**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**xQuarterly Report Pursuant to Section 13 or 15(d)**

**of the Securities Exchange Act of 1934**

 

**For the quarterly period ended March 31, 2008**

 

**or**

 

**o TransitionReport Pursuant to Section 13 or 15(d)**

**of theSecurities 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)

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

 

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting comapny.  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 (Do not check if a smaller reporting  company) |   | Smaller reporting  company o |

 

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:

 

24,161,461 shares of common stock, par value $1.00 per share,outstanding as of May 6, 2008

 

 

----

 

**CARDINALFINANCIAL CORPORATION**

 

**INDEX TO FORM 10-Q**

 

**PART I – FINANCIALINFORMATION**

 
| Item 1. Financial Statements:                                                                       |                                                                                                                                  |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                |                                                                                                                                  |
|                                                                                                | Consolidated Statements of Condition  At March 31, 2008 (unaudited) and December 31, 2007                                   | 3 |
|                                                                                                |                                                                                                                                  |   |
|                                                                                                | Consolidated Statements of Income  For the three months ended March 31, 2008 and 2007 (unaudited)                                | 4 |
|                                                                                                |                                                                                                                                  |   |
|                                                                                                | Consolidated Statements of Comprehensive Income  For the three months ended March 31, 2008 and 2007 (unaudited)                  | 5 |
|                                                                                                |                                                                                                                                  |   |
|                                                                                                | Consolidated Statements of Changes in Shareholders’  Equity  For the three months ended March 31, 2008 and 2007 (unaudited) | 6 |
|                                                                                                |                                                                                                                                  |   |
|                                                                                                | Consolidated Statements of Cash Flows   For the three months ended March 31, 2008 and 2007 (unaudited)                           | 7 |
|                                                                                                |                                                                                                                                  |   |
|                                                                                                | Notes to Consolidated Financial Statements (unaudited)                                                                                | 8 |
|                                                                                                |                                                                                                                                  |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 17                                                                                                                                    |
|                                                                                                |                                                                                                                                  |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 | 45                                                                                                                                    |
|                                                                                                |                                                                                                                                  |
| Item 4. Controls and Procedures                                                                     | 46                                                                                                                                    |
|                                                                                                |                                                                                                                                  |
| **PART II  – OTHER INFORMATION**                                                          |                                                                                                                                  |
| ** **                                                                                          |                                                                                                                                  |
| Item  1. Legal Proceedings                                                                          | 47                                                                                                                                    |
| Item  1A. Risk Factors                                                                              | 47                                                                                                                                    |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                | 47                                                                                                                                    |
| Item 3. Defaults Upon Senior Securities                                                             | 48                                                                                                                                    |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        | 48                                                                                                                                    |
| Item  5. Other Information                                                                          | 48                                                                                                                                    |
| Item 6.  Exhibits                                                                                   | 48                                                                                                                                    |
|                                                                                                |                                                                                                                                  |
| **SIGNATURES**                                                                                      | 49                                                                                                                                    |
|                                                                                                     |                                                                                                                                       |  |  |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCONDITION

 

March 31, 2008 and December 31, 2007

 

(In thousands, except share data)

 
| ** **                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                     |       |               |       |                  |       |
| Cash and due from banks                                                                                                                        |       | $                  | 19,082     |                  | $          | 20,622 |   |
| Federal funds sold                                                                                                                             |       | 20,630             |       | 1,799                 |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total cash and cash equivalents                                                                                                                |       | 39,712             |       | 22,421                |       |
| Investment securities available-for-sale                                                                                                       |       | 302,225            |       | 285,998               |       |
| Investment securities held-to-maturity  (market value of $61,297 and $78,168 at March 31, 2008 and  December 31, 2007, respectively) |       | 61,783             |       | 78,948                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total investment securities                                                                                                                    |       | 364,008            |       | 364,946               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other investments                                                                                                                              |       | 16,188             |       | 14,188                |       |
| Loans held for sale                                                                                                                            |       | 153,339            |       | 170,487               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Loans receivable, net of deferred fees and  costs                                                                                              |       | 1,042,114          |       | 1,039,684             |       |
| Allowance for loan losses                                                                                                                      |       | (11,858            | )          | (11,641               | )          |
|                                                                                                                                           |       |               |       |                  |       |
| Loans receivable, net                                                                                                                          |       | 1,030,256          |       | 1,028,043             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Premises and equipment, net                                                                                                                    |       | 17,938             |       | 18,463                |       |
| Deferred tax asset                                                                                                                             |       | 5,667              |       | 6,638                 |       |
| Goodwill and intangibles, net                                                                                                                  |       | 17,176             |       | 17,239                |       |
| Bank-owned life insurance                                                                                                                      |       | 32,638             |       | 32,316                |       |
| Accrued interest receivable and other  assets                                                                                                  |       | 15,139             |       | 15,290                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total assets                                                                                                                                   |       | $                  | 1,692,061  |                  | $          | 1,690,031 |   |
|                                                                                                                                           |       |               |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                 |       |               |       |                  |       |
| ** **                                                                                                                                     |       |               |       |                  |       |
| Noninterest bearing deposits                                                                                                                   |       | $                  | 124,561    |                  | $          | 123,994 |   |
| Interest bearing deposits                                                                                                                      |       | 1,015,361          |       | 972,931               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total deposits                                                                                                                                 |       | 1,139,922          |       | 1,096,925             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other borrowed funds                                                                                                                           |       | 361,069            |       | 400,060               |       |
| Mortgage funding checks                                                                                                                        |       | 6,300              |       | 9,403                 |       |
| Escrow liabilities                                                                                                                             |       | 2,950              |       | 1,016                 |       |
| Accrued interest payable and other  liabilities                                                                                                |       | 19,037             |       | 23,164                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total liabilities                                                                                                                              |       | 1,529,278          |       | 1,530,568             |       |

 
| ** **                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Common  stock, $1 par value                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Shares authorized                                 |       | 50,000,000 |       | 50,000,000 |       |       |       |       |       |
| Shares issued and outstanding                     |       | 24,164,061 |       | 24,201,561 |       | 24,164     |       | 24,202     |       |
| Additional paid-in capital                        |       | 131,339    |       | 131,516    |       |
| Retained earnings                                 |       | 5,917      |       | 4,213      |       |
| Accumulated other comprehensive gain  (loss), net |       | 1,363      |       | (468       | )          |
|                                              |       |       |       |       |       |
| Total shareholders’ equity                   |       | 162,783    |       | 159,463    |       |
|                                              |       |       |       |       |       |
| Total liabilities and shareholders’ equity   |       | $          | 1,692,061  |       | $          | 1,690,031  |       |
|                                                   |            |            |            |            |            |            |            |            |            |  |  |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFINCOME

 

Three months ended March 31, 2008 and 2007(In thousands, except per share data)(Unaudited)

 
| ** **                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Interest income:                                               |       |     |       |     |       |
| Loans receivable                                               |       | $        | 16,614     |     | $          | 14,596 |   |
| Loans held for sale                                            |       | 2,129    |       | 4,379    |       |
| Federal funds sold                                             |       | 137      |       | 1,020    |       |
| Investment securities available-for-sale                       |       | 3,308    |       | 2,821    |       |
| Investment securities held-to-maturity                         |       | 749      |       | 1,002    |       |
| Other investments                                              |       | 218      |       | 127      |       |
|                                                           |       |     |       |     |       |
| Total interest income                                          |       | 23,155   |       | 23,945   |       |
|                                                           |       |     |       |     |       |
| Interest expense:                                              |       |     |       |     |       |
| Deposits                                                       |       | 9,347    |       | 12,070   |       |
| Other borrowed funds                                           |       | 3,473    |       | 2,040    |       |
| Total interest expense                                         |       | 12,820   |       | 14,110   |       |
|                                                           |       |     |       |     |       |
| Net interest income                                            |       | 10,335   |       | 9,835    |       |
|                                                           |       |     |       |     |       |
| Provision for loan losses                                      |       | 320      |       | 280      |       |
|                                                           |       |     |       |     |       |
| Net interest income after provision for  loan losses           |       | 10,015   |       | 9,555    |       |
|                                                           |       |     |       |     |       |
| Noninterest income:                                            |       |     |       |     |       |
| Service charges on deposit accounts                            |       | 527      |       | 466      |       |
| Loan service charges                                           |       | 310      |       | 386      |       |
| Investment fee income                                          |       | 900      |       | 1,024    |       |
| Realized and unrealized gains on mortgage  banking activities  |       | 2,317    |       | 2,630    |       |
| Net realized gain on investment securities  available-for-sale |       | —   |       | 14       |       |
| Net realized loss on investment securities  trading            |       | (3       | )          | (9       | )          |
| Management fee income                                          |       | 84       |       | 321      |       |
| Litigation recovery on previously impaired  investment         |       | 190      |       | 33       |       |
| Other income                                                   |       | 286      |       | 444      |       |
|                                                           |       |     |       |     |       |
| Total noninterest income                                       |       | 4,611    |       | 5,309    |       |
|                                                           |       |     |       |     |       |
| Noninterest expense:                                           |       |     |       |     |       |
| Salary and benefits                                            |       | 6,003    |       | 6,596    |       |
| Occupancy                                                      |       | 1,399    |       | 1,289    |       |
| Professional fees                                              |       | 583      |       | 490      |       |
| Depreciation                                                   |       | 646      |       | 800      |       |
| Data processing                                                |       | 442      |       | 344      |       |
| Telecommunications                                             |       | 234      |       | 292      |       |
| Amortization of intangibles                                    |       | 63       |       | 63       |       |
| Other operating expenses                                       |       | 2,453    |       | 2,488    |       |
|                                                           |       |     |       |     |       |
| Total noninterest expense                                      |       | 11,823   |       | 12,362   |       |
|                                                           |       |     |       |     |       |
| Net income before income taxes                                 |       | 2,803    |       | 2,502    |       |
|                                                           |       |     |       |     |       |
| Provision for income taxes                                     |       | 761      |       | 737      |       |
|                                                           |       |     |       |     |       |
| Net income                                                     |       | $        | 2,042      |     | $          | 1,765 |   |
|                                                           |       |     |       |     |       |
| Earnings per common share - basic                              |       | $        | 0.08       |     | $          | 0.07 |   |
|                                                           |       |     |       |     |       |
| Earnings per common share - diluted                            |       | $        | 0.08       |     | $          | 0.07 |   |
|                                                           |       |     |       |     |       |
| Weighted-average common shares outstanding  - basic            |       | 24,482   |       | 24,510   |       |
|                                                           |       |     |       |     |       |
| Weighted-average common shares outstanding  - diluted          |       | 24,892   |       | 25,040   |       |

 

See accompanying notes to consolidatedfinancial statements.

 

4

----

 

**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME

Three months ended March 31, 2008 and 2007

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                   |       |     |       |     |       |
| Net income                                                                                                                                                             |       | $        | 2,042      |     | $          | 1,765 |   |
| Other comprehensive income:                                                                                                                                            |       |     |       |     |       |
| Unrealized gain on available-for-sale investment  securities:                                                                                                          |       |     |       |     |       |
| Unrealized holding gain arising during the  period, net of tax expense of $1.1 million in 2008 and tax expense of $127  thousand in 2007                               |       | 2,070    |       | 246      |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Less: reclassification adjustment for gains  included in net income net of tax expense of $5 thousand in 2007                                                          |       | —   |       | (9       | )          |
|                                                                                                                                                                   |       |     |       |     |       |
|                                                                                                                                                                   |       | 2,070    |       | 237      |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Unrealized gain (loss) on derivative  instruments designated as cash flow hedges, net of tax benefit of $143  thousand in 2008 and tax expense of $21 thousand in 2007 |       | (239     | )          | 36       |       |
|                                                                                                                                                                   |       |     |       |     |       |
| Comprehensive income                                                                                                                                                   |       | $        | 3,873      |     | $          | 2,038 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

Three months ended March 31, 2008 and 2007

 

(In thousands)

(Unaudited)

 
| ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                   |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Balance, December 31, 2006                                                        |       | 24,459     |       | $          | 24,459     |           | $          | 132,985       |       | $                      | 705        |       | $          | (2,276 | ) | $ | 155,873 |   |
| Stock options exercised                                                                |       | 10         |       | 10         |       | 37             |       | —        |       | —                 |       | 47         |       |
| Payment of deferred compensation shares                                                |       | —     |       | —     |       | 3              |       | —        |       | —                 |       | 3          |       |
| Dividends on common stock of $0.01 per  share                                          |       | —     |       | —     |       | —         |       | (245          | )          | —                 |       | (245       | )          |
| Change in accumulated other comprehensive  loss                                        |       | —     |       | —     |       | —         |       | —        |       | 273                    |       | 273        |       |
| Net income                                                                             |       | —     |       | —     |       | —         |       | 1,765         |       | —                 |       | 1,765      |       |
| Balance, March 31, 2007                                                           |       | 24,469     |       | $          | 24,469     |           | $          | 133,025       |       | $                      | 2,225      |       | $          | (2,003 | ) | $ | 157,716 |   |
|                                                                                   |       |       |       |       |       |           |       |          |       |                   |       |       |       |   |   |   |   |   |
| Balance, December 31, 2007                                                        |       | 24,202     |       | $          | 24,202     |           | $          | 131,516       |       | $                      | 4,213      |       | $          | (468 | ) | $ | 159,463 |   |
| Cumulative effect adjustment at  January 1, 2008 for the adoption of SFAS No. 157 |       | —     |       |       | —     |           |       | —        |       |                   | (96        | )          |       | — |   |   | (96 | ) |
| Stock compensation expense, net of tax  benefits                                       |       | —     |       | —     |       | 75             |       | —        |       | —                 |       | 75         |       |
| Purchase and retirement of common stock                                                |       | (38        | )          | (38        | )          | (252           | )          | —        |       | —                 |       | (290       | )          |
| Dividends on common stock of $0.01 per  share                                          |       | —     |       | —     |       | —         |       | (242          | )          | —                 |       | (242       | )          |
| Change in accumulated other comprehensive gain  (loss)                                 |       | —     |       | —     |       | —         |       | —        |       | 1,831                  |       | 1,831      |       |
| Net income                                                                             |       | —     |       | —     |       | —         |       | 2,042         |       | —                 |       | 2,042      |       |
| Balance, March 31, 2008                                                           |       | 24,164     |       | $          | 24,164     |           | $          | 131,339       |       | $                      | 5,917      |       | $          | 1,363 |   | $ | 162,783 |   |

 

See accompanying notes to consolidated financial statements.

