 

Specifically,interest income on loans receivable increased $2.3 million for the three monthsended March 31, 2010 compared to the same three month period of 2009.  The increase in interest income on loansreceivable is a result of an increase in the volume of our loans receivableportfolio.  Interest income on loans heldfor sale decreased $520,000 to $1.3 million for the three months ended March 31,2010, a direct result of a period-to-period decrease in loan originations inour held for sale portfolio.  Interestincome on investment securities, on a tax-equivalent basis, increased $673,000for the three months ended March 31, 2010 as compared to the three monthsended March 31, 2009.  The increasein interest income on investment securities is directly related to an increaseof purchases of investment securities over the past year.  Total interest expense has decreased $2.2million for the three months ended March 31, 2010 as compared to the sameperiod of 2009.  The decrease in totalinterest expense is mostly related to the decreases we have taken in theinterest rates we pay on our interest checking and savings depositaccounts.  In addition, our certificatesof deposit are repricing at lower interest rates.

 

Wehave certain loans and investment securities for which a portion of the incomerealized is tax-exempt.  Net interestincome on a tax equivalent basis for the three months ended March 31, 2010and 2009 was $15.5 million and $10.7 million, respectively.

 

Ournet interest margin, on a tax-equivalent basis, which equals net interestincome divided by average interest earning assets, was 3.40% and 2.61% for thethree months ended March 31, 2010 and 2009, respectively.  The increase in the net interest margin forthe three months ended March 31, 2010 compared to the same period of 2009are again attributable to our balance sheet management and strategicallydecreasing the interest rates we pay on our deposit liabilities.  The following tables present an analysis ofaverage earning assets and interest-bearing liabilities with related componentsof interest income and interest expense on a tax equivalent basis.

 

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**AverageBalance Sheets and Interest Rates on Interest-Earning Assets andInterest-Bearing Liabilities**

Three Months Ended March 31,2010, 2009 and 2008

(In thousands)

 
| ** **                                               | ** ** | **2010**             | ** ** | **2009**                       | ** ** | **2008**                  | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** |
| **Assets**                                               |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                 |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $                    | 160,009    |                           | $          | 1,841                     |       | 4.59 | % | $ | 170,513 |   | $ | 2,092 |   | 4.91 | % | $ | 137,047 |   | $ | 2,355 |   | 6.87 | % |
| Real estate - commercial                                 |       | 599,412              |       | 9,148                          |       | 6.10                      | %          | 489,712 |   | 7,651 |   | 6.25 | % | 415,147 |   | 6,839 |   | 6.59 | % |
| Real estate -  construction                              |       | 190,545              |       | 2,615                          |       | 5.49                      | %          | 179,708 |   | 1,766 |   | 3.93 | % | 190,882 |   | 3,222 |   | 6.75 | % |
| Real estate -  residential                               |       | 227,125              |       | 2,923                          |       | 5.15                      | %          | 206,975 |   | 2,828 |   | 5.46 | % | 211,965 |   | 3,002 |   | 5.67 | % |
| Home equity lines                                        |       | 118,574              |       | 1,061                          |       | 3.63                      | %          | 105,867 |   | 976 |   | 3.74 | % | 85,169 |   | 1,158 |   | 5.45 | % |
| Consumer                                                 |       | 2,687                |       | 40                             |       | 5.95                      | %          | 2,513 |   | 36 |   | 5.89 | % | 2,759 |   | 51 |   | 7.39 | % |
| Total loans                                              |       | 1,298,352            |       | 17,628                         |       | 5.43                      | %          | 1,155,288 |   | 15,349 |   | 5.31 | % | 1,042,969 |   | 16,627 |   | 6.38 | % |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for sale                                      |       | 99,333               |       | 1,305                          |       | 5.25                      | %          | 171,812 |   | 1,825 |   | 4.25 | % | 139,336 |   | 2,129 |   | 6.11 | % |
| Investment securities  available-for-sale                |       | 331,774              |       | 3,858                          |       | 4.65                      | %          | 232,342 |   | 2,988 |   | 5.14 | % | 265,248 |   | 3,406 |   | 5.14 | % |
| Investment securities  held-to-maturity                  |       | 33,982               |       | 287                            |       | 3.38                      | %          | 49,059 |   | 484 |   | 3.95 | % | 70,499 |   | 749 |   | 4.25 | % |
| Other investments                                        |       | 15,728               |       | 10                             |       | 0.27                      | %          | 15,633 |   | (19 | ) | -0.50 | % | 14,614 |   | 218 |   | 5.97 | % |
| Federal funds sold                                       |       | 38,941               |       | 23                             |       | 0.24                      | %          | 23,163 |   | 13 |   | 0.23 | % | 18,696 |   | 137 |   | 2.93 | % |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning  assets and interest income (2)   |       | 1,818,110            |       | 23,111                         |       | 5.08                      | %          | 1,647,297 |   | 20,640 |   | 5.01 | % | 1,551,362 |   | 23,266 |   | 6.00 | % |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning  assets:                             |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | $                    | 5,476      |                           |       |                      |       |   | $ | 91 |   |   |   |   |   | $ | 8,631 |   |   |   |   |   |
| Premises and equipment,  net                             |       | 15,773               |       |                           |       |                      |       | 16,307 |   |   |   |   |   | 18,280 |   |   |   |   |   |
| Goodwill and other  intangibles, net                     |       | 13,913               |       |                           |       |                      |       | 14,153 |   |   |   |   |   | 17,213 |   |   |   |   |   |
| Accrued interest and  other assets                       |       | 77,804               |       |                           |       |                      |       | 57,258 |   |   |   |   |   | 52,074 |   |   |   |   |   |
| Allowance for loan  losses                               |       | (19,098              | )          |                           |       |                      |       | (14,727 | ) |   |   |   |   | (11,802 | ) |   |   |   |   |
| Total assets                                             |       | $                    | 1,911,978  |                           |       |                      |       |   | $ | 1,720,379 |   |   |   |   |   | $ | 1,635,758 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  liabilities:                         |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:                            |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 132,129              |       | 210                            |       | 0.64                      | %          | 119,175 |   | 376 |   | 1.28 | % | 124,837 |   | 835 |   | 2.68 | % |
| Money markets                                            |       | 83,420               |       | 161                            |       | 0.77                      | %          | 44,307 |   | 147 |   | 1.33 | % | 42,327 |   | 293 |   | 2.77 | % |
| Statement savings                                        |       | 287,471              |       | 612                            |       | 0.86                      | %          | 261,450 |   | 1,185 |   | 1.84 | % | 375,022 |   | 3,301 |   | 3.53 | % |
| Certificates of deposit                                  |       | 646,533              |       | 3,652                          |       | 2.26                      | %          | 606,588 |   | 5,049 |   | 3.33 | % | 450,488 |   | 4,918 |   | 4.37 | % |
| Total interest - bearing  deposits                       |       | 1,149,553            |       | 4,635                          |       | 1.64                      | %          | 1,031,520 |   | 6,757 |   | 2.66 | % | 992,674 |   | 9,347 |   | 3.78 | % |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                                     |       | 368,700              |       | 3,021                          |       | 3.32                      | %          | 374,121 |   | 3,142 |   | 3.41 | % | 339,665 |   | 3,473 |   | 4.10 | % |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities and interest expense |       | 1,518,253            |       | 7,656                          |       | 2.05                      | %          | 1,405,641 |   | 9,899 |   | 2.86 | % | 1,332,339 |   | 12,820 |   | 3.86 | % |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 163,840              |       |                           |       |                      |       | 133,775 |   |   |   |   |   | 122,408 |   |   |   |   |   |
| Other liabilities                                        |       | 20,975               |       |                           |       |                      |       | 19,569 |   |   |   |   |   | 19,654 |   |   |   |   |   |
| Common shareholders’  equity                        |       | 208,910              |       |                           |       |                      |       | 161,394 |   |   |   |   |   | 161,357 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity         |       | $                    | 1,911,978  |                           |       |                      |       |   | $ | 1,720,379 |   |   |   |   |   | $ | 1,635,758 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income and  net interest margin (2)         |       |                 |       | $                              | 15,455     |                      | 3.40       | % |   |   | $ | 10,741 |   | 2.61 | % |   |   | $ | 10,446 |   | 2.69 | % |

