** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **
| **x**                                                  | ** ** | **Quarterly Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                    |
| **For the  quarterly period ended September 30, 2006** |
| ** **                                             |
| or                                                     |
|                                                   |       |                                                                                          |
| **o**                                                  | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For the transition periodfrom                     to                     **

 

**Commission FileNumber:  0-24557**

** **

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Virginia**                     |   | ** **           |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | **54-1874630**       |
| incorporation or  organization)  |   | (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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.      Yes x   No o

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

Large acceleratedfiler o         Acceleratedfiler x         Non-accelerated filer o

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

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

**24,406,655 shares of common stock, par value $1.00per share,**

**outstanding as of November 1, 2006**

 

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**CARDINAL FINANCIAL CORPORATION**

**INDEX TO FORM 10-Q**

**PART I —FINANCIAL INFORMATION**
| Item 1. Financial  Statements:                                                                      |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                |   |   |
| Consolidated Statements of Condition                                                                |   |   |
| At September 30, 2006 (unaudited) and December 31, 2005                                             |   | 3      |
|                                                                                                |   |   |
| Consolidated Statements of Income                                                                   |   |   |
| For the three and nine months ended September 30, 2006 and 2005  (unaudited)                        |   | 4      |
|                                                                                                |   |   |
| Consolidated Statements of Comprehensive Income                                                     |   |   |
| For the three and nine months ended September 30, 2006 and 2005  (unaudited)                        |   | 5      |
|                                                                                                |   |   |
| Consolidated Statements of Changes in Shareholders’  Equity                                    |   |   |
| For the nine months ended September 30, 2006 and 2005 (unaudited)                                   |   | 6      |
|                                                                                                |   |   |
| Consolidated Statements of Cash Flows                                                               |   |   |
| For the nine months ended September 30, 2006 and 2005 (unaudited)                                   |   | 7      |
|                                                                                                |   |   |
| Notes to Consolidated Financial Statements (unaudited)                                              |   | 8      |
|                                                                                                |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 18     |
|                                                                                                |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |   | 46     |
|                                                                                                |   |   |
| Item 4. Controls and Procedures                                                                     |   | 47     |
|                                                                                                |   |   |
| **PART  II — OTHER INFORMATION**                                                               |   | 48     |
| ** **                                                                                          |   |   |
| Item  1. Legal Proceedings                                                                          |   | 48     |
| Item  1A. Risk Factors                                                                              |   | 48     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |   | 48     |
| 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

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**PART I — FINANCIALINFORMATION**

**Item 1.  Financial Statements**

**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CONDITIONSeptember 30, 2006 and December 31, 2005(In thousands, except share data)**
| ** **                                                                                                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                |       |                         | ** ** | ** **                  | ** ** |
| Cash and due from banks                                                                                                                   |       | $                            | 17,176     |                        | $          | 16,514 |   |
| Federal funds sold                                                                                                                        |       | 38,838                       |       | 20,075                      |       |
| Total cash and  cash equivalents                                                                                                          |       | 56,014                       |       | 36,589                      |       |
| Investment securities  available-for-sale                                                                                                 |       | 230,325                      |       | 178,955                     |       |
| Investment securities  held-to-maturity (market value of $99,771 and $112,025 at September 30, 2006  and December 31, 2005, respectively) |       | 102,662                      |       | 115,269                     |       |
| Total investment  securities                                                                                                              |       | 332,987                      |       | 294,224                     |       |
|                                                                                                                                      |       |                         |       |                        |       |
| Other investments                                                                                                                         |       | 6,666                        |       | 7,092                       |       |
| Loans held for sale,  net                                                                                                                 |       | 258,062                      |       | 361,668                     |       |
|                                                                                                                                      |       |                         |       |                        |       |
| Loans receivable, net  of deferred fees and costs                                                                                         |       | 806,653                      |       | 705,644                     |       |
| Allowance for loan  losses                                                                                                                |       | (9,205                       | )          | (8,301                      | )          |
| Loans  receivable, net                                                                                                                    |       | 797,448                      |       | 697,343                     |       |
|                                                                                                                                      |       |                         |       |                        |       |
| Premises and equipment,  net                                                                                                              |       | 20,446                       |       | 18,201                      |       |
| Deferred tax asset                                                                                                                        |       | 5,829                        |       | 4,399                       |       |
| Goodwill and  intangibles, net                                                                                                            |       | 17,557                       |       | 20,502                      |       |
| Bank-owned life  insurance                                                                                                                |       | 30,212                       |       | —                      |       |
| Accrued interest  receivable and other assets                                                                                             |       | 24,052                       |       | 12,269                      |       |
| Total assets                                                                                                                              |       | $                            | 1,549,273  |                        | $          | 1,452,287 |   |
|                                                                                                                                      |       |                         |       |                        |       |
| **Liabilities  and Shareholders’ Equity**                                                                                            |       |                         |       |                        |       |
| Non-interest bearing  deposits                                                                                                            |       | $                            | 120,424    |                        | $          | 114,915 |   |
| Interest bearing  deposits                                                                                                                |       | 1,056,435                    |       | 954,957                     |       |
| Other borrowed funds                                                                                                                      |       | 151,053                      |       | 155,421                     |       |
| Mortgage funding checks                                                                                                                   |       | 45,393                       |       | 41,635                      |       |
| Escrow liabilities                                                                                                                        |       | 5,631                        |       | 11,013                      |       |
| Accrued interest  payable and other liabilities                                                                                           |       | 17,647                       |       | 26,467                      |       |
| Total  liabilities                                                                                                                        |       | 1,396,583                    |       | 1,304,408                   |       |
|                                                                                                                                      |       |                         |       |                        |       |

 
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Common stock, $1  par value                      |       | **2006**   | ** ** | **2005**   |       |       |       |       |       |
| Shares authorized                                |       | 50,000,000 |       | 50,000,000 |       |       |       |       |       |
| Shares issued and outstanding                    |       | 24,397,461 |       | 24,362,685 |       | 24,397     |       | 24,363     |       |
| Additional  paid-in capital                      |       |       |       |       |       | 132,368    |       | 132,150    |       |
| Accumulated  deficit                             |       |       |       |       |       | (730       | )          | (5,269     | )          |
| Accumulated  other comprehensive loss            |       |       |       |       |       | (3,345     | )          | (3,365     | )          |
| Total shareholders’ equity                  |       |       |       |       |       | 152,690    |       | 147,879    |       |
| Total  liabilities and shareholders’ equity |       |       |       |       |       | $          | 1,549,273  |       | $          | 1,452,287 |   |
|                                                  |            |            |            |            |            |            |            |            |            |  |  |

 

See accompanying notes to consolidated financial statements.

3

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEThree and nine months ended September 30, 2006 and 2005(In thousands, except share and per share data)(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Loans receivable                                               |       | $                                                    | 13,495     |                                                | $          | 9,365 |   | $ | 37,522 |   | $ | 24,979 |   |
| Loans held for sale                                            |       | 5,193                                                |       | 6,101                                               |       | 14,746 |   | 14,117 |   |
| Federal funds sold                                             |       | 181                                                  |       | 208                                                 |       | 915 |   | 346 |   |
| Investment securities available-for-sale                       |       | 2,834                                                |       | 1,414                                               |       | 7,525 |   | 4,376 |   |
| Investment securities held-to-maturity                         |       | 1,079                                                |       | 1,197                                               |       | 3,306 |   | 3,757 |   |
| Other investments                                              |       | 84                                                   |       | 56                                                  |       | 262 |   | 183 |   |
| Total interest income                                          |       | 22,866                                               |       | 18,341                                              |       | 64,276 |   | 47,758 |   |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Interest  expense:                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Deposits                                                       |       | 10,678                                               |       | 6,782                                               |       | 27,605 |   | 16,989 |   |
| Other borrowed funds                                           |       | 1,768                                                |       | 1,339                                               |       | 4,997 |   | 3,602 |   |
| Warehouse financing                                            |       | —                                               |       | 109                                                 |       | 148 |   | 109 |   |
| Total interest expense                                         |       | 12,446                                               |       | 8,230                                               |       | 32,750 |   | 20,700 |   |
| Net interest income                                            |       | 10,420                                               |       | 10,111                                              |       | 31,526 |   | 27,058 |   |
| Provision for  loan losses                                     |       | 230                                                  |       | 500                                                 |       | 870 |   | 1,869 |   |
| Net interest income after provision for loan losses            |       | 10,190                                               |       | 9,611                                               |       | 30,656 |   | 25,189 |   |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Non-interest  income:                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Service charges on deposit accounts                            |       | 418                                                  |       | 348                                                 |       | 1,176 |   | 958 |   |
| Loan service charges                                           |       | 386                                                  |       | 771                                                 |       | 1,567 |   | 2,015 |   |
| Investment fee income                                          |       | 879                                                  |       | 497                                                 |       | 2,552 |   | 947 |   |
| Net gain on sales of loans                                     |       | 2,455                                                |       | 4,752                                               |       | 7,753 |   | 12,368 |   |
| Net realized gain on investment securities  available-for-sale |       | 66                                                   |       | —                                              |       | 66 |   | 33 |   |
| Management fee income                                          |       | 583                                                  |       | 969                                                 |       | 1,665 |   | 2,467 |   |
| Other income                                                   |       | 222                                                  |       | 12                                                  |       | 1,015 |   | 19 |   |
| Total non-interest income                                      |       | 5,009                                                |       | 7,349                                               |       | 15,794 |   | 18,807 |   |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Non-interest  expense:                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Salary and benefits                                            |       | 6,195                                                |       | 6,430                                               |       | 18,224 |   | 16,866 |   |
| Occupancy                                                      |       | 1,399                                                |       | 1,063                                               |       | 3,902 |   | 3,134 |   |
| Professional fees                                              |       | 456                                                  |       | 875                                                 |       | 1,677 |   | 1,824 |   |
| Depreciation                                                   |       | 831                                                  |       | 711                                                 |       | 2,369 |   | 2,100 |   |
| Data processing                                                |       | 362                                                  |       | 233                                                 |       | 1,002 |   | 1,227 |   |
| Telecommunications                                             |       | 316                                                  |       | 303                                                 |       | 937 |   | 913 |   |
| Amortization of intangibles                                    |       | 63                                                   |       | 143                                                 |       | 356 |   | 265 |   |
| Impairment of goowill and intangible assets                    |       | 2,927                                                |       | —                                              |       | 2,927 |   | — |   |
| Other operating expenses                                       |       | 2,496                                                |       | 2,647                                               |       | 7,531 |   | 7,293 |   |
| Total non-interest expense                                     |       | 15,045                                               |       | 12,405                                              |       | 38,925 |   | 33,622 |   |
| Net income before income taxes                                 |       | 154                                                  |       | 4,555                                               |       | 7,525 |   | 10,374 |   |
| Provision  (benefit) for income taxes                          |       | (132                                                 | )          | 1,570                                               |       | 2,254 |   | 3,485 |   |
| Net income                                                     |       | $                                                    | 286        |                                                | $          | 2,985 |   | $ | 5,271 |   | $ | 6,889 |   |
| Earnings per  common share - basic                             |       | $                                                    | 0.01       |                                                | $          | 0.12 |   | $ | 0.22 |   | $ | 0.32 |   |
| Earnings per  common share - diluted                           |       | $                                                    | 0.01       |                                                | $          | 0.12 |   | $ | 0.21 |   | $ | 0.32 |   |
| Weighted-average  common shares outstanding - basic            |       | 24,430,917                                           |       | 24,346,701                                          |       | 24,411,330 |   | 21,344,071 |   |
| Weighted-average common  shares outstanding - diluted          |       | 24,917,422                                           |       | 24,631,402                                          |       | 24,970,941 |   | 21,606,448 |   |

 

See accompanying notes to consolidated financial statements.

4

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEThree and nine months ended September 30, 2006 and 2005(In thousands)(Unaudited)**
| ** **                                                                                                                                                                                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
|                                                                                                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                                                                                                                                                                                |       | $                                                    | 286        |                                                | $          | 2,985 |   | $ | 5,271 |   | $ | 6,889 |   |
| Other  comprehensive income:                                                                                                                                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized gain (loss) on available-for-sale  investment securities:                                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
|                                                                                                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized holding gain (loss) arising during the  period, net of tax of $1,500 and $26 for the three and nine months ended  September 30, 2006 and tax benefit of $111 and $263 for the three and nine  months ended September 30, 2005. |       | 2,851                                                |       | (242                                                | )          | 97 |   | (513 | ) |
|                                                                                                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Less: reclassification adjustment for gains included  in net income, net of tax of $23 for the three and nine months ended  September 30, 2006 and $11 for the nine months ended September 30, 2005.                                      |       | 43                                                   |       | —                                              |       | 43 |   | 22 |   |
|                                                                                                                                                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized gain (loss) on derivative instruments  designated as cash flow hedges, net of tax of $137 and $31 for the three and  nine months ended September 30, 2006.                                                                     |       | 234                                                  |       | —                                              |       | (34 | ) | — |   |
| Comprehensive income                                                                                                                                                                                                                      |       | $                                                    | 3,328      |                                                | $          | 2,743 |   | $ | 5,291 |   | $ | 6,354 |   |

 

See accompanyingnotes to consolidated financial statements.

5

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYNine months ended September 30, 2006 and 2005(In thousands)(Unaudited)**
| ** **                                      | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance, December  31, 2004                     |       | 18,463             |       | $                 | 18,463     |                             | $          | 92,868                   |       | $                                           | (15,145    | )         | $          | (1,081 | ) | $ | 95,105 |   |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Stock options  exercised                        |       | 106                |       | 106               |       | 544                              |       | —                   |       | —                                      |       | 650       |       |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Public offering  shares issued                  |       | 5,175              |       | 5,175             |       | 34,592                           |       | —                   |       | —                                      |       | 39,767    |       |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Shares issued in  acquisition of Wilson/Bennett |       | 611                |       | 611               |       | 4,251                            |       | —                   |       | —                                      |       | 4,862     |       |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Change in  accumulated other comprehensive loss |       | —             |       | —            |       | —                           |       | —                   |       | (535                                        | )          | (535      | )          |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Net income                                      |       | —             |       | —            |       | —                           |       | 6,889                    |       | —                                      |       | 6,889     |       |
| Balance,  September 30, 2005                    |       | 24,355             |       | $                 | 24,355     |                             | $          | 132,255                  |       | $                                           | (8,256     | )         | $          | (1,616 | ) | $ | 146,738 |   |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Balance, December  31, 2005                     |       | 24,363             |       | $                 | 24,363     |                             | $          | 132,150                  |       | $                                           | (5,269     | )         | $          | (3,365 | ) | $ | 147,879 |   |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Stock options  exercised                        |       | 34                 |       | 34                |       | 222                              |       | —                   |       | —                                      |       | 256       |       |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Payment of  deferred compensation shares        |       | —             |       | —            |       | (4                               | )          | —                   |       | —                                      |       | (4        | )          |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Dividends on  common stock                      |       | —             |       | —            |       | —                           |       | (732                     | )          | —                                      |       | (732      | )          |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Change in  accumulated other comprehensive loss |       | —             |       | —            |       | —                           |       | —                   |       | 20                                          |       | 20        |       |
|                                            |       |               |       |              |       |                             |       |                     |       |                                        |       |      |       |
| Net income                                      |       | —             |       | —            |       | —                           |       | 5,271                    |       | —                                      |       | 5,271     |       |
| Balance, September 30,  2006                    |       | 24,397             |       | $                 | 24,397     |                             | $          | 132,368                  |       | $                                           | (730       | )         | $          | (3,345 | ) | $ | 152,690 |   |

 

See accompanying notes to consolidated financial statements.