 

6

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

 

Three Months Ended March 31, 2008 and 2007

 

(In thousands)

 

(Unaudited)

 
| ** **                                                                               | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                                    |       |       |       |       |       |
| Net income                                                                               |       | $          | 2,042      |       | $          | 1,765 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:       |       |       |       |       |       |
| Depreciation                                                                             |       | 646        |       | 800        |       |
| Amortization of premiums, discounts and  intangibles                                     |       | 113        |       | 172        |       |
| Provision for loan losses                                                                |       | 320        |       | 280        |       |
| Loans held for sale originated                                                           |       | (320,979   | )          | (618,047   | )          |
| Proceeds from the sale of loans held for  sale                                           |       | 339,533    |       | 645,103    |       |
| Realized and unrealized gains on mortgage  banking activities                            |       | (2,317     | )          | (2,630     | )          |
| Proceeds from sale, maturity and call of  investment securities trading                  |       | 4,916      |       | 1,992      |       |
| Purchase of investment securities trading                                                |       | (4,919     | )          | (2,001     | )          |
| Loss on sale of investments securities  trading                                          |       | 3          |       | 9          |       |
| Gain on sale of investment securities  available-for-sale                                |       | —     |       | (14        | )          |
| Increase in cash surrender value of  bank-owned life insurance                           |       | (322       | )          | (432       | )          |
| Stock compensation expense, net of tax  benefits                                         |       | 75         |       | —     |       |
| (Increase) decrease in accrued interest  receivable, other assets and deferred tax asset |       | 890        |       | (602       | )          |
| Increase in accrued interest payable,  escrow liabilities and other liabilities          |       | 3,676      |       | 774        |       |
|                                                                                     |       |       |       |       |       |
| Net cash provided by operating activities                                                |       | 23,677     |       | 27,169     |       |
|                                                                                     |       |       |       |       |       |
| Cash flows from investing activities:                                                    |       |       |       |       |       |
| Net purchases of premises and equipment                                                  |       | (121       | )          | (899       | )          |
| Proceeds from sale, maturity and call of  investment securities available-for-sale       |       | 50,695     |       | 26,346     |       |
| Proceeds from maturity and call of  investment securities held-to-maturity               |       | 13,492     |       | —     |       |
| Proceeds from sale of other investments                                                  |       | —     |       | 270        |       |
| Purchase of investment securities  available-for-sale                                    |       | (54,778    | )          | (47,167    | )          |
| Purchase of mortgage-backed securities  available-for-sale                               |       | (22,437    | )          | (3,355     | )          |
| Purchase of other investments                                                            |       | (2,000     | )          | (2,002     | )          |
| Redemptions of investment securities  available-for-sale                                 |       | 7,300      |       | 5,223      |       |
| Redemptions of investment securities  held-to-maturity                                   |       | 3,625      |       | 3,271      |       |
| Net increase in loans receivable, net of  deferred fees and costs                        |       | (2,533     | )          | (25,395    | )          |
|                                                                                     |       |       |       |       |       |
| Net cash used in investing activities                                                    |       | (6,757     | )          | (43,708    | )          |
|                                                                                     |       |       |       |       |       |
| Cash flows from financing activities:                                                    |       |       |       |       |       |
| Net increase in deposits                                                                 |       | 42,997     |       | 13,520     |       |
| Net increase (decrease) in other borrowed  funds - short term                            |       | (83,366    | )          | 23,663     |       |
| Net decrease in mortgage funding checks                                                  |       | (3,103     | )          | (1,516     | )          |
| Proceeds from FHLB advances - long term                                                  |       | 45,000     |       | 45,000     |       |
| Repayments of FHLB advances - long term                                                  |       | (625       | )          | (1,625     | )          |
| Stock options exercised                                                                  |       | —     |       | 47         |       |
| Purchase and retirement of common stock                                                  |       | (290       | )          | —     |       |
| Deferred compensation payments                                                           |       | —     |       | 3          |       |
| Dividends on common stock                                                                |       | (242       | )          | (245       | )          |
|                                                                                     |       |       |       |       |       |
| Net cash provided by financing activities                                                |       | 371        |       | 78,847     |       |
|                                                                                     |       |       |       |       |       |
| Net increase in cash and cash equivalents                                                |       | 17,291     |       | 62,308     |       |
|                                                                                     |       |       |       |       |       |
| Cash and cash equivalents at beginning of  the period                                    |       | 22,421     |       | 36,076     |       |
|                                                                                     |       |       |       |       |       |
| Cash and cash equivalents at end of the  period                                          |       | $          | 39,712     |       | $          | 98,384 |   |
|                                                                                     |       |       |       |       |       |
| **Supplemental disclosure of cash flow  information:**                                   |       |       |       |       |       |
| Cash paid during the period for interest                                                 |       | $          | 12,724     |       | $          | 13,959 |   |
| Cash paid for income taxes                                                               |       | 4          |       | 2,181      |       |

 

See accompanying notes to consolidated financial statements.

 

7

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

(Unaudited)

 

Note 1

 

*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. The Company also ownsWilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an assetmanagement firm and Cardinal Wealth Services, Inc. (“CWS”), an investmentservices subsidiary. On February 9, 2006, the Bank acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc.

 

*Basis of 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, 2008 are not necessarily indicativeof the results to be expected for the full year ending December 31, 2008.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 31,2007.

 

**Note 2**

 

***Stock-Based Compensation***

** **

AtMarch 31, 2008, the Company had two stock-based employee compensationplans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 Equity CompensationPlan (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. There were 16,471 shares of the Company’s common stock available forfuture grants in the Option Plan as of March 31, 2008.

 

In2002, the Company adopted the Equity Plan. The Equity Plan authorizes thegranting and award of incentive stock options, non-qualified stock options,stock appreciation rights, restricted stock awards, phantom stock awards andperformance share awards to directors, eligible officers and key employees ofthe Company.  The Equity Plan currentlyauthorizes grants and awards with respect to 2,420,000 shares of the Company’scommon stock.  There are 219,058 sharesof the Company’s common stock available for future grants and awards in theEquity Plan as of March 31, 2008.

 

8

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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 have ten year terms and vest and becomefully exercisable in 20% increments beginning as of the grant date. Inaddition, the Company has granted stock options to employees of the Companythat have ten year terms and vest and become fully exercisable in 20%increments beginning after their first year of service. During 2005, certainstock options granted to employees had ten year terms and vested and becamefully exercisable immediately.

 

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, 2008 and 2007 was $75,000 and $100,000,respectively. The total income tax benefit recognized in the income statementfor share-based compensation arrangements was $26,000 and $35,000 for the threemonths ended March 31, 2008 and 2007, respectively.

 

Therewere no options granted during the three months ended March 31, 2008. Theweighted average per share fair value of stock option grants made during thethree months ended March 31, 2007 was $4.89.  The fair value of the options granted duringthe three months ended March 31, 2007 was estimated as of the grant dateusing the Black-Scholes option-pricing model based on the following weightedaverage assumptions:

 

| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 31, 2007**     | ** ** |
| ** **              | ** ** | ** **                       | ** ** |
| Estimated option life   |       | 6.5 years                        |       |
| Risk free interest rate |       | 4.81                             | %          |
| Expected volatility     |       | 42.10                            | %          |
| Expected dividend yield |       | 0.40                             | %          |

 

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 five-year U.S. Treasury note rate ineffect at the time of grant.  The expected dividend yield is based uponimplied and historical dividend declarations.

 

9

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Stockoption activity during the three months ended March 31, 2008 is summarizedas follows:

** **
| ** **                                 | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**          | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|--------------------|------------|--------------|------------|-----------------------|------------|------------------|------------|
| ** **                                 | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**           | ** ** | **Aggregate**    | ** ** |
| ** **                                 | ** ** | ** **         | ** ** | **Average**  | ** ** | **Remaining**         | ** ** | **Intrinsic**    | ** ** |
| ** **                                 | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual**       | ** ** | **Value**        | ** ** |
| ** **                                 | ** ** | **Shares**         | ** ** | **Price**    | ** ** | **Term (Years)** | ** ** | **($ 000)** | ** ** |
| Outstanding at December 31, 2007      |       | 2,428,353          |       | $            | 8.53       |                  |       |             |       |   |
| Granted                                    |       | —             |       | —       |       |                  |       |             |       |
| Exercised                                  |       | —             |       | —       |       |                  |       |             |       |
| Forfeited                                  |       | (2,100             | )          | 10.83        |       |                  |       |             |       |
| Outstanding at March 31, 2008         |       | 2,426,253          |       | $            | 8.73       |                  | 6.45       |             | $          | 340 |   |
| Options exercisable at March 31, 2008 |       | 2,180,153          |       | $            | 8.43       |                  | 6.23       |             | $          | 957 |   |

 

Total intrinsic value of options exercised during the three monthsended March 31, 2007 was $50,000. No options were exercised during the three months ended March 31,2008.

 

A summary of the status of the Company’s non-vested stock options andchanges during the three months ended March 31, 2008 is as follows:

 

| ** **                        | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                        | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Balance at December 31, 2007 |       | 292,028            |       | $                   | 5.30       |   |
| Granted                           |       | —             |       | —              |       |
| Vested                            |       | (45,828            | )          | 4.75                |       |
| Forfeited                         |       | (100               | )          | 3.05                |       |
| Balance at March 31, 2008    |       | 246,100            |       | $                   | 5.40       |   |

 

AtMarch 31, 2008, there was $1.6 million of total unrecognized compensationcost related to non-vested share-based compensation arrangements granted underthe plans. The cost is expected to be recognized over a weighted average periodof 3.3 years. The total fair value of shares that vested during the threemonths ended March 31, 2008 and 2007 were $169,000 and $360,000, respectively.

 

Note 3

 

*SegmentInformation*

 

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

 

Thecommercial banking segment includes both commercial and consumer lending and providescustomers with such products as commercial loans, real estate loans, businessfinancing and consumer loans. In addition, this segment provides customers withseveral choices of deposit products including demand deposit accounts, savingsaccounts and certificates of deposit. The mortgage banking segment engagesprimarily in the origination and acquisition of residential mortgages for saleinto the secondary market on a best efforts basis. The wealth management andtrust services segment provides investment and financial advisory services tobusinesses and 

 

10

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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 31,2008 and 2007 is as follows:

** **

**At and for the Three Months Ended March 31, 2008 (in thousands):**

 
| ** **                 | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------|------------|----------------|------------|--------------|------------|----------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                    | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                 | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest income        |       | $              | 9,954      |         | $          | 748                        |       | $          | —     |             | $          | (367             | )          | $ | — |   | $ | 10,335 |   |
| Provision for loan losses  |       | 320            |       | —       |       | —                     |       | —     |       | —           |       | 320              |       |
| Non-interest income        |       | 1,065          |       | 2,635        |       | 900                        |       | 11         |       | —           |       | 4,611            |       |
| Non-interest expense       |       | 7,714          |       | 2,556        |       | 873                        |       | 680        |       | —           |       | 11,823           |       |
| Provision for income taxes |       | 819            |       | 285          |       | 9                          |       | (352       | )          | —           |       | 761              |       |
| Net income (loss)          |       | $              | 2,166      |         | $          | 542                        |       | $          | 18         |             | $          | (684             | )          | $ | — |   | $ | 2,042 |   |
|                       |       |           |       |         |       |                       |       |       |       |             |       |             |       |
| Total Assets               |       | $              | 1,667,220  |         | $          | 169,124                    |       | $          | 3,652      |             | $          | 179,354          |       | $ | (327,289 | ) | $ | 1,692,061 |   |
| Average Assets             |       | $              | 1,625,965  |         | $          | 142,991                    |       | $          | 3,724      |             | $          | 177,700          |       | $ | (314,622 | ) | $ | 1,635,758 |   |

 

**At and for the Three Months Ended March 31, 2007 (inthousands):**

 
| ** **                 | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------|------------|----------------|------------|--------------|------------|----------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                    | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                 | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest income        |       | $              | 9,366      |         | $          | 751                        |       | $          | —     |             | $          | (282             | )          | $ | — |   | $ | 9,835 |   |
| Provision for loan losses  |       | 280            |       | —       |       | —                     |       | —     |       | —           |       | 280              |       |
| Non-interest income        |       | 996            |       | 3,277        |       | 1,024                      |       | 12         |       | —           |       | 5,309            |       |
| Non-interest expense       |       | 7,489          |       | 3,191        |       | 1,040                      |       | 642        |       | —           |       | 12,362           |       |
| Provision for income taxes |       | 799            |       | 299          |       | (47                        | )          | (314       | )          | —           |       | 737              |       |
| Net income (loss)          |       | $              | 1,794      |         | $          | 538                        |       | $          | 31         |             | $          | (598             | )          | $ | — |   | $ | 1,765 |   |
|                       |       |           |       |         |       |                       |       |       |       |             |       |             |       |
| Total Assets               |       | $              | 1,654,253  |         | $          | 330,558                    |       | $          | 5,282      |             | $          | 163,384          |       | $ | (433,849 | ) | $ | 1,719,628 |   |
| Average Assets             |       | $              | 1,599,202  |         | $          | 253,094                    |       | $          | 5,345      |             | $          | 163,762          |       | $ | (407,609 | ) | $ | 1,613,794 |   |

 

AtMarch 31, 2008, the Company did not have any operating segments other thanthose reported. Parent company financial information is included in the “Other”category and represents an overhead function rather than an operating segment.The parent company’s most significant assets are its net investments in itssubsidiaries. The parent company’s net interest expense is comprised ofinterest income from short-term investments and interest expense on trustpreferred securities. The parent company’s non-interest expense is primarilynon-allocable executive salaries and professional services related to theCompany’s regulatory requirements.

 

#### **Note 4**

#### ** **

##### ***Earnings Per Share***

##### ** **

Thefollowing is the calculation of basic and diluted earnings per share for thethree months ended March 31, 2008 and 2007. Stock options issued that werenot included in the calculation of diluted earnings per share because theexercise prices were greater than the average market price were 223,765 and32,510 for the three months ended March 31, 2008 and 2007, respectively.

 

11

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| **(In thousands,  except per share data)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income available to common shareholders                    |       | $        | 2,042      |     | $          | 1,765 |   |
| Weighted average common shares - basic                         |       | 24,482   |       | 24,510   |       |
| Weighted average common shares - diluted                       |       | 24,892   |       | 25,040   |       |
| Earnings per common share - basic                              |       | $        | 0.08       |     | $          | 0.07 |   |
| Earnings per common share - diluted                            |       | $        | 0.08       |     | $          | 0.07 |   |

 

Basicearnings per share is impacted by the number of shares required to be issuedunder the Company’s various deferred compensation plans, and diluted earningsper share is impacted by those common shares which may be, but are not requiredto be, issued (depending on the elections of the participants) under theseplans.