 

----

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

(2) Interest incomefor loans receivable and investment securities available-for-sale is reportedon a fully taxable-equivalent basis at a rate of 34.5%

 

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**Rate andVolume Analysis**

Three Months Ended March 31,2010, 2009 and 2008

(In thousands)

 
| ** **                                | ** ** | **2010  Compared to 2009** | ** ** | **2009  Compared to 2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **Change  Due to**         | ** ** | ** **                 | ** ** | **Change  Due to** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Average  Volume (3)**    | ** ** | **Average  Rate**          | ** ** | **Increase  (Decrease)** | ** ** | **Average  Volume (3)** | ** ** | **Average  Rate** | ** ** | **Increase  (Decrease)** | ** ** |
| **Interest  income:**                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans (1):                                |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Commercial and  industrial                |       | $                          | (125       | )                          | $          | (126 | ) | $ | (251 | ) | $ | 575 |   | $ | (838 | ) | $ | (263 | ) |
| Real estate -  commercial                 |       | 1,715                      |       | (218                       | )          | 1,497 |   | 1,228 |   | (416 | ) | 812 |   |
| Real estate -  construction               |       | 106                        |       | 743                        |       | 849 |   | (189 | ) | (1,267 | ) | (1,456 | ) |
| Real estate -  residential                |       | 270                        |       | (175                       | )          | 95 |   | (66 | ) | (108 | ) | (174 | ) |
| Home equity lines                         |       | 117                        |       | (32                        | )          | 85 |   | 269 |   | (451 | ) | (182 | ) |
| Consumer                                  |       | 4                          |       | 0                          |       | 4 |   | (6 | ) | (9 | ) | (15 | ) |
| Total loans                               |       | 2,087                      |       | 192                        |       | 2,279 |   | 1,811 |   | (3,089 | ) | (1,278 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans held for sale                       |       | (767                       | )          | 247                        |       | (520 | ) | 496 |   | (800 | ) | (304 | ) |
| Investment securities  available-for-sale |       | 1,276                      |       | (406                       | )          | 870 |   | (420 | ) | 2 |   | (418 | ) |
| Investment securities  held-to-maturity   |       | (149                       | )          | (48                        | )          | (197 | ) | (228 | ) | (37 | ) | (265 | ) |
| Other investments                         |       | (0                         | )          | 29                         |       | 29 |   | 16 |   | (253 | ) | (237 | ) |
| Federal funds sold                        |       | 10                         |       | 0                          |       | 10 |   | 32 |   | (156 | ) | (124 | ) |
| Total interest income  (2)                |       | 2,457                      |       | 14                         |       | 2,471 |   | 1,707 |   | (4,333 | ) | (2,626 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                    |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:             |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest checking                         |       | 45                         |       | (211                       | )          | (166 | ) | (45 | ) | (414 | ) | (459 | ) |
| Money markets                             |       | 128                        |       | (114                       | )          | 14 |   | 13 |   | (159 | ) | (146 | ) |
| Statement savings                         |       | 123                        |       | (696                       | )          | (573 | ) | (1,016 | ) | (1,100 | ) | (2,116 | ) |
| Certificates of deposit                   |       | 309                        |       | (1,706                     | )          | (1,397 | ) | 1,700 |   | (1,569 | ) | 131 |   |
| Total interest -  bearing deposits        |       | 605                        |       | (2,727                     | )          | (2,122 | ) | 652 |   | (3,242 | ) | (2,590 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                      |       | (37                        | )          | (84                        | )          | (121 | ) | 313 |   | (644 | ) | (331 | ) |
| Total interest expense                    |       | 568                        |       | (2,811                     | )          | (2,243 | ) | 965 |   | (3,886 | ) | (2,921 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                   |       | $                          | 1,889      |                       | $          | 2,825 |   | $ | 4,714 |   | $ | 742 |   | $ | (447 | ) | $ | 295 |   |

 

----

(1) Non-accrual loans are included in averagebalances and do not have a material effect on the average yield.  Interest income on non-accruing loans was notmaterial for the periods presented.

(2) Interestincome for loans receivable and investment securities available-for-sale isreported on a fully taxable-equivalent basis at a rate of 34.5%

(3) Changesattributable to rate/volume have been allocated to volume.

 

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*Provisionfor Loan Losses*

 

Theprovision for loan losses for the three months ended March 31, 2010 and2009 was $2.4 million and $1.2 million, respectively. The increase in ourprovision expense during 2010 compared to 2009 is a direct result of increasesin non-performing loans and the adverse migration of certain loans through ourallowance for loan losses calculation model because of ongoing adverse economicconditions.  While we continue to reportstrong credit quality in our loan portfolio, we have experienced increases inour watch list credits and net charge-offs. Our provision expense was also impacted by net new loan growth inaddition to our evaluation of the credit quality in our loan portfolio and thequalitative factors we use to determine the adequacy of our loan loss reservesas described above in “Critical Accounting Policies—Allowance for Loan Losses.”

 

During2010, we charged off two residential loans totaling $389,000.  In addition, consumer loans totaling $35,000have been charged-off during 2010.  We recordedcharge-offs on three previously impaired commercial loans to one borrower totaling$1.4 million during 2010.

 

Theallowance for loan losses at March 31, 2010 and December 31, 2009 was$19.3 million and $18.6 million, respectively. Our allowance for loan lossesratio to loans receivable, net was 1.47% and 1.44% at March 31, 2010 and December 31,2009, respectively.  Nonperforming loansat March 31, 2010 and December 31, 2009, were $4.7 million and$847,000, respectively. The increase in our nonaccrual loans was a result ofone commercial loan which had previously been impaired, having deterioratedfurther due to a discrete event in 2010.

 

Continuedchallenging economic conditions could adversely affect our home equity loans ofcredit, credit card and other loan portfolios, including causing increases indelinquencies and default rates, which we expect could impact our charge-offsand provision for loan losses.  Continueddeterioration in commercial and residential real estate values, employment dataand household incomes could result in higher credit losses for us.  Also, in the ordinary course of business, wemay also be subject to a concentration of credit risk to a particular industry,counterparty, borrower or issuer.  At March 31,2010, our commercial real estate portfolio was 46% of our total loanportfolio.  A deterioration in thefinancial condition or prospects of a particular industry or a failure ordowngrade of, or default by, any particular entity or group of entities couldnegatively impact our businesses, perhaps materially, and the systems by whichwe set limits and monitor the level of our credit exposure to individualentities and industries, may not function as we have anticipated.

 

Additionalinformation on the allowance for loan losses, its allocation to the loansreceivable portfolio and information on nonperforming loans can be found in thefollowing tables.

 

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**Allowance for Loan Losses**

Three Months Ended March 31, 2010 and 2009

(In thousands)

 
| ** **                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1 |       | $        | 18,636     |     | $          | 14,518 |   |
|                               |       |     |       |     |       |
| Provision for loan  losses         |       | 2,425    |       | 1,216    |       |
|                               |       |     |       |     |       |
| Loans charged off:                 |       |     |       |     |       |
| Commercial and  industrial         |       | (1,362   | )          | —   |       |
| Residential                        |       | (389     | )          | (386     | )          |
| Consumer                           |       | (35      | )          | (49      | )          |
| Total loans charged off            |       | (1,786   | )          | (435     | )          |
|                               |       |     |       |     |       |
| Recoveries:                        |       |     |       |     |       |
| Commercial and  industrial         |       | 3        |       | 4        |       |
| Residential                        |       | 9        |       | —   |       |
| Total recoveries                   |       | 12       |       | 4        |       |
|                               |       |     |       |     |       |
| Net (charge offs)  recoveries      |       | (1,774   | )          | (431     | )          |
|                               |       |     |       |     |       |
| Ending balance,  March 31,    |       | $        | 19,287     |     | $          | 15,303 |   |

 
| ** **                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **2010**           | ** ** | **2009**         | ** ** |
| **Loans:**                                                 |       |               |       |             |       |
| Balance at period end                                      |       | $                  | 1,307,657  |             | $          | 1,293,432 |   |
| Allowance for loan  losses to loans receivable net of fees |       | 1.47               | %          | 1.44             | %          |
| Annualized net  charge-offs to average loans receivable    |       | 0.55               | %          | 0.22             | %          |
|                                                            |            |                    |            |                  |            |  |  |

