**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

| **ý****  Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |
| **For the  quarterly period ended September 30, 2003**                                                         |
|                                                                                                                |
| **o****  Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**     |

 

**For thetransition period from                 to                 .**

 

**CommissionFile Number: ****0-24557**

 

**CARDINAL FINANCIAL CORPORATION**

(Exact name of Registrant asspecified in its charter)

 

| **Virginia**                                           |   | **54-1874630**      |
|--------------------------------------------------------|--------|---------------------|
| (State or Other Jurisdiction of                        |   | (I.R.S. Employer    |
| Incorporation or Organization)                         |   | Identification No.) |
|                                                   |   |                |
| **8270 Greensboro Drive, Suite 500**                   |
| **McLean, Virginia  22102**                       |
| (Address of Principal Executive  Offices)              |
|                                                   |   |                |
| **(703) 584-3400**                                     |
| (Issuer’s Telephone Number,  Including Area Code) |

 

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes ý   No  o

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:

 

10,076,887 shares of common stock,par value $1.00 per share,

outstanding as of November 7,2003

 

 

 

----

 

 

**CARDINALFINANCIAL CORPORATION**

 

**INDEX TO FORM10-QSB**

 
| **PART I – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |
| Item 1.                                 | Financial Statements (Unaudited): |
|                                    |   |
|                                    | Consolidated  Statements of ConditionSeptember 30, 2003 and December 31, 2002 |
|                                    |   |
|                                    | Consolidated  Statements of OperationsFor the three and nine months ended September 30, 2003 and 2002 |
|                                    |
|                                    |   |
|                                    | Consolidated  Statements of Comprehensive Income (Loss)  For the three and nine months ended September 30, 2003 and 2002 |
|                                    |   |
|                                    | Consolidated  Statements of Changes In Shareholders’ Equity  For the nine months ended September 30, 2003 and 2002 |
|                                    |   |
|                                    | Consolidated Statements  of Cash Flows  For the nine months ended September 30, 2003 and 2002 |
|                                    |   |
|                                    | Notes  to Condensed Consolidated Financial Statements |
|                                    |   |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                    |   |
| Item 3.                                 | Controls and Procedures |
|                                    |   |
| **PART II – OTHER INFORMATION**    |
|                                    |   |
| Item 1.                                 | Legal Proceedings |
| Item  2.                                | Changes  in Securities and Use of Proceeds |
| Item 3.                                 | Defaults Upon  Senior Securities |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders |
| Item 5.                                 | Other Information |
| Item 6.                                 | Exhibits and  Reports on Form 8-K |
|                                    |   |
| **SIGNATURES**                          |
|                                         |  |  |

 

i

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCONDITION

 

September 30, 2003 and December 31, 2002

 

(Dollars in thousands, except share data)

 

 
|                                                                                                                                                                                      |   | **(Unaudited)  September 30,** |    | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|-------------------|--------|
|                                                                                                                                                                                      |   | **2003**                       |    | **2002**          |   |
| **Assets**                                                                                                                                                                                |   |                           |    |              |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Cash and due from banks                                                                                                                                                                   |   | $                              | 9,332   |              | $      | 27,465 |   |
| Federal funds sold                                                                                                                                                                        |   | 10,748                         |    | 35,906            |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Total cash and cash  equivalents                                                                                                                                                          |   | 20,080                         |    | 63,371            |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Investment securities  available-for-sale                                                                                                                                                 |   | 97,174                         |    | 163,665           |   |
| Investment securities  held-to-maturity                                                                                                                                                   |   | 145,892                        |    | —            |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Total investment securities                                                                                                                                                               |   | 243,066                        |    | 163,665           |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Other investments                                                                                                                                                                         |   | 3,748                          |    | 1,615             |   |
| Loans held for sale                                                                                                                                                                       |   | 785                            |    | —            |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Loans receivable, net of  fees                                                                                                                                                            |   | 290,811                        |    | 249,106           |   |
| Allowance for loan losses                                                                                                                                                                 |   | (3,943                         | )       | (3,372            | )      |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Loans receivable, net                                                                                                                                                                     |   | 286,868                        |    | 245,734           |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Premises and equipment, net                                                                                                                                                               |   | 5,040                          |    | 4,942             |   |
| Goodwill                                                                                                                                                                                  |   | 646                            |    | 646               |   |
| Accrued interest and other  assets                                                                                                                                                        |   | 3,115                          |    | 6,350             |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Total assets                                                                                                                                                                              |   | $                              | 563,348 |              | $      | 486,323 |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| **Liabilities and Shareholders’ Equity**                                                                                                                                             |   |                           |    |              |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Deposits                                                                                                                                                                                  |   | $                              | 459,211 |              | $      | 423,479 |   |
| Other borrowed funds                                                                                                                                                                      |   | 62,753                         |    | 2,000             |   |
| Accrued interest and other  liabilities                                                                                                                                                   |   | 2,253                          |    | 20,132            |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Total liabilities                                                                                                                                                                         |   | 524,217                        |    | 445,611           |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Preferred stock, $1 par  value, 10,000,000 shares authorized Series A preferred stock, cumulative convertible,  1,364,062 and 1,364,684 shares outstanding in 2003 and 2002, respectively |   | 1,364                          |    | 1,365             |   |
| Common stock, $1 par value,  50,000,000 shares authorized, 10,076,887 and 10,044,345 shares outstanding in  2003 and 2002, respectively                                                   |   | 10,077                         |    | 10,044            |   |
| Additional paid-in capital                                                                                                                                                                |   | 51,341                         |    | 51,231            |   |
| Accumulated deficit                                                                                                                                                                       |   | (22,716                        | )       | (24,273           | )      |
| Accumulated other  comprehensive income (loss)                                                                                                                                            |   | (935                           | )       | 2,345             |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Total shareholders’ equity                                                                                                                                                           |   | 39,131                         |    | 40,712            |   |
|                                                                                                                                                                                      |   |                           |    |              |   |
| Total liabilities and  shareholders’ equity                                                                                                                                          |   | $                              | 563,348 |              | $      | 486,323 |   |

 

See accompanying notes toconsolidated financial statements.

 

1

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFOPERATIONS

 

For the three and nine months ended September 30,2003 and 2002

(Dollars in thousands, except per share data)

(Unaudited)

 
|                                                           |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|----------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                           |   | **September  30,**      |   | **September  30,**     |   |
|                                                           |   | **2003**                |   | **2002**               |   | **2003** |   | **2002** |   |
| Interest income:                                               |   |                    |   |                   |   |   |   |   |   |
| Loans receivable                                               |   | $                       | 4,166  |                   | $      | 3,737 |   | $ | 12,298 |   | $ | 10,967 |   |
| Federal funds sold                                             |   | 17                      |   | 260                    |   | 98 |   | 613 |   |
| Investment securities  available-for-sale                      |   | 754                     |   | 1,471                  |   | 4,047 |   | 3,284 |   |
| Investment securities  held-to-maturity                        |   | 1,207                   |   | —                 |   | 1,207 |   | — |   |
| Other investments                                              |   | 35                      |   | 17                     |   | 90 |   | 53 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Total interest income                                          |   | 6,179                   |   | 5,485                  |   | 17,740 |   | 14,917 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Interest expense:                                              |   |                    |   |                   |   |   |   |   |   |
| Deposits                                                       |   | 2,062                   |   | 2,603                  |   | 6,528 |   | 6,834 |   |
| Other borrowed funds                                           |   | 279                     |   | 40                     |   | 470 |   | 208 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Total interest expense                                         |   | 2,341                   |   | 2,643                  |   | 6,998 |   | 7,042 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Net interest income                                            |   | 3,838                   |   | 2,842                  |   | 10,742 |   | 7,875 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Provision for loan losses                                      |   | 356                     |   | 95                     |   | 602 |   | 134 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Net interest income after  provision for loan losses           |   | 3,482                   |   | 2,747                  |   | 10,140 |   | 7,741 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Non-interest income:                                           |   |                    |   |                   |   |   |   |   |   |
| Service charges on deposit  accounts                           |   | 172                     |   | 133                    |   | 467 |   | 363 |   |
| Loan service charges                                           |   | 74                      |   | 91                     |   | 342 |   | 286 |   |
| Investment fee income                                          |   | 184                     |   | 188                    |   | 473 |   | 754 |   |
| Net gain on sales of loans                                     |   | 175                     |   | 3                      |   | 259 |   | 50 |   |
| Net realized gain on  investment securities available-for-sale |   | 291                     |   | 121                    |   | 1,201 |   | 121 |   |
| Net gain on sales of other  assets                             |   | —                  |   | —                 |   | — |   | 39 |   |
| Other income                                                   |   | 75                      |   | 98                     |   | 252 |   | 280 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Total non-interest income                                      |   | 971                     |   | 634                    |   | 2,994 |   | 1,893 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Non-interest expense:                                          |   |                    |   |                   |   |   |   |   |   |
| Salary and benefits                                            |   | 1,671                   |   | 1,368                  |   | 4,861 |   | 4,176 |   |
| Occupancy                                                      |   | 317                     |   | 273                    |   | 1,093 |   | 729 |   |
| Professional fees                                              |   | 221                     |   | 235                    |   | 872 |   | 727 |   |
| Depreciation                                                   |   | 276                     |   | 176                    |   | 731 |   | 555 |   |
| Writedown on corporate bond  impairment                        |   | —                  |   | —                 |   | — |   | 1,660 |   |
| Amortization and writedown  of intangibles                     |   | —                  |   | —                 |   | — |   | 22 |   |
| Other operating expenses                                       |   | 1,199                   |   | 900                    |   | 3,649 |   | 2,503 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Total non-interest expense                                     |   | 3,684                   |   | 2,952                  |   | 11,206 |   | 10,372 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Net income (loss) before  income taxes                         |   | 769                     |   | 429                    |   | 1,928 |   | (738 | ) |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Provision for income taxes                                     |   | —                  |   | —                 |   | — |   | — |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Net income (loss)                                              |   | $                       | 769    |                   | $      | 429 |   | $ | 1,928 |   | $ | (738 | ) |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Dividends to preferred  shareholders                           |   | 124                     |   | 124                    |   | 371 |   | 371 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Net income (loss) to common  shareholders                      |   | $                       | 645    |                   | $      | 305 |   | $ | 1,557 |   | $ | (1,109 | ) |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Basic and diluted income  (loss) per common share              |   | $                       | 0.06   |                   | $      | 0.03 |   | $ | 0.15 |   | $ | (0.15 | ) |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Weighted-average common  shares outstanding - basic            |   | 10,072                  |   | 10,044                 |   | 10,058 |   | 7,243 |   |
|                                                           |   |                    |   |                   |   |   |   |   |   |
| Weighted-average common  shares outstanding - diluted          |   | 10,345                  |   | 10,143                 |   | 10,249 |   | 7,243 |   |
|                                                                |        |                         |        |                        |        |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