 

Thefollowing shows the composition of basic outstanding shares for the threemonths ended March 31, 2008 and 2007:

 
| **(in thousands)**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average common shares outstanding                               |       | 24,189   |       | 24,463   |       |
| Weighted average shares attributable to the  deferred compensation plans |       | 293      |       | 47       |       |
| Total weighted average shares - basic                                    |       | 24,482   |       | 24,510   |       |

 

Thefollowing shows the composition of diluted outstanding shares for the threemonths ended March 31, 2008 and 2007:

 
| **(in thousands)**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average shares outstanding - basic  (from above)                        |       | 24,482   |       | 24,510   |       |
| Incremental weighted average shares  attributable to deferred compensation plans |       | 250      |       | 243      |       |
| Weighted average shares attributable to  vested stock options                    |       | 160      |       | 287      |       |
| Incremental shares attributable to unvested  stock options                       |       | —   |       | —   |       |
| Total weighted average shares - diluted                                          |       | 24,892   |       | 25,040   |       |

 

#### **Note 5**

#### ** **

##### ***Derivative Instruments andHedging Activities***

##### ** **

TheCompany is a party to forward loan sales contracts, which are utilized to mitigateexposure to fluctuations in interest rates related to closed loans that areheld for sale.

 

12

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TheCompany designates these derivatives as cash flow hedges in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended. These hedges are recorded at fair value in the statement ofcondition as an other asset or other liability with a corresponding offset toaccumulated other comprehensive income in shareholders’ equity. Amounts arereclassified from accumulated other comprehensive income to the incomestatement in the period or periods that the loan sale is reflected in income.

 

AtMarch 31, 2008, accumulated other comprehensive income included anafter-tax unrealized loss of $239,000 related to forward loan sales contracts.Loans held for sale are generally sold within sixty days of closing and,therefore, substantially all of the amount recorded in accumulated other comprehensiveincome at March 31, 2008 that is related to the Company’s cash flow hedgeswill be recognized in earnings during the second quarter of 2008. For the threemonths ended March 31, 2008, the hedge ineffectiveness recorded throughearnings was immaterial.

 

AtMarch 31, 2008, the Company had $70.1 million in loan commitments andassociated forward sales and had $110.5 million in forward sales associatedwith $110.5 million of loans held for sale contracts. At March 31, 2008,the derivative asset was $3.4 million and the derivative liability was $3.4million.

 

#### **Note 6**

#### ** **

*Goodwill and Other Intangibles*

 

Informationconcerning total amortizable other intangible assets at March 31, 2008 isas follows:

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

**Amortization**                        | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at December 31, 2007 |       | $                           | 1,781      |                                                     | $          | 643                         |       | $ | 795 |   | $ | 489 |   | $ | 2,576 |   | $ | 1,132 |   |
| 2008 activity:                    |       |                        |       |                                                     |       |                        |       |   |   |   |   |   |   |
| Customer relationship intangibles |       | —                      |       | 49                                                       |       | —                      |       | 10 |   | — |   | 59 |   |
| Trade name                        |       | —                      |       | —                                                   |       | —                      |       | 4 |   | — |   | 4 |   |
| Balance at March 31, 2008    |       | $                           | 1,781      |                                                     | $          | 692                         |       | $ | 795 |   | $ | 503 |   | $ | 2,576 |   | $ | 1,195 |   |

 

Theaggregate amortization expense was $63,000 for each of the three months ended March 31,2008 and 2007.

 

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

 

| ** **                        | ** ** | **(In thousands)** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| 2008 (April – December) |       | $                       | 182        |   |
| 2009                              |       | 238                     |       |
| 2010                              |       | 238                     |       |
| 2011                              |       | 238                     |       |
| 2012                              |       | 238                     |       |
| 2013 and thereafter               |       | 246                     |       |
|                                   |            |                         |            |  |

 

13

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Thecarrying amount of goodwill at March 31, 2008 was as follows:

 
| **(In thousands)**           | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and Trust  Services** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at December 31, 2007 |       | $                       | 22         |                  | $          | 12,941                                           |       | $         | 2,832      |   | $ | 15,795 |   |
| 2008 activity                     |       | —                  |       | —                |       | —                                           |       | —    |       |
| Balance at March 31, 2008    |       | $                       | 22         |                  | $          | 12,941                                           |       | $         | 2,832      |   | $ | 15,795 |   |

 

Goodwillof each of the Company’s business segments is tested for impairment on anannual basis or more frequently if events or circumstances warrant. During theperiod ending March 31, 2008, the Company performed an evaluation of thegoodwill associated with its acquisition of FBR National Trust Company, part ofthe wealth management and trust services segment, and no impairment wasindicated.

 

Note 7

 

*Commitments and 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 agreementsto lend to a customer so long as there is no violation of any conditionestablished in the contract.  Commitmentsgenerally have fixed expiration dates up to one year or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future fundingrequirements.

 

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, 2008 are collateralized.

 

Theseinstruments represent obligations of the Company to extend credit or guaranteeborrowings and are not recorded on the consolidated statements of financialcondition.  The rates and terms of theseinstruments are competitive with others in the market in which the Companyoperates.  Commitments to extend creditof $70.1 million as of March 31, 2008 are related to George Mason’spipeline and are of a short term nature.

 

AtMarch 31, 2008, commitments to extend credit were $418.4 million andstandby letters of credit were $10.3 million. The Company has a liability of$11,000 associated with standby letters of credit at March 31, 2008.

 

Thoseinstruments may involve, to varying degrees, elements of credit and interestrate risk in excess of the amount recognized in the consolidated statements offinancial condition.  Credit risk isdefined as the possibility of sustaining a loss because the other parties to afinancial instrument fail to perform in accordance with the terms of thecontract.  The Company’s maximum exposureto credit loss under standby letters of credit and commitments to extend creditis represented by the contractual amounts of those instruments.

 

14

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GeorgeMason maintains a reserve for loans sold that pay off earlier than thecontractual agreed upon period, thereby requiring that George Mason refund partof the service release premium and/or premium pricing received from theinvestor.  The reserve as of March 31,2008 was $18,000.  In addition, GeorgeMason has established a reserve of $100,000 for the estimated exposure torepurchase loans previously sold to investors for which borrowers failed toprovide full and accurate information on their loan application or for whichappraisals have not been acceptable.  Forthe quarter ended March 31, 2008, George Mason has not repurchased norsettled with investors on any such loans.

 

GeorgeMason, as part of the service it provides to its managed companies, purchasesthe loans managed companies originate at the time of origination.  These loans are then sold by George Mason toinvestors.  George Mason has agreementswith its managed companies requiring that, for any loans that were originatedby a managed company and for which investors have requested George Mason torepurchase due to the borrowers failure to provide full and accurateinformation on or related to their loan application or for which appraisalshave not been acceptable, the managed company be responsible for buying backthe loan.  In the event that the managedcompany’s financial condition deteriorates and it is unable to fund therepurchase of such loans, George Mason may have to provide the funds torepurchase these loans from investors. As of March 31, 2008, the Company does not believe that it willincur any losses to fund any such loans that were originated by a managedcompany.

 

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 onmanagement’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.

 

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.

 

Note 8

 

*FairValue Measurements*

 

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 157, *Fair Value Measurements,*which established a framework formeasuring fair value in accordance with U.S. generally accepted accountingprinciples, and expands disclosures about fair value measurements.  In addition, the Company adopted SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities – including an amendment of FAS 115. *SFAS No. 159 allows entitiesto choose, at specified election dates, to measure eligible financial assetsand liabilities at fair value that are not otherwise required to be measured atfair value.

 

SFASNo. 157 defines fair value as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.  SFAS No. 157 also establishes a fairvalue hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring the fairvalue.  There are three levels of inputsthat may be used 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 foridentical or similar instruments in markets that are not active; andmodel-derived valuations in which all significant inputs and significant valuedrivers are observable in active markets.

 

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

 

15

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Uponadoption or at any point during the first quarter of 2008, the Company did notdesignate any asset or liability to be measured at fair value under SFAS No. 159.

 

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

 

TheCompany’s investment securities available-for-sale are recorded at fair valueusing reliable and unbiased evaluations by an industry-wide valuation serviceand therefore fall into the Level 2 category. This service uses evaluated pricing models that vary based on assetclass and include available trade, bid, and other market information.  Generally, the methodology includes brokerquotes, proprietary models, vast descriptive terms and conditions databases, aswell as extensive quality control programs.

 

TheCompany’s interest rate swap derivatives are recorded at fair value usingobservable rates from a national valuation service.  These rates are applied to a third partyindustry-wide valuation model, and therefore, the valuations fall into a Level2 category.

 

Informationpertaining to the Company’s investment securities available-for-sale portfolioand interest rate swap derivatives as of March 31, 2008 is shown below:

 

**At March 31, 2008 (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   |       | $           | 302,225    |                                                                                                |       |   | $ | 302,225 |   |   |   |
| Derivative asset - interest rate swaps     |       | 1,054       |       |                                                                                                |       | 1,054 |   |   |   |
| Derivative liability - interest rate swaps |       | 1,029       |       |                                                                                                |       | 1,029 |   |   |   |
|                                            |            |             |            |                                                                                                     |            |  |  |  |  |  |  |

 

FairValue of Interest Rate Lock Commitments, Forward Loan Sales and Mortgage LoansHeld for Sale

 

Inthe normal course of business, George Mason enters into contractual interestrate lock commitments to extend credit to borrowers with fixed expirationdates.  The commitments become effectivewhen the borrowers “lock-in” a specified interest rate within the time framesestablished by George Mason.  Allborrowers are evaluated for credit worthiness prior to the extension of thecommitment.  Market risk arises ifinterest rates move adversely between the time of the interest rate lock by theborrower and the sale date of the loan to an investor.  To mitigate the effect of the interest raterisk inherent in providing rate lock commitments to borrowers, George Masonenters into best efforts forward 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 investors areundesignated derivatives pursuant to the requirements of SFAS No. 133*,* as amended,**and,accordingly, are marked to fair value through earnings.

 

StaffAccounting Bulletin No. 109, *Written Loan CommitmentsRecorded at Fair Value Through Earnings,* (“SAB No. 109”) waseffective for written loan commitments initiated on or after January 1,2008.  SAB No. 109 requires that theexpected cash flows related to the servicing of a loan be included in the fairvalue measurement of a derivative loan commitment.  SAB No. 109 replaces Staff AccountingBulletin No. 105, *Application of AccountingPrinciples to Loan Commitments,*which precluded the consideration ofservicing cash flows in determining the fair value of a written loancommitment.

 

Theeffects of fair value measurements for the interest rate lock commitmentderivatives and forward sales contract derivatives on earnings in the threemonths ended March 31, 2008 were as follows and were all based on Level 2inputs:

 
| **(in thousands)** | ** ** | **Notional  or  Principal  Amount** | ** ** | **Expected  Premium  (Discount)  to Par** | ** ** | **Movement of  Interest  Rates** | ** ** | **Security  Price  Change** | ** ** | **Total Fair  Value  Adjustment** | ** ** |
|-------------------------|------------|-------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|
| Rate lock commitments   |       | $                                   | 70,066     |                                           | $          | 376                                   |       | $                           | 172        |                                   | $          | — |   | $ | 548 |   |
| Forward sales contracts |       | 121,422                             |       | —                                         |       | —                                |       | (307                        | )          | (307                                   | )          |
| Loans held for sale     |       | 51,356                              |       | 439                                            |       | 135                                   |       | —                      |       | 574                                    |       |
|                    |       |                                |       | $                                              | 815        |                                  | $          | 307                         |       | $                                      | (307       | ) | $ | 815 |   |
|                         |            |                                     |            |                                                |            |                                       |            |                             |            |                                        |            |  |  |  |  |  |

 

Theexpected premium (discount) to par considers two elements (a) the interestrate differential and (b) the servicing rights value.  The interest rate differential is thedifference, if any, between the mortgage loan rates to be paid by the borrowerin the retail market and mortgage loan pricing demanded by investors in thesecondary or wholesale market.  TheCompany sells all of its loans on a servicing released basis, and receives aservicing release premium upon sale.  Theservicing rights value is based on contractual terms with investors and rangedfrom 0.17% to 2.75% of the loan amount, depending on the loan type.  The Company assumes an approximate 40%fallout rate based on recent historical experience when measuring the fairvalue of the rate lock commitments. Fallout is defined as interest rate lock commitments for which theCompany does not close a mortgage loan.

 

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Thefair value of the forward sales contracts to investors considers the marketprice movement of the same type of security between the trade date and thebalance sheet date.  The market pricechanges are multiplied by the notional amount of the forward sales contracts tomeasure the fair value.

 

Tocalculate the effects of the changes in interest rates from the date of thecommitment through loan origination, and then period end, the Company utilizesapplicable published mortgage-backed investment security prices, and multipliesthe price movement between the rate lock date and the balance sheet date by thenotional loan commitment amount.

 

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

 

Priorto the adoption of SAB No. 109 and SFAS No. 157, the fair valuecalculation for interest rate lock commitments and forward sales contracts onlyconsidered the effects of interest rate changes between the date of the ratelock and either the loan closing date or the balance sheet date.  For the three months ended March 31, 2008,the change in fair value of the interest rate lock commitments, loans held forsale, and forward loan sales contracts based only on changes in market interestrates was $307,000.  Interest ratemovements have an offsetting impact on the security prices that serve tomeasure the fair value of these instruments.

 

The impact of adopting SFAS No. 157 and SAB No. 109 on the Company’sstatement of operations for the three months ended March 31, 2008 had theeffect of recognizing gains associated with the Company’s mortgage loan salesactivities in the first quarter rather than in a future reporting period at atime when the loan commitments would mature into closed loans and these closedloans and the Company’s existing loans held for sale would be delivered to theCompany’s investors at which time the Company would receive payment.  An unrealized gain of $815,000 is reported asa component of realized and unrealized gains on mortgage banking activitiesreported in the statement of operations.

 

SFASNo. 157 Adoption Adjustment

 

Thetransition provisions of SFAS No. 157 provide for retrospectiveapplication to financial instruments that were measured at fair value atinitial recognition using a transaction pricing in accordance with specificaccounting literature.  The Company’sinterest rate lock commitments were measured at inception at the transactionprice.  SFAS No. 157 provides thatat the date of adoption (January 1, 2008) a difference between thecarrying amounts and the fair values of these instruments should be recognizedas a cumulative effect adjustment to the opening balance of retainedearnings.  The amount of this cumulativeeffect adjustment was $96,000.