 

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**Allocation of the Allowance for LoanLosses**

At March 31, 2010 and December 31, 2009

(In thousands)

 
| ** **                       | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Allocation**           | ** ** | **% of  Total***            | ** ** | **Allocation** | ** ** | **% of  Total*** | ** ** |
| Commercial and  industrial       |       | $                        | 2,332      |                        | 12.35      | % | $ | 2,797 |   | 12.45 | % |
| Real estate -  commercial        |       | 10,521                   |       | 46.32                       | %          | 9,666 |   | 45.80 | % |
| Real estate -  construction      |       | 3,086                    |       | 14.97                       | %          | 2,829 |   | 14.80 | % |
| Real estate -  residential       |       | 2,083                    |       | 17.26                       | %          | 2,096 |   | 17.67 | % |
| Home equity lines                |       | 1,206                    |       | 8.90                        | %          | 1,182 |   | 9.07 | % |
| Consumer                         |       | 59                       |       | 0.20                        | %          | 66 |   | 0.21 | % |
|                             |       |                     |       |                        |       |   |   |   |   |
| Total allowance for  loan losses |       | $                        | 19,287     |                        | 100.00     | % | $ | 18,636 |   | 100.00 | % |

 

----

* Percentage of loan typeto the total loan portfolio.

 

**Nonperforming Loans**

At March 31,2010 and December 31, 2009

(Inthousands)

 
| ** **                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Nonaccruing loans                             |       | $                        | 4,659      |                        | $          | 696 |   |
|                                          |       |                     |       |                        |       |
| Loans contractually  past-due 90 days or more |       | —                   |       | 151                         |       |
|                                          |       |                     |       |                        |       |
| Total nonperforming  loans                    |       | $                        | 4,659      |                        | $          | 847 |   |

 

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*NoninterestIncome*

 

Noninterestincome includes service charges on deposits and loans, realized and unrealizedgains on mortgage banking activities, investment fee income, management feeincome, and gains on sales of investment securities available-for-sale, andcontinues to be an important factor in our operating results. Noninterestincome for each of the three months ended March 31, 2010 and 2009 was $5.8million.  Realized and unrealized gainson mortgage banking activities by our mortgage banking segment for the threemonths ended March 31, 2010 and 2009 were $2.8 million and $3.3 million,respectively, a decrease of $521,000, or 16%. The decrease in realized and unrealized gains on mortgage bankingactivities is primarily related to a decrease in loan origination and salesvolume.  Included in realized andunrealized gains on mortgage banking activities are any origination,underwriting, and discount points and other funding fees and gains associatedwith our sales of loans to third party investors.  Costs include direct costs associated withthe loan origination, such as commissions and salaries that are deferred at thetime of origination.  Management feeincome, which represents the income earned for services George Mason providesto other mortgage companies owned by local home builders and generallyfluctuates based on the volume of loan sales, increased $246,000 to $577,000for the three months ended March 31, 2010 as compared to $331,000 for thethree months ended March 31, 2009.

 

Loanfees decreased $415,000 to $418,000 for the three months ended March 31,2010 as compared to the same period of 2009. The decrease is primarily related to a decrease in loan originations andsales at our mortgage banking segment, specifically, at George Mason’s titlecompany.

 

Investmentfee income increased $199,000 to $1.0 million for the three months ended March 31,2010 compared to $810,000 for the same period of 2009. The increase in investmentfee income is attributable to increases in the market values of managed andcustodial assets and an increase in customer relationships in our trustdivision and Wilson/Bennett.

 

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Theincrease in the cash surrender value of our bank-owned life insurance for thethree months ended March 31, 2010 and 2009 was $148,000 and $75,000,respectively.  The increase is directlyrelated to increases in the underlying value of the investments.

 

Forthe three months ended March 31, 2010, we recorded net gains on sales ofinvestment securities available-for-sale of $264,000 compared to $552,000 forthe three months ended March 31, 2009. We recorded net realized gains of $56,000 on our trading securitiesportfolio for the three months ended March 31, 2010, compared to a netrealized loss of $631,000 for the same period of 2009.  The loss recorded during the first quarter of2009 was a result of our purchase of investments to economically hedge againstfair value changes of our nonqualified deferred compensation planliability.  These investments aredesignated as trading securities, and as such, the changes in fair value are reflectedin earnings.  These trading losses wereprimarily the result of lower stock prices and were partially offset by areduction in the period’s compensation expense associated with this benefitplan.

 

Noninterestincome represented 27% and 35% of our total revenues for the three months endedMarch 31, 2010 and 2009, respectively.

 

*NoninterestExpense*

 

Noninterestexpense includes, among other things, salaries and benefits, occupancy costs,professional fees, depreciation, data processing, telecommunications andmiscellaneous expenses. Noninterest expense for the three months ended March 31,2010 was $13.1 million, compared to $12.0 million for the same period of 2009,an increase of $1.1 million.

 

Forthe quarter ended March 31, 2010, salaries and benefits expense increasedto $6.1 million up from $5.5 million for the quarter ended March 31,2009.  The increase in salaries andbenefits expense is mostly related to increases in personnel at our wealthmanagement and mortgage banking segments. Data communications expense increased $151,000 to $895,000 for the threemonths ended March 31, 2010 as compared to $744,000 for the same period of2009, a result of deconversion costs charged by our existing vendor for ourupcoming systems conversion to a new applications vendor which will occurduring the second quarter of 2010.  FDICinsurance premiums increased $134,000 to $549,000 for the three months ended March 31,2010 compared to $415,000 for the same period of 2009.  The increase in the assessment is due to theFDIC’s efforts to replenish the levels of the Deposit Insurance Fund which hasbeen depleted due to increasing levels of bank failures.

 

*IncomeTaxes*

 

Forthe three months ended March 31, 2010, we recorded a provision for incometaxes of $1.7 million, compared to $953,000 for the same period of 2009.  Our effective tax rate for the three monthsended March 31, 2010 and 2009 was 31.3% and 30.5%, respectively.  Our effective tax rate is below the statutoryrate as a result of income we receive on tax-exempt investments.  See also “Critical Accounting Policies —Valuation of Deferred Tax Assets.”

 

**Statementsof Condition**

 

Totalassets were $1.95 billion and $1.98 billion at March 31, 2010 and December 31,2009, respectively.

 

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*InvestmentSecurities*

 

Ourinvestment securities portfolio is used as a source of income andliquidity.  Investment securities were$374.5 million at March 31, 2010, compared to $382.5 million at December 31,2009, a decrease of $8.0 million. The investment securities portfolio consistsof investment securities available-for-sale, investment securitiesheld-to-maturity and trading securities. Investment securitiesavailable-for-sale are those securities that we intend to hold for anindefinite period of time, but not necessarily until maturity. These securitiesare carried at fair value and may be sold as part of an asset/liabilitystrategy, liquidity management or regulatory 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. Investment securities-trading are securities wepurchase to economically hedge against fair value changes in our nonqualifieddeferred compensation plan liability. These securities include cash equivalents, equities and mutualfunds.  At March 31, 2010,investment securities available-for-sale were $340.1 million, investmentsecurities held-to-maturity were $32.7 million and investmentsecurities-trading were $1.7 million. At December 31, 2009, investmentsecurities available-for-sale were $343.6 million, investment securitiesheld-to-maturity were $35.2 million, and investment securities-trading were$3.7 million.  See the following tablefor additional information on our investment securities portfolio.

 

Wecomplete reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2010, the majority ofour investment securities portfolio consisted of securities rated AAA by aleading rating agency.  Investmentsecurities which carry a AAA rating are judged to be of the best quality andcarry the smallest degree of investment risk. At March 31, 2010, 96% of our mortgage-related investmentsecurities portfolio are guaranteed by the Federal National MortgageAssociation (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and theGovernment National Mortgage Association (GNMA).