6

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSNine Months Ended September 30, 2006 and 2005(In thousands)(Unaudited)**
| ** **                                                                                                                                                                                                                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from  operating activities:                                                                                                                                                                                                             |       |       |       |       |       |
| Net income                                                                                                                                                                                                                                         |       | $          | 5,271      |       | $          | 6,889 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities:                                                                                                                                                       |       |       |       |       |       |
| Depreciation                                                                                                                                                                                                                                       |       | 2,369      |       | 2,100      |       |
| Amortization of premiums, discounts and intangibles                                                                                                                                                                                                |       | 887        |       | 1,357      |       |
| Impairment of goodwill and intangible assets                                                                                                                                                                                                       |       | 2,927      |       | —     |       |
| Provision for loan losses                                                                                                                                                                                                                          |       | 870        |       | 1,869      |       |
| Loans held for sale originated and acquired                                                                                                                                                                                                        |       | (2,277,231 | )          | (3,902,910 | )          |
| Proceeds from the sale of loans held for sale                                                                                                                                                                                                      |       | 2,388,590  |       | 3,826,072  |       |
| Gain on sale of loans held for sale                                                                                                                                                                                                                |       | (7,753     | )          | (12,368    | )          |
| Gain on sale of investment securities  available-for-sale                                                                                                                                                                                          |       | (66        | )          | (33        | )          |
| Loss on sale of other assets                                                                                                                                                                                                                       |       | 2          |       | 13         |       |
| Increase in other assets                                                                                                                                                                                                                           |       | (13,131    | )          | (8,372     | )          |
| Increase in accrued interest payable, escrow  liabilities and other liabilities                                                                                                                                                                    |       | 7,131      |       | 15,778     |       |
| Net cash provided by (used in) operating activities                                                                                                                                                                                                |       | 109,866    |       | (69,605    | )          |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| Cash flows from  investing activities:                                                                                                                                                                                                             |       |       |       |       |       |
| Purchase of premises and equipment                                                                                                                                                                                                                 |       | (4,568     | )          | (4,169     | )          |
| Proceeds from sale, maturity and call of investment  securities available-for-sale                                                                                                                                                                 |       | —     |       | 6,000      |       |
| Proceeds from sale, maturity and call of  mortgage-backed securities available-for-sale                                                                                                                                                            |       | —     |       | 4,896      |       |
| Proceeds from sale of other investments                                                                                                                                                                                                            |       | 2,938      |       | 8,353      |       |
| Purchase of investment securities available-for-sale                                                                                                                                                                                               |       | (29,300    | )          | (42,776    | )          |
| Purchase of mortgage-backed securities  available-for-sale                                                                                                                                                                                         |       | (62,568    | )          | (12,715    | )          |
| Purchase of other investments                                                                                                                                                                                                                      |       | (2,522     | )          | (7,594     | )          |
| Purchase of Bank-owned life insurance                                                                                                                                                                                                              |       | (30,212    | )          | —     |       |
| Redemptions of investment securities  available-for-sale                                                                                                                                                                                           |       | 18,893     |       | 22,990     |       |
| Redemptions of investment securities held-to-maturity                                                                                                                                                                                              |       | 12,315     |       | 16,594     |       |
| Net cash paid in acquisition                                                                                                                                                                                                                       |       | (339       | )          | (1,379     | )          |
| Net increase in loans receivable, net of deferred  fees and costs                                                                                                                                                                                  |       | (100,975   | )          | (141,986   | )          |
| Net cash used in investing activities                                                                                                                                                                                                              |       | (196,338   | )          | (151,786   | )          |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| Cash flows from  financing activities:                                                                                                                                                                                                             |       |       |       |       |       |
| Net increase in deposits                                                                                                                                                                                                                           |       | 106,987    |       | 270,181    |       |
| Net increase (decrease) in other borrowed funds                                                                                                                                                                                                    |       | 21,757     |       | (54,318    | )          |
| Net increase (decrease) in warehouse financing                                                                                                                                                                                                     |       | —     |       | (30,240    | )          |
| Net increase in mortgage funding checks                                                                                                                                                                                                            |       | 3,758      |       | 57,891     |       |
| Proceeds from FHLB advances - long term                                                                                                                                                                                                            |       | 15,000     |       | 25,000     |       |
| Repayments of FHLB advances - long term                                                                                                                                                                                                            |       | (41,125    | )          | (7,875     | )          |
| Proceeds from public offering of common stock                                                                                                                                                                                                      |       | —     |       | 39,767     |       |
| Stock options exercised                                                                                                                                                                                                                            |       | 256        |       | 650        |       |
| Deferred compensation payments                                                                                                                                                                                                                     |       | (4         | )          | —     |       |
| Dividends on common stock                                                                                                                                                                                                                          |       | (732       | )          | —     |       |
| Net cash provided by financing activities                                                                                                                                                                                                          |       | 105,897    |       | 301,056    |       |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| Net increase in  cash and cash equivalents                                                                                                                                                                                                         |       | 19,425     |       | 79,665     |       |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| Cash and cash  equivalents at beginning of period                                                                                                                                                                                                  |       | 36,589     |       | 23,408     |       |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| Cash and cash  equivalents at end of period                                                                                                                                                                                                        |       | $          | 56,014     |       | $          | 103,073 |   |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| **Supplemental  disclosure of cash flow information:**                                                                                                                                                                                             |       |       |       |       |       |
| Cash paid during the period for interest                                                                                                                                                                                                           |       | $          | 32,942     |       | $          | 20,867 |   |
| Cash paid for income taxes                                                                                                                                                                                                                         |       | 4,963      |       | 1,436      |       |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| **Supplemental  schedule of noncash investing and financing activities:**                                                                                                                                                                          |       |       |       |       |       |
| Unsettled purchased investment securities  available-for-sale                                                                                                                                                                                      |       | $          | 1,419      |       | —     |   |
| Unsettled sold investment securities  available-for-sale                                                                                                                                                                                           |       | 10,210     |       |       |       |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| On June 9, 2005, the Company acquired all of the  issued and outstanding common stock of Wilson/Bennett Capital Management,  Inc. In conjunction with the acquisition, the following noncash changes to  our financial condition occurred:         |       |       |       |       |       |
| Fair value of non-cash assets acquired, primarily  goodwill and intangibles                                                                                                                                                                        |       |       |       | $          | 6,296      |   |
| Fair value of liabilities assumed                                                                                                                                                                                                                  |       |       |       | 33         |       |
| Common shares issued in acquisition                                                                                                                                                                                                                |       |       |       | 4,862      |       |
|                                                                                                                                                                                                                                               |       |       |       |       |       |
| On February 9, 2006, the Company acquired certain  fiduciary and other assets and assumed the liabilities of FBR National Trust  Company. In conjunction with the acquisition, the following noncash changes  to our financial condition occurred: |       |       |       |       |       |
| Fair value of non-cash assets acquired                                                                                                                                                                                                             |       | $          | 507        |       |       |   |
| Fair value of  liabilities assumed                                                                                                                                                                                                                 |       | 127        |       |       |       |

 

See accompanying notes to consolidated financial statements.

7

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006(Unaudited)**

Note 1

*Organization*

Cardinal Financial Corporation (the ”Company”) is incorporatedunder the laws of the Commonwealth of Virginia as a financial holding companywhose activities consist of investment in its wholly-owned subsidiaries. Theprincipal operating subsidiary of the Company is Cardinal Bank (the “Bank”), astate-chartered institution. On July 7, 2004, the Bank acquired George MasonMortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax,Virginia. On June 9, 2005, the Company acquired Wilson/Bennett CapitalManagement, Inc. (“Wilson/Bennett”), an asset management firm. The Companyalso owns Cardinal Wealth Services, Inc. (“CWS”), an investment servicessubsidiary. As described in Note 4, on February 9, 2006, the Bank acquiredcertain fiduciary and other assets and assumed certain liabilities of FBRNational Trust Company, formerly a subsidiary of Friedman, Billings, RamseyGroup, Inc.

*Basis ofPresentation*

In the opinion of management, the accompanying consolidated financialstatements have been prepared in accordance with the requirements of RegulationS-X, Article 10. Accordingly, they do not include all of the informationand footnotes required by U.S. generally accepted accounting principles forcomplete financial statements. However, all adjustments that are, in theopinion of management, necessary for a fair presentation have been included.The results of operations for the three and nine months ended September 30,2006 are not necessarily indicative of the results to be expected for the fullyear ending December 31, 2006. The unaudited interim financial statementsshould be read in conjunction with the audited financial statements and notesto financial statements that are included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005 (the “2005Form 10-K”).

Note 2

*Summary of Significant Accounting Policies*

*Trust Services Revenue*

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

Trust services revenue isrecognized in the period earned in accordance with contractual percentage ofassets under management or custody and is recognized in the consolidatedstatements of income as a component of investment fee income. Revenue is generallydetermined based upon the fair value of assets under management or custody atthe end of the period.

8

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*BankOwned Life Insurance*

Bank owned life insurance is a bank-eligible asset designed to recoverthe costs of providing pre- and post-retirement benefits and to finance generalemployee benefit expenses.  Under an insurancepolicy, executives or other key individuals are the insureds and the Company isthe owner and beneficiary of the policy. As such, the insured has no claim to the insurance policy, the policy’scash value, or a portion of the policy’s death proceeds.  The Company accounts for its bank owned lifeinsurance under Financial Accounting Standards Board Technical Bulletin 85-4, *Accounting for Financial Purchases of Life Insurance. *The cash surrender value of thepolicy is recorded in other assets.  Theincrease in the cash surrender value over time is recorded as othernon-interest income.

Note 3

*Stock-Based Compensation*

On January 1, 2006, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 123R, *Share-BasedPayment*. * *Thisstatement requires that companies recognize in the income statement thegrant-date fair value of stock options and other equity-based compensation. Thestatement also requires stock awards to be classified as either an equity awardor a liability award. Equity classified awards are valued as of the grant dateusing either an observable market price or a valuation methodology. Liabilityclassified awards are valued at fair value at each reporting date. All of theCompany’s stock options are classified as equity awards.

The Company has adopted SFAS No. 123R using the modifiedprospective application method, which requires, among other things, recognitionof compensation costs for all awards outstanding at January 1, 2006 forwhich the requisite service had not been rendered. Total compensation costcharged against income as a result of the adoption of SFAS No. 123R forthe three and nine months ended September 30, 2006 was $103,000 and $250,000,respectively. The total income tax benefit recognized in the income statementfor share-based compensation arrangements was $36,000 and $88,000 for the threeand nine months ended September 30, 2006, respectively.

The Company estimates that this new standard will result in an increasein pretax expense of approximately $359,000 in 2006 compared to none in 2005based on the current number of unvested stock options outstanding. Additionalexpense would be recorded for any future stock option grants, and expense wouldbe reduced by estimated option forfeitures.

At September 30, 2006, the Company had two stock-based employeecompensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002Equity Compensation Plan (the “Equity Plan”).

In 1998, the Company adopted the Option Plan pursuant to which theCompany may grant stock options for up to 625,000 shares of the Company’scommon stock to employees and members of the Company’s and its subsidiaries’boards of directors. There are 17,044 shares of the Company’s common stockavailable for future grants in the Option Plan as of September 30, 2006.

In 2002, the Company adopted the Equity Plan. The Equity Planauthorizes the granting of options, which may be incentive stock options or non-qualifiedstock options, stock appreciation rights, restricted stock awards, phantomstock awards or performance share awards to directors, eligible officers andkey employees of the Company. In 2006, the shareholders approved an amendmentto the Equity Plan to increase the number of shares of common stock reservedfor issuance under it from 1,970,000 to 2,420,000.  There are 233,133 shares of the Company’scommon stock available for future grants and awards in the Equity Plan as ofSeptember 30, 2006.

9

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

The following table illustrates the effect on net income and earningsper share of common stock as if the Company had applied the fair valuerecognition provisions of SFAS No. 123R to stock-based employeecompensation for the periods indicated:

 
| **(In thousands, except per share data)**                                                            | ** ** | **Three Months Ended  September 30,  2005** | ** ** | **Nine Months Ended  September 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net income                                                                                                                    |       | $                                                          | 2,985      |                                                      | $          | 6,889 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method for all awards, net of tax |       | (215                                                       | )          | (3,987                                                    | )          |
| Pro forma net  income                                                                                                         |       | $                                                          | 2,770      |                                                      | $          | 2,902 |   |
|                                                                                                                          |       |                                                       |       |                                                      |       |
| Earnings per  share:                                                                                                          |       |                                                       |       |                                                      |       |
| Basic - as reported                                                                                                           |       | $                                                          | 0.12       |                                                      | $          | 0.32 |   |
| Basic - pro forma                                                                                                             |       | 0.11                                                       |       | 0.14                                                      |       |
| Diluted - as reported                                                                                                         |       | 0.12                                                       |       | 0.32                                                      |       |
| Diluted - pro  forma                                                                                                          |       | 0.11                                                       |       | 0.13                                                      |       |

 

Options to purchase 44,000 and 963,911 shares of common stock weregranted during the three and nine months ended September 30, 2005,respectively. Of those grants, 44,000 and 955,911 immediately vested on thegrant date for the three and nine months ended September 30, 2005,respectively. Total pro forma stock-based employee compensation expense for thethree and nine months ended September 30, 2005 reflects the immediate vestingattributes of these stock option grants.

The weighted average per share fair values of stock option grants madeduring the three months ended September 30, 2006 and 2005 were $5.38 and $5.92,respectively. The weighted average per share fair values of option grants madeduring the nine months ended September 30, 2006 and 2005 were $5.71 and $5.97,respectively. The fair values of the options granted for these periods wereestimated as of the grant date using the Black-Scholes option-pricing modelbased on the following weighted average assumptions:
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Estimated option  life   |       | 6.5 years                                            |       | 10 years                                            |       | 6.5 years |   | 10 years |   |
| Risk free  interest rate |       | 4.69 — 5.02%                                    |       | 4.21%                                               |       | 4.44 — 5.03% |   | 4.25% |   |
| Expected  volatility     |       | 43.20%                                               |       | 43.11%                                              |       | 43.20% |   | 43.11% |   |
| Expected dividend yield  |       | 0.50%                                                |       | 0.00%                                               |       | 0.50% |   | 0.00% |   |

 

10

----

 

Expected volatility is based upon the average annual historicalvolatility of the Company’s common stock. The estimated option life is derivedfrom the “simplified method” formula as described in Staff Accounting Bulletin107 (“SAB 107”). The risk free interest rate is based upon the five-year U.S.Treasury note rate in effect at the time of grant.  The expected dividendyield is based upon implied and historical dividend declarations.

Stock option activity during the nine months ended September 30, 2006is summarized as follows:

** **
| ** **                                 | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining   Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at  December 31, 2005          |       | 2,269,221                  |       | $                                      | 8.29       |                                                      |       |                                    |       |   |
| Granted                                    |       | 279,500                    |       | 11.86                                  |       |                                                      |       |                                    |       |
| Exercised                                  |       | 34,536                     |       | 7.36                                   |       |                                                      |       |                                    |       |
| Forfeited                                  |       | 20,340                     |       | 9.47                                   |       |                                                      |       |                                    |       |
| Outstanding at  September 30, 2006         |       | 2,493,845                  |       | $                                      | 8.69       |                                                      | 7.88       |                                    | $          | 5,660 |   |
| Options exercisable at  September 30, 2006 |       | 2,087,189                  |       | $                                      | 8.46       |                                                      | 7.74       |                                    | $          | 5,220 |   |

 

Total intrinsic value of options exercised during the three and ninemonths ended September 30, 2006 was $5,000 and $124,000 respectively.

A summary of the status of the Company’s non-vestedstock options and changes during the nine months ended September 30, 2006 is asfollows:

|                                | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Balance at  December 31, 2005  |       | 240,981                    |       | $                                                       | 2.10       |   |
| Granted                        |       | 279,500                    |       | 5.71                                                    |       |
| Vested                         |       | (107,635                   | )          | 2.01                                                    |       |
| Forfeited                      |       | (6,190                     | )          | 3.21                                                    |       |
| Balance at September  30, 2006 |       | 406,656                    |       | $                                                       | 4.59       |   |

 

At September 30, 2006, there was $1.7 million of total unrecognizedcompensation cost related to non-vested share-based compensation arrangementsgranted under the plans. The cost is expected to be recognized over a weightedaverage period of 3.9 years. The total fair value of shares that vested duringthe three and nine months ended September 30, 2006 was $10,000 and $368,000,respectively.

11

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On October 19, 2005, the Company’s board of directors authorized thatany outstanding, unvested options that were or became “underwater” (i.e., theirper share exercise price is greater than the market price) on or beforeDecember 31, 2005 be amended to become fully vested. This modificationresulted in the immediate vesting of 54,000 stock options that were held byemployees of the Company. The options that vested had exercise prices rangingfrom $9.58 to $11.15. On October 19, 2005, the market value of the Company’scommon stock was $9.81. This modification did not result in the recognition ofexpense in 2005 because the options had no intrinsic value at the grant date oron the date of modification. Vesting of these options was accelerated toeliminate the need to recognize the remaining fair value compensation expenseassociated with these options following the adoption of SFAS No. 123R. Theamount of compensation expense related to these options that would have beenrecognized in the financial statements after the Company’s implementation ofSFAS No. 123R, assuming no forfeitures, was $127,000.

#### Note 4

*Acquisitions*

On February 9, 2006, the Bank acquired certain fiduciary and otherassets and assumed certain liabilities of FBR National Trust Company, formerlya subsidiary of Friedman, Billings, Ramsey Group, Inc. The Bank acts astrustee or custodian for assets under management in excess of $5 billion as aresult of this transaction. This transaction diversifies the Bank’s sources ofnon-interest income and allows it to provide additional services to itscustomers.

This transaction was accounted for as a purchase and the acquiredassets and assumed liabilities were recorded at their fair values as of thepurchase date. This acquisition did not have a significant impact on operatingresults for the three and nine months ended September 30, 2006 and is notexpected to have a material impact on the Company’s financial condition oroperating results in 2006.