 

ManagedCompany Loans

 

George Mason serves as a pass through conduit for the managed companiesto sell loans to investors in the secondary market.  Concurrent with entering into a rate lockagreement with a borrower, the managed company loan is sold forward to aninvestor in the secondary market.  Afterthe managed company closes the loan, it is assigned to George Mason.  George Mason then facilitates the transfer ofthe loan to the investor.  George Masondoes not earn any spread or other fees from the loan assignment nor from thetransfer to the investor.  All gains inthe loan sale are earned by the managed company.  At March 31, 2008, loans held for saleincludes $56.1 million of loans originated by the managed companies that willbe delivered to the investors by George Mason. Any change in the fair value of the loans held for sale originated bythe managed company will result in an equal an offsetting change in liabilityto the managed company.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

Thefollowing presents management’s discussion and analysis of our consolidatedfinancial condition at March 31, 2008 and December 31, 2007 and theunaudited results of our operations for the three months ended March 31,2008 and 2007. 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, 2007.

 

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

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

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

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

·                  maintainingcapital levels adequate to support our growth;

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

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

·                  changes ingeneral economic and business conditions in our market area including the localand national economy;

·                  risks and uncertainties related to futuretrust operations;

·                  changesin the operations of Wilson/Bennett Capital Management, Inc., its customerbase and assets under management and any associated impact on the fair value ofgoodwill in the future;

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

·                  problems withtechnology utilized by us;

·                  changing trendsin customer profiles and behavior; and

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

 

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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 Item 1A of our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

**Overview**

 

Weare a locally managed financial holding company headquartered in Tysons Corner,Virginia, committed to providing superior customer service, a diversified mixof financial products and services, and convenient banking to our retail andbusiness customers. We own Cardinal Bank (the “Bank”), a Virginiastate-chartered community bank, Cardinal Wealth Services, Inc. (“CWS”), aninvestment services subsidiary, and Wilson/Bennett Capital Management, Inc.(“Wilson/Bennett”), an asset management firm. Through these three subsidiariesand George Mason Mortgage, LLC (“George Mason”), a mortgage banking subsidiaryof the Bank, we offer a wide range of traditional banking products and servicesto both our commercial and retail customers. Our commercial relationshipmanagers focus on attracting small and medium-sized businesses as well asgovernment contractors, commercial real estate developers and builders andprofessionals, such as physicians, accountants and attorneys. We have 25 branchoffice locations and seven mortgage banking office locations and providecompetitive products and services. We complement our core banking operations byoffering a full range of investment products and services to our customersthrough our third-party brokerage relationship with Raymond James FinancialServices, Inc., asset management services through Wilson/Bennett andservices through our trust division which include trust, estates, custody,investment management, escrows, and retirement plans. The trust division isincluded, along with CWS and Wilson/Bennett, in the wealth management and trustservices segment.

 

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 carefully underwritingand then monitoring our extensions of credit. In addition to net interestincome, noninterest income is an important source of revenue for us andincludes, among other things, service charges on deposits and loans, investmentfee income, which includes trust revenues, gains and losses on sales ofinvestment securities available-for-sale, gains on sales of mortgage loans, andmanagement fee income.

 

**Critical Accounting 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 

 

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dependent upon subjective or complex judgments, assumptions andestimates.  Changes in such judgments,assumptions and estimates may have a significant impact on the consolidatedfinancial statements.  Actual results, infact, 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, accounting foreconomic hedging activities, accounting for business combinations andimpairment testing of goodwill, accounting for the impairment of amortizingintangible assets and other long-lived assets, and the valuation of deferredtax assets.

 

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

#### ** **

**We maintain the allowance for loan losses ata level that represents management’s best estimate of known and inherent lossesin our loan portfolio.  Both the amountof the provision expense and the level of the allowance for loan losses areimpacted by many factors, including general and industry-specific economicconditions, actual and expected credit losses, historical trends and specificconditions of individual borrowers. Unusual and infrequently occurring events, such as weather-relateddisasters, may impact our assessment of possible credit losses.  As a part of our analysis, we use comparativepeer group data and qualitative factors such as levels of and trends indelinquencies and nonaccrual loans, national and local economic trends andconditions and concentrations of loans exhibiting similar risk profiles tosupport our estimates.**

** **

Forpurposes of our analysis, we categorize our loans into one of fivecategories:  commercial and industrial, commercial real estate (includingconstruction), home equity lines of credit, residential mortgages, and consumerloans. In the absence of meaningful historical loss factors, peer group lossfactors are applied and are adjusted by the qualitative factors mentioned above.The indicated loss factors resulting from this analysis are applied for each ofthe five categories of loans. In addition, we individually assign loss factorsto all loans that have been identified as having loss attributes, as indicatedby deterioration in the financial condition of the borrower or a decline inunderlying collateral value if the loan is collateral dependent. Since we havelimited historical data on which to base loss factors for classified loans, wetypically apply, in accordance with regulatory guidelines, a 5% loss factor toloans classified as special mention, a 15% loss factor to loans classified assubstandard and a 50% loss factor to loans classified as doubtful. Loansclassified as loss loans are fully reserved or charged off.   In certain instances, we evaluate theimpairment of certain loans on a loan by loan basis.  For these loans, we analyze the fair value ofthe collateral underlying the loan and consider estimated costs to sell thecollateral on a discounted basis.  If thenet collateral value is less than the loan balance (including accrued interestand any unamortized premium or discount associated with the loan) we recognizean impairment 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.

 

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*Accountingfor Economic Hedging Activities*

 

Weaccount for our derivatives and hedging activities in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 133, *Accountingfor Derivative Instruments and Certain Hedging Activities,* asamended, which requires that all derivative instruments be recorded on thestatement of condition at their fair values*.*We do not enter intoderivative transactions for speculative purposes. For derivatives designated ashedges, we contemporaneously document the hedging relationship, including therisk management objective and strategy for undertaking the hedge, howeffectiveness will be assessed at inception and at each reporting period andthe method for measuring ineffectiveness. We evaluate the effectiveness of these transactions at inception and onan ongoing basis.  Ineffectiveness isrecorded through earnings.  Forderivatives designated as cash flow hedges, the fair value adjustment isrecorded as a component of other comprehensive income, except for theineffective portion which is recorded in earnings.  For derivatives designated as fair valuehedges, the fair value adjustments for both the hedged item and the hedginginstrument are recorded through the income statement with any differenceconsidered 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 flowhedge accounting is discontinued, we continue to carry the derivative at itsfair value on the statement of condition and recognize any subsequent changesin fair 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 and closeswithin the time frame established by us. Interest rate risk arises on thesecommitments and subsequently closed loans if interest rates change between thetime of the interest rate lock and the delivery of the loan to the investor.Loan commitments related to residential mortgage loans intended to be sold areconsidered 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 bestefforts delivery forward loan sales contracts. During the rate lock commitmentperiod, these forward loan sales contracts are marked to market throughearnings and are not designated as accounting hedges under SFAS No. 133,as amended. The fair values of loan commitments and the fair values of forwardloan sales contracts generally move in opposite directions, and the net impactof changes of these valuations on net income during the loan commitment periodis generally inconsequential. At the closing of the loan, the loan commitmentderivative expires and we record a loan held for sale and continue to beobligated under the same forward loan sales contract.   The forward sales contract is thendesignated as a hedge against the variability in cash to be received from theloan sale.  Loans held for sale areaccounted for at the lower of cost or market in accordance with SFAS No. 65,*Accounting for Certain Mortgage BankingActivities.*

 

*Accounting for BusinessCombinations and Impairment Testing of Goodwill*

 

Weaccount for acquisitions of other businesses in accordance with SFAS No. 141,*Business Combinations*. Thisstatement mandates the use of purchase accounting and, accordingly, assets andliabilities, including previously unrecorded assets and liabilities, arerecorded at fair values as of the acquisition date. We utilize a variety ofvaluation methods to 

 

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estimatefair value of acquired assets and liabilities. To support our purchaseallocations, we have utilized independent consultants to identify and valueidentifiable purchased intangibles. The difference between the fair value ofassets acquired and the liabilities assumed is recorded as goodwill. Goodwilland other intangible assets are accounted for in accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*.In accordance with this statement, goodwill will not be amortized but will betested 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 unit. If the analysis indicatesthat the fair value of the reporting unit is less than its carrying value, wedo an analysis to compare the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill. The implied fair value ofthe goodwill is determined by allocating the fair value of the reporting unitto all its assets and liabilities. If the implied fair value of the goodwill isless than the carrying value, an impairment loss is recognized.

 

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

 

Inaccordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, we continuallyreview our long-lived assets for impairment whenever events or changes incircumstances indicate that the remaining estimated useful life of such assetsmight warrant revision or that the balances may not be recoverable. We evaluatepossible impairment by comparing estimated future cash flows, before interestexpense and on an undiscounted basis, with the net book value of long-termassets, including amortizable intangible assets. If undiscounted cash flows areinsufficient to recover assets, further analysis is performed in order todetermine 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.

 

###### **New Financial Accounting Standards**

###### ** **

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements.*  SFAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with U.S. generally accepted accounting principles, and expandsdisclosures about fair value measurements. The statement clarifies that the exchange price is the price in anorderly transaction between market participants to sell an asset or transfer aliability at the measurement date.  Thestatement emphasizes that fair value is a market-based measurement and not an

 

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entity-specificmeasurement.  It also establishes a fairvalue hierarchy used in fair value measurements and expands the requireddisclosures of assets and liabilities measured at fair value.  This standard is effective for fiscal yearsbeginning after December 15, 2007. See Note 8 to the notes to the consolidated financial statements above.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities — including anamendment of FAS 115.*  SFAS No. 159allows entities to choose, at specified election dates, to measure eligiblefinancial assets and liabilities at fair value that are not otherwise requiredto be measured at fair value.  If acompany elects the fair value option for an eligible item, changes in that item’sfair value in subsequent reporting periods must be recognized in currentearnings.  SFAS No. 159 alsoestablishes presentation and disclosure requirements designed to drawcomparison between entities that elect different measurement attributes forsimilar assets and liabilities.  SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  See Note 8 to the notes to the consolidatedfinancial statements above.

 

InNovember 2007, the SEC issued Staff Accounting Bulletin No. 109 (“SABNo. 109”), *Written Loan Commitments Recorded at FairValue Through Earnings*.  SAB No. 109requires fair value measurements of derivatives or other written loancommitments recorded through earnings to include the future cash flows relatedto the loan’s servicing rights.  SAB No. 109also states that internally developed intangible assets should be excluded fromthese measurements.  SAB No. 109,which supersedes SAB No. 105, *Application of AccountingPrinciples to Loan Commitments*, applies to all loan commitments thatare accounted for at fair value through earnings.  Previously, SAB No. 105 applied to onlyderivative loan commitments accounted for at fair value through earnings.  SAB No. 109 should be appliedprospectively to derivative loan commitments issued or modified in fiscalquarters beginning after December 15, 2007. See Note 8 to the notes to the consolidatedfinancial statements above.

 

InDecember 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SABNo. 110”), *Certain Assumptions Used in ValuationMethods. *SAB No. 110extends the use of the “simplified” method, under certain circumstances, indeveloping an estimate of expected term of “plain vanilla” share options inaccordance with SFAS No. 123R, *Share-Based Payment. *Prior to the issuance of SAB No. 110,SAB No. 107 stated that the simplified method was only available forgrants made up to December 31, 2007. We are continuing the use of the simplified method.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities. *SFAS No. 161 amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities,*requires companies with derivative instruments to disclose information abouthow and why a company uses derivative instruments, how derivative instrumentsand related hedged items are accounted for under SFAS No. 133, and howderivative instruments and related hedged items affect a company’s financialposition, financial performance, and cash flows.  The required disclosures include the fairvalue of derivative instruments and their gains and losses in tabular format,information about credit-risk-related contingent features in derivativeagreements, counterparty credit risk, and the company’s strategies andobjectives for using derivative instruments. SFAS No. 161 is effective prospectively for periods beginning on orafter November 15, 2008.  Theadoption of this standard is not expected to have a material impact on ourconsolidated financial condition or results of operations.

 

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##### **Statements ofIncome**

##### ** **

*General*

 

Netincome for the three months ended March 31, 2008 and 2007 was $2.0 millionand $1.8 million, respectively, an increase of $277,000, or 16%.  The increase in net income is primarily aresult of an increase in net interest income for the three months ended March 31,2008 compared to the same three month period of 2007.

 

Netinterest income after the provision for loan losses increased $460,000 to $10.0million for the three months ended March 31, 2008 compared to $9.6 millionfor the three months ended March 31, 2007. The increase in net interest income after provision for loan losses is adirect result of a decrease in our interest expense for the three months ended March 31,2008 of $1.3 million, offset by a decrease in interest income of $790,000 andan increase in provision for loan losses of $40,000 all as compared to the sameperiod of 2007.

 

Noninterestincome for the three months ended March 31, 2008 was $4.6 million, adecrease of $698,000, or 13%, compared to $5.3 million for the three monthsended March 31, 2007.  The decreasein noninterest income is primarily due to the decrease in realized andunrealized gains on mortgage banking activities of $313,000, or 12%, to $2.3million for the three months ended March 31, 2008 as compared to $2.6million for the three months ended March 31, 2007.  Management fee income also decreased to$84,000 for the three months ended March 31, 2008, compared to $321,000for the same period of 2007.  Thesedecreases are a result of the tightening credit conditions within the mortgageindustry and the slowdown in the regional housing market.

 

Noninterestexpense decreased $539,000, or 4%, to $11.8 million for the three months ended March 31,2008, compared to $12.4 million for the same period of 2007.  The decrease in noninterest expense isprimarily attributable to a decrease in salary and benefits expense of $593,000for the three months ended March 31, 2008 compared to the same period of2007 due to the decrease in the level of staffing and commissions paid at ourmortgage banking subsidiary.

 

Basicand diluted earnings per common share was $0.08 for the three months ended March 31,2008.  Basic and diluted earnings percommon share for the three months ended March 31, 2007 was $0.07.  Weighted average fully diluted sharesoutstanding for the three months ended March 31, 2008 and 2007 was24,891,673 and 25,039,757, respectively.

 

Returnon average assets for the three months ended March 31, 2008 and 2007 was0.50% and 0.44%, respectively. Return on average equity for the three monthsended March 31, 2008 and 2007 was 5.06% and 4.50%, respectively.  The efficiency ratio for the three monthsended March 31, 2008 and 2007 was 79.10% and 81.63%, respectively.  Non-interest income to average assets for thethree months ended March 31, 2008 and 2007 was 1.13% and 1.32%, respectively.

 

Netincome attributable to the commercial banking segment for the three monthsended March 31, 2008 and 2007 was $2.2 million and $1.8 million,respectively.  The increase in net incomefor the three months ended March 31, 2008 compared to the same period of2007 in the commercial banking segment is primarily attributable to an increasein net interest income.