2

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the three and nine months endedSeptember 30, 2003 and 2002

(Dollars in thousands)

(Unaudited)

 
|                                                                      |   | **Three  Months Ended ,** |   | **Nine  Months Ended** |   |
|---------------------------------------------------------------------------|--------|---------------------------|--------|------------------------|--------|
|                                                                      |   | **September  30**         |   | **September  30,**     |   |
|                                                                      |   | **2003**                  |   | **2002**               |   | **2003** |   | **2002** |   |
|                                                                      |   |                      |   |                   |   |   |   |   |   |
| Net income (loss)                                                         |   | $                         | 769    |                   | $      | 429 |   | $ | 1,928 |   | $ | (738 | ) |
| Other comprehensive income  (loss):                                       |   |                      |   |                   |   |   |   |   |   |
| Unrealized gain on  available-for-sale investment securities:             |   |                      |   |                   |   |   |   |   |   |
| Unrealized holding gain  (loss) arisingduring the period                  |   | (2,169                    | )      | 1,702                  |   | (2,079 | ) | 2,843 |   |
| Less: reclassification  adjustment forgains included in net income (loss) |   | 291                       |   | 121                    |   | 1,201 |   | 121 |   |
|                                                                      |   |                      |   |                   |   |   |   |   |   |
| Comprehensive income (loss)                                               |   | $                         | (1,691 | )                      | $      | 2,010 |   | $ | (1,352 | ) | $ | 1,984 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

For thenine months ended September 30, 2003 and 2002

(Amounts inthousands)

(Unaudited)

 
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   | **Accumulated**    |   |      |   |
|------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|------------|--------|------------|--------|----------------|--------|-----------------|--------|--------------------|--------|-----------|--------|
|                                                                   |   |          |   |          |   |       |   |       |   | **Additional** |   |            |   | **Other**          |   |      |   |
|                                                                   |   | **Preferred** |   | **Preferred** |   | **Common** |   | **Common** |   | **Paid-in**    |   | **Accumulated** |   | **Comprehensive**  |   |      |   |
|                                                                   |   | **Shares**    |   | **Stock**     |   | **Shares** |   | **Stock**  |   | **Capital**    |   | **Deficit**     |   | **Income  (Loss)** |   | **Total** |   |
| Balance,  December 31, 2001                                            |   | 1,365         |   | $             | 1,365  |       | 4,294  |       | $      | 4,294          |   | $               | 38,488 |               | $      | (23,249   | )      | $ | (274 | ) | $ | 20,624 |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Dividends  on preferred stock                                          |   | —        |   | —        |   | —     |   | —     |   | —         |   | (371            | )      | —             |   | (371      | )      |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Rights  offering shares issued                                         |   | —        |   | —        |   | 2,437      |   | 2,437      |   | 5,462          |   | —          |   | —             |   | 7,899     |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Public  offering shares issued                                         |   | —        |   | —        |   | 3,313      |   | 3,313      |   | 7,281          |   | —          |   | —             |   | 10,594    |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Change  in unrealized loss on investment securities available-for-sale |   | —        |   | —        |   | —     |   | —     |   | —         |   | —          |   | 2,722              |   | 2,722     |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Net  loss                                                              |   | —        |   | —        |   | —     |   | —     |   | —         |   | (738            | )      | —             |   | (738      | )      |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Balance,  September 30, 2002                                           |   | 1,365         |   | $             | 1,365  |       | 10,044 |       | $      | 10,044         |   | $               | 51,231 |               | $      | (24,358   | )      | $ | 2,448 |   | $ | 40,730 |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Balance,  December 31, 2002                                            |   | 1,365         |   | $             | 1,365  |       | 10,044 |       | $      | 10,044         |   | $               | 51,231 |               | $      | (24,273   | )      | $ | 2,345 |   | $ | 40,712 |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Stock  options exercised                                               |   | —        |   | —        |   | 32         |   | 32         |   | 110            |   | —          |   | —             |   | 142       |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Dividends  on preferred stock                                          |   | —        |   | —        |   | —     |   | —     |   | —         |   | (371            | )      | —             |   | (371      | )      |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Preferred  stock converted to common stock                             |   | (1            | )      | (1            | )      | 1          |   | 1          |   | —         |   | —          |   | —             |   | —    |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Change  in unrealized gain on investment securities available-for-sale |   | —        |   | —        |   | —     |   | —     |   | —         |   | —          |   | (3,280             | )      | (3,280    | )      |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Net  income                                                            |   | —        |   | —        |   | —     |   | —     |   | —         |   | 1,928           |   | —             |   | 1,928     |   |
|                                                                   |   |          |   |          |   |       |   |       |   |           |   |            |   |               |   |      |   |
| Balance,  September 30, 2003                                           |   | 1,364         |   | $             | 1,364  |       | 10,077 |       | $      | 10,077         |   | $               | 51,341 |               | $      | (22,716   | )      | $ | (935 | ) | $ | 39,131 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

 

For thenine months ended September 30, 2003 and 2002

 

(Dollars inthousands)

 

(Unaudited)

 
|                                                                                                |   | **Nine  Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                |   | **2003**                             |   | **2002** |   |
| Cash flows from operating  activities:                                                              |   |                                 |   |   |   |
| Net income (loss)                                                                                   |   | $                                    | 1,928  |   | $ | (738 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities: |   |                                 |   |   |   |
| Depreciation                                                                                        |   | 731                                  |   | 555 |   |
| Amortization of intangibles,  premiums and discounts                                                |   | 1,719                                |   | 626 |   |
| Provision for loan losses                                                                           |   | 602                                  |   | 134 |   |
| Originations of loans held  for sale                                                                |   | (30,318                              | )      | (4,369 | ) |
| Proceeds from the sale of  loans held for sale                                                      |   | 29,792                               |   | 9,038 |   |
| Writedown on corporate bond  impairment                                                             |   | —                               |   | 1,660 |   |
| Gain on sale of loans held  for sale                                                                |   | (259                                 | )      | (50 | ) |
| Gain on sale of investment  securities available-for-sale                                           |   | (1,201                               | )      | (121 | ) |
| Gain on sale of other assets                                                                        |   | —                               |   | (39 | ) |
| (Increase) decrease in  accrued interest and other assets                                           |   | 3,235                                |   | (715 | ) |
| Decrease in accrued interest  and other liabilities                                                 |   | (17,879                              | )      | (1,708 | ) |
|                                                                                                |   |                                 |   |   |   |
| Net cash provided by (used  in) operating activities                                                |   | (11,650                              | )      | 4,273 |   |
|                                                                                                |   |                                 |   |   |   |
| Cash flows from investing activities:                                                               |   |                                 |   |   |   |
| Purchase of premises and  equipment                                                                 |   | (829                                 | )      | (88 | ) |
| Proceeds from sale, maturity  and call of investment securities                                     |   | 88,535                               |   | 16,053 |   |
| Proceeds from sale of other  investments                                                            |   | 350                                  |   | 188 |   |
| Purchase of investment  securities                                                                  |   | (222,938                             | )      | (131,129 | ) |
| Purchase of other  investments                                                                      |   | (2,483                               | )      | (184 | ) |
| Redemptions of investment  securities                                                               |   | 51,204                               |   | 11,736 |   |
| Net increase in loans  receivable                                                                   |   | (41,736                              | )      | (15,335 | ) |
|                                                                                                |   |                                 |   |   |   |
| Net cash used in investing  activities                                                              |   | (127,897                             | )      | (118,759 | ) |
|                                                                                                |   |                                 |   |   |   |
| Cash flows from financing  activities:                                                              |   |                                 |   |   |   |
| Net increase in deposits                                                                            |   | 35,732                               |   | 157,644 |   |
| Net increase (decrease) in  other borrowed funds                                                    |   | 60,753                               |   | (8,824 | ) |
| Proceeds from rights  offering                                                                      |   | —                               |   | 7,899 |   |
| Proceeds from public  offering                                                                      |   | —                               |   | 10,594 |   |
| Stock options exercised                                                                             |   | 142                                  |   | — |   |
| Dividends on preferred stock                                                                        |   | (371                                 | )      | (371 | ) |
|                                                                                                |   |                                 |   |   |   |
| Net cash provided by  financing activities                                                          |   | 96,256                               |   | 166,942 |   |
|                                                                                                |   |                                 |   |   |   |
| Net increase (decrease) in  cash and cash equivalents                                               |   | (43,291                              | )      | 52,456 |   |
|                                                                                                |   |                                 |   |   |   |
| Cash and cash equivalents at  beginning of period                                                   |   | 63,371                               |   | 34,459 |   |
|                                                                                                |   |                                 |   |   |   |
| Cash and cash equivalents at  end of period                                                         |   | $                                    | 20,080 |   | $ | 86,915 |   |
|                                                                                                |   |                                 |   |   |   |
| **Supplemental disclosure of cash  flow information:**                                              |   |                                 |   |   |   |
| Cash paid during period for  interest                                                               |   | $                                    | 6,924  |   | $ | 6,947 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(Unaudited)