The operating results of the trust division are included in the Company’sconsolidated operating results and its Wealth Management and Trust Servicessegment information since the date of acquisition.

The fair value of the net assets acquired was $380,000.  The acquisition resulted in the recognitionof an intangible asset for purchased customer relationships of $161,000, whichis being amortized on a straight-line basis over nine years, and in therecognition of goodwill of $178,000. The Company used the assistance of anindependent valuation consultant to determine the value assigned toidentifiable intangible assets. Goodwill will not be amortized but will bereviewed for impairment when evidence of impairment exists or, at a minimum, onan annual basis.

Note 5

# *Segment Information*

The Company operates in three business segments: Commercial Banking,Mortgage Banking, and Wealth Management and Trust Services.

The Commercial Banking segment includes both commercial and consumerlending and provides customers with such products as commercial loans, realestate loans, business financing and consumer loans. In addition, this segmentalso provides customers with several choices of deposit products includingdemand deposit accounts, savings accounts and certificates of deposit. TheMortgage Banking segment engages primarily in the origination and acquisitionof residential mortgages for sale into the secondary market on a best effortsbasis. The Wealth Management and Trust Services segment provides investment andfinancial advisory services to businesses and individuals, including financialplanning, retirement/estate planning, trust, estates, custody, investmentmanagement, escrows, and retirement plans.

Wilson/Bennett is included in the Wealth Management and Trust Servicessegment since the date of acquisition, June 9, 2005. Results related tothe assets acquired, and liabilities assumed, from FBR National Trust Companyare reflected in the Wealth Management and Trust Services segment since thedate of their acquisition and assumption, February 9, 2006.

12

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Information about the reportable segments and reconciliation of thisinformation to the consolidated financial statements at and for the three andnine months ended September 30, 2006 and 2005, is as follows:

**Cardinal FinancialCorporation and SubsidiariesSegment Reporting at and for the Three and Nine Months ended September 30, 2006and 2005(Dollars in thousands)(Unaudited)**

**At and for the Three Months Ended September 30, 2006:**
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net interest  income        |       | $                       | 9,565      |                  | $          | 1,126                                            |       | $         | —     |                          | $          | (271             | )          | $ | — |   | $ | 10,420 |   |
| Provision for  loan losses  |       | 230                     |       | —                |       | —                                           |       | —    |       | —                        |       | 230              |       |
| Non-interest  income        |       | 776                     |       | 3,341                 |       | 879                                              |       | 13        |       | —                        |       | 5,009            |       |
| Non-interest  expense       |       | 6,972                   |       | 3,615                 |       | 3,912                                            |       | 546       |       | —                        |       | 15,045           |       |
| Provision for  income taxes |       | 899                     |       | 305                   |       | (1,083                                           | )          | (253      | )          | —                        |       | (132             | )          |
| Net income  (loss)          |       | $                       | 2,240      |                  | $          | 547                                              |       | $         | (1,950     | )                             | $          | (551             | )          | $ | — |   | $ | 286 |   |
|                        |       |                    |       |                  |       |                                             |       |      |       |                          |       |             |       |
| Total Assets                |       | $                       | 1,481,715  |                  | $          | 273,126                                          |       | $         | 5,567      |                          | $          | 160,511          |       | $ | (371,646 | ) | $ | 1,549,273 |   |
| Average Assets              |       | $                       | 1,470,211  |                  | $          | 276,383                                          |       | $         | 7,602      |                          | $          | 158,898          |       | $ | (424,252 | ) | $ | 1,488,842 |   |

 

**At and forthe Three Months Ended September 30, 2005:**

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net interest  income        |       | $                       | 8,544      |                  | $          | 1,780                                            |       | $         | —     |                          | $          | (213             | )          | $ | — |   | $ | 10,111 |   |
| Provision for  loan losses  |       | 500                     |       | —                |       | —                                           |       | —    |       | —                        |       | 500              |       |
| Non-interest  income        |       | 479                     |       | 6,362                 |       | 497                                              |       | 11        |       | —                        |       | 7,349            |       |
| Non-interest  expense       |       | 6,542                   |       | 4,845                 |       | 454                                              |       | 564       |       | —                        |       | 12,405           |       |
| Provision for  income taxes |       | 659                     |       | 1,153                 |       | 3                                                |       | (245      | )          | —                        |       | 1,570            |       |
| Net income  (loss)          |       | $                       | 1,322      |                  | $          | 2,144                                            |       | $         | 40         |                          | $          | (521             | )          | $ | — |   | $ | 2,985 |   |
|                        |       |                    |       |                  |       |                                             |       |      |       |                          |       |             |       |
| Total Assets                |       | $                       | 1,409,575  |                  | $          | 467,261                                          |       | $         | 7,330      |                          | $          | 166,980          |       | $ | (511,520 | ) | $ | 1,539,626 |   |
| Average Assets              |       | $                       | 1,342,346  |                  | $          | 480,250                                          |       | $         | 7,330      |                          | $          | 165,675          |       | $ | (542,301 | ) | $ | 1,453,300 |   |

 

**At and forthe Nine Months Ended September 30, 2006:**

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage   Banking** | ** ** | **Wealth  Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|--------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net interest  income        |       | $                       | 28,921     |                        | $          | 3,405                                            |       | $         | —     |                          | $          | (800             | )          | $ | — |   | $ | 31,526 |   |
| Provision for  loan losses  |       | 870                     |       | —                      |       | —                                           |       | —    |       | —                        |       | 870              |       |
| Non-interest  income        |       | 2,589                   |       | 10,618                      |       | 2,553                                            |       | 34        |       | —                        |       | 15,794           |       |
| Non-interest  expense       |       | 20,077                  |       | 11,604                      |       | 5,543                                            |       | 1,701     |       | —                        |       | 38,925           |       |
| Provision for  income taxes |       | 3,312                   |       | 853                         |       | (1,048                                           | )          | (863      | )          | —                        |       | 2,254            |       |
| Net income (loss)           |       | $                       | 7,251      |                        | $          | 1,566                                            |       | $         | (1,942     | )                             | $          | (1,604           | )          | $ | — |   | $ | 5,271 |   |
|                        |       |                    |       |                        |       |                                             |       |      |       |                          |       |             |       |
| Total Assets                |       | $                       | 1,481,715  |                        | $          | 273,126                                          |       | $         | 5,567      |                          | $          | 160,511          |       | $ | (371,646 | ) | $ | 1,549,273 |   |
| Average Assets              |       | $                       | 1,417,778  |                        | $          | 268,592                                          |       | $         | 7,397      |                          | $          | 159,849          |       | $ | (421,208 | ) | $ | 1,432,408 |   |
|                        |       |                    |       |                        |       |                                             |       |      |       |                          |       |             |       |

 

**At and forthe Nine Months Ended September 30, 2005:**

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage   Banking** | ** ** | **Wealth  Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|--------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net interest  income        |       | $                       | 22,980     |                        | $          | 4,723                                            |       | $         | —     |                          | $          | (645             | )          | $ | — |   | $ | 27,058 |   |
| Provision for  loan losses  |       | 1,869                   |       | —                      |       | —                                           |       | —    |       | —                        |       | 1,869            |       |
| Non-interest  income        |       | 1,325                   |       | 16,512                      |       | 946                                              |       | 24        |       | —                        |       | 18,807           |       |
| Non-interest  expense       |       | 18,008                  |       | 13,223                      |       | 999                                              |       | 1,392     |       | —                        |       | 33,622           |       |
| Provision for  income taxes |       | 1,490                   |       | 2,691                       |       | (35                                              | )          | (661      | )          | —                        |       | 3,485            |       |
| Net income (loss)           |       | $                       | 2,938      |                        | $          | 5,321                                            |       | $         | (18        | )                             | $          | (1,352           | )          | $ | — |   | $ | 6,889 |   |
|                        |       |                    |       |                        |       |                                             |       |      |       |                          |       |             |       |
| Total Assets                |       | $                       | 1,409,575  |                        | $          | 467,261                                          |       | $         | 7,330      |                          | $          | 166,980          |       | $ | (511,520 | ) | $ | 1,539,626 |   |
| Average Assets              |       | $                       | 1,226,214  |                        | $          | 380,490                                          |       | $         | 3,454      |                          | $          | 140,497          |       | $ | (450,884 | ) | $ | 1,299,771 |   |

 

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At September 30, 2006, the Company did not have any operating segmentsother than those reported. Parent company financial information is included inthe “Other” category and represents an overhead function rather than anoperating segment. The parent company’s most significant assets are its netinvestments in its subsidiaries. The parent company’s net interest income iscomprised of interest income from short-term investments and interest expenseon trust preferred securities. The parent company’s non-interest expense isprimarily non-allocable executive salaries and professional services related tothe Company’s regulatory requirements.

#### Note 6

##### *Earnings Per Share*

The following is the calculation of basic and diluted earnings pershare for the three and nine months ended September 30, 2006 and 2005. Stockoptions outstanding at September 30, 2006 and 2005 were ­2,493,845 and2,049,817, respectively. Stock options issued that were not included in thecalculation of diluted earnings per share because the exercise prices weregreater than the average market price were 2,971 and 27,363 for the threemonths ended September 30, 2006 and 2005, respectively. Stock options issuedthat were not included in the calculation of diluted earnings per share becausethe exercise prices were greater than the average market price were none and28,357 for the nine months ended September 30, 2006 and 2005, respectively. 
| ** **                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except share and per share data)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  available to common shareholders                                           |       | $                                                    | 286        |                                                | $          | 2,985 |   | $ | 5,271 |   | $ | 6,889 |   |
| Weighted average  common shares - basic                                                |       | 24,430,917                                           |       | 24,346,701                                          |       | 24,411,330 |   | 21,344,071 |   |
| Weighted average  common shares - diluted                                              |       | 24,917,422                                           |       | 24,631,402                                          |       | 24,970,941 |   | 21,606,448 |   |
| Earnings per  common share - basic                                                     |       | $                                                    | 0.01       |                                                | $          | 0.12 |   | $ | 0.22 |   | $ | 0.32 |   |
| Earnings per common  share - diluted                                                   |       | $                                                    | 0.01       |                                                | $          | 0.12 |   | $ | 0.21 |   | $ | 0.32 |   |

 

#### Note 7

##### *Derivatives and Hedging Activities*

The Company is a party to forward loan sales contracts, which areutilized to mitigate exposure to fluctuations in interest rates related to loancommitments and closed mortgage loans that are held for sale.

Beginning on October 1, 2005, the Company designated thesederivatives as cash flow hedges in accordance with 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.

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At September 30, 2006, accumulated other comprehensive income includedan after-tax unrealized loss of $322,000 related to forward loan salecontracts. Loans held for sale are generally sold within sixty days of closingand, therefore, substantially all of the amount recorded in accumulated othercomprehensive income at September 30, 2006 which is related to the Company’scash flow hedges will be recognized in earnings during the fourth quarter of2006. For the three and nine months ended September 30, 2006, the hedgeineffectiveness recorded through earnings was not significant.

At September 30, 2006, the derivative asset was $1.6 million and thederivative liability was $2.0 million. The Company had $84.6 million in loancommitments and $84.6 million in associated forward loan sales. TheCompany also had $208.6 million in forward loan sales contracts hedging themajority of its loans held for sale.

#### Note 8

*Goodwill and Other Intangibles*

On June 29, 2006, the Company entered into anAmendment to the Employment Agreement (the “Amendment”) with John W. Fisher,president and chief executive officer of Wilson/Bennett. The Amendment amendedthe Employment Agreement dated as of June 8, 2005 between the Company and Mr.Fisher.  As provided in the Amendment,Mr. Fisher retired from the business on September 30, 2006, and has agreed toassist the Company in a consulting and business development function, asrequested by the Company through April 30, 2007, and honor his non-competeagreement with the Company, which will end on September 30, 2007.

During the third quarter and as Mr. Fishertransitioned out of his involvement with Wilson/Bennett, Mr. Fisher’s announcedretirement had a negative impact on the operations, customer base and assetsunder management with Wilson/Bennett.  Inparticular, several significant clients unexpectedly either terminated oradvised the Company that they intended to terminate their asset managementcontracts with Wilson/Bennett during the third quarter of 2006.  In addition and as a result of this customerloss, the value of purchased customer relationships and Mr. Fisher’semployment and noncompete agreement decreased. Accordingly, the Company updated the analysis of the fair value of thegoodwill and intangible assets associated with the acquisition ofWilson/Bennett. The analysis was prepared using valuation techniques includingthe discounted cash flow approach. The updated analysis indicated that goodwilland intangibles related to Wilson/Bennett, a division of Wealth Management andTrust Services segment, were impaired. As a result, the Company recordednon-cash impairment charges of $2.0 million associated with Mr. Fisher’semployment agreement and the customer relationship intangible assets recognizedas part of the Wilson/Bennett acquisition. The Company also recorded anadditional $960,000 of impairment charges associated with the goodwill ofWilson/Bennett.

Information concerning total amortizable other intangible assets atSeptember 30, 2006 is as follows:

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| ** **                        | ** ** | **Mortgage Banking**   | ** ** | **Wealth Management   and Trust Services** | ** ** | **Total**                   | ** ** |
|-----------------------------------|------------|-----------------------------|------------|----------------------------------------------------------------|------------|-----------------------------|------------|
| **(In thousands)**           | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**                                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at  December 31, 2005     |       | $                           | 1,781      |                                                           | $          | 247                         |       | $ | 2,602 |   | $ | 211 |   | $ | 4,383 |   | 458 |   |
| 2006 activity:                    |       |                        |       |                                                           |       |                        |       |   |   |   |   |   |   |
| Customer relationship intangibles |       | —                      |       | 149                                                            |       | (1,294                      | )          | 109 |   | (1,294 | ) | 258 |   |
| Employment/non-compete agreement  |       | —                      |       | —                                                         |       | (513                        | )          | 87 |   | (513 | ) | 87 |   |
| Trade name                        |       | —                      |       | —                                                         |       | —                      |       | 11 |   | — |   | 11 |   |
| Balance at September  30, 2006    |       | $                           | 1,781      |                                                           | $          | 396                         |       | $ | 795 |   | $ | 418 |   | $ | 2,576 |   | $ | 814 |   |
|                                   |            |                             |            |                                                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The decrease inthe gross carrying amount of the customer relationship intangibles of $1.3million includes the impairment charge of $1.5 million related toWilson/Bennett and acquired customer relationships related to the trustdivision acquisition of $161,000.  Thedecrease in the gross carrying amount of the employment/non-compete agreementof $513,000 is the impairment charge related to Wilson/Bennett. 

The aggregate amortization expense for the three months ended September30, 2006 and 2005 was $63,000 and $143,000, respectively.  The aggregate amortization expense for thenine months ended September 30, 2006 and 2005 was $356,000 and $265,000,respectively.

The estimated amortization expense for the next five years, which hasbeen updated as a result of the impairment charges recorded in the WealthManagement and Trust Services segment, is as follows:

|                                 | ** ** | **(In thousands)** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| 2006 (October —  December) |       | $                       | 63         |   |
| 2007                            |       | 254                     |       |
| 2008                            |       | 245                     |       |
| 2009                            |       | 238                     |       |
| 2010                            |       | 238                     |       |
| 2011                            |       | 238                     |       |
|                                 |            |                         |            |  |

 

The changes in the carrying amount of goodwill for year to dateSeptember 30, 2006 were as follows:

 
| **(In thousands)**        | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth Management   and Trust Services** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------------------------------------------------|------------|-----------|------------|
| Balance at  December 31, 2005  |       | $                       | 22         |                  | $          | 12,941                                                         |       | $         | 3,614      |   | $ | 16,577 |   |
| 2006 activity:                 |       |                    |       |                  |       |                                                           |       |      |       |
| Trust division acquisition     |       | —                  |       | —                |       | 178                                                            |       | 178       |       |
| Goodwill impairment charge     |       | —                  |       | —                |       | (960                                                           | )          | (960      | )          |
| Balance at  September 30, 2006 |       | $                       | 22         |                  | $          | 12,941                                                         |       | $         | 2,832      |   | $ | 15,795 |   |

 

Note 9

*Commitments and Contingencies*

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

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

At September 30, 2006, commitments to extend credit were $341.7 millionand standby letters of credit were $7.3 million.

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in the agreement.Commitments generally have expiration dates or other termination clauses andmay require payment of a fee. Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future funding requirements. The Bank evaluates eachcustomer’s credit worthiness on a case-by-case basis. The amount of collateralobtained is based on management’s credit evaluation of the counterparty.Collateral held varies but may include accounts receivable, inventory, propertyand equipment, and income-producing commercial properties.