 

Themortgage banking segment reported net income of $542,000 for the three monthsended March 31, 2008 compared to net income of $538,000 for the threemonths ended March 31, 2007.  Theincrease in net income for the three months ended March 31, 2008 wasprimarily attributable to the adoption of SFAS No. 157 and SABNo. 109, which resulted in an increase in earnings of approximately$597,000 net of tax.

 

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The wealth management and trust services segment, which includes CWS,Wilson/Bennett and the trust division of the Bank, recorded net income of$18,000 and $31,000 for the three month periods ended March 31, 2008 and 2007,respectively.  

 

*Net Interest Income*

 

Net interest income represents the difference between interest and feesearned on interest -earning assets and the interest paid on deposits and otherinterest-bearing liabilities. The level of net interest income is impactedprimarily by variations in the volume and mix of these assets and liabilities,as well as changes in interest rates. Net interest income for the three monthsended March 31, 2008 and 2007 was $10.3 million and $9.8 million, respectively,a period-to-period increase of $500,000, or 5%. The increase in net interestincome is primarily the result of a greater decrease in our cost ofinterest-bearing liabilities than our decrease in the yields earned for averageearning assets.  We have certain loansand investment securities for which a portion of the income realized istax-exempt.  Net interest income on a taxequivalent basis for the three months ended March 31, 2008 and 2007 was $10.4million and $9.9 million, respectively.  

 

Our net interest margin, which equals net interest income divided byaverage earning assets, was 2.69% and 2.60%, respectively, for the three monthsended March 31, 2008 and 2007. The increase in the net interest margin for thethree months ended March 31, 2008 compared to the same period of 2007 is aresult of a greater decrease in the cost of interest-bearing liabilities thanthe decrease in yields earned for average earning assets.  Tables 1 and 2 present an analysis of averageearning assets and interest-bearing liabilities with related components ofinterest income and interest expense on a tax equivalent basis. 

 

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**Average Balance Sheets and Interest Rates onInterest-Earning Assets and Interest-Bearing Liabilities**

Three Months Ended March 31, 2008, 2007, and 2006

(In thousands)

 
| ** **                                               | ** ** | **2008**    | ** ** | **2007**     | ** ** | **2006**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | **Yield/**  | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $           | 137,047    |         | $          | 2,355       |       | 6.87 | % | $ | 103,408 |   | $ | 1,949 |   | 7.54 | % | $ | 73,098 |   | $ | 1,305 |   | 7.14 | % |
| Real estate -  commercial                                |       | 415,147     |       | 6,839        |       | 6.59        | %          | 324,412 |   | 5,340 |   | 6.58 | % | 271,044 |   | 4,392 |   | 6.48 | % |
| Real estate -  construction                              |       | 190,882     |       | 3,222        |       | 6.75        | %          | 160,346 |   | 3,382 |   | 8.44 | % | 129,026 |   | 2,539 |   | 7.87 | % |
| Real estate -  residential                               |       | 211,965     |       | 3,002        |       | 5.67        | %          | 197,781 |   | 2,676 |   | 5.41 | % | 158,040 |   | 2,005 |   | 5.07 | % |
| Home equity lines                                        |       | 85,169      |       | 1,158        |       | 5.45        | %          | 63,827 |   | 1,167 |   | 7.31 | % | 76,449 |   | 1,172 |   | 6.22 | % |
| Consumer                                                 |       | 2,759       |       | 51           |       | 7.39        | %          | 4,880 |   | 94 |   | 7.70 | % | 4,999 |   | 92 |   | 7.36 | % |
| Total loans                                              |       | 1,042,969   |       | 16,627       |       | 6.38        | %          | 854,654 |   | 14,608 |   | 6.84 | % | 712,656 |   | 11,505 |   | 6.46 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for  sale                                     |       | 139,336     |       | 2,129        |       | 6.11        | %          | 248,962 |   | 4,379 |   | 7.04 | % | 233,560 |   | 4,278 |   | 7.33 | % |
| Investment  securities - trading                         |       | —      |       | —       |       | 0.00        | %          | 45 |   | 1 |   | 4.56 | % | — |   | — |   | 0.00 | % |
| Investment  securities available-for-sale                |       | 265,248     |       | 3,406        |       | 5.14        | %          | 241,383 |   | 2,896 |   | 4.80 | % | 192,106 |   | 2,072 |   | 4.32 | % |
| Investment  securities held-to-maturity                  |       | 70,499      |       | 749          |       | 4.25        | %          | 96,158 |   | 1,002 |   | 4.17 | % | 113,294 |   | 1,125 |   | 3.97 | % |
| Other investments                                        |       | 14,614      |       | 218          |       | 5.97        | %          | 8,727 |   | 127 |   | 5.82 | % | 6,563 |   | 89 |   | 5.43 | % |
| Federal funds  sold                                      |       | 18,696      |       | 137          |       | 2.93        | %          | 79,911 |   | 1,024 |   | 5.13 | % | 59,569 |   | 649 |   | 4.42 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income (2)   |       | 1,551,362   |       | 23,266       |       | 6.00        | %          | 1,529,840 |   | 24,037 |   | 6.28 | % | 1,317,748 |   | 19,718 |   | 5.99 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest  earning assets:                             |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                                 |       | $           | 8,631      |         |       |        |       |   | $ | 9,390 |   |   |   |   |   | $ | 7,278 |   |   |   |   |   |
| Premises and  equipment, net                             |       | 18,280      |       |         |       |        |       | 20,180 |   |   |   |   |   | 18,157 |   |   |   |   |   |
| Goodwill and  other intangibles, net                     |       | 17,213      |       |         |       |        |       | 17,469 |   |   |   |   |   | 20,471 |   |   |   |   |   |
| Accrued interest  and other assets                       |       | 52,074      |       |         |       |        |       | 46,659 |   |   |   |   |   | 11,269 |   |   |   |   |   |
| Allowance for  loan losses                               |       | (11,802     | )          |         |       |        |       | (9,744 | ) |   |   |   |   | (8,425 | ) |   |   |   |   |
| Total assets                                             |       | $           | 1,635,758  |         |       |        |       |   | $ | 1,613,794 |   |   |   |   |   | $ | 1,366,498 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing liabilities:                         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:                            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 124,837     |       | 835          |       | 2.68        | %          | 129,251 |   | 921 |   | 2.88 | % | 125,284 |   | 722 |   | 2.34 | % |
| Money markets                                            |       | 42,327      |       | 293          |       | 2.77        | %          | 63,739 |   | 379 |   | 2.38 | % | 185,874 |   | 1,186 |   | 2.55 | % |
| Statement savings                                        |       | 375,022     |       | 3,301        |       | 3.53        | %          | 351,121 |   | 4,168 |   | 4.76 | % | 9,476 |   | 32 |   | 1.36 | % |
| Certificates of  deposit                                 |       | 450,488     |       | 4,918        |       | 4.37        | %          | 568,904 |   | 6,602 |   | 4.64 | % | 620,123 |   | 5,852 |   | 3.77 | % |
| Total interest -  bearing deposits                       |       | 992,674     |       | 9,347        |       | 3.78        | %          | 1,113,015 |   | 12,070 |   | 4.40 | % | 940,757 |   | 7,792 |   | 3.36 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 339,665     |       | 3,473        |       | 4.10        | %          | 199,725 |   | 2,040 |   | 4.14 | % | 145,102 |   | 1,523 |   | 4.25 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,332,339   |       | 12,820       |       | 3.86        | %          | 1,312,740 |   | 14,110 |   | 4.36 | % | 1,085,859 |   | 9,315 |   | 3.48 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 122,408     |       |         |       |        |       | 123,567 |   |   |   |   |   | 110,321 |   |   |   |   |   |
| Other liabilities                                        |       | 19,654      |       |         |       |        |       | 20,496 |   |   |   |   |   | 20,842 |   |   |   |   |   |
| Common  shareholders’ equity                        |       | 161,357     |       |         |       |        |       | 156,991 |   |   |   |   |   | 149,476 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $           | 1,635,758  |         |       |        |       |   | $ | 1,613,794 |   |   |   |   |   | $ | 1,366,498 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income and net interest margin (2)         |       |        |       | $            | 10,446     |        | 2.69       | % |   |   | $ | 9,927 |   | 2.60 | % |   |   | $ | 10,403 |   | 3.16 | % |

 

----

(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) Interest income for loans receivable,investment securities available-for-sale and fed funds sold (which includesinvestments in money market preferred stock) is reported on a fully taxable-equivalentbasis at a rate of 34%.

 

26

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**Rate and Volume Analysis**

Three Months Ended March 31, 2008, 2007, and 2006

(In thousands)

 
| ** **                               | ** ** | **2008 Compared to 2007** | ** ** | **2007 Compared to 2006** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **Change Due to**              | ** ** | ** **                               | ** ** | **Change Due to** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Average**                              | ** ** | **Average**                              | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                               | ** ** | **Volume (3)**                      | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume (3)** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest income:**                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans (1):                               |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                |       | $                                        | 634        |                                     | $          | (228 | ) | $ | 406 |   | $ | 541 |   | $ | 103 |   | $ | 644 |   |
| Real estate - commercial                 |       | 1,493                                    |       | 6                                        |       | 1,499 |   | 865 |   | 83 |   | 948 |   |
| Real estate - construction               |       | 644                                      |       | (804                                     | )          | (160 | ) | 616 |   | 227 |   | 843 |   |
| Real estate - residential                |       | 192                                      |       | 134                                      |       | 326 |   | 504 |   | 167 |   | 671 |   |
| Home equity lines                        |       | 387                                      |       | (396                                     | )          | (9 | ) | (179 | ) | 174 |   | (5 | ) |
| Consumer                                 |       | (41                                      | )          | (2                                       | )          | (43 | ) | (2 | ) | 4 |   | 2 |   |
| Total loans                              |       | 3,309                                    |       | (1,290                                   | )          | 2,019 |   | 2,345 |   | 758 |   | 3,103 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans held for sale                      |       | (1,928                                   | )          | (322                                     | )          | (2,250 | ) | 282 |   | (181 | ) | 101 |   |
| Investment securities - trading          |       | (1                                       | )          | —                                   |       | (1 | ) | 1 |   | (0 | ) | 1 |   |
| Investment securities available-for-sale |       | 286                                      |       | 224                                      |       | 510 |   | 538 |   | 286 |   | 824 |   |
| Investment securities held-to-maturity   |       | (267                                     | )          | 14                                       |       | (253 | ) | (170 | ) | 47 |   | (123 | ) |
| Other investments                        |       | 86                                       |       | 5                                        |       | 91 |   | 30 |   | 8 |   | 38 |   |
| Federal funds sold                       |       | (785                                     | )          | (102                                     | )          | (887 | ) | 236 |   | 139 |   | 375 |   |
| Total interest income (2)                |       | 700                                      |       | (1,471                                   | )          | (771 | ) | 3,262 |   | 1,057 |   | 4,319 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                    |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:             |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | (22                                      | )          | (64                                      | )          | (86 | ) | 25 |   | 174 |   | 199 |   |
| Money markets                            |       | (127                                     | )          | 41                                       |       | (86 | ) | (780 | ) | (27 | ) | (807 | ) |
| Statement savings                        |       | 281                                      |       | (1,148                                   | )          | (867 | ) | 1,195 |   | 2,941 |   | 4,136 |   |
| Certificates of deposit                  |       | (1,375                                   | )          | (309                                     | )          | (1,684 | ) | (466 | ) | 1,216 |   | 750 |   |
| Total interest - bearing deposits        |       | (1,243                                   | )          | (1,480                                   | )          | (2,723 | ) | (26 | ) | 4,304 |   | 4,278 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 1,463                                    |       | (30                                      | )          | 1,433 |   | 573 |   | (56 | ) | 517 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total interest expense                   |       | 220                                      |       | (1,510                                   | )          | (1,290 | ) | 547 |   | 4,248 |   | 4,795 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                                        | 480        |                                     | $          | 39 |   | $ | 519 |   | $ | 2,715 |   | $ | (3,191 | ) | $ | (476 | ) |

 

----

(1) Non-accrual loansare 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 income forloans receivable, investment securities available-for-sale and fed funds sold(which includes investments in money market preferred stock) is reported on afully taxable-equivalent basis at a rate of 34%.

(3) Changes attributable to rate/volume have been allocated tovolume.

 

27

----

 

*Provision for Loan Losses*

 

Theprovision for loan losses for the three months ended March 31, 2008 and2007 was $320,000 and $280,000, respectively. The increase in provision expensefor the three months ended March 31, 2008 compared to the same period of2007 is primarily the result of charging-off two residential real estate loanstotaling $87,000 and one commercial loan totaling $16,000, and net new loangrowth in addition to our evaluation of the credit quality in our loanportfolio and the qualitative factors we use to determine the adequacy of ourloan loss reserves as described above in “Critical AccountingPolicies—Allowance for Loan Losses.” The allowance for loan losses at March 31,2008 and December 31, 2007 was $11.9 million and $11.6 million, respectively.Our allowance for loan losses ratio to loans receivable, net was 1.14% and1.12% at March 31, 2008 and December 31, 2007, respectively.  Non performing loans at March 31, 2008 andDecember 31, 2007 were $233,000 and $963,000, respectively, all of which wereincluded in the loans held for sale portfolio and were determined to bewell-secured and in the process of collection.

 

Additionalinformation on the allowance for loan losses, its allocation to the loansreceivable portfolio and information on nonperforming loans can be found inTables 3, 4 and 5.