 

Wehave $8.7 million in non-government non-agency mortgage-relatedsecurities.  These securities are ratedfrom AAA to AA.  The various protectiveelements on the non-agency securities may change in the future if marketconditions or the financial stability of credit insurers changes, which couldimpact the ratings of these securities.

 

AtMarch 31, 2010 certain of our investment grade securities were in anunrealized loss position.  Investmentsecurities with unrealized losses are a result of pricing changes due to recentand negative conditions in the current market environment and not as a resultof permanent credit impairment. Contractual cash flows for the agencymortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities andmunicipal securities have third party protective elements and there are nonegative indications that the contractual cash flows will not be received whendue.  We do not intend to sell nor do webelieve it is probable that we will be required to sell any of our temporarilyimpaired securities.

 

Inaddition, our held-to-maturity portfolio includes investments in four pooledtrust preferred securities, totaling $8.0 million of par value at March 31,2010 (each security has a par value of $2.0 million).  These securities are presented as corporatebonds in the table below.  The collateralunderlying these structured securities are instruments issued by financialinstitutions or insurers.  We own the A-3tranches in each issuance.  Each of the bondsare rated by more than one rating agency. Two of the securities have a composite rating of AA, one of thesecurities has a composite rating of BBB and the other security has a compositerating of BB.  These ratings areconsistent with the grades from the other rating agencies.  There is minimal observable trading activityfor these types of securities.  We haveestimated the fair value of these securities through the use of internalcalculations and through information provided by external pricing services.  

 

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Giventhe level of subordination below our A-3 tranches, and the actual and expectedperformance of the underlying collateral, we expect to receive all contractualinterest and principal payments recovering the amortized cost basis of each ofthe four securities, and concluded that these securities are notother-than-temporarily impaired.

 

Noother-than-temporary impairment has been recognized on the securities in ourinvestment portfolio during 2010.

 

Wehold $15.7 million in FHLB stock at March 31, 2010, which is included inother investments on the statements of condition.  During 2008, the FHLB of Atlanta announced achange in their dividend declaration and payment schedule beginning during thefourth quarter of 2008.  The change wasinitiated so that the dividend can be declared and paid to member banks afterthe FHLB has calculated their net income for the preceding quarter.  During 2009, the FHLB announced changes toits capital stock requirements. Specifically, the Board of Directors increased the dollar cap on itsstock purchases from $25 million to $26 million and repurchases of memberexcess stock will be evaluated on a quarterly basis instead of a dailybasis.  We do not expect the abovechanges to materially impact our liquidity position.

 

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**InvestmentSecurities**

At March 31, 2010 and December 31, 2009

(In thousands)

 
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Available-for-sale  at March 31, 2010**  |       |          |       |      |       |        |       |
| U.S.  government-sponsored agencies             |       |          |       |      |       |        |       |
| Five to ten years                               |       | $             | 20,944     |      | $          | 21,349      |       | 4.20 | % |
| After ten years                                 |       | 29,975        |       | 29,943    |       | 5.01        | %          |
| Total U.S.  government-sponsored agencies       |       | 50,919        |       | 51,292    |       | 4.68        | %          |
|                                            |       |          |       |      |       |        |       |
| Mortgage-backed  securities (1)                 |       |          |       |      |       |        |       |
| One to five years                               |       | 8             |       | 8         |       | 8.99        | %          |
| Five to ten years                               |       | 28,026        |       | 29,060    |       | 4.22        | %          |
| After ten years                                 |       | 186,407       |       | 191,436   |       | 4.72        | %          |
| Total mortgage-backed  securities               |       | 214,441       |       | 220,504   |       | 4.65        | %          |
|                                            |       |          |       |      |       |        |       |
| Tax exempt municipal  securities (2)            |       |          |       |      |       |        |       |
| Five to ten years                               |       | 6,542         |       | 6,644     |       | 3.36        | %          |
| After ten years                                 |       | 53,448        |       | 53,442    |       | 4.01        | %          |
| Taxable municipal  securities                   |       |          |       |      |       |        |       |
| Five to ten years                               |       | 498           |       | 496       |       | 4.55        | %          |
| After ten years                                 |       | 2,829         |       | 2,773     |       | 5.03        | %          |
| Total municipal  securities                     |       | 63,317        |       | 63,355    |       | 3.99        | %          |
|                                            |       |          |       |      |       |        |       |
| U. S. treasury  securities                      |       |          |       |      |       |        |       |
| One to five years                               |       | 4,906         |       | 4,940     |       | 2.36        | %          |
| Total U.S. treasury  securities                 |       | 4,906         |       | 4,940     |       | 2.36        | %          |
| Total investment  securities available-for-sale |       | $             | 333,583    |      | $          | 340,091     |       | 4.49 | % |

 
| ** **                                    | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                    | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Held-to-maturity  at March 31, 2010**  |       |          |       |      |       |        |       |
| Mortgage-backed  securities (1)               |       |          |       |      |       |        |       |
| One to five years                             |       | $             | 1,572      |      | $          | 1,620       |       | 4.31 | % |
| Five to ten years                             |       | 5,809         |       | 6,083     |       | 4.61        | %          |
| After ten years                               |       | 17,301        |       | 17,893    |       | 4.10        | %          |
| Total mortgage-backed  securities             |       | 24,682        |       | 25,596    |       | 4.23        | %          |
|                                          |       |          |       |      |       |        |       |
| Corporate bonds                               |       |          |       |      |       |        |       |
| After ten years                               |       | 8,004         |       | 3,362     |       | 1.30        | %          |
| Total corporate bonds                         |       | 8,004         |       | 3,362     |       | 1.30        | %          |
| Total investment  securities held-to-maturity |       | 32,686        |       | 28,958    |       | 3.52        | %          |
|                                          |       |          |       |      |       |        |       |
| Total investment  securities                  |       | $             | 366,269    |      | $          | 369,049     |       | 4.41 | % |

 

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| ** **                                        | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|---------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                        | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Available-for-sale  at December 31, 2009** |       |          |       |      |       |        |       |
| U.S.  government-sponsored agencies               |       |          |       |      |       |        |       |
| Five to ten years                                 |       | $             | 26,074     |      | $          | 26,030      |       | 4.15 | % |
| After ten years                                   |       | 29,974        |       | 29,629    |       | 5.01        | %          |
| Total U.S.  government-sponsored agencies         |       | 56,048        |       | 55,659    |       | 4.61        | %          |
|                                              |       |          |       |      |       |        |       |
| Mortgage-backed  securities (1)                   |       |          |       |      |       |        |       |
| One to five years                                 |       | 9             |       | 9         |       | 8.97        | %          |
| Five to ten years                                 |       | 33,079        |       | 33,964    |       | 4.21        | %          |
| After ten years                                   |       | 184,635       |       | 189,432   |       | 4.84        | %          |
| Total mortgage-backed  securities                 |       | 217,723       |       | 223,405   |       | 4.74        | %          |
|                                              |       |          |       |      |       |        |       |
| Tax exempt municipal  securities (2)              |       |          |       |      |       |        |       |
| Five to ten years                                 |       | 6,090         |       | 6,156     |       | 3.34        | %          |
| After ten years                                   |       | 50,270        |       | 50,227    |       | 4.01        | %          |
| Taxable municipal  securities                     |       |          |       |      |       |        |       |
| After ten years                                   |       | 3,331         |       | 3,225     |       | 4.96        | %          |
| Total municipal  securities                       |       | 59,691        |       | 59,608    |       | 3.99        | %          |
|                                              |       |          |       |      |       |        |       |
| U. S. treasury  securities                        |       |          |       |      |       |        |       |
| One to five years                                 |       | 4,901         |       | 4,897     |       | 2.36        | %          |
| Total U.S. treasury  securities                   |       | 4,901         |       | 4,897     |       | 2.36        | %          |
| Total investment securities  available-for-sale   |       | $             | 338,363    |      | $          | 343,569     |       | 4.55 | % |

 
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Held-to-maturity  at December 31, 2009** |       |          |       |      |       |        |       |
| Mortgage-backed  securities (1)                 |       |          |       |      |       |        |       |
| One to five years                               |       | $             | 1,833      |      | $          | 1,884       |       | 4.43 | % |
| Five to ten years                               |       | 6,244         |       | 6,478     |       | 4.59        | %          |
| After ten years                                 |       | 19,103        |       | 19,731    |       | 4.26        | %          |
| Total mortgage-backed  securities               |       | 27,180        |       | 28,093    |       | 4.35        | %          |
|                                            |       |          |       |      |       |        |       |
| Corporate bonds                                 |       |          |       |      |       |        |       |
| After ten years                                 |       | 8,004         |       | 3,343     |       | 1.33        | %          |
| Total corporate bonds                           |       | 8,004         |       | 3,343     |       | 1.33        | %          |
| Total investment  securities held-to-maturity   |       | 35,184        |       | 31,436    |       | 3.66        | %          |
|                                            |       |          |       |      |       |        |       |
| Total investment  securities                    |       | $             | 373,547    |      | $          | 375,005     |       | 4.47 | % |

 

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(1)  Based oncontractual maturities.