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

Standby letters of credit are conditional commitments the Bank issuesto guarantee the performance of a customer to a third party. Those guaranteesare primarily issued to support public and private borrowing arrangements,including commercial paper, bond financing, and similar transactions. Thecredit risk involved in issuing standby letters of credit is essentially thesame as that involved in extending loan facilities to customers. The Bank holdscertificates of deposit, deposit accounts, and real estate as collateralsupporting those commitments when collateral is deemed necessary.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

The following presents management’s discussion andanalysis of our consolidated financial condition at September 30, 2006 andDecember 31, 2005 and the unaudited results of our operations for thethree and nine months ended September 30, 2006 and 2005. This discussion shouldbe read in conjunction with our unaudited consolidated financial statements andthe notes thereto appearing elsewhere in this report, the audited consolidatedfinancial statements and the notes to consolidated financial statementsincluded in our Annual Report on Form 10-K for the year endedDecember 31, 2005.

**CautionAbout Forward-Looking Statements**

We make forward-looking statements in this Form 10-Q that aresubject to risks and uncertainties. These forward looking statements include statements regarding ourprofitability, 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,” orother similar words or terms are intended to identify forward-lookingstatements.

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

·                  theability to successfully manage our growth or implement our growth strategies ifwe are unable to identify attractive markets, locations or opportunities toexpand in the future;

·                  changesin interest rates and the successful management of interest rate risk;

·                  risksinherent in making loans such as repayment risks and fluctuating collateralvalues;

·                  maintainingcost controls and asset quality as we open or acquire new branches;

·                  maintainingcapital levels adequate to support our growth;

·                  relianceon our management team, including the ability to attract and retain keypersonnel;

·                  competitionwith other banks and financial institutions, and companies outside of thebanking industry, including those companies that have substantially greateraccess to capital and other resources;

·                  changesin general economic and business conditions in our market area;

·                  risks and uncertainties related to futuretrust operations, including our ability to successfully integrate trustoperations into the organization;

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

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

·                  problemswith technology utilized by us;

·                  changingtrends in customer profiles and behavior; and

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

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

In addition, this section should be read in conjunction withthe description of our “Risk Factors” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2005.

**Overview**

We are a locally managed financial holding companyheadquartered in Tysons Corner, Virginia, committed to providing superiorcustomer service, a diversified mix of financial products and services, andconvenient banking to our retail and business customers. We own Cardinal Bank(the “Bank”), a Virginia state-chartered community bank, Cardinal WealthServices, Inc. (“CWS”), an investment services subsidiary, and Wilson/BennettCapital Management, Inc. (“Wilson/Bennett”), an asset management firmacquired in June 2005. Through these three subsidiaries and George MasonMortgage, LLC (“George Mason”), a mortgage banking subsidiary of the Bank, weoffer a wide range of traditional banking products and services to both ourcommercial and retail customers. Our commercial relationship managers focus onattracting small and medium-sized businesses as well as government contractors,commercial real estate developers and builders and professionals, such asphysicians, accountants and attorneys. We have 23 branch office locations andseven mortgage banking office locations and provide competitive products andservices. We complement our core banking operations by offering a full range ofinvestment products and services to our customers through our third-partybrokerage relationship with Raymond James Financial Services, Inc. andasset management services through Wilson/Bennett.

On February 9, 2006, we acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, RamseyGroup, Inc. Our new trust division acts as trustee or custodian for assetsin excess of $5 billion. Services provided by this division include trust,estates, custody, investment management, escrows, and retirement plans. Thisacquisition did not have a significant impact on operating results for thethree and nine months ended September 30, 2006 and is not expected to have amaterial impact on our financial condition or operating results in 2006. Thetrust division is included, along with CWS and Wilson/Bennett, in the WealthManagement and Trust Services segment. In prior periods, this segment wascalled Investment Services or Trust and Investment Services.

On June 9, 2005, we acquired Wilson/Bennett fora total consideration of $6.5 million, which consisted of a payment of $1.6million in cash and the issuance of 611,111 shares of our common stock, whichwe valued at $4.9 million. Wilson/Bennett’s assets and liabilities wererecorded at fair value as of the purchase date. This transaction resulted inthe recognition of $3.6 million of goodwill and $2.6 million of otherintangible assets. Wilson/Bennett uses a value-oriented approach that focuseson large capitalization stocks. Wilson/Bennett’s primary source of revenue ismanagement fees earned on the assets it manages for its customers. Thesemanagement fees are generally based upon the market value of managed andcustodial assets and, accordingly, revenues from Wilson/Bennett will be,assuming a consistent customer base, more when appropriate indices, such as theS&P 500, are higher and lower when such indices are depressed.

In July 2006, we announcedthe retirement of John W. Fisher, Wilson/Bennett’s founder, Chief ExecutiveOfficer and President from Wilson/Bennett and our board of directors as ofSeptember 30, 2006.  During the thirdquarter and as Mr. Fisher transitioned out of his involvement with Wilson/Bennett,several significant clients unexpectedly either terminated or 

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advised us that they intended to terminate theirasset management contracts and this triggered an evaluation of our goodwill andintangible assets.  Accordingly, weupdated our analysis of the fair value of the goodwill and intangible assetsassociated with our acquisition of Wilson/Bennett.  The updated analysis indicated an impairmentto the goodwill and certain customer relationships and Mr. Fisher’s employmentagreement.  We recorded a non-cash impairmentloss totaling $2.9 million pretax, and $1.9 million after tax, during thequarter ended September 30, 2006.

Since Mr. Fisher’s retirement announcement,Wilson/Bennett has added experienced portfolio managers and professional salesstaff to assist with cross-sell opportunities with our other divisions.  We will continue to monitor the operations ofWilson/Bennett, its customer base and managed and custodial assets and anyassociated impact on goodwill and the remaining intangible assets in the future.

Net interest income is our primary source ofrevenue. We define revenue as net interest income plus non-interest income. Asdiscussed further in the interest rate sensitivity section, we manage ourbalance sheet and interest rate risk exposure to maximize, and concurrentlystabilize, net interest income. We do this by monitoring our liquidity positionand the spread between the interest rates earned on interest-earning assets andthe interest rates paid on interest-bearing liabilities. We attempt to minimizeour exposure to interest rate risk, but are unable to eliminate it entirely. In addition to management of interest rate risk, we analyze our loanportfolio for exposure to credit risk. Loan defaults and foreclosures areinherent risks in the banking industry and we attempt to limit our exposure tothese risks by carefully underwriting and then monitoring our extensions ofcredit. In addition to net interest income, non-interest income is an importantsource of revenue for us and includes, among other things, service charges ondeposits and loans, investment fee income, which includes trust revenues, netgains on sales of investment securities available-for-sale, gains on sales ofmortgage loans, and management fee income.

**CriticalAccounting Policies**

*General*

U. S. generally accepted accounting principles are complex and requiremanagement to apply significant judgment to various accounting, reporting, anddisclosure matters.  Management must useassumptions, judgments and estimates when applying these principles whereprecise measurements are not possible or practical.  These policies are critical because they arehighly 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 policies we view as critical are those relating tojudgments, assumptions and estimates regarding the determination of theallowance for loan losses, accounting for economic hedging activities,accounting for business combinations and impairment testing of goodwill,accounting for the impairment of intangible assets, and the valuation ofdeferred tax assets.

#### *Allowance for LoanLosses*

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

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**trendsand specific conditions of individual borrowers.  Unusual and infrequently occurring events,such as hurricanes and other weather-related disasters, may impact ourassessment of possible credit losses.  Asa part of our analysis, we use comparative peer group data and qualitativefactors such as levels of and trends in delinquencies and nonaccrual loans,national and local economic trends and conditions and concentrations of loansexhibiting similar risk profiles to support our estimates.**

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

Credit losses are an inherent part of our businessand, although we believe the methodologies for determining the allowance forloan losses and the current level of the allowance are adequate, it is possiblethat there may be unidentified losses in the portfolio at any particular timethat may become evident at a future date pursuant to additional internalanalysis or regulatory comment. Additional provisions for such losses, ifnecessary, would be recorded in the Commercial Banking or Mortgage Bankingsegments, as appropriate, and would negatively impact earnings.

*Accounting for Economic Hedging Activities*

We account for our derivatives and hedgingactivities in accordance Statement of Financial Accounting Standards (“SFAS”)No. 133, *Accounting for Derivative Instruments andCertain Hedging Activities,* as amended, which requires that allderivative instruments be recorded on the statement of condition at their fairvalues*.*We evaluate the effectiveness of these transactions at inception and onan ongoing basis. Ineffectiveness is recorded through earnings. We do not enterinto derivative transactions for speculative purposes.

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

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

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net impact of changes of these valuations on net income during the loancommitment period is generally inconsequential. At the closing of the loan, theloan commitment derivative expires and we record a loan held for sale and continueto be obligated under the same forward loan sales contract. Loans held for saleare accounted for at the lower of cost or market in accordance with SFASNo. 65, *Accounting for Certain MortgageBanking Activities.*Prior to October 1, 2005, the changes invalue of the forward loan sales contracts from the date the loan closed to thedate it was sold to an investor were marked to market through earnings.

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

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

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

*Accounting for Business Combinations and ImpairmentTesting of Goodwill*

We account for acquisitions of other businesses inaccordance with SFAS No. 141, *BusinessCombinations*. This statement mandates the use of purchase accountingand, accordingly, assets and liabilities, including previously unrecordedassets and liabilities, are recorded at fair values as of the acquisition date.We utilize a variety of valuation methods to estimate fair value of acquiredassets and liabilities. These methodologies are often based upon assumptions andestimates which may change at a future date and require that the carryingamount of assets and liabilities acquired be adjusted. 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 SFASNo. 142, *Goodwill and Other IntangibleAssets*. In accordance with this statement, goodwill will not beamortized but will be tested on at least an annual basis for impairment.

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

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implied fair value of the goodwill is less than the carrying value, animpairment loss is recognized.

*Accounting for the Impairment of Intangible Assets*

In accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-LivedAssets*, we continually review our long-lived assets for impairmentwhenever events or changes in circumstances indicate that the remainingestimated useful life of such assets might warrant revision or that thebalances may not be recoverable. We evaluate possible impairment by comparingestimated future cash flows, before interest expense and on an undiscountedbasis, with the net book value of long-term assets including amortizableintangible assets. If undiscounted cash flows are insufficient to recoverassets, further analysis is performed in order to determine the amount of theimpairment.

An impairment loss is then recorded equal to theamount by which the carrying amount of the assets exceeds their fair value.Fair value is usually determined based on the present value of estimatedexpected future cash flows using a discount rate commensurate with the risksinvolved.

#### *Valuation ofDeferred Tax Assets*

We record a provision for income tax expense basedon the amounts of current taxes payable or refundable and the change in netdeferred tax assets or liabilities during the year. Deferred tax assets andliabilities are recognized for the tax effects of differing carrying values ofassets and liabilities for tax and financial statement purposes that willreverse in future periods. When substantial uncertainty exists concerning therecoverability of a deferred tax asset, the carrying value of the asset isreduced by a valuation allowance. The amount of any valuation allowanceestablished is based upon an estimate of the deferred tax asset that is morelikely than not to be recovered. Increases or decreases in the valuationallowance result in increases or decreases to the provision for income taxes.

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

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

On July 13, 2006,the FASB issued Interpretation No. 48 (“FIN No. 48”), *Accountingfor Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.*This interpretation clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes.* FIN No. 48 prescribes arecognition threshold and measurement principles for financial statementdisclosure of tax positions taken or expected to be taken on a tax return. Thisinterpretation is effective for 

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fiscal years beginningafter December 15, 2006. We are assessing the impact the adoption of FIN No. 48will have on our consolidated financial position and results of operations.

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB No. 108”).  SAB No. 108 discusses the process ofquantifying financial statement misstatements to determine if any restatementof prior financial statements is required. The statement addresses the two techniques commonly used in practice inaccumulating and quantifying misstatements, and requires that the techniquewith the most severe result be used in determining whether a misstatement ismaterial.  SAB No. 108 is effective forfiscal years beginning after November 15, 2006. We do not expect the adoption of this standard to have a material impacton our consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements.* SFAS No. 157 defines fair value, establishes a framework for measuringfair value in accordance with U.S. generally accepted accounting principles,and expands disclosures about fair value measurements.  The statement clarifies that the exchangeprice is the price in an orderly transaction between market participants tosell an asset or transfer a liability at the measurement date.  The statement emphasizes that fair value is amarket-based measurement and not an entity-specific measurement.  It also establishes a fair value hierarchyused in fair value measurements and expands the required disclosures of assetsand liabilities measured at fair value. This standard is effective for fiscal years beginning after December 15,2007.  The adoption of this standard isnot expected to have a material impact on our consolidated financial positionand results of operations.

In September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans.*  SFAS No. 158 amends SFAS Nos. 87, 88, 106 and132R.  SFAS No. 158 requires employers torecognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status.  Secondly, it requires employers to measurethe plan assets and obligations that determine its funded status as of the endof the fiscal year.  Lastly, employersare required to recognize changes in the funded status of a defined benefitpostretirement plan in the year that the changes occur with the changesreported in comprehensive income.  Thestandard is effective for fiscal years ending December 15, 2006. We do notexpect the adoption of this standard to have a material impact on ourconsolidated financial position and results of operations.

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

*General*

Net income for the threemonths ended September 30, 2006 and 2005 was $286,000 and $3.0 million,respectively, a decrease of $2.7 million, or 90%.  The decrease in net income for the threemonths ended September 30, 2006 compared to the same period of 2005 isprimarily a result of the impairment charges to the goodwill and certain otherintangible assets related to our acquisition of Wilson/Bennett.  Due to our announcement in July 2006 of theretirement of Wilson/Bennett’s founder, Chief Executive Officer and President,we experienced a loss of certain significant clients and managed and custodialassets.  We recorded non-cash impairmentlosses totaling $2.9 million pretax, and $1.9 million after tax.  Excluding these impairment charges, we wouldhave recorded net income of $2.2 million for the three months ended September30, 2006, a decrease of $796,000 compared to the same period of 2005.  A reconciliation of this non-GAAP financialmeasure to our GAAP financial information is presented in Table 1 below.

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Net interest income afterprovision for loans losses increased $579,000 for the three months endedSeptember 30, 2006 compared to the same period of 2005.  Non-interest income decreased $2.3 million,which is primarily a result of the decrease in gains on sales of loans due tothe slowdown in the regional housing market. Non-interest expense increased$2.6 million, or 21%, to $15.0 million for the three months ended September 30,2006, compared to $12.4 million for the same period of 2005.  Non-interest expense (excluding impairmentcharges of $2.9 million) decreased $288,000 for the three months endedSeptember 30, 2006 compared to the same period of 2005. A reconciliation ofthis non-GAAP financial measure to our GAAP financial information is presentedin Table 1 below.

Basic earnings per sharewere $0.01 and $0.12 for the three months ended September 30, 2006 and 2005,respectively. For the three months ended September 30, 2006 and 2005, dilutedearnings per share were $0.01 and $0.12, respectively. Weighted average fullydiluted shares outstanding for the three months ended September 30, 2006 and2005 were 24,917,422 and 24,631,402, respectively.  Excluding the impairment charges, basic anddiluted earnings per share for the each of the three months ended September 30,2006 would have been $0.09. A reconciliation of this non-GAAP financial measureto our GAAP financial information is presented in Table 1 below.

Net income for the ninemonths ended September 30, 2006 and 2005 was $5.3 million and $6.9 million,respectively, a decrease of $1.6 million, or 23%. The decrease is attributableto the aforementioned impairment charges recorded during the third quarter of2006.  Net interest income afterprovision for loans losses increased $5.5 million, or 22%, to $30.7 million forthe nine months ended September 30, 2006 compared to $25.2 million for the ninemonths ended September 30, 2005. Non-interest income was $15.8 million for the nine months endedSeptember 30, 2006 compared to $18.8 million for the same period of 2005, adecrease of $3.0 million, or 16%, which is primarily a result of the decreasein gains on sales of loans due to the slowdown in the regional housing market.Non-interest expense increased $5.3 million, or 16%, to $38.9 million for thenine months ended September 30, 2006, compared to $33.6 million for the sameperiod of 2005.  Non-interest expense(excluding impairment charges of $2.9 million) increased $2.4 million for thenine months ended September 30, 2006 compared to the same period of 2005. Areconciliation of this non-GAAP financial measure to our GAAP financialinformation is presented in Table 1 below.

Basic earnings per sharewere $0.22 and $0.32 for the nine months ended September 30, 2006 and 2005,respectively. For the nine months ended September 30, 2006 and 2005, dilutedearnings per share were $0.21 and $0.32, respectively. Weighted average fullydiluted shares outstanding for the nine months ended September 30, 2006 and2005 were 24,970,941 and 21,606,448, respectively.  Excluding the impairment charges, basic anddiluted earnings per share for the nine months ended September 30, 2006 wouldhave been $0.30 and $0.29, respectively. A reconciliation of this non-GAAPfinancial measure to our GAAP financial information is presented in Table 1below.