 

28

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**Allowance for Loan Losses**

Three Months Ended March 31, 2008 and 2007

(In thousands)

 
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1 |       | $        | 11,641     |     | $          | 9,638 |   |
|                              |       |     |       |     |       |
| Provision for loan losses         |       | 320      |       | 280      |       |
|                              |       |     |       |     |       |
| Loans charged off:                |       |     |       |     |       |
| Commercial and industrial         |       | (16      | )          | —   |       |
| Consumer                          |       | (87      | )          | —   |       |
| Total loans charged off           |       | (103     | )          | —   |       |
|                              |       |     |       |     |       |
| Recoveries:                       |       |     |       |     |       |
| Commercial and industrial         |       | —   |       | —   |       |
| Consumer                          |       | —   |       | —   |       |
| Total recoveries                  |       | —   |       | —   |       |
|                              |       |     |       |     |       |
| Net (charge offs) recoveries      |       | (103     | )          | —   |       |
|                              |       |     |       |     |       |
| Ending balance, March 31,    |       | $        | 11,858     |     | $          | 9,918 |   |

 
| ** **                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **Loans:**                                                  |       |               |       |                  |       |
| Balance at period end                                       |       | $                  | 1,042,114  |                  | $          | 1,039,684 |   |
| Allowance for loan losses to loans  receivable, net of fees |       | 1.14               | %          | 1.12                  | %          |
| Annualized net charge-offs to average loans  receivable     |       | 0.04               | %          | 0.06                  | %          |
|                                                             |            |                    |            |                       |            |  |  |

 

29

----

 

**Allocation of the Allowance for Loan Losses**

At March 31, 2008 and December 31, 2007

(In thousands)

 
| ** **                      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Allocation**           | ** ** | **% of Total***   | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and industrial       |       | $                        | 1,904      |                        | 12.69      | % | $ | 1,956 |   | 13.51 | % |
| Real estate - commercial        |       | 5,293                    |       | 40.40                       | %          | 5,225 |   | 39.95 | % |
| Real estate - construction      |       | 2,177                    |       | 17.57                       | %          | 2,217 |   | 17.93 | % |
| Real estate - residential       |       | 1,504                    |       | 20.65                       | %          | 1,402 |   | 20.50 | % |
| Home equity lines               |       | 898                      |       | 8.41                        | %          | 772 |   | 7.81 | % |
| Consumer                        |       | 82                       |       | 0.28                        | %          | 69 |   | 0.30 | % |
|                            |       |                     |       |                        |       |   |   |   |   |
| Total allowance for loan losses |       | $                        | 11,858     |                        | 100.00     | % | $ | 11,641 |   | 100.00 | % |

 

----

* Percentage of loan type to the total loanportfolio.

 

30

----

 

**Nonperforming Loans**

At March 31, 2008 and December 31, 2007

(In thousands)

 
| ** **                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Nonaccruing loans                             |       | $                  | —     |                  | $          | — |   |
|                                          |       |               |       |                  |       |
| Loans contractually past-due 90 days or  more |       | 233                |       | 963                   |       |
|                                          |       |               |       |                  |       |
| Total nonperforming loans                     |       | $                  | 233        |                  | $          | 963 |   |

 

31

----

 

*NoninterestIncome*

 

Noninterestincome includes service charges on deposits and loans, realized and unrealizedgains on mortgage banking activities, investment fee income, and management feeincome, and continues to be an important factor in our operating results.Noninterest income for the three months ended March 31, 2008 and 2007 was $4.6million and $5.3 million, respectively, a decrease of $698,000, or 13%. Realizedand unrealized gains on mortgage banking activities by George Mason for thethree months ended March 31, 2008 and 2007 were $2.3 million and $2.6million, respectively, a decrease of $313,000, or 12%.  Included in realized and unrealized gains on mortgagebanking activities are any origination, underwriting, and discount points andother funding fees received and deferred at loan origination.  Costs include direct costs associated with theloan origination, such as commissions and salaries that are deferred at thetime of origination.  In addition, weadopted SFAS No. 157 and SAB No. 109 during the first quarter of 2008. Theadoption of these standards resulted in an increase in gains of approximately $911,000.Additional information on the adoption of these standards can be found in Note8 to our notes to the consolidated financial statements.  Management fee income for the three monthsended March 31, 2008 and 2007 was $84,000 and $321,000, respectively, adecrease of $237,000, or 74%. The decrease in realized and unrealized gains on mortgagebanking activities and management fee income is directly related to the tighteningcredit conditions within the mortgage industry and the slowdown in the regionalhousing market.  Management fee incomerepresents the income earned for services George Mason provides to othermortgage companies owned by local home builders and generally fluctuates basedon the volume of loan sales.

 

Servicecharges on deposit accounts increased $61,000 to $527,000 for the three monthsended March 31, 2008 compared to $466,000 for the same period of 2007. Theincreases in service charges on deposit accounts are primarily the result of anincreased number of deposit accounts in 2008 compared to 2007. Loan servicecharge income decreased $76,000 to $310,000 for the three months ended March 31,2008, compared to $386,000 for the same period of 2007 and is related to thedecrease in service charges recorded in the mortgage banking segment, which isrelated to the slowdown in the regional housing market.

 

Investmentfee income decreased $124,000 to $900,000 for the three months ended March 31,2008 compared to $1.0 million for the same period of 2007. The decrease ininvestment fee income is primarily attributable to the decrease in netcommissions earned at CWS as a result of employee turnover in that subsidiary.

 

Duringthe three months ended March 31, 2008, we received a litigation settlementfrom a previously impaired investment of $190,000 compared to $33,000 receivedduring the three months ended March 31, 2007.

 

Noninterestincome represented 31% and 35% of our total revenues for the three months endedMarch 31, 2008 and 2007, respectively.

 

*NoninterestExpense*

 

Noninterestexpense includes salaries and benefits, occupancy costs, professional fees,depreciation, data processing, telecommunications and miscellaneous expenses.Noninterest expense for the three months ended March 31, 2008 was $11.8million, compared to $12.4 million for the same period of 2007, a decrease of$539,000, or 4%.  This decrease isprimarily due to a decrease in our salaries and benefits expense attributableto a decrease in the level of staffing and commissions paid at our mortgagebanking subsidiary.

 

*IncomeTaxes*

 

Forthe three months ended March 31, 2008, we recorded a provision for incometax expense of $761,000, compared to $737,000 for the same period of 2007.  Our effective tax rate for the three monthsended March 31, 2008 and 2007 was 27.2% and 29.5%, respectively.  The decrease in our effective tax rate isprimarily a result of our increase in tax-exempt investments over the pasttwelve months and our tax-exempt income being a larger percentage of ouroverall 

 

32

----

 

netincome for the three months ended March 31, 2008 compared to March 31,2007.  See also “Critical AccountingPolicies — Valuation of Deferred Tax Assets.”

 

**Statements of Condition**

 

Totalassets were $1.69 billion at each of March 31, 2008 and December 31,2007.

 

*InvestmentSecurities*

 

Investmentsecurities were $364.0 million at March 31, 2008, compared to $364.9million at December 31, 2007, a decrease of $938,000. The investmentportfolio consists of investment securities available-for-sale and investmentsecurities held-to-maturity. Investment securities available-for-sale are thosesecurities that we intend to hold for an indefinite period of time, but notnecessarily until maturity. These securities are carried at fair value and maybe sold as part of an asset/liability strategy, liquidity management orregulatory capital management. Investment securities held-to-maturity are those securities that we havethe intent and ability to hold to maturity and are carried at amortized cost.At March 31, 2008, investment securities available-for-sale were $302.2million and investment securities held-to-maturity were $61.8 million. SeeTable 6 for additional information on our investment securities portfolio.

 

At March 31, 2008 and December 31, 2007, investmentsecurities with unrealized losses are investment grade securities.  Investment securities with unrealized losseshave interest rates that are less than current market interest rates and,therefore, the indicated temporary losses are not a result of permanent creditimpairment.  Mortgage-backed investmentsecurities, which are the primary component of the unrealized losses in theinvestment securities portfolio at those dates, are primarily comprised ofsecurities issued by the Federal National Mortgage Association (FNMA), FederalHome Loan Mortgage Corporation (FHLMC) and Government National MortgageAssociation (GNMA).

 

Ourinvestment portfolio consists primarily of securities backed or guaranteed byFNMA or FHLMC.  For all non government or agency securities, we completereviews at least quarterly. As of March 31, 2008, 99% of our investmentsecurities portfolio consisted of AAA rated securities.  Investment securitieswhich carry a AAA rating are judged to be of the best quality and carry thesmallest degree of investment risk.   We expect to receive fullpayment of interest and principal on the securities in the investmentportfolio. The various protective elements on our non agency securities maychange in the future if market conditions or the financial stability of creditinsurers changes, which could impact the ratings of our securities.

 

Ofthe $39.0 million in our municipal securities portfolio, $36.5 million remainAAA rated while approximately $2.5 million were downgraded during 2008 to AA orsingle A status due to the downgrades of the monoline insurance companies thatinsured those bonds.  The bonds remainunlimited general obligations of the municipalities and we expect to receiverepayment of all principal amounts due to us. There is no other than temporary impairment due to credit quality.

 

33

----

 

**Investment Securities**

At March 31, 2008 and December 31, 2007

(In thousands)

 
| ** **                                                   | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                                   | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Available-for-sale at March 31, 2008** |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies                           |       |          |       |      |       |        |       |
| One to five years                                            |       | $             | 27,999     |      | $          | 28,002      |       | 1.72 | % |
| Five to ten years                                            |       | 53,996        |       | 55,237    |       | 5.69        | %          |
| Total U.S. government-sponsored agencies                     |       | 81,995        |       | 83,239    |       | 4.33        | %          |
|                                                         |       |          |       |      |       |        |       |
| Mortgage-backed securities (1)                               |       |          |       |      |       |        |       |
| One to five years                                            |       | 3,357         |       | 3,397     |       | 4.27        | %          |
| Five to ten years                                            |       | 9,954         |       | 9,976     |       | 3.91        | %          |
| After ten years                                              |       | 164,521       |       | 165,723   |       | 5.14        | %          |
| Total mortgage-backed securities                             |       | 177,832       |       | 179,096   |       | 5.05        | %          |
|                                                         |       |          |       |      |       |        |       |
| Municipal securities (2)                                     |       |          |       |      |       |        |       |
| After ten years                                              |       | 39,037        |       | 39,290    |       | 4.28        | %          |
| Total municipal securities                                   |       | 39,037        |       | 39,290    |       | 4.28        | %          |
|                                                         |       |          |       |      |       |        |       |
| U. S. treasury securities                                    |       |          |       |      |       |        |       |
| One to five years                                            |       | 599           |       | 600       |       | 4.09        | %          |
| Total U.S. treasury securities                               |       | 599           |       | 600       |       | 4.09        | %          |
| Total investment securities  available-for-sale              |       | $             | 299,463    |      | $          | 302,225     |       | 4.75 | % |

 
| ** **                                    | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                    | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Held-to-maturity at March 31, 2008**   |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies            |       |          |       |      |       |        |       |
| One to five years                             |       | $             | 3,000      |      | $          | 3,005       |       | 3.23 | % |
| After ten years                               |       | 3,013         |       | 3,022     |       | 4.73        | %          |
| Total U.S. government-sponsored agencies      |       | 6,013         |       | 6,027     |       | 3.98        | %          |
|                                          |       |          |       |      |       |        |       |
| Mortgage-backed securities (1)                |       |          |       |      |       |        |       |
| One to five years                             |       | 1,294         |       | 1,315     |       | 4.63        | %          |
| Five to ten years                             |       | 10,432        |       | 10,493    |       | 4.48        | %          |
| After ten years                               |       | 36,040        |       | 36,218    |       | 4.54        | %          |
| Total mortgage-backed securities              |       | 47,766        |       | 48,026    |       | 4.53        | %          |
|                                          |       |          |       |      |       |        |       |
| Corporate bonds                               |       |          |       |      |       |        |       |
| After ten years                               |       | 8,004         |       | 7,244     |       | 4.04        | %          |
| Total corporate bonds                         |       | 8,004         |       | 7,244     |       | 4.04        | %          |
| Total investment securities  held-to-maturity |       | 61,783        |       | 61,297    |       | 4.41        | %          |
|                                          |       |          |       |      |       |        |       |
| Total investment securities                   |       | $             | 361,246    |      | $          | 363,522     |       | 4.69 | % |

 

**34**

----

 
| ** **                                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Available-for-sale at December 31, 2007** |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies                              |       |          |       |      |       |        |       |
| One to five years                                               |       | $             | 44,160     |      | $          | 44,161      |       | 5.59 | % |
| Five to ten years                                               |       | 39,116        |       | 39,850    |       | 5.99        | %          |
| Total U.S. government-sponsored agencies                        |       | 83,276        |       | 84,011    |       | 5.78        | %          |
|                                                            |       |          |       |      |       |        |       |
| Mortgage-backed securities (1)                                  |       |          |       |      |       |        |       |
| One to five years                                               |       | 3,552         |       | 3,526     |       | 4.25        | %          |
| Five to ten years                                               |       | 10,902        |       | 10,746    |       | 3.89        | %          |
| After ten years                                                 |       | 154,435       |       | 153,912   |       | 5.13        | %          |
| Total mortgage-backed securities                                |       | 168,889       |       | 168,184   |       | 5.03        | %          |
|                                                            |       |          |       |      |       |        |       |
| Municipal securities (2)                                        |       |          |       |      |       |        |       |
| After ten years                                                 |       | 33,671        |       | 33,219    |       | 4.09        | %          |
| Total U.S. treasury securities                                  |       | 33,671        |       | 33,219    |       | 4.09        | %          |
|                                                            |       |          |       |      |       |        |       |
| U. S. treasury securities                                       |       |          |       |      |       |        |       |
| One to five years                                               |       | 592           |       | 584       |       | 4.09        | %          |
| Total U.S. treasury securities                                  |       | 592           |       | 584       |       | 4.09        | %          |
| Total investment securities  available-for-sale                 |       | $             | 286,428    |      | $          | 285,998     |       | 5.14 | % |

 
| ** **                                     | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                     | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Held-to-maturity at December 31, 2007** |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies             |       |          |       |      |       |        |       |
| One to five years                              |       | $             | 6,500      |      | $          | 6,468       |       | 3.63 | % |
| Five to ten years                              |       | 11,011        |       | 10,998    |       | 4.52        | %          |
| After ten years                                |       | 2,000         |       | 2,002     |       | 5.30        | %          |
| Total U.S. government-sponsored agencies       |       | 19,511        |       | 19,468    |       | 4.30        | %          |
|                                           |       |          |       |      |       |        |       |
| Mortgage-backed securities (1)                 |       |          |       |      |       |        |       |
| One to five years                              |       | 379           |       | 383       |       | 4.71        | %          |
| Five to ten years                              |       | 7,618         |       | 7,555     |       | 4.29        | %          |
| After ten years                                |       | 43,436        |       | 43,133    |       | 4.52        | %          |
| Total mortgage-backed securities               |       | 51,433        |       | 51,071    |       | 4.49        | %          |
|                                           |       |          |       |      |       |        |       |
| Corporate bonds                                |       |          |       |      |       |        |       |
| After ten years                                |       | 8,004         |       | 7,629     |       | 4.56        | %          |
| Total corporate bonds                          |       | 8,004         |       | 7,629     |       | 4.56        | %          |
| Total investment securities  held-to-maturity  |       | 78,948        |       | 78,168    |       | 4.45        | %          |
|                                           |       |          |       |      |       |        |       |
| Total investment securities                    |       | $             | 365,376    |      | $          | 364,166     |       | 4.99 | % |

 

----

(1)  Based on contractual maturities.