 

Note1

 

*Organization*

 

CardinalFinancial Corporation (the ”Company”) was incorporated November 24,1997 under the laws of the Commonwealth of Virginia as a bank holding companywhose activities consist of investment in its wholly-owned subsidiaries.  The Company opened Cardinal Bank, N.A. in1998 and Cardinal *Wealth Services, Inc.,* an investment services subsidiary, in1999.  In 1999, the Company opened twoadditional banking subsidiaries and, in late 2000, completed an acquisition ofHeritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank.  These banking subsidiaries were consolidatedinto Cardinal Bank, N.A. as of March 1, 2002.

 

*Basis ofPresentation*

 

Inthe opinion of management, the accompanying consolidated financial statementshave been prepared in accordance with the requirements of Regulation S-X,Article 10.  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  However, all adjustmentsthat are, in the opinion of management, necessary for a fair presentation havebeen included.  The results ofoperations for the three and nine months ended September 30, 2003 are notnecessarily indicative of the results to be expected for the full year endingDecember 31, 2003.  The unauditedinterim financial statements should be read in conjunction with the auditedfinancial statements and notes to financial statements that are presented inthe Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002(the “2002 Form 10-KSB”).

 

# ***Stock Based Compensation***

 

### **At September 30, 2003, the Company had twostock-based employee compensation plans, the 1999 Stock Option Plan and the2002 Equity Compensation Plan.  Theseplans are described more fully in Footnote 14 of the 2002 Form 10-KSB.**

 

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

 

6

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share as if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employee compensation.

 

(Dollars in thousands, exceptper share data)

 
|                                                                                                              |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                              |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Net income (loss) to common  shareholders                                                                         |   | $                                     | 645    |                                 | $      | 305 |   | $ | 1,557 |   | $ | (1,109 | ) |
| Deduct: Total stock-based  employee compensation expense determined under fair value-based method for  all awards |   | (106                                  | )      | (29                                  | )      | (434 | ) | (218 | ) |
| Pro forma net income (loss)                                                                                       |   | $                                     | 539    |                                 | $      | 276 |   | $ | 1,123 |   | $ | (1,327 | ) |
|                                                                                                              |   |                                  |   |                                 |   |   |   |   |   |
| Earnings (loss) per common  share:                                                                                |   |                                  |   |                                 |   |   |   |   |   |
| Basic - as reported                                                                                               |   | $                                     | 0.06   |                                 | $      | 0.03 |   | $ | 0.15 |   | $ | (0.15 | ) |
| Basic - as pro forma                                                                                              |   | 0.05                                  |   | 0.03                                 |   | 0.11 |   | (0.18 | ) |
| Diluted - as reported                                                                                             |   | 0.06                                  |   | 0.03                                 |   | 0.15 |   | (0.15 | ) |
| Diluted - as pro forma                                                                                            |   | 0.05                                  |   | 0.03                                 |   | 0.11 |   | (0.18 | ) |

 

Theweighted average per share fair values of grants made for the three and ninemonths ended September 30, 2003 were $2.80 and $2.12, respectively.  The weighted average per share fair valuesof grants made for the nine months ended September 30, 2002 was $2.12.  There were no option grants during the threemonthe period ended September 30, 2002. The fair values of the options granted were estimated on the grant dateusing the Black - Scholes option - pricing model based on the followingweighted average assumptions: 

 
|                    |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|-------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                    |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Estimated option life   |   | 10 years                              |   | 10 years                             |   | 10 years |   | 10 years |   |
| Risk free interest rate |   | 4.23                                  | %      | 4.25                                 | %      | 3.96 | % | 4.25 | % |
| Expected volatility     |   | 20.40                                 | %      | 20.40                                | %      | 20.40 | % | 20.40 | % |
| Expected dividend yield |   | 0.00                                  | %      | 0.00                                 | %      | 0.00 | % | 0.00 | % |

 

Therewere 9,750 options granted during the three months ended September 30, 2003 and374,250 options granted during the nine months ended September 30, 2003.  Of those grants issued, 1,000 and 92,100,respectively, immediately vested on the grant date.

 

7

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Note2

 

*Segment Disclosures*

 

TheCompany operates and reports in two business segments, banking and investmentservices.  The banking segmentencompasses the operations of Cardinal Bank, N.A. and includes both commercialand consumer lending and provides customers such products as commercial loans,real estate loans, and other business financing and consumer loans.  In addition, this segment also providescustomers with several choices of deposit products including demand depositaccounts, savings accounts and certificates of deposit.  The investment services segment includesCardinal Wealth Services, Inc., which provides investment services tobusinesses and individuals, including financial planning and retirement/estateplanning, through an affiliation with Raymond James Financial Services, Inc., aregistered investment advisor.

 

Informationabout each reportable segment, and reconciliation of such information to theconsolidated financial statements as of and for the three and nine months endedSeptember 30, 2003 and 2002, follows:

 

**For the Three MonthsEnded September 30, 2003:**

** **
| **(Dollars in thousands)** |   | **Banking** |    | **Investment  Services** |   | **Intersegment  Elimination** |   | **Other** |    | **Consolidated** |   |
|----------------------------|--------|-------------|---------|--------------------------|--------|-------------------------------|--------|-----------|---------|------------------|--------|
| Net  interest income       |   | $           | 3,815   |                     | $      | —                        |   | $         | —  |             | $      | 23 |   | $ | 3,838 |   |
| Provision  for loan losses |   | 356         |    | —                   |   | —                        |   | —    |    | 356              |   |
| Non-interest  income       |   | 787         |    | 184                      |   | —                        |   | —    |    | 971              |   |
| Non-interest  expense      |   | 3,196       |    | 217                      |   | —                        |   | 271       |    | 3,684            |   |
| Net  income (loss)         |   | $           | 1,050   |                     | $      | (33                           | )      | $         | —  |             | $      | (248 | ) | $ | 769 |   |
| Total  assets              |   | $           | 560,418 |                     | $      | 229                           |   | $         | (36,759 | )                | $      | 39,460 |   | $ | 563,348 |   |

** **

**For the Three MonthsEnded September 30, 2002:**

** **
| **(Dollars in thousands)** |   | **Banking** |    | **Investment  Services** |   | **Intersegment  Elimination** |   | **Other** |    | **Consolidated** |   |
|----------------------------|--------|-------------|---------|--------------------------|--------|-------------------------------|--------|-----------|---------|------------------|--------|
| Net  interest income       |   | $           | 2,810   |                     | $      | —                        |   | $         | —  |             | $      | 32 |   | $ | 2,842 |   |
| Provision  for loan losses |   | 95          |    | —                   |   | —                        |   | —    |    | 95               |   |
| Non-interest  income       |   | 446         |    | 188                      |   | —                        |   | —    |    | 634              |   |
| Non-interest  expense      |   | 2,666       |    | 223                      |   | —                        |   | 63        |    | 2,952            |   |
| Net  income (loss)         |   | $           | 495     |                     | $      | (35                           | )      | $         | —  |             | $      | (31 | ) | $ | 429 |   |
| Total  assets              |   | $           | 443,511 |                     | $      | 332                           |   | $         | (38,192 | )                | $      | 41,151 |   | $ | 446,802 |   |

 

8

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**For the Nine MonthsEnded September 30, 2003:**

** **
| **(Dollars in thousands)** |   | **Commercial  Banking** |    | **Investment  Services** |   | **Intersegment  Elimination** |   | **Other** |    | **Consolidated** |   |
|----------------------------|--------|-------------------------|---------|--------------------------|--------|-------------------------------|--------|-----------|---------|------------------|--------|
| Net interest  income       |   | $                       | 10,666  |                     | $      | —                        |   | $         | —  |             | $      | 76 |   | $ | 10,742 |   |
| Provision  for loan losses |   | 602                     |    | —                   |   | —                        |   | —    |    | 602              |   |
| Non-interest  income       |   | 2,521                   |    | 473                      |   | —                        |   | —    |    | 2,994            |   |
| Non-interest  expense      |   | 9,801                   |    | 548                      |   | —                        |   | 857       |    | 11,206           |   |
| Net  income (loss)         |   | $                       | 2,784   |                     | $      | (75                           | )      | $         | —  |             | $      | (781 | ) | $ | 1,928 |   |
| Total  assets              |   | $                       | 560,418 |                     | $      | 229                           |   | $         | (36,759 | )                | $      | 39,460 |   | $ | 563,348 |   |