Return on average assets for the three months endedSeptember 30, 2006 and 2005 was 0.08% and 0.82%, respectively. Return onaverage equity for the three months ended September 30, 2006 and 2005 was 0.75%and 8.10%, respectively. Return on average assets for the nine months endedSeptember 30, 2006 and 2005 was 0.49% and 0.71%, respectively. Return onaverage equity for the nine months ended September 30, 2006 and 2005 was 4.66%and 7.53%, respectively.

Webelieve that, because the impairment loss is a nonrecurring one-time charge toearnings, excluding the loss from our operating results supplements the GAAPfinancial information and provides more useful comparable measures ofevaluating the operating results and any related trends that may be affectingour business. 

25

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**Table 1.**

**Reconciliation ofGAAP to Non-GAAP Financial Measures**Forthe Three and Nine Months Ended September 30, 2006 and 2005(Dollars in thousands, except per share data)
| ** **                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| GAAP reported  non-interest expense                                      |       | $                                                    | 15,045     |                                                | $          | 12,405 |   | $ | 38,925 |   | $ | 33,622 |   |
| Less  nonrecurring expenses, pretax                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Impairment of goodwill                                                   |       | 960                                                  |       | —                                              |       | 960 |   | — |   |
| Impairment of customer relationships intangible                          |       | 1,455                                                |       | —                                              |       | 1,455 |   | — |   |
| Impairment of employment/non-compete agreement                           |       | 513                                                  |       | —                                              |       | 513 |   | — |   |
| Non-interest  expense without nonrecurring expenses                      |       | $                                                    | 12,117     |                                                | $          | 12,405 |   | $ | 35,997 |   | $ | 33,622 |   |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| GAAP reported  net income                                                |       | $                                                    | 286        |                                                | $          | 2,985 |   | $ | 5,271 |   | $ | 6,889 |   |
| Less  nonrecurring expenses, after tax                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Impairment of goodwill                                                   |       | 624                                                  |       | —                                              |       | 624 |   | — |   |
| Impairment of customer relationships intangible                          |       | 946                                                  |       | —                                              |       | 946 |   | — |   |
| Impairment of employment/non-compete agreement                           |       | 333                                                  |       | —                                              |       | 333 |   | — |   |
| Net income  without nonrecurring expenses                                |       | $                                                    | 2,189      |                                                | $          | 2,985 |   | $ | 7,174 |   | $ | 6,889 |   |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| GAAP reported  net income per common share, basic                        |       | $                                                    | 0.01       |                                                | $          | 0.12 |   | $ | 0.22 |   | $ | 0.32 |   |
| Less  nonrecurring expenses, after tax:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Impairment of goodwill                                                   |       | 0.03                                                 |       | —                                              |       | 0.03 |   | — |   |
| Impairment of customer relationships intangible                          |       | 0.04                                                 |       | —                                              |       | 0.04 |   | — |   |
| Impairment of employment/non-compete agreement                           |       | 0.01                                                 |       | —                                              |       | 0.01 |   | — |   |
| Earnings per  common share without nonrecurring expenses - basic         |       | $                                                    | 0.09       |                                                | $          | 0.12 |   | $ | 0.30 |   | $ | 0.32 |   |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| GAAP reported  net income per common share, fully diluted                |       | $                                                    | 0.01       |                                                | $          | 0.12 |   | $ | 0.21 |   | $ | 0.32 |   |
| Less  nonrecurring expenses, after tax:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Impairment of goodwill                                                   |       | 0.03                                                 |       | —                                              |       | 0.03 |   | — |   |
| Impairment of customer relationships intangible                          |       | 0.04                                                 |       | —                                              |       | 0.04 |   | — |   |
| Impairment of employment/non-compete agreement                           |       | 0.01                                                 |       | —                                              |       | 0.01 |   | — |   |
| Earnings per  common share without nonrecurring expenses - fully diluted |       | $                                                    | 0.09       |                                                | $          | 0.12 |   | $ | 0.29 |   | $ | 0.32 |   |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |

** **

26

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*General*

Net income attributable to the Commercial Bankingsegment for the three months ended September 30, 2006 and 2005 was $2.2 millionand $1.3 million, respectively.  Netincome attributable to the Commercial Banking segment for the nine months endedSeptember 30, 2006 and 2005 was $7.3 million and $2.9 million,respectively.  The increases in netincome for the three and nine months periods ended September 30, 2006 comparedto the same periods of 2005 in the Commercial Banking segment is attributableto an increase in the volume of average earning assets and the increased yieldson those assets.

Net income attributable to the Mortgage Bankingsegment for the three months ended September 30, 2006 and 2005 was $547,000 and$2.1 million, respectively.  Net incomeattributable to the Mortgage Banking segment for the nine months endedSeptember 30, 2006 and 2005 was $1.6 million and $5.3 million, respectively.The decreases in the Mortgage Banking segment’s net income for the three andnine months periods ended September 30, 2006 compared to the same periods of2005 were due to a slowdown in the regional housing market.

The Wealth Management and Trust Services segment,which includes CWS, Wilson/Bennett and the new trust division of the Bank,recorded a net loss of $2.0 million for the three months ended September 30,2006, as compared to net income of $40,000 for the same period 2005. Theimpairment charges mentioned above were recorded in this business segment.  Excluding the impairment charges of $2.9million, the Wealth Management and Trust Services segment would have reported anet loss of $47,000, which is primarily attributable to the decrease in managedand custodial assets for Wilson/Bennett. This business segment reported a netloss of $1.9 million and a net loss of $18,000 for the nine months endedSeptember 30, 2006 and 2005, respectively. The trust division of the Bank isincluded in the results of operations since the date of acquisition,February 9, 2006. 

*NetInterest Income*

Net interest income represents the differencebetween interest and fees earned on interest earning assets and the interestpaid on deposits and other interest bearing liabilities. The level of netinterest income is impacted primarily by variations in the volume and mix ofthese assets and liabilities, as well as changes in interest rates. Netinterest income for the three months ended September 30, 2006 and 2005 was$10.4 million and $10.1 million, respectively, a period-to-period increase of$309,000, or 3%. The increase in net interest income is primarily the result ofan increase in the average volume of loans receivable and investment securitiescompared with the same period of 2005. These increases were funded throughincreases in total deposits and other borrowed funds. Net interest income forthe three months ended September 30, 2006 and 2005 represented 68% and 58% ofour total revenues, respectively.

Net interest income for the nine months endedSeptember 30, 2006 and 2005 was $31.5 million and $27.1 million, respectively,a period-to-period increase of $4.5 million, or 17%. The increase in netinterest income is primarily the result of an increase in the average volume ofloans receivable and investment securities compared with the same period of2005. These increases were funded through increases in total deposits and otherborrowed funds. Net interest income for the nine months ended September 30,2006 and 2005 represented 67% and 59% of our total revenues, respectively.

Our net interest margin, which equals net interestincome divided by average earning assets, for the three months ended September30, 2006 and 2005 was 2.93% and 2.92%, respectively. Our net interest marginfor the nine months ended September 30, 2006 and 2005 

27

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was 3.05% and 2.89%, respectively. The increase in the net interestmargin for the three and nine months ended September 30, 2006 compared to thesame periods of 2005 is a result of a higher volume of loans receivable andinvestment securities and an increased rate of interest earned on those earningassets compared with the interest rate paid on the increased volume of depositsand other borrowed funds. Tables 2 through 5 present an analysis of averageearning assets and interest bearing liabilities with related components ofinterest income and interest expense.

**Table 2.Average Balance Sheets and Interest Rates on Earnings Assets and Interest -Bearing Liabilities**ThreeMonths Ended September 30, 2006, 2005 and 2004(In thousands)
| ** **                                               | ** ** | **2006**             | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Interest   Income/  Expense** | ** ** | **Rate** | ** ** | **Average   Balance** | ** ** | **Interest   Income/  Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and industrial                                |       | $                    | 86,592     |                           | $          | 1,649    |       | 7.62 | % | $ | 67,519 |   | $ | 1,089 |   | 6.45 | % | $ | 60,086 |   | $ | 767 |   | 5.11 | % |
| Real estate - commercial                                 |       | 294,680              |       | 4,881                          |       | 6.63     |       | 277,487 |   | 4,466 |   | 6.44 |   | 190,371 |   | 2,945 |   | 6.19 |   |
| Real estate - construction                               |       | 146,803              |       | 3,214                          |       | 8.76     |       | 65,414 |   | 1,189 |   | 7.27 |   | 58,291 |   | 848 |   | 5.82 |   |
| Real estate - residential                                |       | 173,942              |       | 2,315                          |       | 5.32     |       | 130,390 |   | 1,607 |   | 4.93 |   | 44,558 |   | 653 |   | 5.86 |   |
| Home equity lines                                        |       | 71,888               |       | 1,339                          |       | 7.45     |       | 68,624 |   | 927 |   | 5.36 |   | 55,039 |   | 486 |   | 3.50 |   |
| Consumer                                                 |       | 5,008                |       | 97                             |       | 7.75     |       | 4,760 |   | 87 |   | 7.31 |   | 7,858 |   | 127 |   | 6.46 |   |
| Total loans                                              |       | 778,913              |       | 13,495                         |       | 6.93     |       | 614,194 |   | 9,365 |   | 6.10 |   | 416,203 |   | 5,826 |   | 5.60 |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                                |       | 275,885              |       | 5,193                          |       | 7.53     |       | 468,808 |   | 6,101 |   | 5.21 |   | 369,623 |   | 3,268 |   | 3.54 |   |
| Investment  securities - available-for-sale (2)          |       | 243,259              |       | 2,891                          |       | 4.75     |       | 149,207 |   | 1,414 |   | 3.79 |   | 165,721 |   | 1,536 |   | 3.71 |   |
| Investment  securities held-to-maturity                  |       | 104,768              |       | 1,079                          |       | 4.12     |       | 124,632 |   | 1,197 |   | 3.84 |   | 154,229 |   | 1,432 |   | 3.71 |   |
| Other investments                                        |       | 5,584                |       | 84                             |       | 6.03     |       | 6,718 |   | 56 |   | 3.31 |   | 8,163 |   | 78 |   | 3.82 |   |
| Federal funds  sold                                      |       | 15,219               |       | 181                            |       | 4.71     |       | 23,863 |   | 208 |   | 3.46 |   | 14,323 |   | 49 |   | 1.37 |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income       |       | 1,423,628            |       | 22,923                         |       | 6.44     | %          | 1,387,422 |   | 18,341 |   | 5.29 | % | 1,128,262 |   | 12,189 |   | 4.32 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earnings assets:                           |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | 4,966                |       |                           |       |     |       | 13,963 |   |   |   |   |   | 14,904 |   |   |   |   |   |
| Premises and equipment, net                              |       | 20,528               |       |                           |       |     |       | 17,525 |   |   |   |   |   | 14,727 |   |   |   |   |   |
| Goodwill and other intangibles, net                      |       | 20,425               |       |                           |       |     |       | 20,649 |   |   |   |   |   | 15,129 |   |   |   |   |   |
| Accrued interest and other assets                        |       | 28,265               |       |                           |       |     |       | 21,119 |   |   |   |   |   | 11,286 |   |   |   |   |   |
| Allowance for loan losses                                |       | (8,970               | )          |                           |       |     |       | (7,378 | ) |   |   |   |   | (4,864 | ) |   |   |   |   |
| Total assets                                             |       | $                    | 1,488,842  |                           |       |     |       |   | $ | 1,453,300 |   |   |   |   |   | $ | 1,179,444 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                           |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                              |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 134,293              |       | 976                            |       | 2.91     | %          | 109,030 |   | 316 |   | 1.15 | % | 148,168 |   | 486 |   | 1.30 | % |
| Money markets                                            |       | 89,179               |       | 517                            |       | 2.32     |       | 223,210 |   | 1,570 |   | 2.81 |   | 28,065 |   | 42 |   | 0.60 |   |
| Statement savings                                        |       | 232,930              |       | 2,802                          |       | 4.78     |       | 9,979 |   | 29 |   | 1.14 |   | 7,827 |   | 16 |   | 0.83 |   |
| Certificates of deposit                                  |       | 584,089              |       | 6,383                          |       | 4.37     |       | 555,193 |   | 4,867 |   | 3.51 |   | 477,936 |   | 3,124 |   | 2.61 |   |
| Total interest-bearing deposits                          |       | 1,040,491            |       | 10,678                         |       | 4.07     |       | 897,412 |   | 6,782 |   | 3.00 |   | 661,996 |   | 3,668 |   | 2.22 |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 154,047              |       | 1,768                          |       | 4.55     |       | 258,735 |   | 1,448 |   | 2.22 |   | 315,712 |   | 1,327 |   | 1.68 |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,194,538            |       | 12,446                         |       | 4.13     |       | 1,156,147 |   | 8,230 |   | 2.82 |   | 977,708 |   | 4,995 |   | 2.04 |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 119,448              |       |                           |       |     |       | 124,553 |   |   |   |   |   | 94,995 |   |   |   |   |   |
| Other liabilities                                        |       | 22,658               |       |                           |       |     |       | 25,202 |   |   |   |   |   | 10,726 |   |   |   |   |   |
| Common shareholders’ equity                         |       | 152,198              |       |                           |       |     |       | 147,398 |   |   |   |   |   | 96,015 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $                    | 1,488,842  |                           |       |     |       |   | $ | 1,453,300 |   |   |   |   |   | $ | 1,179,444 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income and  net interest margin (2)         |       |                 |       | $                              | 10,477     |     | 2.93       | % |   |   | $ | 10,111 |   | 2.92 | % |   |   | $ | 7,194 |   | 2.55 | % |

----

(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 quarters presented.

(2)                Interest income for investment securitiesavailable-for-sale is reported on a fully taxable-equivalent basis at a rate of35%.

28

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**Table 3.Rate and Volume Analysis**ThreeMonths Ended September 30, 2006, 2005 and 2004(In thousands)
| ** **                                      | ** ** | **Three Months Ended September 30,   2006 Compared to 2005** | ** ** | **Three Months Ended September 30,   2005 Compared to 2004** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Average   Volume**                                                                            | ** ** | **Average  Rate**                                                                                    | ** ** | **Increase  (Decrease)** | ** ** | **Average   Volume** | ** ** | **Average  Rate** | ** ** | **Increase  (Decrease)** | ** ** |
| **Interest  income:**                           |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Loans (1):                                      |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                       |       | $                                                                                                    | 308        |                                                                                                 | $          | 252 |   | $ | 560 |   | $ | 95 |   | $ | 227 |   | $ | 322 |   |
| Real estate - commercial                        |       | 277                                                                                                  |       | 138                                                                                                  |       | 415 |   | 1,348 |   | 173 |   | 1,521 |   |
| Real estate - construction                      |       | 1,479                                                                                                |       | 546                                                                                                  |       | 2,025 |   | 104 |   | 237 |   | 341 |   |
| Real estate - residential                       |       | 537                                                                                                  |       | 171                                                                                                  |       | 708 |   | 1,258 |   | (304 | ) | 954 |   |
| Home equity lines                               |       | 44                                                                                                   |       | 368                                                                                                  |       | 412 |   | 119 |   | 322 |   | 441 |   |
| Consumer                                        |       | 5                                                                                                    |       | 5                                                                                                    |       | 10 |   | (50 | ) | 10 |   | (40 | ) |
| Total loans                                     |       | 2,650                                                                                                |       | 1,480                                                                                                |       | 4,130 |   | 2,874 |   | 665 |   | 3,539 |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                       |       | (2,511                                                                                               | )          | 1,603                                                                                                |       | (908 | ) | 877 |   | 1,956 |   | 2,833 |   |
| Investment  securities - available-for-sale (2) |       | 891                                                                                                  |       | 586                                                                                                  |       | 1,477 |   | (153 | ) | 31 |   | (122 | ) |
| Investment  securities held-to-maturity         |       | (191                                                                                                 | )          | 73                                                                                                   |       | (118 | ) | (275 | ) | 40 |   | (235 | ) |
| Other investments                               |       | (9                                                                                                   | )          | 37                                                                                                   |       | 28 |   | (13 | ) | (9 | ) | (22 | ) |
| Federal funds  sold                             |       | (75                                                                                                  | )          | 48                                                                                                   |       | (27 | ) | 33 |   | 126 |   | 159 |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Total interest income                           |       | 755                                                                                                  |       | 3,827                                                                                                |       | 4,582 |   | 3,343 |   | 2,809 |   | 6,152 |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                          |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                     |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Interest checking                               |       | 73                                                                                                   |       | 587                                                                                                  |       | 660 |   | (128 | ) | (42 | ) | (170 | ) |
| Money markets                                   |       | (942                                                                                                 | )          | (111                                                                                                 | )          | (1,053 | ) | 288 |   | 1,240 |   | 1,528 |   |
| Statement savings                               |       | 641                                                                                                  |       | 2,132                                                                                                |       | 2,773 |   | 4 |   | 9 |   | 13 |   |
| Certificates of deposit                         |       | 255                                                                                                  |       | 1,261                                                                                                |       | 1,516 |   | 502 |   | 1,241 |   | 1,743 |   |
| Total interest-bearing deposits                 |       | 27                                                                                                   |       | 3,869                                                                                                |       | 3,896 |   | 666 |   | 2,448 |   | 3,114 |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Other borrowed  funds                           |       | (586                                                                                                 | )          | 906                                                                                                  |       | 320 |   | (235 | ) | 356 |   | 121 |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Total interest expense                          |       | (559                                                                                                 | )          | 4,775                                                                                                |       | 4,216 |   | 431 |   | 2,804 |   | 3,235 |   |
|                                            |       |                                                                                                 |       |                                                                                                 |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                         |       | $                                                                                                    | 1,314      |                                                                                                 | $          | (948 | ) | $ | 366 |   | $ | 2,912 |   | $ | 5 |   | $ | 2,917 |   |

----

(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 quarters presented.