(2) Yields fortax-exempt municipal securities are not reported on a tax-equivalent basis.

 

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*LoansReceivable*

 

Totalloans receivable, net of deferred fees and costs, were $1.31 billion at March 31,2010 and $1.29 billion at December 31, 2009, an increase of $14.2million.  See the following table fordetails on the loans receivable portfolio. Loans held for sale at March 31,2010 were $144.0 million compared to $179.5 million at December 31,2009.  Loans held for sale are valued atthe lower of cost or fair value.

 

**Loans Receivable**

At March 31, 2010 and December 31, 2009

(In thousands)

 
| ** **                       | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                             |       |                     |       |                        |       |   |   |   |   |
| Commercial and  industrial       |       | $                        | 161,609    |                        | 12.35      | % | $ | 161,156 |   | 12.45 | % |
| Real estate -  commercial        |       | 606,295                  |       | 46.32                       | %          | 592,780 |   | 45.80 | % |
| Real estate -  construction      |       | 195,947                  |       | 14.97                       | %          | 191,523 |   | 14.80 | % |
| Real estate -  residential       |       | 225,839                  |       | 17.26                       | %          | 228,693 |   | 17.67 | % |
| Home equity lines                |       | 116,540                  |       | 8.90                        | %          | 117,392 |   | 9.07 | % |
| Consumer                         |       | 2,582                    |       | 0.20                        | %          | 2,859 |   | 0.21 | % |
|                             |       |                     |       |                        |       |   |   |   |   |
| Gross loans                      |       | $                        | 1,308,812  |                        | 100.00     | % | 1,294,403 |   | 100.00 | % |
|                             |       |                     |       |                        |       |   |   |   |   |
| Net deferred (fees)  costs       |       | (1,155                   | )          |                        |       | (971 | ) |   |   |
| Less: allowance for  loan losses |       | (19,287                  | )          |                        |       | (18,636 | ) |   |   |
|                             |       |                     |       |                        |       |   |   |   |   |
| Loans receivable, net            |       | $                        | 1,288,370  |                        |       |   | $ | 1,274,796 |   |   |   |

 

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*Deposits*

 

Totaldeposits were $1.33 billion at March 31, 2010 compared to $1.30billion at December 31, 2009. During the first quarter of 2010, we haddecreases in our noninterest bearing checking products and certificates ofdeposit, and increases in interest bearing and money market checking andsavings accounts. We have had success in attracting deposit balances fromcustomers seeking to deposit their money with smaller, local banks anddepositors are increasing balances held with financial institutions as a resultof the increased protection of their money by the FDIC.  See the following table for details oncertificates of deposit with balances of $100,000 or more. We are a member ofthe Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDICinsurance protection on multi-million dollar certificates of deposit throughour Bank.  When a customer places a largedeposit through CDARS, we place their funds into certificates of deposit withother banks in the CDARS network in increments of less than $250,000 so thatprincipal and interest are eligible for FDIC insurance protection.  At March 31, 2010 and December 31,2009, we had $45.2 million and $59.4 million, respectively, in CDARS deposits,which are considered to be brokered deposits. Brokered certificates of deposit not in the CDARS network were $15.0 millionand $28.2 million at March 31, 2010 and December 31, 2009,respectively.

 

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

At March 31, 2010

(In thousands)

 
| ** **                             | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|-----------|------------|
| **Maturities:**                        |       |           |       |            |       |      |       |
| Three months or less                   |       | $              | 48,897     |            | $          | 25,841    |       | $ | 74,738 |   |
| Over three months  through six months  |       | 45,042         |       | 11,795          |       | 56,837    |       |
| Over six months through  twelve months |       | 66,612         |       | 2,633           |       | 69,245    |       |
| Over twelve months                     |       | 88,007         |       | 40,052          |       | 128,059   |       |
|                                   |       | $              | 248,558    |            | $          | 80,321    |       | $ | 328,879 |   |

 

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

 

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*Borrowings*

 

Otherborrowed funds decreased $51.5 million to $376.0 million at March 31,2010, compared to $427.6 million at December 31, 2009.  Treasury, Tax & Loan Note optionborrowings decreased $690,000 to $1.3 million at March 31, 2010 comparedto $2.0 million at December 31, 2009. FHLB advances remained at $280.0 million at March 31, 2010 comparedto December 31, 2009. Customer repurchase agreements decreased $5.9million to $74.1 million at March 31, 2010 compared to $80.0 million at December 31,2009.  We had no federal funds purchasedat March 31, 2010 compared to $45.0 million at December 31,2009.  The following table providesinformation on our borrowings.

 

**Short-Term Borrowings and OtherBorrowed Funds**

At March 31, 2010

(In thousands)

 

**Short-term FHLB advances:**

 
| **Advance Date**                                                | ** ** | **Term of Advance** | ** ** | **Maturity or  Call Date** | ** **  | **Interest Rate** | ** ** | **Amount  Outstanding** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------|-------------|------------------------|------------|-------------------------|------------|
| May-08                                                               |       | 2 year                        |       | May-10                               |        | 3.31                   | %          | 10,000                  |       |
| **Total  short-term FHLB advances and weighted average rate**        |       | **3.31**                      | **%**      | **$**                                | **10,000**  |                   |
| ** **                                                           |       |                          |       |                                 |        |
| **Other  short-term borrowed funds:**                                |       |                          |       |                                 |        |
| TT&L note option                                                 |       | 0.00                          | %          | $                                    | 1,296       |                   |
| Customer repurchase  agreements                                      |       | 0.29                          | %          | 74,119                               |        |
| **Total  other short-term borrowed funds and weighted average rate** | ** ** | **0.29**                      | **%**      | **$**                                | **75,415**  | ** **             |
| ** **                                                           | ** ** | ** **                    | ** ** | ** **                           | ** **  |
| **Other  borrowed funds:**                                           |       |                          |       |                                 |        |
| Trust preferred                                                      |       | 3.93                          | %          | $                                    | 20,619      |                   |
| FHLB advances - long  term                                           |       | 4.00                          | %          | 270,000                              |        |
| **Other  borrowed funds and weighted average rate**                  | ** ** | **4.00**                      | **%**      | **$**                                | **290,619** | ** **             |
|                                                                 |       |                          |       |                                 |        |
| **Total  other borrowed funds and weighted average rate**            | ** ** | **3.23**                      | **%**      | **$**                                | **376,034** | ** **             |

 

*Shareholders’Equity*

 

Shareholders’equity at March 31, 2010 was $208.6 million compared to $204.5 million at December 31,2009, an increase of $4.1 million, or 2%. The increase in shareholders’ equityat March 31, 2010 compared to December 31, 2009 is primarilyattributable to net income of $3.8 million for the three months ended March 31,2010.  In addition, accumulated othercomprehensive income increased $780,000 for the three months ended March 31,2010.  Book value per share at March 31,2010 was $7.26 compared to $7.12 at December 31, 2009. Tangible book valueper share (which is book value per share adjusted for changes in othercomprehensive income, less goodwill and other intangible assets) at March 31,2010 was $6.64 compared to $6.52 at December 31, 2009.