 

**For the Nine MonthsEnded September 30, 2002:**

** **
| **(Dollars in thousands)** |   | **Commercial  Banking** |    | **Investment  Services** |   | **Intersegment  Elimination** |   | **Other** |    | **Consolidated** |   |
|----------------------------|--------|-------------------------|---------|--------------------------|--------|-------------------------------|--------|-----------|---------|------------------|--------|
| Net  interest income       |   | $                       | 7,824   |                     | $      | —                        |   | $         | —  |             | $      | 51 |   | $ | 7,875 |   |
| Provision  for loan losses |   | 134                     |    | —                   |   | —                        |   | —    |    | 134              |   |
| Non-interest  income       |   | 1,066                   |    | 756                      |   | —                        |   | 71        |    | 1.893            |   |
| Non-interest  expense      |   | 9,068                   |    | 914                      |   | —                        |   | 390       |    | 10,372           |   |
| Net  income (loss)         |   | $                       | (312    | )                        | $      | (158                          | )      | $         | —  |             | $      | (268 | ) | $ | (738 | ) |
| Total  assets              |   | $                       | 443,511 |                     | $      | 332                           |   | $         | (38,192 | )                | $      | 41,151 |   | $ | 446,802 |   |

 

TheCompany does not have any operating segments other than those reported.  Parent company financial information isincluded in the “Other” category above and represents the overhead functionrather than an operating segment.  TheParent’s most significant assets are its net investments in itssubsidiaries.  The parent company’s netinterest income is comprised of interest income from federal funds sold and otherinvestments.

 

Note3

 

*Earnings (Loss) Per Common Share*

 

Thefollowing table discloses the calculation of basic and diluted earnings (loss)per common share for the three and nine months ended September 30, 2003 and2002. Stock options outstanding as of September 30, 2003 and 2002 were 861,237and 573,073, respectively.  Stockoptions issued, which were not included in the calculation of diluted earningsper share because the exercise prices were greater than the average marketprice, were 3,545 and 15,507 for the three and nine months ended September 30,2003, respectively.  Because the Companyreported a net loss to common shareholders for the nine months ended September30, 2002, all stock options issued as of that date have an anti-dilutive effectand, therefore, have been excluded from the earnings (loss) per common sharecalculation for the period.

 

9

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| **(Dollars in thousands,**                  |   | **Three  Months Ended   September 30,** |   | **Nine  Months Ended   September 30,** |   |
|---------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
| **except share and per share data)**        |   | **2003**                                |   | **2002**                               |   | **2003** |   | **2002** |   |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Net income (loss)                           |   | $                                       | 769    |                                   | $      | 429 |   | $ | 1,928 |   | $ | (738 | ) |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Dividends to preferred  shareholders        |   | 124                                     |   | 124                                    |   | 371 |   | 371 |   |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Net income (loss) to common  shareholders   |   | 645                                     |   | 305                                    |   | 1,557 |   | (1,109 | ) |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Weighted average common  shares for basic   |   | 10,072,262                              |   | 10,044,345                             |   | 10,058,202 |   | 7,243,053 |   |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Weighted average common  shares for diluted |   | 10,344,977                              |   | 10,142,930                             |   | 10,249,184 |   | 7,243,053 |   |
|                                             |        |                                         |        |                                        |        |  |  |  |  |  |  |  |  |

 

Note4

 

*Goodwill*

 

At September30, 2003, goodwill of $646,000 represented the remaining balance attributableto the purchase of Heritage Bancorp, Inc., acquired in September 2000.  In 2002, the Company evaluated impairment ofgoodwill under SFAS No. 142, *Goodwill andOther Intangible Assets*.  Noevents have occurred that indicate an impairment of goodwill exists since our2002 annual impairment test.

 

AtSeptember 30, 2003 and December 31, 2002, the Company had no other intangibleassets.

 

10

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

** **

The following presents management’s discussion and analysis of ourconsolidated financial condition as of September 30, 2003 and December 31, 2002and the results of our operations for the three and nine months ended September30, 2003 and 2002.  This discussionshould be read in conjunction with our unaudited consolidated financialstatements and the notes thereto appearing elsewhere in this report.

 

**Company Overview**

 

CardinalFinancial Corporation is a locally owned and managed financial servicesorganization headquartered in Northern Virginia committed to providing topquality customer service, a diversified product mix and convenient avenues forbanking to consumers and businesses.  Asof September 30, 2003, total assets increased 15.8% to $563.3 million comparedto $486.3 million at December 31, 2002. Net loans receivable increased 16.7% to $290.8 million compared to$249.1 million at December 31, 2002. Total deposits increased 8.4% to $459.2 million as of September 30, 2003compared to $423.5 million at December 31, 2002.  Our investment services subsidiary, Cardinal *Wealth Services, Inc.*, ended the quarterwith assets under management exceeding $121.1 million.

 

**Critical AccountingPolicies**

 

Generally accepted accounting principles arecomplex and require management to apply significant judgment to variousaccounting, reporting, and disclosure matters. Management must use assumptions and estimates to apply these principleswhere actual measurements are not possible or practical.  Below is a discussion of our criticalaccounting policies.  These policies arecritical because they are highly dependent upon subjective or complexjudgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financialstatements.  Actual results could differfrom those estimates.

 

The accounting policies we view as critical tous are those relating to estimates and judgments regarding the determination ofthe allowance for loan losses and the valuation allowance for deferred taxassets.

 

*Allowance for Loan Losses*

 

Wemaintain the allowance for loan losses at a level that represents management’sbest estimate of known and inherent losses in the loan portfolio.  Both the amount of the provision expense andthe level of the allowance for loan losses are impacted by many factors,including general economic conditions, actual and expected credit losses,historical trends and specific conditions of the individual borrower.  As a part of our analysis, we usecomparative peer group data, duration factors and qualitative factors such aslevels of and trends in delinquencies and nonaccrual loans, national and local

 

11

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economictrends and conditions and concentrations of loans exhibiting similar riskprofiles to support our estimates.  Theloan loss provision for the three and nine months ended September 30, 2003 was$356,000 and $602,000, respectively. The loan loss provision for both the three and nine months endedSeptember 30, 2002 was $95,000 and $134,000, respectively.  The allowance for loan loss as of September30, 2003 and December 31, 2002 was $3.9 million and $3.4 million, respectively.  The ratio of the allowance for loan lossesto total loans, net of fees, was 1.36% at September 30, 2003 compared to 1.35%at December 31, 2002.  Additionalinformation on the allowance for loan losses and provision expense can be foundlater in this discussion.

 

Creditlosses are an inherent part of our business and, although we believe themethodologies for determining the allowance for loan losses and the currentlevel of the allowance are adequate, it is possible that there may beunidentified losses in the portfolio that may become evident only at a futuredate.  Additional provisions for suchlosses, if necessary, would negatively impact earnings and would be recorded inthe banking business segment.

 

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

 

*Valuation Allowance for Deferred Tax Assets*

 

Deferredincome taxes reflect temporary differences in the recognition of revenue andexpenses for tax reporting and financial statement purposes, principallybecause certain items, such as depreciation and amortization, are recognized indifferent periods for financial reporting and tax return purposes.  We have net deferred tax assets, includingnet operating loss carryforwards, all of which have a full valuation allowanceas of September 30, 2003.  A valuationallowance is established against deferred tax assets when, in the judgment ofmanagement, it is more likely than not that such deferred tax assets will notbe realized.  The benefit of ourdeferred tax assets will only be recognized when it becomes more likely than notthat they will be realized.  A valuationallowance of $4.5 million at December 31, 2002, has been established fordeferred tax assets, as realization is dependent upon generating future taxableincome.

 

12

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*New Financial Accounting Standards*

 

InApril 2003, the Financial Accounting Standards Board, or FASB, issued StatementNo. 149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities,*which is generallyeffective for contracts entered into or modified after June 30, 2003.  This Statement amends and clarifies financialaccounting and reporting for derivative instruments embedded in othercontracts, collectively referred to as “derivatives” and hedging activitiesunder SFAS No. 133.  Statement No. 149has not had an impact on our financial results.

 

InMay 2003, the FASB issued Statement No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity,*effective for financial instruments entered into or modifiedafter May 31, 2003.  This Statementestablishes standards for classifying and measuring certain financialinstruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within the scope of the Statement (such asobligations that a reporting entity can or must settle by issuing its ownequity shares) as a liability rather than equity.  Statement No. 150 has not had an impact on our financial results.  

 

InNovember 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others,*whichaddresses the disclosures to be made by a guarantor in its interim and annualfinancial statements about its obligations under guarantees.  Interpretation No. 45 also requires therecognition of a liability by a guarantor at the inception of certainguarantees.  The liability is recognizedfor the non-contingent component of the guarantee, which is the obligation tostand ready to perform in the event that specified triggering events orconditions occur.  The initialmeasurement of this liability is the fair value of the guarantee atinception.  The recognition of theliability is required even if it is not probable that payments will be requiredunder the guarantee, or if the guarantee was issued with a premium payment, oras part of a transaction with multiple elements.  We currently have $2.6 million of standby letters of credit thatrequire accounting and disclosure under this Interpretation.  No liability has been recorded as ofSeptember 30, 2003 and December 31, 2002, as such amounts were immaterial.