(2)                Interest income for investment securitiesavailable-for-sale is reported on a fully taxable-equivalent basis at a rate of35%.

29

----

 

**Table 4.Average Balance Sheets and Interest Rates on Earning Assets and Interest -Bearing Liabilities**NineMonths Ended September 30, 2006, 2005 and 2004(In thousands)
| ** **                                               | ** ** | **2006**                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **Average   Balance** | ** ** | **Interest   Income/  Expense** | ** ** | **Rate** | ** ** | **Average   Balance** | ** ** | **Interest   Income/  Expense** | ** ** | **Rate** | ** ** | **Average   Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and industrial                                |       | $                          | 80,964     |                                 | $          | 4,409    |       | 7.26 | % | $ | 65,077 |   | $ | 2,898 |   | 5.94 | % | $ | 58,937 |   | $ | 2,318 |   | 5.24 | % |
| Real estate - commercial                                 |       | 281,599                    |       | 13,940                               |       | 6.60     |       | 249,501 |   | 11,738 |   | 6.27 |   | 159,906 |   | 7,508 |   | 6.26 |   |
| Real estate - construction                               |       | 138,066                    |       | 8,596                                |       | 8.30     |       | 67,582 |   | 3,451 |   | 6.81 |   | 48,651 |   | 2,053 |   | 5.63 |   |
| Real estate - residential                                |       | 166,637                    |       | 6,470                                |       | 5.18     |       | 108,084 |   | 4,201 |   | 5.18 |   | 43,312 |   | 1,856 |   | 5.71 |   |
| Home equity lines                                        |       | 75,146                     |       | 3,831                                |       | 6.80     |       | 64,884 |   | 2,418 |   | 4.98 |   | 50,316 |   | 1,255 |   | 3.32 |   |
| Consumer                                                 |       | 4,825                      |       | 276                                  |       | 7.63     |       | 5,195 |   | 273 |   | 7.03 |   | 9,184 |   | 435 |   | 6.31 |   |
| Total loans                                              |       | 747,237                    |       | 37,522                               |       | 6.70     |       | 560,323 |   | 24,979 |   | 5.94 |   | 370,306 |   | 15,425 |   | 5.55 |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                                |       | 264,994                    |       | 14,746                               |       | 7.42     |       | 382,603 |   | 14,117 |   | 4.92 |   | 124,175 |   | 3,268 |   | 3.51 |   |
| Investment  securities - available-for-sale (2)          |       | 222,847                    |       | 7,633                                |       | 4.57     |       | 154,356 |   | 4,376 |   | 3.78 |   | 163,009 |   | 4,360 |   | 3.57 |   |
| Investment  securities held-to-maturity                  |       | 108,927                    |       | 3,306                                |       | 4.05     |       | 130,479 |   | 3,757 |   | 3.84 |   | 154,025 |   | 4,260 |   | 3.69 |   |
| Other investments                                        |       | 6,152                      |       | 262                                  |       | 5.67     |       | 6,141 |   | 183 |   | 3.97 |   | 5,464 |   | 162 |   | 3.95 |   |
| Federal funds  sold                                      |       | 26,887                     |       | 915                                  |       | 4.55     |       | 15,148 |   | 346 |   | 3.06 |   | 11,695 |   | 96 |   | 1.09 |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income       |       | 1,377,044                  |       | 64,384                               |       | 6.23     | %          | 1,249,050 |   | 47,758 |   | 5.10 | % | 828,674 |   | 27,571 |   | 4.44 | % |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earning assets:                            |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | 6,766                      |       |                                 |       |     |       | 8,906 |   |   |   |   |   | 12,050 |   |   |   |   |   |
| Premises and equipment, net                              |       | 19,560                     |       |                                 |       |     |       | 17,288 |   |   |   |   |   | 9,893 |   |   |   |   |   |
| Goodwill and other intangibles, net                      |       | 20,514                     |       |                                 |       |     |       | 17,613 |   |   |   |   |   | 5,100 |   |   |   |   |   |
| Accrued interest and other assets                        |       | 17,201                     |       |                                 |       |     |       | 13,557 |   |   |   |   |   | 7,887 |   |   |   |   |   |
| Allowance for loan losses                                |       | (8,677                     | )          |                                 |       |     |       | (6,643 | ) |   |   |   |   | (4,564 | ) |   |   |   |   |
| Total assets                                             |       | $                          | 1,432,408  |                                 |       |     |       |   | $ | 1,299,771 |   |   |   |   |   | $ | 859,040 |   |   |   |   |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                           |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                              |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 139,949                    |       | 2,875                                |       | 2.74     | %          | 123,055 |   | 1,106 |   | 1.20 | % | 151,448 |   | 1,520 |   | 1.34 | % |
| Money markets                                            |       | 133,062                    |       | 2,480                                |       | 2.49     |       | 144,187 |   | 2,852 |   | 2.64 |   | 26,418 |   | 116 |   | 0.58 |   |
| Statement savings                                        |       | 107,484                    |       | 3,703                                |       | 4.59     |       | 9,279 |   | 75 |   | 1.09 |   | 7,535 |   | 38 |   | 0.67 |   |
| Certificates of deposit                                  |       | 607,555                    |       | 18,547                               |       | 4.08     |       | 543,859 |   | 12,956 |   | 3.19 |   | 330,802 |   | 6,774 |   | 2.73 |   |
| Total interest-bearing deposits                          |       | 988,050                    |       | 27,605                               |       | 3.74     |       | 820,380 |   | 16,989 |   | 2.77 |   | 516,203 |   | 8,448 |   | 2.18 |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 157,372                    |       | 5,145                                |       | 4.37     |       | 223,562 |   | 3,711 |   | 2.22 |   | 161,866 |   | 2,098 |   | 1.73 |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,145,422                  |       | 32,750                               |       | 3.82     |       | 1,043,942 |   | 20,700 |   | 2.65 |   | 678,069 |   | 10,546 |   | 2.07 |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 114,889                    |       |                                 |       |     |       | 113,634 |   |   |   |   |   | 82,839 |   |   |   |   |   |
| Other liabilities                                        |       | 21,156                     |       |                                 |       |     |       | 20,195 |   |   |   |   |   | 4,857 |   |   |   |   |   |
| Preferred shareholders’equity                       |       | —                     |       |                                 |       |     |       | — |   |   |   |   |   | 2,123 |   |   |   |   |   |
| Common shareholders’ equity                         |       | 150,941                    |       |                                 |       |     |       | 122,000 |   |   |   |   |   | 91,152 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $                          | 1,432,408  |                                 |       |     |       |   | $ | 1,299,771 |   |   |   |   |   | $ | 859,040 |   |   |   |   |   |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income and net interest margin (2)         |       |                       |       | $                                    | 31,634     |     | 3.05       | % |   |   | $ | 27,058 |   | 2.89 | % |   |   | $ | 17,025 |   | 2.74 | % |
|                                                     |       |                       |       |                                 |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |

----

(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 investment securitiesavailable-for-sale is reported on a fully taxable-equivalent basis at a rate of35%.

30

----

 

**Table 5.Rate and Volume Analysis**NineMonths Ended September 30, 2006, 2005 and 2004(In thousands)
| ** **                                      | ** ** | **Nine Months Ended September 30,   2006 Compared to 2005** | ** ** | **Nine Months Ended September 30,   2005 Compared to 2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Average   Volume**                                                                           | ** ** | **Average  Rate**                                                                                   | ** ** | **Increase  (Decrease)** | ** ** | **Average   Volume** | ** ** | **Average  Rate** | ** ** | **Increase  (Decrease)** | ** ** |
| **Interest  income:**                           |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Loans (1):                                      |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                       |       | $                                                                                                   | 709        |                                                                                                | $          | 802 |   | $ | 1,511 |   | $ | 241 |   | $ | 339 |   | $ | 580 |   |
| Real estate - commercial                        |       | 1,504                                                                                               |       | 698                                                                                                 |       | 2,202 |   | 4,207 |   | 23 |   | 4,230 |   |
| Real estate - construction                      |       | 3,601                                                                                               |       | 1,544                                                                                               |       | 5,145 |   | 799 |   | 599 |   | 1,398 |   |
| Real estate - residential                       |       | 2,273                                                                                               |       | (4                                                                                                  | )          | 2,269 |   | 2,776 |   | (431 | ) | 2,345 |   |
| Home equity lines                               |       | 382                                                                                                 |       | 1,031                                                                                               |       | 1,413 |   | 360 |   | 803 |   | 1,163 |   |
| Consumer                                        |       | (19                                                                                                 | )          | 22                                                                                                  |       | 3 |   | (189 | ) | 27 |   | (162 | ) |
| Total loans                                     |       | 8,450                                                                                               |       | 4,093                                                                                               |       | 12,543 |   | 8,194 |   | 1,360 |   | 9,554 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                       |       | (4,339                                                                                              | )          | 4,968                                                                                               |       | 629 |   | 6,801 |   | 4,048 |   | 10,849 |   |
| Investment  securities - available-for-sale (2) |       | 1,942                                                                                               |       | 1,315                                                                                               |       | 3,257 |   | (231 | ) | 247 |   | 16 |   |
| Investment  securities held-to-maturity         |       | (620                                                                                                | )          | 169                                                                                                 |       | (451 | ) | (651 | ) | 148 |   | (503 | ) |
| Other investments                               |       | 0                                                                                                   |       | 79                                                                                                  |       | 79 |   | 20 |   | 1 |   | 21 |   |
| Federal funds  sold                             |       | 270                                                                                                 |       | 299                                                                                                 |       | 569 |   | 28 |   | 222 |   | 250 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Total interest income                           |       | 5,703                                                                                               |       | 10,923                                                                                              |       | 16,626 |   | 14,161 |   | 6,026 |   | 20,187 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                          |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                     |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Interest checking                               |       | 152                                                                                                 |       | 1,617                                                                                               |       | 1,769 |   | (287 | ) | (127 | ) | (414 | ) |
| Money markets                                   |       | (220                                                                                                | )          | (152                                                                                                | )          | (372 | ) | 515 |   | 2,221 |   | 2,736 |   |
| Statement savings                               |       | 801                                                                                                 |       | 2,827                                                                                               |       | 3,628 |   | 8 |   | 29 |   | 37 |   |
| Certificates of deposit                         |       | 1,520                                                                                               |       | 4,071                                                                                               |       | 5,591 |   | 4,335 |   | 1,847 |   | 6,182 |   |
| Total interest-bearing deposits                 |       | 2,253                                                                                               |       | 8,363                                                                                               |       | 10,616 |   | 4,571 |   | 3,970 |   | 8,541 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Other borrowed  funds                           |       | (1,099                                                                                              | )          | 2,533                                                                                               |       | 1,434 |   | 793 |   | 820 |   | 1,613 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Total interest expense                          |       | 1,154                                                                                               |       | 10,896                                                                                              |       | 12,050 |   | 5,364 |   | 4,790 |   | 10,154 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |
| Net interest  income (2)                        |       | $                                                                                                   | 4,549      |                                                                                                | $          | 27 |   | $ | 4,576 |   | $ | 8,797 |   | $ | 1,236 |   | $ | 10,033 |   |
|                                            |       |                                                                                                |       |                                                                                                |       |   |   |   |   |   |   |   |   |

----

(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 investment securitiesavailable-for-sale is reported on a fully taxable-equivalent basis at a rate of35%.

31

----

*Provisionfor Loan Losses*

The provision for loan losses for the three monthsended September 30, 2006 and 2005 was $230,000 and $500,000, respectively. Forthe nine months ended September 30, 2006 and 2005, the provision was $870,000and $1.9 million, respectively. The decrease in provision expense for the threeand nine months ended September 30, 2006 compared to the same periods of 2005is primarily the result of 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 September30, 2006 and December 31, 2005 was $9.2 million and $8.3 million, respectively.Our allowance for loan losses ratio to loans receivable, net was 1.14% atSeptember 30, 2006 and 1.18% at December 31, 2005. There were netrecoveries of previously charged-off loans of $34,000 for the nine months of2006. Non-performing loans were equal to 0.03% of total loans receivable foreach of September 30, 2006 and December 31, 2005.

In 1999 and 2001, the Company purchased loanparticipations of approximately $12.3 million from a bank in New Orleans,Louisiana, which represented approximately 950 loans. At September 30, 2006,the aggregate total remaining balances on these participations wereapproximately $1.3 million and represented approximately 200 loans secured byvarious types of recreational vehicles. The borrowers are located in severalsouthern states including Louisiana. Hurricane and other weather-relatedproblems had disrupted the operations of the New Orleans bank, curtailed maildelivery and other communications in the area and caused wide-spreaddestruction in the gulf coast region. The majority of these loans continue toperform in accordance with their terms, and as of September 30, 2006, we haveremoved them from our problem loan watch list.

Additional information on the allowance for loanlosses, its allocation to the loans receivable portfolio and information onnonperforming loans can be found in Tables 6, 7 and 8.

**Table6.Allowance for Loan Losses**NineMonths Ended September 30, 2006 and 2005(In thousands)
| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Beginning  balance, January 1 |       | $        | 8,301      |     | $          | 5,878 |   |
|                          |       |     |       |     |       |
| Provision for  loan losses    |       | 870      |       | 1,869    |       |
|                          |       |     |       |     |       |
| Loans charged  off:           |       |     |       |     |       |
| Commercial and industrial     |       | (42      | )          | (120     | )          |
| Consumer                      |       | (1       | )          | (8       | )          |
| Total loans charged off       |       | (43      | )          | (128     | )          |
|                          |       |     |       |     |       |
| Recoveries:                   |       |     |       |     |       |
| Commercial and industrial     |       | 77       |       | 75       |       |
| Consumer                      |       | —   |       | 12       |       |
| Total recoveries              |       | 77       |       | 87       |       |
|                          |       |     |       |     |       |
| Net (charge  offs) recoveries |       | 34       |       | (41      | )          |
|                          |       |     |       |     |       |
| Ending balance,  September 30 |       | $        | 9,205      |     | $          | 7,706 |   |

 
| ** **                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Loans:**                                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Balance at period end                                       |       | $                      | 806,653    |                  | $          | 705,644 |   |
| Allowance for loan losses to loans receivable, net  of fees |       | 1.14%                  |       | 1.18%                 |       |
| Annualized net charge-offs to average loans  receivable     |       | 0.00%                  |       | 0.01%                 |       |
|                                                             |            |                        |            |                       |            |  |  |

 

32

----

**Table7.Allocation of the Allowance for Loan Losses**AtSeptember 30, 2006 and December 31, 2005(In thousands)
| ** **                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Allocation**               | ** ** | **% of Total***   | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and  industrial       |       | $                            | 1,485      |                        | 11.11      | % | $ | 1,153 |   | 9.83 | % |
| Real estate -  commercial        |       | 3,529                        |       | 37.49                       |       | 3,338 |   | 39.01 |   |
| Real estate -  construction      |       | 1,840                        |       | 19.68                       |       | 1,432 |   | 18.13 |   |
| Real estate -  residential       |       | 1,832                        |       | 22.49                       |       | 1,490 |   | 21.65 |   |
| Home equity  lines               |       | 405                          |       | 8.59                        |       | 721 |   | 10.63 |   |
| Consumer                         |       | 114                          |       | 0.64                        |       | 167 |   | 0.75 |   |
|                             |       |                         |       |                        |       |   |   |   |   |
| Total allowance for  loan losses |       | $                            | 9,205      |                        | 100.00%    |   | $ | 8,301 |   | 100.00% |   |

----

* Percentage of loan typeto the total loan portfolio.