 

##### **Business SegmentOperations**

##### ** **

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

 

*Commercial Banking*

 

Thecommercial banking segment includes both commercial and consumer lending andprovides customers such products as commercial loans, real estate loans, andother business financing and consumer loans. In addition, this segment alsoprovides customers with various deposit products including demand depositaccounts, savings accounts and certificates of deposit.

 

Forthe three months ended March 31, 2010, the commercial banking segmentrecorded net income of $3.6 million compared to $1.7 million for the sameperiod of 2009. See “**Statements of Income**— *General—Business**Segments*”above for additional information regarding the operating results for thecommercial banking segment for the periods presented.  At March 31, 2010, total assets for thissegment were $1.92 billion, loans receivable, net of deferred fees and costs,were $1.31 billion and total deposits were $1.33 billion. At March 31,2009, total assets were $1.75 billion, loans receivable, net of deferred feesand costs, were $1.17 billion and total deposits were $1.21 billion.

 

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*MortgageBanking*

 

Theoperations of the mortgage banking segment are conducted through George Mason,and Cardinal First. Both George Mason and Cardinal First engage primarily inthe origination and acquisition of residential mortgages for sale into thesecondary market on a best efforts basis.

 

Forthe three months ended March 31, 2010 and 2009, the mortgage bankingsegment recorded net income of $559,000 and $1.3 million, respectively. See “**Statements of Income** — *General—Business**Segments*” above for additionalinformation regarding the operating results for the mortgage banking segmentfor the periods presented.  At March 31,2010, total assets for this segment were $160.4 million; loans held for salewere $144.0 million and mortgage funding checks were $8.6 million. At March 31,2009, total assets were $224.6 million; loans held for sale were $212.1 millionand mortgage funding checks were $27.1 million.

 

*Wealth Management and Trust Services*

 

Thewealth management and trust services segment provides investment and financialservices to businesses and individuals, including financial planning,retirement/estate planning, trusts, estates, custody, investment management,escrows, and retirement plans. Operations of the Bank’s trust division, CWS andWilson/Bennett are included in this operating segment.

 

Forthe three months ended March 31, 2010 and 2009, the wealth management andtrust services segment recorded net income of $127,000 and $10,000,respectively. See “**Statements of Income**— *General—Business**Segments*”above for additional information regarding the operating results for thisbusiness segment for the periods presented. At March 31, 2010, total assets were $3.5 million and managed andcustodial assets were $3.2 billion. At March 31, 2009, total assets forthis segment were $3.5 million and managed and custodial assets were $2.6billion.

 

Additionalinformation pertaining to our business segments can be found in Note 3 to thenotes to consolidated financial 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 and certaindebt obligations) and Tier 2 (which includes certain other debt obligations, aportion of the allowance for loan losses, and 45% of any unrealized gains inequity securities).

 

AtMarch 31, 2010, our Tier 1 and total (Tier 1 and Tier 2) risk-basedcapital ratios were 13.21% and 14.44%, respectively. At December 31, 2009,our Tier 1 and total risk-based capital ratios were 12.97% and 14.15%,respectively.  Our regulatory capitallevels for the Bank and bank holding company meet those established forwell-capitalized institutions.  Theincrease in our risk-based capital ratios was primarily a result of changesduring the first quarter of 2010 in our balance sheet and increases ourincrease in shareholders’ equity at March 31, 2010 compared to December 31,2009.

 

Thefollowing table provides additional information pertaining to our capitalratios.

 

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**Capital Components**

AtMarch 31, 2010 and December 31, 2009

(Inthousands)

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | **To Be Well**        | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | ** **            | ** ** | **Ratio** | ** ** | **Amount** | ** ** | ** ** | ** ** | **Ratio** | ** ** |
|                                                             |       |       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Cardinal  Financial Corporation (Consolidated):**              |       |       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| ** **                                                       |       |       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| **At March 31, 2010**                                       |       |       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Total  risk-based capital/Total capital to risk-weighted assets  |       | $          | 230,169    |                  | 14.44      | %                     | $          | 127,522               |       | >  |   | 8.00 | % | $ | 159,403 |   | >  |   | 10.00 | % |
| Tier  I capital/Tier I capital to risk-weighted assets           |       | 210,649    |       | 13.21                 | %          | 63,761                |       | >             |       | 4.00 | % | 95,642 |   | >  |   | 6.00 | % |
| Tier  I capital/Total capital to average assets                  |       | 210,649    |       | 11.10                 | %          | 75,923                |       | >             |       | 4.00 | % | 94,903 |   | >  |   | 5.00 | % |
|                                                             |       |       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| **At December 31, 2009**                                    |       |       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Total  risk-based capital/ Total capital to risk-weighted assets |       | $          | 226,137    |                  | 14.15      | %                     | $          | 127,869               |       | >  |   | 8.00 | % | $ | 159,837 |   | >  |   | 10.00 | % |
| Tier  I capital/ Tier I capital to risk-weighted assets          |       | 207,286    |       | 12.97                 | %          | 63,935                |       | >             |       | 4.00 | % | 95,902 |   | >  |   | 6.00 | % |
| Tier  I capital/ Total capital to average assets                 |       | 207,286    |       | 11.03                 | %          | 75,185                |       | >             |       | 4.00 | % | 93,981 |   | >  |   | 5.00 | % |

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | ** **                 | ** ** | **Ratio** | ** ** | **Amount** | ** ** | ** ** | ** ** | **Ratio** | ** ** |
|                                                             |       |       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **Cardinal Bank:**                                          |       |       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| ** **                                                       |       |       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **At March 31, 2010**                                       |       |       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total  risk-based capital/Total capital to risk-weighted assets  |       | $          | 211,511    |                       | 13.34      | %                          | $          | 126,883                    |       | >  |   | 8.00 | % | $ | 158,604 |   | >  |   | 10.00 | % |
| Tier  I capital/Tier I capital to risk-weighted assets           |       | 191,991    |       | 12.11                      | %          | 63,441                     |       | >                  |       | 4.00 | % | 95,162 |   | >  |   | 6.00 | % |
| Tier  I capital/Total capital to average assets                  |       | 191,991    |       | 10.16                      | %          | 75,617                     |       | >                  |       | 4.00 | % | 94,521 |   | >  |   | 5.00 | % |
|                                                             |       |       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **At December 31, 2009**                                    |       |       |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total  risk-based capital/ Total capital to risk-weighted assets |       | $          | 206,413    |                       | 12.98      | %                          | $          | 127,257                    |       | >  |   | 8.00 | % | $ | 159,071 |   | >  |   | 10.00 | % |
| Tier  I capital/ Tier I capital to risk-weighted assets          |       | 187,562    |       | 11.79                      | %          | 63,629                     |       | >                  |       | 4.00 | % | 95,443 |   | >  |   | 6.00 | % |
| Tier  I capital/ Total capital to average assets                 |       | 187,562    |       | 10.02                      | %          | 74,884                     |       | >                  |       | 4.00 | % | 93,605 |   | >  |   | 5.00 | % |

 

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**ContractualObligations**

 

Wehave entered into a number of long-term contractual obligations to support ourongoing activities. These contractual obligations will be funded throughoperating revenues and liquidity sources held or available to us and excludecontractual interest costs, where applicable. The required payments under suchobligations are detailed in the following table.