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities,*which explainsidentification of variable interest entities and the assessment of whether toconsolidate those entities. Interpretation No. 46 requires existing unconsolidated variable interestentities to be consolidated by their primary beneficiaries if the entities donot effectively disperse risks among the involved parties.  The provisions of Interpretation No. 46 wereto be effective for all financial statements issued after January 1, 2003.  On October 1, 2003, however, the FASBdelayed implementation of Interpretation No. 46, and on October 31, 2003 issuedan exposure draft with proposal amendments to the original provisions ofInterpretation No. 46.  The commentperiod deadline for the exposure draft is December 1, 2003.  We currently hold no significant variableinterests in any entities that are not currently consolidated.

 

13

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**Financial Condition**

 

Totalassets were $563.3 million at September 30, 2003 compared to $486.3 million atDecember 31, 2002, an increase of $77.0 million or 15.8%.  This growth was driven by increases in totaldeposits and other borrowed funds.

 

Investmentsecurities were $243.1 million at September 30, 2003 compared to $163.7 millionat December 31, 2002, an increase of $79.4 million or 48.5%.  During the third quarter of 2003, wereclassified a portion of the available-for-sale investment securitiesportfolio as held-to-maturity.  Thesesecurities are mostly pledged as collateral for Federal Home Loan Bank advancesand our customer repurchase agreements. Of the $243.1 million investment portfolio, $145.9 million areclassified as held-to-maturity and $97.2 million are classified asavailable-for-sale.  See Table 1 foradditional information on our investment securities portfolio.

 

Duringthe third quarter of 2003, we implemented a $25.0 million leverage strategythat allowed us to take advantage of the availability of low cost funds throughadvances from the Federal Home Loan Bank of Atlanta and purchasemortgage-backed investment securities. The impact of this strategy is an increase of approximately $120,000 inquarterly net interest income.

 

Duringthe first quarter of 2003, we modified the methodology we use classify our coredeposits from interest checking to money market deposits.  This change resulted in a significantdecline in the reserve balance we maintain at the Federal Reserve Bank. As aresult, we were able to decrease our cash and due from bank balances by $18.1million, or 66.0% to $9.3 million at September 30, 2003 compared to $27.5 millionat December 31, 2002.  These funds wereinvested in the investment securities portfolio, allowing us to earn intereston balances that were formerly non-interest earning assets.

 

Loans receivable, net of fees, increased by $41.7 million, or 16.7% to$290.8 million at September 30, 2003 from $249.1 million at December 31, 2002(see Table 2 for details on the loans receivable portfolio). The strongestgrowth was in commercial real estate loans, construction loans, residentialreal estate loans and home equity loans. We began in late 1999 to better diversify the loan portfolio bypurchasing consumer loans.  We continuedto diversify our portfolio in 2002 by establishing a separate retail-lendinggroup, creating competitive home equity products, and by purchasing small poolsof residential mortgages.  In addition,we created a separate commercial real estate lending group that has increasedour loan production in this portion of our loan portfolio.

 

Totaldeposits increased $35.7 million, or 8.4% to $459.2 million at September 30,2003 compared to $423.5 million at December 31, 2002 (see Table 3 for detailson certificates of deposit with balances of $100,000 or more).  Other borrowed funds increased $60.8 millionto $62.8 million at September 30, 2003 compared to $2.0 million at December 31,2002. Due to the interest rates on Federal Home Loan Bank advances being attheir lowest levels in several years, we borrowed $50.6 million over the pastnine months of 2003.  During the secondquarter of 2003, we introduced a repurchase agreement program for thosecommercial customers that leave larger balances in their demand depositaccounts, allowing them to earn 0.75% on the balances in this account.

 

14

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Repurchaseagreements at September 30, 2003 were $12.2 million.  These funds were invested in investment securities, allowing usto increase our net interest margin and tighten our interest rate sensitivityposition.  

 

Shareholders’ equity at September 30, 2003 was $39.1million, a decrease of $1.6 million, or 3.9%, compared to $40.7 million atDecember 31, 2002.  The decrease wasdriven by the change in our unrealized gains in the investment securitiesavailable-for-sale portfolio from December 31, 2002 to an unrealized loss as ofSeptember 30, 2003.  The net change forthe nine months ended September 30, 2003 was $3.3 million.  This decrease in shareholders’ equity waspartially offset by net income to common shareholders of $1.6 million for thenine months ended September 30, 2003.  Bookvalue per common share at September 30, 2003 was $3.21 compared to $3.37 atDecember 31, 2002.

 

**Results of Operations**

 

Netincome to common shareholders for the three months ended September 30, 2003 and2002 was $645,000 and $305,000, respectively, an improvement of $340,000, or111.5%.  Net income to commonshareholders for the nine months ended September 30, 2003 was $1.6 millioncompared to a loss of $1.1 million for the same nine month period of 2002, animprovement of $2.7 million.  Theincrease in net income to common shareholders is primarily a result ofincreased net interest income and non-interest income.  In addition, during the second quarter of 2002,we recorded an other than temporary corporate bond impairment of $1.7 million,which increased non-interest expense for the nine months ended September 30,2002.

 

Earningsper common share increased to $0.06 and $0.15 per common share for the threeand nine months ended September 30, 2003, respectively, compared to earningsper common share of $0.03 for the three months ended September 30, 2002 and aloss per common share of $0.15 for the nine months ended September 30,2002.  These results are presented afterthe effect of dividends paid in each three and nine months period to preferredshareholders.  Dividends to preferredshareholders were $124,000 and $371,000 for each of three and nine months endedSeptember 30, 2003 and 2002, respectively. Weighted average common shares outstanding for the three months endedSeptember 30, 2003 were 10,345,000 compared to 10,143,000 for the three monthsended September 30, 2002.  For the ninemonths ended September 30, 2003 and 2002, weighted average common sharesoutstanding were 10,249,000 and 7,243,000, respectively.

 

Returnon average assets for the three months ended September 30, 2003 and 2002 was0.56% and 0.41%, respectively.  For thenine months ended September 30, 2003 and 2002, return on average assets was0.51% and –0.27%, respectively.  Returnon average equity for the three months ended September 30, 2003 and 2002 was7.79% and 4.33%, respectively.  For thenine months ended September 30, 2003 and 2002, return on average equity was6.42% and –3.25%, respectively.

 

15

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Netinterest income is our primary source of revenue, representing the differencebetween interest and fees earned on interest earning assets and the interestpaid on deposits and other interest bearing liabilities.  The level of net interest income is impactedprimarily by variations in the volume and mix of these assets and liabilities,as well as changes in interest rates when compared to previous periods ofoperations.  Net interest income for thethree months ended September 30, 2003 and 2002 was $3.8 million and $2.8million, respectively, a period-to-period increase of $1.0 million, or35.1%.  Net interest income for the ninemonths ended September 30, 2003 and 2002 was $10.7 million and $7.9 million,respectively, a period-to-period increase of $2.9 million, or 36.4%.  The increase in net interest income is aresult of the increase in average volume of investment securitiesavailable-for-sale and loans receivable, net of the impact of decreased yields,during 2003, compared with the same period of 2002.  These increases were funded through the increases in totaldeposits and other borrowed funds.

 

Ournet interest margin for the three months ended September 30, 2003 and 2002 was2.88% and 2.86%, respectively.  For thenine months ended September 30, 2003 and 2002, net interest margin was 2.96%and 3.05%, respectively.  When comparedto the third quarter of 2002, our net interest margin for the third quarter of2003 increased 2 basis points.  Thisslight increase in net interest margin was due primarily to the transfer ofcash balances and lower yielding federal funds sold into higher yieldinginvestment securities.  Despite thisincrease in net interest margin during the third quarter of 2003, our marginfor the year to date 2003 decreased 9 basis points compared to the same periodof 2002.  The decrease in the netinterest margin was a result of the change in the mix of earning assets towardslower yielding earning assets and the decreased interest rate environmentexperienced during the year.  Tables 4,4a, 5, and 5a present an analysis of average earning assets, interest bearingliabilities and demand deposits with related components of interest income andinterest expense.

 

Provisionfor loan losses for the three months ended September 30, 2003 and 2002 was$356,000 and $95,000, respectively.  Forthe nine months ended September 30, 2003 and 2002, provision for loan losseswas $602,000 and $134,000, respectively. The allowance for loan losses at September 30, 2003 was $3.9 millioncompared to $3.4 million at December 31, 2002. Our allowance for loan loss ratio at September 30, 2003 was 1.36%compared to 1.35% at December 31, 2002. Loan growth over the current periods presented has significantlyincreased from prior periods, which has caused our increase in provisionexpense.  We continued to experiencestrong loan quality with annualized net charged-off loans equal to .01% tototal loans for the nine months ended September 30, 2003 and non-performingloans equal to .18% of total loans as of September 30, 2003.  Additional information on the allowance forloan loss and its allocation to the total loans receivable portfolio can befound in Tables 6 and 7 to this discussion.