33

----

**Table 8.Nonperforming Loans Receivable**At September 30, 2006 and December 31, 2005(In thousands)
| ** **                            | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Nonaccruing  loans                    |       | $                            | 247        |                        | $          | 214 |   |
|                                  |       |                         |       |                        |       |
| Loans  contractually past-due         |       |                         |       |                        |       |
| 90 days or more                       |       | 3                            |       | 33                          |       |
| Total  nonperforming loans receivable |       | $                            | 250        |                        | $          | 247 |   |

** **

34

----

 

*Non-interest Income*

Non-interest income includes, among other things,service charges on deposits and loans, gains on the sale of mortgage loans,investment fee income, and management fee income, and continues to be animportant factor in our operating results. Non-interest income for the threemonths ended September 30, 2006 and 2005 was $5.0 million and $7.3 million,respectively, a decrease of $2.3 million, or 32%. Non-interest income for thenine months ended September 30, 2006 and 2005 was $15.8 million and $18.8million, respectively, a decrease of $3.0 million or 16%.  Net gains on sales of mortgage loans byGeorge Mason for the three months ended September 30, 2006 and 2005 were $2.5million and $4.8 million, respectively, a decrease of $2.3 million, or48%.  Net gains on sales of mortgageloans by George Mason for the nine months ended September 30, 2006 and 2005 was$7.8 million and $12.4 million, respectively, a decrease of $4.6 million, or37%. The decreases in net gains on sales of mortgage loans for the three andnine months ended September 30, 2006 compared to the same periods of 2005 weredue to the slowdown in the regional housing market caused in part by risinginterest rates. Included in the net gains on sale of mortgage loans are any origination,underwriting, and discount points and other funding fees received and deferredat loan origination. Costs include direct costs associated with the loanorigination, such as commissions and salaries that are deferred at the time oforigination.   Management fee income for the three months ended September30, 2006 and 2005 was $583,000 and $969,000, respectively, a decrease of$386,000, or 40%. Management fee income for the nine months ended September 30,2006 and 2005 was $1.7 million and $2.5 million, respectively, a decrease of$802,000, or 33%. Management fee income represents the income earned forservices provided by George Mason to other mortgage banking companies owned bylocal home builders and generally fluctuates based on the volume of loan sales.

Service charges on deposit accounts increased$70,000 to $418,000 for the three months ended September 30, 2006 compared to$348,000 for the same period of 2005. For the nine months ended September 30,2006, service charges on deposit accounts increased $218,000 to $1.2 millioncompared to $958,000 for the same period of 2005. The increases in servicecharges on deposit accounts is primarily the result of an increased number ofdeposit accounts in 2006 compared to 2005. Loan service charge income decreased$385,000 to $386,000 for the three months ended September 30, 2006, compared to$771,000 for the same period of 2005. For the nine months ended September 30, 2006, loan service charge incomedecreased $448,000 to $1.6 million compared to $2.0 million for the same periodof 2005.  The decrease in loan servicecharge income is related to our mortgage banking segment and the slowdown inthe regional housing market.

Investment fee income increased $382,000 to $879,000for the three months ended September 30, 2006 compared to $497,000 for the sameperiod of 2005. For the nine months ended September 30, 2006, investment feeincome increased $1.6 million to $2.6 million compared to $947,000 for the sameperiod of 2005. The increases in investment fee income are primarilyattributable to the addition of the trust division in February 2006 and,for the nine month period comparison, the acquisition of Wilson/Bennett in June2005.

Included in other income are gains related to theextinguishment of two borrowings totaling $769,000 for the nine months endedSeptember 30, 2006. In addition, we invested $30.0 million in bank owned lifeinsurance during the third quarter of 2006. The increase in the cash surrender value for the three months endedSeptember 30, 2006 was $212,000. There were no similar transactions for thesame periods of 2005.

Non-interest income for the three months endedSeptember 30, 2006 and 2005 represented 32% and 42% of our total revenues,respectively.  Non-interest income forthe nine months ended September 30, 2006 and 2005 represented 33% and 41% ofour total revenues, respectively.

*Non-interest Expense*

Non-interest expense includes, among other things,salaries and benefits, occupancy, professional fees, depreciation, dataprocessing, telecommunications and miscellaneous expenses. Non-interest expensefor the three months ended September 30, 2006 was $15.0 million, compared to$12.4 million for the same period of 2005, an increase of $2.6 million,21%.  For the nine months ended September30, 2006, non-interest expense was $38.9 million, compared to

35

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$33.6 million for the same period of 2005, an increase of $5.3 million,or 16%. The increases are primarily attributable to the aforementionedimpairment charges totaling $2.9 million for the three and nine months endedSeptember 30, 2006.  In addition,non-interest expense has increased as a result of our branch office expansionduring the past twelve months and the acquisitions of Wilson/Bennett and thetrust division. Expenses related to the branch expansion are primarilyrepresented in the increases in our salaries and benefits expense, occupancyexpense and depreciation expense. We expect non-interest expense to continue toincrease as we continue our branch expansion in 2006. We currently plan to opentwo branch offices during the remainder of 2006.

***Income Taxes***

For the three months ended September 30, 2006, werecorded an income tax benefit of $132,000, compared to income tax expense of$1.6 million for the same period of 2005. For the nine months ended September 30, 2006 and 2005, we recordedprovisions for income taxes of $2.3 million and $3.5 million,respectively.  During the third quarterof 2006, we retroactively updated our effective tax rate for the effects oftax-exempt investments the Bank has purchased during the year.  See also “Critical Accounting Policies —Valuation of Deferred Tax Assets.”

**Statementsof Condition**

Total assets were $1.55 billion at September 30,2006, compared to $1.45 billion at December 31, 2005, an increase of $97.0million, or 7%. This growth was driven primarily by increases in loansreceivable and the investment securities portfolio, which were funded by growthin our deposits.

*Investment Securities*

Investment securities were $333.0 million atSeptember 30, 2006, compared to $294.2 million at December 31, 2005, anincrease of $38.8 million, or 13%. The investment portfolio consists ofinvestment securities available-for-sale and investment securitiesheld-to-maturity. Investment securities available-for-sale are those securitiesthat we intend to hold for an indefinite period of time, but not necessarilyuntil maturity. These securities are carried at fair value and may be sold aspart of an asset/liability strategy, liquidity management or regulatory capitalmanagement.  Investment securitiesheld-to-maturity are those securities that we have the intent and ability tohold to maturity and are carried at amortized cost. At September 30, 2006,investment securities available-for-sale were $230.3 million and investmentsecurities held-to-maturity were $102.7 million. See Table 9 for additionalinformation on our investment securities portfolio.

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, are primarily comprised of bonds issued by theFederal National Mortgage Association (FNMA) and Federal Home Loan MortgageCorporation (FHLMC).

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**Table 9.Investment Securities**

At September 30, 2006 andDecember 31, 2005

(In thousands)
| ** **                                                       | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Available-for-sale at September 30, 2006** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies                              |       |          |       |      |       |        |       |
| One to five years                                                |       | $             | 51,970     |      | $          | 51,384      |       | 4.91 | % |
| Five to ten years                                                |       | 13,050        |       | 13,030    |       | 5.92        |       |
| Total U.S. government-sponsored agencies                         |       | 65,020        |       | 64,414    |       | 5.11        |       |
|                                                             |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                                     |       |          |       |      |       |        |       |
| One to five years                                                |       | 4,661         |       | 4,511     |       | 4.15        |       |
| Five to ten years                                                |       | 11,006        |       | 10,635    |       | 3.75        |       |
| After ten years                                                  |       | 130,722       |       | 127,331   |       | 4.69        |       |
| Total mortgage-backed securities                                 |       | 146,389       |       | 142,477   |       | 4.60        |       |
|                                                             |       |          |       |      |       |        |       |
| Municipal  securities                                            |       |          |       |      |       |        |       |
| After ten years                                                  |       | 21,570        |       | 21,439    |       | 4.10        |       |
| Total municipal securities                                       |       | 21,570        |       | 21,439    |       | 4.10        |       |
|                                                             |       |          |       |      |       |        |       |
| U. S. treasury  securities                                       |       |          |       |      |       |        |       |
| One to five years                                                |       | 2,002         |       | 1,995     |       | 2.63        |       |
| Total U.S. treasury securities                                   |       | 2,002         |       | 1,995     |       | 2.63        |       |
| Total investment securities available-for-sale                   |       | $             | 234,981    |      | $          | 230,325     |       | 4.68 | % |

 
| ** **                                                     | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|----------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Held-to-maturity at September 30, 2006** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S.  government-sponsored agencies                            |       |          |       |      |       |        |       |
| One to five years                                              |       | $             | 9,500      |      | $          | 9,216       |       | 3.52 | % |
| Five to ten years                                              |       | 13,019        |       | 12,730    |       | 4.43        |       |
| After ten years                                                |       | 3,000         |       | 2,963     |       | 5.57        |       |
| Total U.S. government-sponsored agencies                       |       | 25,519        |       | 24,909    |       | 4.22        |       |
|                                                           |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                                   |       |          |       |      |       |        |       |
| Five to ten years                                              |       | 7,136         |       | 6,939     |       | 4.18        |       |
| After ten years                                                |       | 62,002        |       | 60,096    |       | 4.33        |       |
| Total mortgage-backed securities                               |       | 69,138        |       | 67,035    |       | 4.32        |       |
|                                                           |       |          |       |      |       |        |       |
| Corporate bonds                                                |       |          |       |      |       |        |       |
| After ten years                                                |       | 8,005         |       | 7,827     |       | 4.21        |       |
| Total corporate bonds                                          |       | 8,005         |       | 7,827     |       | 4.21        |       |
| Total investment securities held-to-maturity                   |       | 102,662       |       | 99,771    |       | 4.29        |       |
|                                                           |       |          |       |      |       |        |       |
| Total investment securities                                    |       | $             | 337,643    |      | $          | 330,096     |       | 4.56 | % |

 

37

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

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

----

* Based oncontractual maturities.

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*Loans*

 

Loans receivable, net of deferred fees and costs,increased by $101.0 million, or 14%, to $806.7 million at September 30, 2006from $705.6 million at December 31, 2005. See Table 10 for details on theloans receivable portfolio. We experienced growth in our commercial andindustrial, real estate commercial, real estate construction and residentialreal estate loan portfolios. We expect continued growth within these loancategories over the reminder of 2006 due to our increased legal lending limitof $20.8 million at September 30, 2006 and the volume of loans we havescheduled for funding. In addition, we had $258.1 million in loans held forsale, net at September 30, 2006, compared to $361.7 million atDecember 31, 2005, a decrease of $103.6 million. Loans that are held forsale, net are valued at the lower of cost or market value. The decrease inloans held for sale at September 30, 2006 compared to December 31, 2005 isdirectly related to the slowdown in the regional housing market.

**Table 10.Loans Receivable**

At September 30, 2006 andDecember 31, 2005

(In thousands)
| ** **                       | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Commercial and  industrial       |       | $                                | 89,603     |                            | 11.11      | % | $ | 69,392 |   | 9.83 | % |
| Real estate -  commercial        |       | 302,487                          |       | 37.49                           |       | 275,381 |   | 39.01 |   |
| Real estate -  construction      |       | 158,754                          |       | 19.68                           |       | 128,009 |   | 18.13 |   |
| Real estate -  residential       |       | 181,410                          |       | 22.49                           |       | 152,818 |   | 21.65 |   |
| Home equity  lines               |       | 69,283                           |       | 8.59                            |       | 75,048 |   | 10.63 |   |
| Consumer                         |       | 5,262                            |       | 0.64                            |       | 5,255 |   | 0.75 |   |
|                             |       |                             |       |                            |       |   |   |   |   |
| Gross loans                      |       | $                                | 806,799    |                            | 100.00     | % | $ | 705,903 |   | 100.00 | % |
|                             |       |                             |       |                            |       |   |   |   |   |
| Net deferred  (fees) costs       |       | (146                             | )          |                            |       | (259 | ) |   |   |
| Less: allowance  for loan losses |       | (9,205                           | )          |                            |       | (8,301 | ) |   |   |
|                             |       |                             |       |                            |       |   |   |   |   |
| Loans  receivable, net           |       | $                                | 797,448    |                            |       |   | $ | 697,343 |   |   |   |

 

*Deposits*

Total deposits were $1.18 billion at September30, 2006 compared to $1.07 billion at December 31, 2005. We experiencedincreases in our non-interest bearing checking, interest checking, and savingsdeposit products, which offset decreases in our interest-bearing money marketdeposits and certificates of deposit. See Table 11 for details on certificatesof deposit with balances of $100,000 or more. The increase in interest checkingdeposits is a result of new customers from our branch expansion and competitivedeposit pricing, particularly with our Chairman’s Club interest checkingrelationship product, which we introduced in the first quarter of 2006. OurChairman’s Club interest checking deposit promotion is a relationship accountthat offered initially and continues to offer an interest rate of 4.01% onbalances over $25,000. Our savings deposits increased as a result of our newSimply Savings product, which allows new customers to earn a yield of 5.01% onfunds deposited with us.  We had nobrokered certificates of deposit at September 30, 2006 compared to $9.8 millionat December 31, 2005.

 

**Table 11.Certificates of Deposit of $100,000 or More**

At  September 30, 2006

(In thousands)
| **Maturities:**                        | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| Three months or  less                  |       | $                   | 105,143    |            | $          | 30,536    |       | $ | 135,679 |   |
| Over three  months through six months  |       | 31,651              |       | 23,932          |       | 55,583    |       |
| Over six months  through twelve months |       | 16,740              |       | 12,989          |       | 29,729    |       |
| Over twelve  months                    |       | 46,621              |       | 7,095           |       | 53,716    |       |
|                                   |       | $                   | 200,155    |            | $          | 74,552    |       | $ | 274,707 |   |

----

* No-Penalty certificates of deposit can be redeemed at anytime at therequest of the depositor.

39

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*Borrowings*

Other borrowed funds decreased $4.4 million to$151.1 million at September 30, 2006, compared to $155.4 million atDecember 31, 2005. Treasury, Tax & Loan Note option borrowingsincreased $5.2 million to $10.4 million at September 30, 2006 compared to $5.2million at December 31, 2005.  FHLBadvances decreased $21.1 million to $67.3 million at September 30, 2006compared to $88.5 million at December 31, 2005. Customer repurchase agreementsincreased $11.6 million to $52.7 million at September 30, 2006 compared to$41.2 million at December 31, 2005. Table 12 provides information on our borrowings.

**Table 12.Short-Term Borrowings and Other Borrowed Funds**

At September 30, 2006

(In thousands)

 
| **Short-term FHLB advances:**                              | ** ** | ** **                    | ** ** | ** **                                                                         | ** ** | **Amount**             | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------|------------|
| **Advance Date**                                                | ** ** | **Term of Advance** | ** ** | **Date Due**                                                                  | ** ** | **Interest Rate** | ** ** | **Outstanding** | ** ** |
| Jul-03                                                               |       | 4  years                      |       | Jul-07                                                                             |       | 2.63%                  |       | $                 6,250 |   |
| Mar-03                                                               |       | 4  years                      |       | Mar-07                                                                             |       | 2.81%                  |       | 1,000 |   |
| Apr-04                                                               |       | 3  years                      |       | Apr-07                                                                             |       | 3.15%                  |       | 3,000 |   |
| May-04                                                               |       | 3  years                      |       | May-07                                                                             |       | 3.50%                  |       | 10,000 |   |
| Jun-05                                                               |       | 2  years                      |       | Jun-07                                                                             |       | 4.12%                  |       | 5,000 |   |
| Jun-06                                                               |       | 1  years                      |       | Jun-07                                                                             |       | 4.12%                  |       | 5,000 |   |
| **Total short-term FHLB advances and weighted  average rate**        | ** ** | **3.47%**                     | ** ** | **$                30,250** | ** ** |
| ** **                                                           | ** ** | ** **                    | ** ** | ** **                                                                         | ** ** |
| **Other short-term borrowed funds:**                                 |       |                          | ** ** | ** **                                                                         | ** ** | ** **             | ** ** |
| TT&L Note  option                                                |       |                          |       |                                                                               |       | 4.50%                  |       | 10,375 |   |
| Customer  repurchase agreements                                      |       |                          |       | 2.10%                                                                              |       | 52,726                 |       |
| **Total other short-term borrowed funds and weighted  average rate** |       | **2.49%**                     |       | **$                63,101** |       |
| ** **                                                           | ** ** | ** **                    | ** ** | ** **                                                                         | ** ** |
| **Other borrowed funds:**                                            | ** ** | ** **                    | ** ** | ** **                                                                         | ** ** |
| Trust  preferred                                                     |       | 7.25%                         |       | $                20,619     |       |
| FHLB  advances - long term                                           |       | 3.99%                         |       | 37,083                                                                             |       |
| **Other borrowed funds and weighted average rate**                   | ** ** | **5.15%**                     | ** ** | **$                57,702** | ** ** |
|                                                                 | ** ** | ** **                    | ** ** | ** **                                                                         | ** ** |
| **Total  other borrowed funds and weighted average rate**            | ** ** | **3.71%**                     | ** ** | **$              151,053**       | ** ** |
|                                                                      |            |                               |            |                                                                                    |            |                        |            |  |  |  |  |

 

At September 30, 2006, mortgage funding checksincreased by $3.8 million to $45.4 million, compared to $41.6 million atDecember 31, 2005. These liabilities are related to George Mason and areused to fund the loans in process of being sold. George Mason has creditfacilities with the Bank and also has a third party facility of $250 million.There were no borrowings outstanding under this third party facility atSeptember 30, 2006.