 

**Contractual Obligations**

At March 31, 2010

(In thousands)

 
| ** **                                           | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** | ** **                     | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **Total**  | ** ** | **Less than 1  Year**           | ** ** | **1 - 2 Years** | ** ** | **3 - 5 Years** | ** ** | **More than 5  Years** | ** ** |
| Long-Term Debt  Obligations:                         | ** ** | ** ** | ** ** | ** **                                | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Certificates of deposit                              |       | $          | 580,173    |                                      | $          | 336,804                        |       | $ | 117,458 |   | $ | 96,183 |   | $ | 29,728 |   |
|                                                 |       |       |       |                                      |       |                           |       |   |   |   |   |
| Brokered certificates  of deposit                    |       | 60,230     |       | 57,411                                    |       | 2,819                          |       | — |   | — |   |
|                                                 |       |       |       |                                      |       |                           |       |   |   |   |   |
| Advances from the  Federal Home Loan Bank of Atlanta |       | 280,000    |       | 10,000                                    |       | 15,000                         |       | 100,000 |   | 155,000 |   |
|                                                 |       |       |       |                                      |       |                           |       |   |   |   |   |
| Trust preferred  securities                          |       | 20,619     |       | —                                    |       | —                         |       | — |   | 20,619 |   |
|                                                 |       |       |       |                                      |       |                           |       |   |   |   |   |
| Operating lease  obligations                         |       | 30,897     |       | 4,153                                     |       | 3,530                          |       | 9,258 |   | 13,956 |   |
|                                                 |       |       |       |                                      |       |                           |       |   |   |   |   |
| Total                                                |       | $          | 971,919    |                                      | $          | 408,368                        |       | $ | 138,807 |   | $ | 205,441 |   | $ | 219,303 |   |

 

**FinancialInstruments with Off-Balance-Sheet Risk and Credit Risk**

 

Weare a party to financial instruments with off-balance sheet risk in the normalcourse of business to meet the financing needs of our customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit. Those instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized on the balance sheet.

 

TheBank’s maximum exposure to credit loss in the event of nonperformance by theother party to the financial instrument for commitments to extend credit andstandby 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.

 

Wehave counter-party risk which may arise from the possible inability of GeorgeMason’s third-party investors to meet the terms of their forward salescontracts. George Mason works with third-party investors that are generallywell-capitalized, are investment grade and exhibit strong financial performanceto mitigate this risk.  We do not expectany third-party investor to fail to meet its obligation.  In addition, we have derivative counterpartyrisk relating to certain interest rate swaps we have with third parties.  This risk may arise from the inability of thethird party to meet the terms of the contract. We continuously monitor the financial condition of these thirdparties.  We do not expect these thirdparties to fail to meet their obligations.

 

GeorgeMason estimates a reserve (early pay-off reserve) for mortgage loans sold thatare repaid by the borrower within a certain number of days following the loansale, thereby requiring that George Mason refund part of the service releasepremium and/or premium pricing received from the investor pursuant to the loansale agreement.  

 

GeorgeMason has a reserve for its estimated exposure to repurchase loans previouslysold to investors for which borrowers failed to provide full and accurate informationon their loan application or for which appraisals have not been acceptable orwhen the loan was not underwritten in accordance with the loan programspecified by the loan investor. At March 31, 2010, this reserve had abalance of $796,000.  We evaluate themerits of each claim and estimate the reserve based on actual and expectedclaims received and consider the historical amounts paid to settle suchclaims.  We have taken actions withrespect to our investor arrangements in an attempt to limit the number offuture claims.

 

Inaddition, George Mason, as part of the service it provides to its managedcompanies, purchases the loans originated by managed companies at the time oforigination.  These loans are then soldby George Mason to investors.  GeorgeMason has agreements with its managed

 

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companies requiring that themanaged company fund the repurchase or settle the claim, for any loans thatwere originated by the managed company and for which investors have requestedGeorge Mason to repurchase due to the borrowers failure to provide full andaccurate information on or related to their loan application or for whichappraisals have not been acceptable or when the loan was not underwritten inaccordance with the loan program specified by the loan investor.  In the event that the managed company’sfinancial condition deteriorates and it is unable to fund the repurchase ofsuch loans, George Mason may have to provide the funds to repurchase theseloans from investors.  In this instance,George Mason would establish an allowance on the receivable from the managedcompany.  There is no such allowancerecorded at March 31, 2010 as management fully recovered all amounts owedby managed companies as of that date.

 

During the second quarter of2008, George Mason entered into an agreement with a mortgage correspondentrelated to the loan purchase agreement between the two parties.  The agreement provided for the release ofknown and unknown claims by the mortgage correspondent in exchange for a $1.8million payment made by George Mason to the correspondent.  The terms of this agreement require that wemay be obligated to make additional payments to the correspondent in futureperiods based on certain conditions.  Theamount of the exposure declines with the passage of time.

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generallyhave expiration dates or other termination clauses and may require payment of afee. Since many of the commitments are expected to expire without being drawnupon, 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 obtainedis based on management’s credit evaluation of the counterparty.  Collateral held varies but may includeaccounts receivable, inventory, property and equipment, and income-producingcommercial properties.

 

Unfundedcommitments under lines of credit are commitments for possible futureextensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to whichwe have committed.

 

Standbyletters of credit are conditional commitments we issued 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. We hold certificates ofdeposit, deposit accounts, and real estate as collateral supporting thosecommitments for which collateral is deemed necessary.

 

AtMarch 31, 2010, commitments to extend credit were $477.8 million andstandby letters of credit were $13.2 million. Commitments to extend credit of$112.3 million as of March 31, 2010 are related to the mortgage bankingsegment’s mortgage loan funding commitments and are of a short term nature.

 

## **Liquidity**

## ** **

Liquidityin the banking industry is defined as the ability to meet the demand for fundsof both depositors and borrowers. We must be able to meet these needs byobtaining funding from depositors or other lenders or by converting non-cashitems into cash.  The objective of our 

 

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liquiditymanagement program is to ensure that we always have sufficient resources tomeet the demands of our depositors and borrowers. Stable core deposits and astrong capital position provide the base for our liquidity position. We believewe have demonstrated our ability to attract deposits because of our convenientbranch locations, personal service and pricing.

 

Inaddition to deposits, we have access to different wholesale funding markets.These markets include the brokered CD market, the repurchase agreement marketand the federal funds market. We are a member of the Certificates of DepositAccount Registry Service (“CDARS”). CDARS allows our customers to access FDIC insurance protection onmulti-million dollar certificates of deposit through our Bank.  When a customer places a large depositthrough CDARS, we place their funds into certificates of deposit with otherbanks in the CDARS network in increments of less than $250,000 so thatprincipal and interest are eligible for FDIC insurance protection.  We also maintain secured lines of credit withthe Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta.Having diverse funding alternatives reduces our reliance on any one source forfunding.

 

Cashflow from amortizing assets or maturing assets can also provide funding to meetthe needs of depositors and borrowers.

 

Wehave established a formal liquidity contingency plan which establishes aliquidity management team and provides guidelines for liquidity management. Forour liquidity management program, we first determine our current liquidityposition and then forecast liquidity based on anticipated changes in the balancesheet. In this forecast, we expect to maintain a liquidity cushion. We alsostress test our liquidity position under several different stress scenarios.Guidelines for the forecasted liquidity cushion and for liquidity cushions foreach stress scenario have been established. In addition, one stress testcombines all other stress tests to see how liquidity would react to severalnegative scenarios occurring at the same time. We believe that we havesufficient resources to meet our liquidity needs.

 

Liquidassets, which include cash and due from banks, federal funds sold andinvestment securities available for sale, totaled $367.6 million at March 31,2010 or 19% of total assets. We held investments that are classified asheld-to-maturity in the amount of $32.7 million at March 31, 2010. Tomaintain ready access to the Bank’s secured lines of credit, the Bank haspledged roughly half of its investment securities and a portion of itsresidential real estate loan portfolio to the Federal Home Loan Bank of Atlantawith additional investment securities and certain loans in its commercial realestate and commercial & industrial portfolios pledged to the FederalReserve Bank of Richmond. Additional borrowing capacity at the Federal HomeLoan Bank of Atlanta at March 31, 2010 was $3 million. Borrowing capacitywith the Federal Reserve Bank of Richmond was $387 million at March 31,2010. These facilities are subject to the FHLB and the Federal Reserveapproving disbursement to us.  Inaddition, we have unsecured federal funds purchased lines of $315 millionavailable to us.  We anticipatemaintaining liquidity at a level sufficient to protect depositors, provide forreasonable growth and fully comply with all regulatory requirements.

 

##### **Interest RateSensitivity**

##### ** **

Weare exposed to various business risks including interest rate risk. Our goal isto maximize net interest income without incurring excessive interest rate risk.Management of net interest income and interest rate risk must be consistentwith the level of capital and liquidity that we maintain. We manage interestrate risk through an asset and liability committee (“ALCO”). 

 

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ALCOis responsible for managing the interest rate risk in conjunction withliquidity and capital management.