 

Non-interestincome for the three months ended September 30, 2003 and 2002 was $971,000 and$634,000, respectively, a period-to-period increase of $337,000, or 53.2%.  For the nine months ended September 30, 2003and 2002, non-interest income was $3.0 million and $1.9 million, respectively,a period-to-period increase of $1.1 million, or 58.2%.  The increase in non-interest income isprimarily attributable to the realized gains

 

16

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onsales of a portion of our investment securities available-for-saleportfolio.  These gains were recorded onsales of mortgage-backed securities with rapid pre-payment qualities, whichwere a result of the lower interest rate environment experienced during thequarter and year to date.  In addition,gain on sales of loans for the three months ended September 30, 2003 was$175,000 compared to $3,000 for the same three month period of 2002, anincrease of $172,000.  For the ninemonths ended September 30, 2003, net gain on sales of loans was $259,000compared to $50,000 for the same nine month period of 2002, representing anincrease of $209,000.  Substantially allof these gains were the result of sales of mortgage loans through a loan salesprogram that began in March 2003.  Boththe securities gains and loan sales gains were offset by decreases ininvestment fee income during the past nine months of 2003 compared to the sameperiods of 2002.

 

Non-interest expense for the three months ended September 30, 2003 was$3.7 million, compared to $3.0 million for the same period of 2002, an increaseof $732,000, or 24.8%.  For the ninemonths ended September 30, 2003, non-interest expense was $11.2 million,compared to $10.4 million for the same nine month period of 2002.  The increase is mostly attributable to thebranch expansion we have completed over the past twelve months.  We opened our ninth branch on September 2 atour headquarters location and our tenth branch on October 1 in Leesburg.  In addition, our Arlington branch locationis not included in the September 30, 2002 financial results, as that branchopened during the fourth quarter of 2002. Expenses related to the branch expansion are represented in theincreases in our salaries and benefits expense and occupancy expense.

 

We recorded an other than temporary impairment writedown of $1.7 millionon a corporate bond during the second quarter of 2002. Excluding the effects ofthis impairment writedown, non-interest expense increased $2.5 million for thenine months ended September 30, 2003 compared to the same period in 2002.  In addition, both the move of ourheadquarters to Tysons Corner during the first quarter of 2003, and the openingof three branch locations during the past twelve months have impacted 2003expenses.  Expenses have also increasedin professional fees, marketing and advertising, and loan expenses to supportour branch openings and strong asset growth over the past nine months.

 

Aspreviously announced in January 2003, the Company has reached an agreement toacquire at least two additional premier full service branch office sites inVirginia – one in western Fairfax County and one in eastern Prince WilliamCounty.  Pending regulatory approval,these two additional branch sites are expected to open during the first orsecond quarter of 2004.  We expectnon-interest expense to increase proportionately as a result of theseadditional branch openings.

 

Wehave not recorded income tax expense or benefit due to the existence of netlosses in all prior years of operations. We have net deferred tax assets, including net operating losscarryforwards, all of which have a full valuation allowance as of September 30,2003.  A valuation allowance isestablished against deferred tax assets when, in the judgment of management, itis more likely than not that such deferred tax assets will not berealized.  The benefit of our deferredtax assets will only be recognized when it

 

17

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becomesmore likely than not that they will be realized.  For more information, see “Critical Accounting Policies” above inthis discussion.

 

**Business Segment Operations**

 

Weprovide banking and non-banking financial services and products through oursubsidiaries.  Management operates andreports on the results of our operations through two business segments, bankingand investment services.

 

*Banking*

 

Thebanking segment provides comprehensive banking services to small businesses andindividuals through multiple delivery channels.  Services offered include commercial and consumer lending, depositproducts and banking via the  Internetor telephone.

 

For thethree months ended September 30, 2003, the banking segment recorded net incomeof $1.1 million compared to $495,000 for the three months ended September 30,2002, an improvement of $555,000.  Forthe nine months ended September 30, 2003, the banking segment recorded netincome of $2.8 million, compared to a loss of $312,000 during the same periodof 2002, an improvement of $3.1 million. The improvement in earnings is a result of increased net interestincome, due to increased volume of earning assets, as well as an increase innon-interest income due to realized gains on investment securitiesavailable-for-sale, for this segment. In addition, the writedown of the bond impairment was recognized in thisbusiness segment during the second quarter of 2002.  As of September 30, 2003, total assets were $560.4 million, loansreceivable, net of fees, were $290.8 million and total deposits were $459.2million.  As of September 30, 2002,total assets were $443.5 million, loans receivable, net of fees were $216.4 millionand total deposits were $406.7 million.

 

*Investment Services*

 

Theinvestment services segment provides financial and estate planning services,through an affiliation with Raymond James Financial Services, Inc., aregistered investment advisor.

 

Forthe three months ended September 30, 2003, the investment services segmentrecorded a net loss of $33,000, compared to a loss of $35,000 during the sameperiod of 2002, an improvement of $2,000. For the nine months ended September 30, 2003, this segment reported anet loss of $75,000, compared to a net loss of $158,000 for the same period of2002, an improvement of $83,000.  As ofSeptember 30, 2003, total assets were $229,000 and total assets undermanagement were $121.1 million.  As ofSeptember 30, 2002, total assets were $332,000 and total assets undermanagement were $102.2 million.  Therevenues and assets under management from this business segment have increasedduring 2003 as a result of increased transaction activity and accumulation ofassets under management as well as the rebound that has occurred in the equitymarkets over the past nine months.

 

18

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

 

**Capital Resources**

 

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

 

Regulatoryagencies measure capital adequacy utilizing a formula that takes into accountthe individual risk profile of a financial institution.  The guidelines define capital as both Tier 1(primarily common shareholders’ equity, defined to include certain debtobligations) and Tier 2 (to include certain other debt obligations and aportion of the allowance for loan losses and 45% of unrealized gains in equitysecurities).

 

AtSeptember 30, 2003, shareholders’ equity was $39.1 million compared to $40.7million at December 31, 2002.  Thedecrease in shareholders’ equity is primarily the result of an unfavorablemark-to-market adjustment of $3.3 million in our primarily mortgage backedinvestment securities available-for-sale portfolio offset by recorded netincome to common shareholders of $1.6 million. Book value per common share at September 30, 2003 was $3.21, compared to$3.37 at December 31, 2002.  Tangiblebook value per common share at September 30, 2003 was $3.14, compared to $3.31at December 31, 2002.  At September 30,2003, our tier 1 and total risk-based capital ratios were 10.6% and 11.7%,respectively.  At December 31, 2002, ourtier 1 and total risk-based capital ratios were 12.3% and 13.4%,respectively.  Our regulatory capitallevels for the bank and bank holding company meet those established forwell-capitalized institutions. Table 8 provides additional informationpertaining to our capital ratios.

 

**Liquidity**

*** ***

Theobjective of liquidity management is to ensure the continuous availability offunds to meet the demands of depositors, investors and borrowers.  Stable core deposits and a strong capitalposition are the current components of a solid foundation for our liquidity position.  In addition, the availability of regionaland national wholesale funding sources including federal funds purchased,negotiable certificates of deposit, securities sold under agreements torepurchase, and borrowings from the Federal Home Loan Bank enhance ourliquidity.  Cash flows from operations,such as loan payments and payoffs are also a significant source ofliquidity.  We have a contingency planthat provides for continued monitoring of liquidity needs and available sourcesof liquidity.  We believe we have theability to meet our increased liquidity needs. Liquid assets, which include cash and due from banks, federal funds soldand investment securities available-for-sale, at September 30, 2003, totaled$117.3 million, or 20.8% of total assets. We have investment securities that are classified as held-to-maturity of$145.9 million at September 30, 2003. Of that, $76.0 million were available as collateral for additionalFederal Home Loan Bank

 

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borrowings.  Management is committed to maintainingliquidity at a level sufficient to protect depositors, provide for reasonablegrowth and fully comply with all regulatory requirements.

 

**Interest Rate Sensitivity**

 

Asset/liabilitymanagement involves the monitoring of our sensitivity to interest ratemovements.  In order to measure theeffect of interest rates on our net interest income, management takes intoconsideration the expected cash flows from the loan and securities portfoliosand the expected magnitude of the repricing of specific asset and liabilitycategories.  Management evaluatesinterest sensitivity risk and then formulates guidelines to manage this riskbased upon its outlook regarding the economy, forecasted interest ratemovements and other business factors. Management’s goal is to maximize and stabilize the net interest marginby limiting exposure to interest rate changes.

 

Thedata in Table 9 reflects the repricing or expected maturities of various assetsand liabilities as of September 30, 2003. This “gap” analysis represents the difference between interest sensitiveassets and liabilities in a specific time interval.  The interest sensitivity gap analysis presents a position thatexisted at one particular point in time, and assumes that assets andliabilities with similar repricing characteristics will reprice at the sametime and to the same degree.

 

**Forward-LookingStatements**

** **

ThisQuarterly Report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  Theseforward-looking statements are not historical facts, but rather are predictionsand generally can be identified by use of statements that include phrases suchas “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan, “ “foresee”or other words or phrases of similar import. Similarly, statements that describe our future financial condition orresults of operations, objectives, strategies, plans, goals or future performanceand business also are forward-looking statements.  These forward-looking statements involve known and unknown risks,uncertainties and other factors, including those described in the 2002 Form10-KSB under “Forward-Looking Statements and Risk Factors,” that could causeour actual results to differ materially from those currently anticipated inthese forward-looking statements.  Inlight of these risks and uncertainties, the forward-looking events might ormight not occur.

 

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Table1. 