40

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*Shareholders’ Equity*

Shareholders’ equity at September 30, 2006 was$152.7 million, an increase of $4.8 million, compared to $147.9 million atDecember 31, 2005. The increase from the year end was primarily a resultof net income of $5.3 million for the nine months ended September 30, 2006, anda favorable market value adjustment of $65,000 on investment securitiesavailable-for-sale offset by an increase in unrealized losses on derivativeinstruments designated as cash flow hedges of $34,000 and dividend payments totaling$732,000 as of September 30, 2006. Book value per share at September 30, 2006was $6.26, compared to $6.07 at December 31, 2005. Tangible book value pershare at September 30, 2006 was $5.68 compared to $5.12 at December 31,2005.

##### **Business Segment Operations**

We provide banking and non-banking financialservices and products through our subsidiaries.

*Commercial Banking*

The Commercial Banking segment includes bothcommercial and consumer lending and provides customers such products ascommercial loans, real estate loans, and other business financing and consumerloans. In addition, this segment also provides customers with various depositproducts including demand deposit accounts, savings accounts and certificatesof deposit.

For the three months ended September 30, 2006, theCommercial Banking segment recorded net income of $2.2 million compared to $1.3million for the same period of 2005, an increase of $918,000. For the ninemonths ended September 30, 2006, the Commercial Banking segment recorded netincome of $7.3 million compared to $2.9 million for the nine months endedSeptember 30, 2005, an increase of $4.3 million. The increases in net incomeare primarily related to the increased volume and interest rates in the Bank’sloan receivable portfolio. At September 30, 2006, total assets for this segmentwere $1.48 billion, loans receivable, net of deferred fees and costs, were$806.7 million and total deposits were $1.18 billion. At September 30, 2005,total assets were $1.41 billion, loans receivable, net of deferred fees andcosts were $632.1 million and total deposits were $1.09 billion.

*Mortgage Banking*

The operations of the Mortgage Banking segment areconducted through George Mason. George Mason engages primarily in theorigination and acquisition of residential mortgages for sale into thesecondary market on a best efforts basis.

Forthe three months ended September 30, 2006 and 2005, the Mortgage Bankingsegment recorded net income of $547,000 and $2.1 million, respectively. For thenine months ended September 30, 2006 and 2005, the Mortgage Banking segmentrecorded net income of $1.6 million and $5.3 million, respectively. Thedecreases in net income are directly related to the decreased volume of loansoriginated due to the slowdown in regional housing market caused in part byincreases in interest rates. At September 30, 2006, total assets for this segmentwere $273.1 million, loans held for sale, net were $258.1 million and mortgagefunding checks were $45.4 million. At September 30, 2005, total assets were$467.3 million, loans held for sale, net were $454.7 million and mortgagefunding checks were $104.3 million.

41

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*Wealth Management and TrustServices*

The Wealth Management and Trust Services segmentprovides investment and financial services to business and individuals,including financial planning, retirement/estate planning, trusts, estates,custody, investment management, escrows, and retirement plans. Wilson/Bennettis included in this operating segment since the date of its acquisition,June 9, 2005. On February 9, 2006, we acquired certain fiduciary andother assets and assumed certain liabilities of FBR National Trust Company,formerly a subsidiary of Friedman, Billings, Ramsey Group, Inc. On thedate of acquisition, the trust division had $5.6 billion in managed andcustodial assets.

For the three months ended September 30, 2006, theWealth Management and Trust Services segment recorded a net loss of $2.0million, compared to net income of $40,000 for the same period of 2005. For thenine months ended September 30, 2006, the Wealth Management and Trust Servicessegment recorded a net loss of $1.9 million, compared to a net loss of $18,000for the same period of 2005. The net loss reported for the three and ninemonths ended September 30, 2006 is primarily attributable to the aforementionedimpairment charges recorded at Wilson/Bennett. At September 30, 2006, total assets were $5.6 million and managed andcustodial assets were $5.9 billion. At September 30, 2005, total assets forthis segment were $7.3 million and managed and custodial assets were $333.4million. The increase in managed and custodial assets from 2005 to 2006 isdirectly related to the addition of the trust division in February 2006.

Information pertaining to our business segments canbe found in Note 5 to the Notes to Consolidated Financial Statements.

## **Capital Resources**

Capital adequacy is an important measure offinancial stability and performance. Our objectives are to maintain a level ofcapitalization that is sufficient to sustain asset growth and promote depositorand investor confidence.

Regulatory agencies measure capital adequacy utilizinga formula that takes into account the individual risk profile of the financialinstitution. The guidelines define capital as both Tier 1 (which includescommon shareholders’ equity, defined to include certain debt obligations) andTier 2 (which includes certain other debt obligations, a portion of theallowance for loan losses, and 45% of any unrealized gains in equitysecurities).

At September 30, 2006, our Tier 1 and total (Tier 1and Tier 2) risk-based capital ratios were 14.00% and 14.82%, respectively. AtDecember 31, 2005, our Tier 1 and total risk-based capital ratios were14.83% and 15.65%, respectively.  Ourregulatory capital levels for the Bank and bank holding company meet thoseestablished for well-capitalized institutions. Table 13 provides additionalinformation pertaining to our capital ratios.

**Table 13.Capital Components**

At September 30, 2006 andDecember 31, 2005

(In thousands)
| ** **                                                      | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **To Be Well  Capitalized Under  Prompt Corrective** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                      | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                                                                | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **At  September 30, 2006**                                      |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |
| Total risk based  capital/Total capital to risk-weighted assets |       | $          | 167,796    |                       | 14.82      | %                          | $          | 90,552                                                                   | >  | 8.00 | % | $ | 113,190 | >  | 10.00 | % |
| Tier I  capital/Tier I capital to risk-weighted assets          |       | 158,479    |       | 14.00                      | %          | 45,276                     | >  | 4.00                                                                     | %          | 67,914 | >  | 6.00 | % |
| Tier I  capital/Total capital to average assets                 |       | 158,479    |       | 10.79                      | %          | 58,737                     | >  | 4.00                                                                     | %          | 73,421 | >  | 5.00 | % |
|                                                            |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |
|                                                            |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |
| **At  December 31, 2005**                                       |       |       |       |                       |       |                       |       |                                                                     |       |   |   |   |   |
| Total risk-based  capital/Total capital to risk-weighted assets |       | $          | 159,155    |                       | 15.65      | %                          | $          | 81,334                                                                   | >  | 8.00 | % | $ | 101,668 | >  | 10.00 | % |
| Tier I  capital/Tier I capital to risk-weighted assets          |       | 150,742    |       | 14.83                      | %          | 40,667                     | >  | 4.00                                                                     | %          | 61,001 | >  | 6.00 | % |
| Tier I capital/Total  capital to average assets                 |       | 150,742    |       | 10.71                      | %          | 56,308                     | >  | 4.00                                                                     | %          | 70,386 | >  | 5.00 | % |

 

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**ContractualObligations**

We have entered into a number of long-termcontractual obligations to support our ongoing business activities. Thesecontractual obligations will be funded through operating revenues and liquiditysources held or available to us. The required payments under such obligationsare detailed in Table 14.

**Table 14.Contractual Obligations**

At September 30, 2006

(In thousands)

 
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 - 2  Years** | ** ** | **3 - 5  Years** | ** ** | **More than  5 Years** | ** ** |
| Certificates of  deposit                             |       | $                                         | 588,917    |   | $ | 456,101 |   | $ | 121,632 |   | $ | 10,984 |   | $ | 200 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Advances from  the Federal Home Loan Bank of Atlanta |       | 67,333                                    |       | 30,250 |   | 22,083 |   | — |   | 15,000 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Trust preferred  securities                          |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations                         |       | 19,629                                    |       | 4,377 |   | 3,279 |   | 5,797 |   | 6,176 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                                         | 696,498    |   | $ | 490,728 |   | $ | 146,994 |   | $ | 16,781 |   | $ | 41,995 |   |

 

**Commitmentsand Contingencies**

In the normal course of business, we are a party tofinancial instruments with off-balance sheet risk to meet the financing needsof our customers. These financial instruments include commitments to extendcredit and standby letters of credit. These instruments involve, to varyingdegrees, elements of credit risk in excess of the amount recognized on thebalance sheet.

The Bank’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit and standby letters of credit is represented by thecontractual amount of those instruments. The Bank uses the same credit policiesin making commitments and conditional obligations as it does for on-balancesheet instruments.

At September 30, 2006, commitments to extend creditwere $341.7 million and standby letters of credit were $7.3 million.

Commitments to extend credit are agreements to lendto a customer as long as there is no violation of any condition established inthe agreement. Commitments generally have expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future funding requirements. We evaluate eachcustomer’s credit worthiness on a case-by-case basis. The amount of collateralobtained is based on management’s credit evaluation of the counterparty.Collateral held varies but may include accounts receivable, inventory, propertyand equipment, and income-producing commercial properties.

Unfunded commitments under lines of credit arecommitments for possible future extensions of credit to existing customers.Those lines of credit may or may not be drawn upon to the total extent offunding to which we have committed.

Standby letters of credit are conditionalcommitments we issued to guarantee the performance of a customer to a thirdparty. Those guarantees are primarily issued to support public and privateborrowing arrangements, including commercial paper, bond financing, and similartransactions. The credit risk involved in issuing standby letters of credit isessentially the same as that involved in extending loan facilities tocustomers. We hold certificates of deposit, deposit accounts, and real estateas collateral supporting those commitments when collateral is deemed necessary.

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## **Liquidity**

Liquidity in the banking industry is defined as theability to meet the demand for funds of both depositors and borrowers. We mustbe able to meet these needs with cash on hand by obtaining funding fromdepositors or other lenders or by converting non-cash items to cash. Theobjective of our liquidity management program is to ensure that we always havesufficient liquid resources to meet the demands of our depositors andborrowers. Stable core deposits and a strong capital position provide the basefor our liquidity position. We have demonstrated our ability to attract retaildeposits because of our convenient branch locations, personal service anddeposit pricing.

In addition to retail deposits, we have access tovarious wholesale funding markets. These markets include the brokered CDmarket, the repurchase agreement market and the federal funds market. We alsomaintain secured lines of credit with the Federal Reserve Bank of Richmond and theFederal Home Loan Bank of Atlanta. Having diverse funding alternatives reducesour reliance on any one source for funding.

Cash flow from amortizing assets or maturing assetscan also provide funding to meet the needs of depositors and borrowers.

We have established a formal liquidity contingencyplan which establishes a liquidity management team and provides guidelines forliquidity management. For our liquidity management program, we first determineour current liquidity position and then forecast liquidity based on anticipatedchanges in the balance sheet. In this forecast, we expect to maintain aliquidity cushion. We also stress test our liquidity position under severaldifferent stress scenarios. Guidelines for the forecasted liquidity cushion andfor liquidity cushions for each stress scenario have been established. Inaddition, one stress test combines all other stress tests to see how liquiditywould react to several negative scenarios occurring at the same time. Webelieve that we have sufficient resources to meet our liquidity needs.

George Mason and the Bank have a one year $150million floating rate revolving credit and security agreement with a thirdparty. The purpose of this credit facility is to fund residential mortgageloans at George Mason prior to their sale into the secondary market. The creditfacility requires, among other things, that George Mason and the Bank havepositive quarterly net income and maintain specified minimum tangible andregulatory net worth levels. The Company has guaranteed repayment of this debt.The interest rate on this credit facility is LIBOR plus between 1.50% and1.875%. At September 30, 2006, this line was not utilized.

In addition to this facility, this same lender hasalso provided a $100 million facility that is utilized by George Mason towarehouse residential mortgage loans held for sale to this lender. The terms ofthis facility are substantially the same as the above-referenced revolvingcredit and security agreement and the cost of this facility is netted againstinterest earned on the loans pending settlement with the lender. Loans underthis credit facility are considered sold when financed.

Liquid assets, which include cash and due frombanks, federal funds sold and investment securities available for sale, totaled$286.3 million at September 30, 2006 or 18% of total assets. We holdinvestments that are classified as held-to-maturity in the amount of $102.7million at September 30, 2006. To maintain ready access to the Bank’s securedlines of credit, the Bank has pledged the majority of its investment securitiesto the Federal Home Loan Bank of Atlanta with additional investment securitiespledged to the Federal Reserve Bank of Richmond. Additional borrowing capacityat the Federal Home Loan Bank of Atlanta at September 30, 2006 was $262.7million. Borrowing capacity with the Federal Reserve Bank of Richmond was $15.9million at September 30, 2006. George Mason has $650 million of lines of creditavailable, including $400 million with the Bank and $250 million describedabove. We anticipate maintaining liquidity at a level sufficient to protectdepositors, provide for reasonable growth and fully comply with all regulatoryrequirements.

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

We are exposed to various business risks includinginterest rate risk. Our goal is to maximize net interest income withoutincurring excessive interest rate risk. Management of net interest income andinterest rate risk must be consistent with the level of capital and liquiditythat we maintain. We manage interest rate risk through an asset and liabilitycommittee (“ALCO”). ALCO is responsible for managing the interest rate risk forthe Company in conjunction with liquidity and capital management.

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

At September 30, 2006, given the assumptions builtinto our forecasting model, we were liability sensitive. Liability sensitivemeans that we had more liabilities maturing or repricing than assets. While wecontinue to have a significant portion of our assets as floating rate assets,the average maturity of our liabilities has decreased and we have increased thelevel of non-maturity deposits which allows the bank to adjust the rates onthese liabilities quickly in a falling rate scenario. In a falling rateenvironment, net interest income should grow for a liability sensitive bank. Inthe down 200 basis point scenario for one year, net interest income improves bynot more than 4.0% compared to the base case and by not more than 6.1% over thetwo year time horizon. Being liability sensitive, net interest income generallydeclines compared to the base case in a rising rate environment. At September30, 2006, net interest income has a negative variance to the base case of notmore than 2% over the two year time horizon. These changes from the base caseare within the guidelines we have established.

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

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

At September 30, 2006, given the assumption builtinto our forecasting model, we were liability sensitive. Liability sensitivemeans that we had more liabilities maturing or repricing than assets. While wecontinue to have a significant portion of our assets as floating rate assets,the average maturity of our liabilities has decreased and we have increased thelevel of non-maturity deposits which allows the bank to adjust the rates onthese liabilities quickly in a falling rate scenario. In a falling rateenvironment, net interest income should grow for a liability sensitive bank. Inthe down 200 basis point scenario for one year, net interest income improves bynot more than 4.0% compared to the base case and by not more than 6.1% over thetwo year time horizon. Being liability sensitive, net interest income generallydeclines compared to the base case in a rising rate environment. At September30, 2006, net interest income has a negative variance to the base case of notmore than 2% over the two year time horizon. These changes from the base caseare within the guidelines we have established.

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**Item 4. Controls and Procedures**

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

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

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

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**PART II —OTHER INFORMATION**

**Item 1. Legal Proceedings**

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

**Item1A.  Risk Factors**

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

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

(a)  None.

(b)  Notapplicable.

(c)  None.

**Item 3.  Defaults Upon Senior Securities**

(a)  None.

(b)  None.

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

(a)  None.

(b)  Notapplicable.

(c)  None.

(d)  None.

**Item 5.  Other Information**

(a)  None.

(b)  None.

**Item 6.  Exhibits**

31.1      Rule13a-14(a) Certification of Chief Executive Officer31.2      Rule 13a-14(a) Certification of Chief Financial Officer32.1      Statement of Chief Executive Officer Pursuant to 18 U.S.C.Section 135032.2      Statement of Chief Financial Officer Pursuant to 18 U.S.C.Section 1350

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**SIGNATURES**

**Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.**
|                    | ** ** | CARDINAL FINANCIAL  CORPORATION                                                     |
|-------------------------|------------|-------------------------------------------------------------------------------------|
|               |       | (Registrant)                                                                        |
|                    |       |                                                                                |
| Date: November  8, 2006 |       | /s/ Bernard H. Clineburg                                                            |
|                    |       | Bernard H. Clineburg                                                                |
|               |       | Chairman and Chief Executive Officer                                                |
|               |       | (Principal Executive Officer)                                                       |
|                    |       |                                                                                |
| Date: November  8, 2006 |       | /s/ Mark A. Wendel                                                                  |
|                    |       | Mark A. Wendel                                                                      |
|               |       | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |
|                    |       |                                                                                |
| Date: November  8, 2006 |       | /s/ Jennifer L. Deacon                                                              |
|                    |       | Jennifer L. Deacon                                                                  |
|               |       | Senior Vice President and Controller                                                |
|               |       | (Principal Accounting Officer)                                                      |

 

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