 

**35**

----

 

*Loans*

 

Loansreceivable, net of deferred fees and costs, were $1.04 billion at each of March 31,2008 and December 31, 2007.  SeeTable 7 for details on the loans receivable portfolio. During the first quarterof 2008, the mix of our loan portfolio changed slightly, with decreases incommercial and industrial loans, real estate construction and consumer loans,offset by increases in commercial and residential real estate loans and homeequity loans.  In addition, we had $153.3million in loans held for sale at March 31, 2008, compared to $170.5million at December 31, 2007, a decrease of $17.1 million. Loans held forsale are valued at the lower of cost or market value. The decrease in loansheld for sale at March 31, 2008 compared to December 31, 2007 is dueto decreased loan origination volume as a result of the slowdown in theregional housing market and tightening credit conditions within the mortgageindustry.

 

**Loans Receivable**

At March 31, 2008 and December 31, 2007

(In thousands)

 
| ** **                      | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Commercial and industrial       |       | $                            | 132,249    |                            | 12.69      | % | $ | 140,531 |   | 13.51 | % |
| Real estate - commercial        |       | 421,161                      |       | 40.40                           | %          | 415,471 |   | 39.95 | % |
| Real estate - construction      |       | 183,182                      |       | 17.57                           | %          | 186,514 |   | 17.93 | % |
| Real estate - residential       |       | 215,201                      |       | 20.65                           | %          | 213,197 |   | 20.50 | % |
| Home equity lines               |       | 87,642                       |       | 8.41                            | %          | 81,247 |   | 7.81 | % |
| Consumer                        |       | 2,931                        |       | 0.28                            | %          | 3,129 |   | 0.30 | % |
|                            |       |                         |       |                            |       |   |   |   |   |
| Gross loans                     |       | $                            | 1,042,366  |                            | 100.00     | % | 1,040,089 |   | 100.00 | % |
|                            |       |                         |       |                            |       |   |   |   |   |
| Net deferred (fees) costs       |       | (252                         | )          |                            |       | (405 | ) |   |   |
| Less: allowance for loan losses |       | (11,858                      | )          |                            |       | (11,641 | ) |   |   |
|                            |       |                         |       |                            |       |   |   |   |   |
| Loans receivable, net           |       | $                            | 1,030,256  |                            |       |   | $ | 1,028,043 |   |   |   |

 

36

----

 

*Deposits*

 

Totaldeposits were $1.14 billion at March 31, 2008 compared to $1.10billion at December 31, 2007. We experienced increases in our noninterestbearing checking and savings products and decreases in our interest checking,money market and certificates of deposit products. See Table 8 for details oncertificates of deposit with balances of $100,000 or more. Our savings depositscontinue to increase as a result of our Simply Savings product, which allowsnew customers to earn a yield of 3.01% on funds deposited with us.  We had brokered certificates of deposit of$15.0 million and $10.0 million at March 31, 2008 and December 31,2007, respectively.

 

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

At March 31, 2008

(In thousands)

 
| ** **                            | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| **Maturities:**                       |       |                |       |            |       |      |       |   |   |   |
| Three months or less                  |       | $                   | 76,454     |            | $          | 6,255     |       | $ | 82,709 |   |
| Over three months through six months  |       | 33,648              |       | 16,007          |       | 49,655    |       |
| Over six months through twelve months |       | 22,162              |       | 7,147           |       | 29,309    |       |
| Over twelve months                    |       | 35,046              |       | 836             |       | 35,882    |       |
|                                  |       | $                   | 167,310    |            | $          | 30,245    |       | $ | 197,555 |   |

 

----

* No-Penalty certificates of deposit can beredeemed at anytime at the request of the depositor.

 

37

----

 

*Borrowings*

 

Otherborrowed funds decreased $39.0 million to $361.1 million at March 31,2008, compared to $400.1 million at December 31, 2007. Treasury, Tax &Loan Note option borrowings decreased $5.6 million to $5.6 million at March 31,2008 compared to $11.2 million at December 31, 2007.  FHLB advances increased $42.4 million to$275.8 million at March 31, 2008 compared to $233.5 million at December 31,2007. Customer repurchase agreements decreased $7.8 million to $59.0 million atMarch 31, 2008 compared to $66.8 million at December 31, 2007.  At December 31, 2007, we had federalfunds purchased of $68.0 million compared to none at March 31, 2008.  The overall decrease in our other borrowedfunds was a result of the increase in deposits we had during the first quarterof 2008.  Table 9 provides information onour borrowings.

 

**Short-Term Borrowings and Other Borrowed Funds**

At March 31, 2008

(In thousands)

 

**Short-term FHLB advances:**

 
| ** **                                                           | ** ** | ** **                    | ** ** | ** **                               | ** ** | ** **             | ** **  | **Amount**      | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|------------------------|-------------|-----------------|------------|
| **Advance Date**                                                | ** ** | **Term of Advance** | ** ** | **Maturity or Call Date** | ** ** | **Interest Rate** | ** **  | **Outstanding** | ** ** |
| Apr-05                                                               |       | 3 years                       |       | Apr-08                                   |       | 4.31                   | %           | $               | 5,000      |   |
| Apr-05                                                               |       | 3 years                       |       | Apr-08                                   |       | 4.08                   | %           | 5,000           |       |
| Jul-03                                                               |       | 5 years                       |       | Jul-08                                   |       | 2.29                   | %           | 833             |       |
| **Total  short-term FHLB advances and weighted average rate**        | ** ** | **4.05**                      | **%**      | **$**                                    | **10,833** | ** **             |
| ** **                                                           |       |                          |       |                                     |       |                   |        |            |       |
| **Other short-term borrowed funds:**                                 |       |                          |       |                                     |       |                   |        |            |       |
| TT&L Note option                                                 |       |                          |       |                                     |       | 3.46                   | %           | $               | 5,598      |   |
| Customer repurchase agreements                                       |       |                          |       |                                     |       | 2.70                   | %           | 59,019          |       |
| **Total  other short-term borrowed funds and weighted average rate** | ** ** | **2.77**                      | **%**      | **$**                                    | **64,617** | ** **             |
| ** **                                                           |       |                          |       |                                     |       |                   |        |            |       |
| **Other borrowed funds:**                                            |       |                          |       |                                     |       |                   |        |            |       |
| Trust preferred                                                      |       |                          |       |                                     |       | 7.16                   | %           | $               | 20,619     |   |
| FHLB advances - long term                                            |       |                          |       |                                     |       | 3.88                   | %           | 265,000         |       |
| **Other  borrowed funds and weighted average rate**                  | ** ** | ** **                    | ** ** | **4.12**                                 | **%**      | **$**                  | **285,619** | ** **      |
|                                                                 |       |                          |       |                                     |       |                   |        |            |       |
| **Total  other borrowed funds and weighted average rate**            | ** ** | ** **                    | ** ** | **3.87**                                 | **%**      | **$**                  | **361,069** | ** **      |

 

*Shareholders’Equity*

 

Shareholders’equity at March 31, 2008 was $162.8 million, an increase of $3.3 million,compared to $159.5 million at December 31, 2007. The increase inshareholders’ equity was a result of our net income for the first quarter of2008 of $2.0 million.  In addition,accumulated other comprehensive income increased $1.8 million for the firstquarter of 2008.  During the firstquarter of 2008, we repurchased 37,500 shares of our common stock under ourshare repurchase plan for a cost of $290,000. Book value per share at March 31, 2008 was $6.74 compared to $6.45at December 31, 2007. Tangible book value per share (which is book valueper share adjusted for changes in other comprehensive income, less goodwill andother intangible assets) at March 31, 2008 was $5.97 compared to $5.82 at December 31,2007.

 

38

----

 

##### **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, 2008, the commercial banking segmentrecorded net income of $2.2 million compared to $1.8 million for the sameperiod of 2007, an increase of $372,000. The increase in net income isprimarily related to increases in net interest margin.  Provision for loan losses increased $40,000to $320,000 for the three months ended March 31, 2008 compared to $280,000for the three months ended March 31, 2007. Noninterest income increased $70,000 to $1.1 million for the threemonths ended March 31, 2008 compared to $996,000 for the three monthsended March 31, 2007.  Noninterestexpense increased $225,000 to $7.7 million for the three months ended March 31,2008 compared to $7.5 million for the same period of 2007.  The increase in noninterest expense is aresult of the branch expansion that occurred during the first quarter of 2007,along with increases in data processing and advertising expense to support theBank’s branch network.  At March 31,2008, total assets for this segment were $1.67 billion, loans receivable, netof deferred fees and costs, were $1.04 billion and total deposits were $1.14billion. At March 31, 2007, total assets were $1.65 billion, loansreceivable, net of deferred fees and costs, were $870.8 million and totaldeposits were $1.23 billion.

 

*MortgageBanking*

 

Theoperations of the mortgage banking segment are conducted through George Mason.George Mason engages primarily in the origination and acquisition ofresidential mortgages for sale into the secondary market on a best effortsbasis.

 

Forthe three months ended March 31, 2008 and 2007, the mortgage bankingsegment recorded net income of $542,000 and $538,000, respectively. During thefirst quarter of 2008, we adopted SFAS No. 157 and SAB No. 109, which resultedin an increase of $597,000 net of tax to our first quarter operating results.  Noninterest income decreased $642,000 to $2.6million for the three months ended March 31, 2008 compared to $3.3 millionfor the same three month period of 2007. Noninterest expense decreased $635,000, or 20%, to $2.6 million for thethree months ended March 31, 2008 compared to $3.2 million for the samethree month period of 2007.  At March 31,2008, total assets for this segment were $169.1 million; loans held for salewere $153.3 million and mortgage funding checks were $6.3 million. At March 31,2007, total assets were $330.6 million; loans held for sale were $314.3 millionand mortgage funding checks were $44.6 million.

 

The decreases in assets and loan volumes have resulted from the slowdownin the housing market and the tightening of credit conditions. In reaction, wehave decreased operating expenses primarily through reductions in head count.

 

*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,

 

39

----

 

trusts,estates, custody, investment management, escrows, and retirement plans.Operations of the Bank’s trust division, CWS and Wilson/Bennett are included inthis operating segment.

 

Forthe three months ended March 31, 2008 and 2007, the wealth management andtrust services segment recorded net income of $18,000 and $31,000,respectively. For the three months ended March 31, 2008 and 2007,noninterest income was $900,000 and $1.0 million, respectively.  The decrease in noninterest income isprimarily attributable to employee turnover at CWS.  Noninterest expense for the three monthsended March 31, 2008 and 2007 were $873,000 and $1.0 million,respectively.  The decrease innoninterest expense is primarily attributable to decreases in salary andbenefits expense and professional fees at CWS and Wilson/Bennett.  At March 31, 2008, total assets were$3.7 million and managed and custodial assets were $3.4 billion. At March 31,2007, total assets for this segment were $5.3 million and managed and custodialassets were $6.2 billion. The decrease in managed and custodial assets isprimarily attributable to a decrease in managed assets at our trust divisiondue to the loss of low margin custody relationships with two clients.

 

Informationpertaining to our business segments can be found in Note 3 to the Notes toConsolidated 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, defined toinclude certain debt obligations) and Tier 2 (which includes certain other debtobligations, a portion of the allowance for loan losses, and 45% of anyunrealized gains in equity securities).

 

AtMarch 31, 2008, our Tier 1 and total (Tier 1 and Tier 2) risk-basedcapital ratios were 12.10% and 12.99%, respectively. At December 31, 2007,our Tier 1 and total risk-based capital ratios were 12.10% and 12.98%,respectively.  Our regulatory capitallevels for the Bank and bank holding company meet those established forwell-capitalized institutions. Table 10 provides additional informationpertaining to our capital ratios.

 

40

----

 

**Capital Components**

At March 31, 2008 and December 31,2007

(In thousands)

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **                 | ** ** | **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, 2008**                                       |       |       |       |                        |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $          | 176,308    |                        | 12.99      | %                          | $          | 108,570                    | >  |                       | 8.00       | % | $ | 135,712 | >  |   | 10.00 | % |
| Tier I capital/ Tier I capital to  risk-weighted assets          |       | 164,245    |       | 12.10                       | %          | 54,285                     | >  |                       | 4.00       | %                          | 81,427     | >  |   | 6.00 | % |
| Tier I capital/ Total capital to average  assets                 |       | 164,245    |       | 10.15                       | %          | 64,742                     | >  |                       | 4.00       | %                          | 80,927     | >  |   | 5.00 | % |
|                                                             |       |       |       |                        |       |                       |       |                       |       |                       |       |   |   |   |   |
| **At December 31, 2007**                                    |       |       |       |                        |       |                       |       |                       |       |                       |       |   |   |   |   |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $          | 174,523    |                        | 12.98      | %                          | $          | 107,569                    | >  |                       | 8.00       | % | $ | 134,461 | >  |   | 10.00 | % |
| Tier I capital/ Tier I capital to  risk-weighted assets          |       | 162,691    |       | 12.10                       | %          | 53,785                     | >  |                       | 4.00       | %                          | 80,677     | >  |   | 6.00 | % |
| Tier I capital/ Total capital to average  assets                 |       | 162,691    |       | 10.26                       | %          | 63,456                     | >  |                       | 4.00       | %                          | 79,320     | >  |   | 5.00 | % |

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | **To Be Well**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **Cardinal Bank:**                                          | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount** | ** **                 | **Ratio**  | ** ** |
| **At March 31, 2008**                                       |       |       |       |                       |       |                       |       |                       |       |       |                       |       |   |   |   |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $          | 162,770    |                       | 12.02      | %                          | $          | 108,306                    | >  |       | 8.00                       | %          | $ | 135,383 | >  |   | 10.00 | % |
| Tier I capital/ Tier I capital to  risk-weighted assets          |       | 150,707    |       | 11.13                      | %          | 54,153                     | >  |                       | 4.00       | %          | 81,230                     | >  |   | 6.00 | % |
| Tier I capital/ Total capital to average  assets                 |       | 150,707    |       | 9.33                       | %          | 64,621                     | >  |                       | 4.00       | %          | 80,776                     | >  |   | 5.00 | % |
|                                                             |       |       |       |                       |       |                       |       |                       |       |       |                       |       |   |   |   |
| **At December 31, 2007**                                    |       |       |       |                       |       |                       |       |                       |       |       |                       |       |   |   |   |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $          | 159,745    |                       | 11.91      | %                          | $          | 107,308                    | >  |       | 8.00                       | %          | $ | 134,135 | >  |   | 10.00 | % |
| Tier I capital/ Tier I capital to  risk-weighted assets          |       | 147,913    |       | 11.03                      | %          | 53,654                     | >  |                       | 4.00       | %          | 80,481                     | >  |   | 6.00 | % |
| Tier I capital/ Total capital to average  assets                 |       | 147,913    |       | 9.34                       | %          | 63,331                     | >  |                       | 4.00       | %          | 79,163                     | >  |   | 5.00 | % |

 

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**Contractual Obligations**

 

Wehave entered into a number of long-term contractual obligations to support ourongoing business activities. These contractual obligations will be fundedthrough operating revenues and liquidity sources held or available to us andexclude contractual interest costs, where applicable. The required paymentsunder such obligations are detailed in Table 11.