 

**InvestmentSecurities**

As of September 30, 2003 and December31, 2002

(Dollars in thousands)  

 
|                                             |   | **Amortized  Cost** |    | **Fair  Value** |   | **Average  Yield** |       |
|--------------------------------------------------|--------|---------------------|---------|-----------------|--------|--------------------|------------|
| **Available-for-sale as of September  30, 2003** |   |                |    |            |   |               |       |
| U.S. government agencies and  enterprises        |   |                |    |            |   |               |       |
| One to five years                                |   | $                   | 3,000   |            | $      | 3,012              |       | 2.55 | % |
| Five to ten years                                |   | 1,000               |    | 957             |   | 3.00               | %          |
| Total U.S. government  agencies                  |   | $                   | 4,000   |            | $      | 3,969              |       | 2.66 | % |
|                                             |   |                |    |            |   |               |       |
| Mortgage-backed securities*                      |   |                |    |            |   |               |       |
| Five to ten years                                |   | $                   | 5,044   |            | $      | 5,082              |       | 4.34 | % |
| After ten years                                  |   | 82,014              |    | 81,054          |   | 3.98               | %          |
| Total mortgage-backed  securities                |   | $                   | 87,058  |            | $      | 86,136             |       | 4.00 | % |
|                                             |   |                |    |            |   |               |       |
| Other bonds                                      |   |                |    |            |   |               |       |
| After ten years                                  |   | $                   | 5,000   |            | $      | 4,995              |       | 1.91 | % |
| Total other bonds                                |   | $                   | 5,000   |            | $      | 4,995              |       | 1.91 | % |
|                                             |   |                |    |            |   |               |       |
| Treasury bonds                                   |   |                |    |            |   |               |       |
| One to five years                                |   | $                   | 2,051   |            | $      | 2,074              |       | 2.64 | % |
| Total treasury bonds                             |   | $                   | 2,051   |            | $      | 2,074              |       | 2.64 | % |
| Total investment securities  available-for-sale  |   | $                   | 98,109  |            | $      | 97,174             |       | 3.82 | % |
|                                             |   |                |    |            |   |               |       |
|                                             |   | **Amortized  Cost** |    | **Fair  Value** |   | **Average  Yield** | ** ** |
| **Held-to-maturity  as of September 30, 2003**   |   |                |    |            |   |               |       |
| U.S. government agencies and  enterprises        |   |                |    |            |   |               |       |
| One to five years                                |   | $                   | 1,000   |            | $      | 1,007              |       | 3.85 | % |
| Five to ten years                                |   | 9,001               |    | 8,810           |   | 3.76               | %          |
| After ten years                                  |   | 2,999               |    | 2,944           |   | 4.20               | %          |
| Total U.S. government  agencies                  |   | $                   | 13,000  |            | $      | 12,761             |       | 3.87 | % |
|                                             |   |                |    |            |   |               |       |
| Mortgage-backed securities*                      |   |                |    |            |   |               |       |
| Five to ten years                                |   | $                   | 10,014  |            | $      | 9,941              |       | 3.73 | % |
| After ten years                                  |   | 114,878             |    | 113,748         |   | 4.07               | %          |
| Total mortgage-backed  securities                |   | $                   | 124,892 |            | $      | 123,689            |       | 4.04 | % |
|                                             |   |                |    |            |   |               |       |
| Other bonds                                      |   |                |    |            |   |               |       |
| After ten years                                  |   | $                   | 8,000   |            | $      | 7,850              |       | 4.21 | % |
| Total other bonds                                |   | $                   | 8,000   |            | $      | 7,850              |       | 4.21 | % |
| Total investment securities  held-to-maturity    |   | $                   | 145,892 |            | $      | 144,300            |       | 4.03 | % |
|                                             |   |                |    |            |   |               |       |
| Total investment securities                      |   | $                   | 244,001 |            | $      | 241,474            |       | 3.94 | % |
|                                             |   |                |    |            |   |               |       |
|                                             |   | **Amortized  Cost** |    | **Fair  Value** |   | **Average  Yield** | ** ** |
| **Available-for-sale  as of December 31, 2002**  |   |                |    |            |   |               |       |
| U.S. government agencies and  enterprises        |   |                |    |            |   |               |       |
| One to five years                                |   | $                   | 26,739  |            | $      | 26,988             |       | 3.47 | % |
| Five to ten years                                |   | 12,048              |    | 12,048          |   | 3.68               | %          |
| Total U.S. government  agencies                  |   | $                   | 38,787  |            | $      | 39,036             |       | 3.53 | % |
|                                             |   |                |    |            |   |               |       |
| Mortgage-backed securities*                      |   |                |    |            |   |               |       |
| Within one year                                  |   | $                   | 15,478  |            | $      | 15,750             |       | 3.61 | % |
| One to five years                                |   | 70,552              |    | 72,342          |   | 4.82               | %          |
| Five to ten years                                |   | 13,695              |    | 13,686          |   | 4.43               | %          |
| After ten years                                  |   | 15,301              |    | 15,301          |   | 5.20               | %          |
| Total mortgage-backed  securities                |   | $                   | 115,026 |            | $      | 117,079            |       | 4.66 | % |
|                                             |   |                |    |            |   |               |       |
| Other bonds                                      |   |                |    |            |   |               |       |
| After ten years                                  |   | $                   | 5,000   |            | $      | 5,000              |       | 3.39 | % |
| Total other bonds                                |   | $                   | 5,000   |            | $      | 5,000              |       | 3.39 | % |
|                                             |   |                |    |            |   |               |       |
| Treasury bonds                                   |   |                |    |            |   |               |       |
| One to five years                                |   | $                   | 2,507   |            | $      | 2,550              |       | 2.67 | % |
| Total treasury bonds                             |   | $                   | 2,507   |            | $      | 2,550              |       | 2.67 | % |
|                                             |   |                |    |            |   |               |       |
| Total investment securities  available-for-sale  |   | $                   | 161,320 |            | $      | 163,665            |       | 4.33 | % |

 

----

* Based on contractual maturities.

 

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Table2.

 

**Loans Receivable**

As of September 30, 2003 and December31, 2002

(Dollars in thousands)

 
|                             |   | **September  30,  2003** |    | **December  31,  2002** |   |
|----------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                             |   |                     |    |                    |   |   |   |   |   |
| Commercial                       |   | $                        | 43,298  |                    | 14.88  | % | $ | 58,292 |   | 23.40 | % |
| Real estate - commercial         |   | 131,309                  |    | 45.14                   | %      | 116,135 |   | 46.63 | % |
| Real estate - construction       |   | 30,315                   |    | 10.42                   | %      | 5,781 |   | 2.32 | % |
| Real estate - residential        |   | 41,561                   |    | 14.29                   | %      | 31,808 |   | 12.77 | % |
| Home equity lines                |   | 36,176                   |    | 12.44                   | %      | 26,831 |   | 10.77 | % |
| Consumer                         |   | 8,258                    |    | 2.83                    | %      | 10,235 |   | 4.11 | % |
|                             |   |                     |    |                    |   |   |   |   |   |
| Gross loans                      |   | $                        | 290,917 |                    | 100.00 | % | $ | 249,082 |   | 100.00 | % |
|                             |   |                     |    |                    |   |   |   |   |   |
| Add: unearned income, net        |   | (106                     | )       |                    |   | 24 |   |   |   |
| Less: allowance for loan  losses |   | (3,943                   | )       |                    |   | (3,372 | ) |   |   |
|                             |   |                     |    |                    |   |   |   |   |   |
| Loans receivable, net            |   | $                        | 286,868 |                    |   |   | $ | 245,734 |   |   |   |

 

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Table3.

 

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

As of September 30, 2003

(Dollars in thousands)

 
|                                   |   | **September  30,** |   |
|----------------------------------------|--------|--------------------|--------|
|                                   |   | **2003**           |   |
| **Maturities:**                        |   |               |   |
| Three months or less                   |   | $                  | 14,288 |   |
| Over three months through  six months  |   | 17,806             |   |
| Over six months through  twelve months |   | 18,576             |   |
| Over twelve months                     |   | 37,384             |   |
|                                   |   | $                  | 88,054 |   |

 

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Table4.

 

**Average BalanceSheets and Interest Rates on Earning Assets and Interest - Bearing Liabilities**

For the Three Months Ended September30, 2003, 2002 and 2001

(Dollars in thousands)