 

Weemploy an independent consulting firm to model our interest ratesensitivity.  We use a net interestincome simulation model as our primary tool to measure interest ratesensitivity. Many assumptions are developed based on expected activity in thebalance sheet. For maturing assets, assumptions are created for theredeployment of these assets. For maturing liabilities, assumptions are developedfor the replacement of these funding sources. Assumptions are also developedfor assets and liabilities that could reprice during the modeled time period.These assumptions also cover how we expect rates to change on non-maturitydeposits such as interest checking, money market checking, savings accounts aswell as certificates of deposit. With the funding markets still lackingliquidity, forecasts for deposit rate movements carry greater uncertainty thanwhen this market is functioning normally. Based on inputs that include the current balance sheet, the currentlevel of interest rates and the developed assumptions, the model then producesan expected level of net interest income assuming that market rates remainunchanged. This is considered the base case. Next, the model determines whatnet interest income would be based on specific changes in interest rates. Therate simulations are performed for a two year period and include ramped ratechanges of down 100 basis points and up 200 basis points. The down 200 basispoint scenario was discontinued given the current level of interest rates.  In the ramped down rate change, the modelmoves rates gradually down 100 basis points over the first year and then rates remainflat in the second year.

 

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

 

AtMarch 31, 2010, we were liability sensitive for the entire two yearsimulation period.   Liability sensitivemeans that we have more interest-bearing liabilities repricing thaninterest-earning assets.  For a decliningrate environment, net interest income would increase for a liability sensitivebank.  Being liability sensitive our netinterest income should contract in a rising rate scenario.  In the up 200 basis point scenario, our netinterest income would decrease by not more than 0.5% for the one year periodand by not more than 0.8% over the two year time horizon.  In the down 100 basis point scenario theinterest rate risk model indicates that our net interest income would decreaseby not more than 0.7% for the one year period and by not more than 1.2% overthe two year time horizon.

 

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**Item 3.  Quantitative and QualitativeDisclosures About Market Risk**

 

OurAsset/Liability Committee is responsible for reviewing our liquidityrequirements and maximizing our net interest income consistent with capitalrequirements, liquidity, interest rate and economic outlooks, competitivefactors and customer needs. Interest rate risk arises because the assets of theBank and the liabilities of the Bank have different maturities andcharacteristics. In order to measure this interest rate risk, we use asimulation process that measures the impact of changing interest rates on netinterest income. This model is run for the Bank by an independent consultingfirm. The simulations incorporate assumptions related to expected activity inthe balance sheet. For maturing assets, assumptions are developed for theredeployment 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 interest checking, money market checking, savingsaccounts as well as certificates of deposit. With the funding markets stilllacking liquidity, forecasts for deposit rate movements carry greateruncertainty than when this market is functioning normally.  Based on inputs that include the most recentperiod end balance sheet, the current level of interest rates and the developedassumptions, the model then produces an expected level of net interest incomeassuming that interest rates remain unchanged. This becomes the base case.Next, the model determines the impact on net interest income given specifiedchanges in interest rates. The rate simulations are performed for a two yearperiod and include ramped rate changes of down 100 basis points and up 200basis points. The down 200 basis point scenario was discontinued given thecurrent level of interest rates.  In theramped down rate change, the model moves rates gradually down 100 basis pointsover the first year and then rates remain flat in the second year.

 

Forthe up 200 basis point scenario, rates are gradually increased by 200 basispoints in the first year and remain flat in the second year. In both the up anddown scenarios, the model assumes a parallel shift in the yield curve. Theresults of these simulations are then compared to the base case.

 

AtMarch 31, 2010, we were liability sensitive for the entire two yearsimulation period.   Liability sensitivemeans that we have more interest-bearing liabilities repricing thaninterest-earning assets.  For a decliningrate environment, net interest income would increase for a liability sensitivebank.  Being liability sensitive our netinterest income should contract in a rising rate environment.  In the up 200 basis point scenario, our netinterest income would decrease by not more than 0.5% for the one year periodand by not more than 0.8% over the two year time horizon.  In the down 100 basis point scenario theinterest rate risk model indicates that our net interest income will decreaseby not more than 0.7% over the one year period and by not more than 1.2% in thetwo year time horizon.

 

Seealso “Interest Rate Sensitivity” in Item 2 above for a discussion of our interestrate risk.

 

Wehave counter-party risk that may arise from the possible inability of GeorgeMason’s third party investors to meet the terms of their forward salescontracts.  George Mason works withthird-party investors that are generally well-capitalized, are investment gradeand exhibit strong financial performance to mitigate this risk.  We do not expect any third-party investor tofail to meet its obligation.  In addition,we have derivative counterparty risk relating to certain interest rate swaps wehave with a third party.  This risk mayarise from the inability of the third party to

 

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meetthe terms of the contracts.  We monitorthe financial condition of this third party on an annual basis.  We do not expect this third party to fail tomeet its obligation.

 

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**Item 4.  Controls and Procedures**

 

TheCompany maintains disclosure controls and procedures that are designed toensure that the information required to be disclosed by it in the reports thatit files or submits under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods requiredby the Securities and Exchange Commission, including, without limitation, thosecontrols and procedures designed to ensure that such information is accumulatedand communicated to the Company’s management to allow timely decisionsregarding required disclosures.

 

Asof the end of the period covered by this report, an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures was carried out under the supervision and with the participationof the Company’s management, including its chief executive officer and chieffinancial officer. Based on and as of the date of such evaluation, theseofficers concluded that the Company’s disclosure controls and procedures wereeffective.

 

TheCompany also maintains a system of internal accounting controls that isdesigned to provide assurance that assets are safeguarded and that transactionsare executed in accordance with management’s authorization and are properlyrecorded. This system is continually reviewed and is augmented by writtenpolicies and procedures, the careful selection and training of qualifiedpersonnel and an internal audit program to monitor its effectiveness. Therewere no changes in our internal control over financial reporting identified inconnection with our evaluation of it that occurred during our last fiscalquarter that materially affected, or are likely to materially affect, ourinternal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Inthe ordinary course of our operations, we become party to various legalproceedings.  Currently, we are not partyto any material legal proceedings, and no such proceedings are, to management’sknowledge, threatened against us.

 

**Item 1A.  Risk Factors**

 

Our operations are subjectto many risks that could adversely affect our future financial condition andperformance and, therefore, the market value of our securities, including therisk factors that are outlined in our Annual Report on Form 10-K for theyear ended December 31, 2009.  Therehave been no material changes in our risk factors from those disclosed.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

** **

(a)  None.

(b)  Not applicable.

(c)          Forthe three months ended March 31, 2010, we did not purchase shares of ourcommon stock.

 

**Item 3.  Defaults Upon Senior Securities**

 

(a)  None.

(b)  None.

 

**Item 4.  (Removed and Reserved)**

 

**Item 5.  Other Information**

 

(a) None.

(b)  None.

 

**Item 6.  Exhibits**

 

31.1         Rule 13a-14(a) Certificationof Chief Executive Officer

31.2         Rule 13a-14(a) Certificationof Chief Financial Officer

32.1         Statement of ChiefExecutive Officer Pursuant to 18 U.S.C. Section 1350

32.2         Statement of ChiefFinancial 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 10, 2010 | /s/  Bernard H. Clineburg                                                           |
|                     | Bernard  H. Clineburg                                                               |
|                     | Chairman  and Chief Executive Officer                                               |
|                     | (Principal  Executive Officer)                                                      |
|                     |                                                                                |
|                     |                                                                                |
| Date:  May 10, 2010 | /s/  Mark A. Wendel                                                                 |
|                     | Mark  A. Wendel                                                                     |
|                     | Executive  Vice President and Chief Financial Officer (Principal Financial Officer) |
|                     |                                                                                |
|                     |                                                                                |
| Date:  May 10, 2010 | /s/  Jennifer L. Deacon                                                             |
|                     | Jennifer  L. Deacon                                                                 |
|                     | Senior  Vice President and Controller                                               |
|                     | (Principal  Accounting Officer)                                                     |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                               |
|----------------------|------------|-------------------------------------------------------------------------------|
| 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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