 

**Contractual Obligations**

At March 31, 2008

(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                             |       | $                                         | 434,431    |   | $ | 347,437 |   | $ | 84,262 |   | $ | 2,732 |   | $ | — |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Brokered certificates of deposit                     |       | 14,988                                    |       | 6,797 |   | 4,960 |   | 3,231 |   | — |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Advances from the Federal Home Loan Bank of  Atlanta |       | 275,833                                   |       | 10,833 |   | — |   | 135,000 |   | 130,000 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Trust preferred securities                           |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                          |       | 19,921                                    |       | 4,847 |   | 4,397 |   | 6,010 |   | 4,667 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                                         | 765,792    |   | $ | 369,914 |   | $ | 93,619 |   | $ | 146,973 |   | $ | 155,286 |   |

 

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**Commitments and Contingencies**

 

Inthe normal course of business, we are a party to financial instruments withoff-balance sheet risk to meet the financing needs of our customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit. 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.

 

AtMarch 31, 2008, commitments to extend credit were $418.4 million andstandby letters of credit were $10.3 million. The liability associated withstandby letters of credit at March 31, 2008 was $11,000.

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the agreement. 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.

 

Standbyletters of credit are conditional commitments we issued to guarantee theperformance of the contractual obligations by a customer to a third party.Those guarantees are primarily issued to support public and private borrowingarrangements, including commercial paper, bond financing, and similar transactions.The credit risk involved in issuing standby letters of credit is essentiallythe same as that involved in extending loan facilities to customers. We holdcertificates of deposit, deposit accounts, real estate or other appropriateforms of collateral supporting those commitments for which collateral is deemednecessary.  The majority of theseguarantees extend until satisfactory completion of the customer’s contractualobligations.

 

GeorgeMason maintains a reserve for loans sold that pay off earlier than thecontractual agreed upon period, thereby requiring that George Mason refund partof the service release premium and/or premium pricing received from theinvestor.  The reserve as of March 31,2008 was $18,000.  In addition, GeorgeMason has established a reserve of $100,000 for the estimated exposure torepurchase loans previously sold to investors for which borrowers failed toprovide full and accurate information on or related to their loan applicationor for which appraisals have not been acceptable.  For the quarter ended March 31, 2008,George Mason has not repurchased nor settled with investors on any such loans.

 

GeorgeMason, as part of the service it provides to its managed companies, purchasesthe loans managed companies originate at the time of origination.  These loans are then sold by George Mason toinvestors.  George Mason has agreementswith its managed companies requiring that, for any loans that were originatedby a managed company and for which investors have requested George Mason torepurchase due to the borrowers failure to provide full and accurateinformation on or related to their loan application or for which appraisalshave not been acceptable, the managed company be responsible for buying backthe loan.  In the event that the managedcompany’s financial condition deteriorates and it is unable to fund therepurchase of such loans, George Mason may have to provide the funds torepurchase these loans from

 

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investors.  As of March 31, 2008, we do not believe thatwe will incur any losses to fund any such loans that were originated by amanaged company.

 

Wehave derivative counter-party risk that may arise from the possible inabilityof George Mason’s third party investors to meet the terms of their forwardsales contracts.  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.

 

## **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 noncashitems into cash.  The objective of ourliquidity management program is to ensure that we always have sufficientresources to meet the demands of our depositors and borrowers. Stable core depositsand a strong capital position provide the base for our liquidity position. Webelieve we have demonstrated our ability to attract deposits because of ourconvenient branch locations, personal service and pricing.

 

Inaddition to deposits, we have access to various wholesale funding markets.These markets include the brokered CD market, the repurchase agreement marketand the federal funds market. We also maintain secured lines of credit with theFederal 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 thebalance sheet. In this forecast, we expect to maintain a liquidity cushion. Wealso stress test our liquidity position under several different stressscenarios. Guidelines for the forecasted liquidity cushion and for liquiditycushions for each stress scenario have been established. In addition, onestress test combines all other stress tests to see how liquidity would react toseveral negative 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 $341.9 million at March 31,2008 or 20% of total assets. We held investments that are classified asheld-to-maturity in the amount of $61.8 million at March 31, 2008. Tomaintain ready access to the Bank’s secured lines of credit, the Bank haspledged roughly a third of its investment securities to the Federal Home LoanBank of Atlanta with additional investment securities pledged to the Federal ReserveBank of Richmond. Additional borrowing capacity at the Federal Home Loan Bankof Atlanta at March 31, 2008 was $98.3 million. Borrowing capacity withthe Federal Reserve Bank of Richmond was $42.0 million at March 31, 2008.We anticipate maintaining liquidity at a level sufficient to protectdepositors, provide for reasonable growth and fully comply with all regulatoryrequirements.

 

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##### **Interest RateSensitivity**

 

We are exposed to variousbusiness risks including interest rate risk. Our goal is to maximize netinterest income without incurring excessive interest rate risk. Management ofnet interest income and interest rate risk must be consistent with the level ofcapital and liquidity that we maintain. We manage interest rate risk through anasset and liability committee (“ALCO”). ALCO is responsible for managing theinterest rate risk in conjunction with liquidity 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 the balancesheet. For maturing assets, assumptions are created for the redeployment ofthese assets. For maturing liabilities, assumptions are developed for thereplacement of these funding sources. Assumptions are also developed for assetsand liabilities that could reprice during the modeled time period. Theseassumptions also cover how we expect rates to change on non-maturity depositssuch as interest checking, money market checking, savings accounts as well ascertificates of deposit. Based on inputs that include the current balancesheet, the current level of interest rates and the developed assumptions, themodel then produces an expected level of net interest income assuming thatmarket rates remain unchanged. This is considered the base case. Next, the modeldetermines what net interest income would be based on specific changes ininterest rates. The rate simulations are performed for a two year period andinclude ramped rate changes of down 200 basis points and up 200 basis points.In the ramped down rate change, the model moves rates gradually down 200 basispoints over the first year and then rates remain flat 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, 2008, we were liability sensitive for the entire two year simulationperiod.   Liability sensitive means thatwe had more liabilities repricing than assets. We have more of our liabilitiesin non-maturity or short-term deposit products than we have in floating rateassets.  In a decreasing interest rateenvironment, net interest income would grow for a liability sensitivebank.  In the down 200 basis pointscenario, net interest income improves by not more than 10.5% for the one yearperiod and by not more than 13.8% over the two year time horizon. In the up 200basis point scenario, for a liability sensitive bank, net interest incomeshould contract in a rising rate environment. In the up 200 basis point scenario, net interest income decreases by notmore than 6.2% in the first year and decreases by not more than 5.5% over thetwo year time horizon compared to the base case.

 

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**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Our Asset/LiabilityCommittee is responsible for reviewing our liquidity requirements andmaximizing our net interest income consistent with capital requirements,liquidity, interest rate and economic outlooks, competitive factors andcustomer needs. Interest rate risk arises because the assets of the Bank andthe liabilities of the Bank have different maturities and characteristics. Inorder to measure this interest rate risk, we use a simulation process thatmeasures the impact of changing interest rates on net interest income. Thismodel is run for the Bank by an independent consulting firm. The simulationsincorporate assumptions related to expected activity in the balance sheet. Formaturing assets, assumptions are developed for the redeployment of theseassets. For maturing liabilities, assumptions are developed for the replacementof these funding sources. Assumptions are also developed for assets andliabilities that reprice during the modeled time period. These assumptions alsocover how we expect rates to change on non-maturity deposits such as interestchecking, money market checking, savings accounts as well as certificates ofdeposit. Based on inputs that include the most recent period end balance sheet,the current level of interest rates and the developed assumptions, the modelthen produces an expected level of net interest income assuming that interestrates remain unchanged. This becomes the base case. Next, the model determinesthe impact on net interest income given specified changes in interest rates.The rate simulations are performed for a two year period and include rampedrate changes of down 200 basis points and up 200 basis points. In the rampeddown rate change, the model moves rates gradually down 200 basis points overthe first year and then rates remain flat in the second year. For the up 200 basispoint scenario, rates are gradually increased by 200 basis points in the firstyear and remain flat in the second year. In both the up and down scenarios, themodel assumes a parallel shift in the yield curve. The results of thesesimulations are then compared to the base case.

 

AtMarch 31, 2008, we were liability sensitive for the entire two yearsimulation period.   Liability sensitivemeans that we had more liabilities repricing than assets. We have more of ourliabilities in non-maturity or short-term deposit products than we have infloating rate assets.  In a decreasinginterest rate environment, net interest income would grow for a liabilitysensitive bank.  In the down 200 basispoint scenario, net interest income improves by not more than 10.5% for the oneyear period and by not more than 13.8% over the two year time horizon.  In the up 200 basis point scenario, for aliability sensitive bank, net interest income should contract in a rising rateenvironment.  In the up 200 basis pointscenario, net interest income decreases by not more than 6.2% in the first yearand decreases by not more than 5.5% over the two year time horizon compared tothe base case.

 

See also “Interest RateSensitivity” in Item 2 above for a discussion of our interest rate risk.

 

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**Item 4.  Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that theinformation required to be disclosed by it in the reports that it files orsubmits under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods required by theSecurities 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.

 

As of the end of the periodcovered by this report, an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures was carried outunder the supervision and with the participation of the Company’s management,including its chief executive officer and chief financial officer. Based on andas of the date of such evaluation, these officers concluded that the Company’sdisclosure controls and procedures were effective.

 

The Company also maintains asystem of internal accounting controls that is designed to provide assurancethat assets are safeguarded and that transactions are executed in accordancewith management’s authorization and are properly recorded. This system iscontinually reviewed and is augmented by written policies and procedures, thecareful selection and training of qualified personnel and an internal auditprogram to monitor its effectiveness. There were no changes in our internalcontrol over financial reporting identified in connection with our evaluationof it that occurred during our last fiscal quarter that materially affected, orare likely to materially affect, our internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

In the ordinary course of our operations, we may become party to legalproceedings.

 

On February 28, 2008, OneBeacon MidwestCompany (“OneBeacon”) filed a complaint for declaratory judgment in the U.S.District Court for the Eastern District of Virginia.  OneBeacon provides insurance coverage for usand we have filed an insurance claim and proof of loss to recover the $3.5million attributable to the loss recorded in 2007 on the escrow arrangementbetween Liberty Growth Fund LP and AIMS Worldwide, Inc.  OneBeacon is seeking a determination of theirrights and obligations under a Financial Institution Bond issued by OneBeaconto us with respect to this claim and proof of loss.  Through this action, OneBeacon seeks a courtdeclaration that the Financial Institution Bond does not provide coverage forour claim.

 

**Item 1A. Risk Factors**

 

Our operationsare subject to many risks that could adversely affect our future financialcondition and performance and, therefore, the market value of oursecurities.  The risk factors that areapplicable to us are outlined in our Annual Report on Form 10-K for theyear ended December 31, 2007.  Theserisk factors have not changed as of the date of this report.

 

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

** **

(a)          None.

(b)         Not applicable.

(c)          For the three months ended March 31, 2008,we purchased 37,500 shares of our common stock at a total cost of$290,000.  All of these shares have beencancelled and retired.

 
| **Period**                                     | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid per  Share ($)** | ** ** | **(c) Total  Number of  Shares  Purchased as  Part of Publicly  Announced  Program** | ** ** | **(d) Maximum  Number of  Shares that May  Yet Be  Purchased  Under the  Program** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| January 1 –  January 31, 2008   |       | —                                                |       | —                                                         |       | —                                                                                                        |       | —                                                                                                           |       |
| February 1 –  February 29, 2008 |       | 17,500                                                |       | 7.99                                                           |       | 17,500                                                                                                        |       | 704,360                                                                                                          |       |
| March 1 – March 31,  2008       |       | 20,000                                                |       | 7.49                                                           |       | 20,000                                                                                                        |       | 684,360                                                                                                          |       |
| **Total**                                      | ** ** | **37,500**                                            | ** ** | **7.72**                                                       | ** ** | **37,500**                                                                                                    | ** ** | **684,360**                                                                                                      | ** ** |

 

On February 26,2007, the Board of Directors adopted and we announced a program to repurchase up to 1,000,000shares of our common stock.  The timingand amount of repurchases, if any, will depend on market conditions, shareprice, trading volume and other factors, and there is no assurance that we willpurchase shares during any period.  Notermination date was set for the buyback program. Shares may be purchased inthe open market or through privately negotiated transactions.

 

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**Item 3.  Defaults Upon Senior Securities**

 

(a)  None.

(b)  None.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

(a)  None.

(b)  Not applicable.

(c)  None.

(d)  None.

 

**Item 5.  Other Information**

 

(a)  None

(b)  None.

 

**Item 6.  Exhibits**

 
| 31.1 |   | Rule 13a-14(a) Certification  of Chief Executive Officer            |
|------|--------|-------------------------------------------------------------------------------|
| 31.2 |   | Rule 13a-14(a) Certification  of Chief Financial Officer            |
| 32.1 |   | Statement  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
| 32.2 |   | Statement  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |

 

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**SIGNATURES**

 

**Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized.**

 
| ** **                  | **CARDINAL FINANCIAL CORPORATION**                       |
|-----------------------------|----------------------------------------------------------|
| ** **                  | **(Registrant)**                                         |
| ** **                  | ** **                                               |
| **Date: May 12, 2008** | **/s/**Bernard  H. Clineburg                             |
| ** **                  | **Bernard H. Clineburg**                                 |
| ** **                  | **Chairman and Chief Executive Officer**                 |
| ** **                  | **(Principal Executive Officer)**                        |
| ** **                  | ** **                                               |
| ** **                  | ** **                                               |
| **Date: May 12, 2008** | **/s/**Mark A.  Wendel                                   |
| ** **                  | **Mark A. Wendel**                                       |
| ** **                  | **Executive Vice President and Chief Financial Officer** |
| ** **                  | **(Principal Financial Officer)**                        |
| ** **                  | ** **                                               |
| ** **                  | ** **                                               |
| **Date: May 12, 2008** | **/s/**Jennifer  L. Deacon                               |
| ** **                  | **Jennifer L. Deacon**                                   |
| ** **                  | **Senior Vice President and Controller**                 |
| ** **                  | **(Principal Accounting Officer)**                       |

 

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