 
|                                                     |   | **2003**             |    | **2002**                       |   | **2001** |   |
|----------------------------------------------------------|--------|----------------------|---------|--------------------------------|--------|----------|--------|
|                                                     |   | **Average  Balance** |    | **Interest  Income/  Expense** |   | **Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Rate** |   |
| **Assets**                                               |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                                   |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                               |   | $                    | 45,983  |                           | $      | 708      |   | 6.16 | % | $ | 49,780 |   | $ | 893 |   | 7.18 | % | $ | 53,237 |   | $ | 1,115 |   | 8.38 | % |
| Real  estate - commercial                                |   | 121,606              |    | 2,100                          |   | 6.91     | %      | 94,614 |   | 1,887 |   | 7.98 | % | 77,165 |   | 1,673 |   | 8.67 | % |
| Real  estate - construction                              |   | 23,778               |    | 310                            |   | 5.22     | %      | 6,675 |   | 100 |   | 5.96 | % | 6,044 |   | 127 |   | 8.40 | % |
| Real  estate - residential                               |   | 38,448               |    | 602                            |   | 6.27     | %      | 19,103 |   | 369 |   | 7.72 | % | 17,864 |   | 384 |   | 8.59 | % |
| Home  equity lines                                       |   | 34,873               |    | 289                            |   | 3.29     | %      | 24,268 |   | 263 |   | 4.30 | % | 18,755 |   | 287 |   | 6.12 | % |
| Consumer                                                 |   | 8,465                |    | 157                            |   | 7.36     | %      | 11,884 |   | 225 |   | 7.51 | % | 14,911 |   | 293 |   | 7.86 | % |
| Total  loans                                             |   | 273,153              |    | 4,166                          |   | 6.10     | %      | 206,324 |   | 3,737 |   | 7.24 | % | 187,976 |   | 3,879 |   | 8.25 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities available-for-sale                |   | 127,609              |    | 754                            |   | 2.36     | %      | 127,307 |   | 1,471 |   | 4.62 | % | 5,788 |   | 95 |   | 6.57 | % |
| Investment  securities held-to-maturity                  |   | 121,343              |    | 1,207                          |   | 3.98     | %      | — |   | — |   | 0.00 | % | — |   | — |   | 0.00 | % |
| Other  investments                                       |   | 3,496                |    | 35                             |   | 4.00     | %      | 1,199 |   | 17 |   | 5.67 | % | 1,319 |   | 22 |   | 6.67 | % |
| Federal  funds sold                                      |   | 6,915                |    | 17                             |   | 0.98     | %      | 62,104 |   | 260 |   | 1.66 | % | 25,168 |   | 218 |   | 3.44 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income       |   | 532,516              |    | 6,179                          |   | 4.64     | %      | 396,934 |   | 5,485 |   | 5.53 | % | 220,251 |   | 4,214 |   | 7.65 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earning assets:                            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                 |   | 8,380                |    |                           |   |     |   | 19,861 |   |   |   |   |   | 10,706 |   |   |   |   |   |
| Premises  and equipment, net                             |   | 5,045                |    |                           |   |     |   | 4,678 |   |   |   |   |   | 5,572 |   |   |   |   |   |
| Goodwill  and other intangibles                          |   | 646                  |    |                           |   |     |   | 646 |   |   |   |   |   | 9,167 |   |   |   |   |   |
| Accrued  interest and other assets                       |   | 2,583                |    |                           |   |     |   | 3,500 |   |   |   |   |   | 1,836 |   |   |   |   |   |
| Allowance  for loan losses                               |   | (3,650               | )       |                           |   |     |   | (3,049 | ) |   |   |   |   | (2,138 | ) |   |   |   |   |
| Total  assets                                            |   | $                    | 545,520 |                           |   |     |   |   | $ | 422,570 |   |   |   |   |   | $ | 245,394 |   |   |   |   |   |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing liabilities:                         |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing deposits:                            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  checking                                       |   | 153,681              |    | 538                            |   | 1.39     | %      | 130,110 |   | 904 |   | 2.76 | % | 16,128 |   | 74 |   | 1.84 | % |
| Money  markets                                           |   | 28,765               |    | 43                             |   | 0.59     | %      | 32,019 |   | 151 |   | 1.87 | % | 26,350 |   | 185 |   | 2.82 | % |
| Statement  savings                                       |   | 5,741                |    | 8                              |   | 0.53     | %      | 4,287 |   | 13 |   | 1.24 | % | 4,502 |   | 24 |   | 2.16 | % |
| Certificates  of deposit                                 |   | 179,540              |    | 1,473                          |   | 3.25     | %      | 150,658 |   | 1,535 |   | 4.04 | % | 103,439 |   | 1,420 |   | 5.51 | % |
| Total  interest - bearing deposits                       |   | 367,727              |    | 2,062                          |   | 2.22     | %      | 317,074 |   | 2,603 |   | 3.26 | % | 150,419 |   | 1,703 |   | 4.49 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  borrowed funds                                    |   | 63,882               |    | 279                            |   | 1.74     | %      | 4,065 |   | 40 |   | 3.93 | % | 10,912 |   | 122 |   | 4.45 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |   | 431,609              |    | 2,341                          |   | 2.15     | %      | 321,139 |   | 2,643 |   | 3.27 | % | 161,331 |   | 1,825 |   | 4.50 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                         |   | 72,819               |    |                           |   |     |   | 60,161 |   |   |   |   |   | 49,337 |   |   |   |   |   |
| Other  liabilities                                       |   | 1,596                |    |                           |   |     |   | 1,659 |   |   |   |   |   | 2,500 |   |   |   |   |   |
| Preferred  shareholders’ equity                     |   | 6,824                |    |                           |   |     |   | 6,825 |   |   |   |   |   | 7,057 |   |   |   |   |   |
| Common  shareholders’ equity                        |   | 32,672               |    |                           |   |     |   | 32,786 |   |   |   |   |   | 25,169 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity         |   | $                    | 545,520 |                           |   |     |   |   | $ | 422,570 |   |   |   |   |   | $ | 245,394 |   |   |   |   |   |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income and net interest margin             |   |                 |    | $                              | 3,838  |     | 2.88   | % |   |   | $ | 2,842 |   | 2.86 | % |   |   | $ | 2,389 |   | 4.34 | % |

 

24

----

 

Table4a.

 

Rate and Volume Analysis (TaxEquivalent Basis)

(Dollars in thousands)

 
|                                      |   | **Three  Months Ended September 30,  2003 Compared to 2002** |   | **Three  Months Ended September 30,  2002 Compared to 2001** |   |
|-------------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                      |   | **Average  Volume**                                          |   | **Average  Rate**                                            |   | **Increase  (Decrease)** |   | **Average  Volume** |   | **Average  Rate** |   | **Increase  (Decrease)** |   |
| **Interest income:**                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Loans:                                    |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Commercial                                |   | $                                                            | (68    | )                                                            | $      | (117 | ) | $ | (185 | ) | $ | (72 | ) | $ | (150 | ) | $ | (222 | ) |
| Real estate - commercial                  |   | 538                                                          |   | (325                                                         | )      | 213 |   | 379 |   | (165 | ) | 214 |   |
| Real estate - construction                |   | 255                                                          |   | (45                                                          | )      | 210 |   | 14 |   | (41 | ) | (27 | ) |
| Real estate - residential                 |   | 373                                                          |   | (140                                                         | )      | 233 |   | 27 |   | (42 | ) | (15 | ) |
| Home equity lines                         |   | 115                                                          |   | (89                                                          | )      | 26 |   | 84 |   | (108 | ) | (24 | ) |
| Consumer                                  |   | (65                                                          | )      | (3                                                           | )      | (68 | ) | (60 | ) | (8 | ) | (68 | ) |
| Total loans                               |   | 1,148                                                        |   | (719                                                         | )      | 429 |   | 372 |   | (514 | ) | (142 | ) |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Investment securities  available-for-sale |   | 3                                                            |   | (720                                                         | )      | (717 | ) | 1,995 |   | (619 | ) | 1,376 |   |
| Investment securities  held-to-maturity   |   | —                                                       |   | 1,207                                                        |   | 1,207 |   | — |   | — |   | — |   |
| Other investments                         |   | 33                                                           |   | (15                                                          | )      | 18 |   | (2 | ) | (3 | ) | (5 | ) |
| Federal funds sold                        |   | (231                                                         | )      | (12                                                          | )      | (243 | ) | 321 |   | (279 | ) | 42 |   |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Total interest income                     |   | 953                                                          |   | (259                                                         | )      | 694 |   | 2,686 |   | (1,415 | ) | 1,271 |   |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| **Interest expense:**                     |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:              |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Interest checking                         |   | 164                                                          |   | (530                                                         | )      | (366 | ) | 527 |   | 303 |   | 830 |   |
| Money markets                             |   | (15                                                          | )      | (93                                                          | )      | (108 | ) | 40 |   | (74 | ) | (34 | ) |
| Statement savings                         |   | 5                                                            |   | (10                                                          | )      | (5 | ) | (1 | ) | (10 | ) | (11 | ) |
| Certificates of deposit                   |   | 294                                                          |   | (356                                                         | )      | (62 | ) | 656 |   | (541 | ) | 115 |   |
| Total interest - bearing  deposits        |   | 448                                                          |   | (989                                                         | )      | (541 | ) | 1,222 |   | (322 | ) | 900 |   |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                      |   | 593                                                          |   | (354                                                         | )      | 239 |   | (77 | ) | (5 | ) | (82 | ) |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Total interest expense                    |   | 1,041                                                        |   | (1,343                                                       | )      | (302 | ) | 1,145 |   | (327 | ) | 818 |   |
|                                      |   |                                                         |   |                                                         |   |   |   |   |   |   |   |   |   |
| Net interest income                       |   | $                                                            | (88    | )                                                            | $      | 1,084 |   | $ | 996 |   | $ | 1,541 |   | $ | (1,088 | ) | $ | 453 |   |

 

25

----

 

Table5.

 

**Average BalanceSheets and Interest Rates on Earning Assets and Interest - Bearing Liabilities**

For the Nine Months Ended September30, 2003, 2002 and 2001

(Dollars in thousands)

 
|                                                     |   | **2003**             |    | **2002**                       |   | **2001** |   |
|----------------------------------------------------------|--------|----------------------|---------|--------------------------------|--------|----------|--------|
|                                                     |   | **Average  Balance** |    | **Interest  Income/  Expense** |   | **Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Rate** |   | **Average  Balance** |   | **Interest  Income/  Expense** |   | **Rate** |   |
| **Assets**                                               |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                                   |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                               |   | $                    | 49,883  |                           | $      | 2,356    |   | 6.30 | % | $ | 52,156 |   | $ | 2,788 |   | 7.13 | % | $ | 50,710 |   | $ | 3,345 |   | 8.80 | % |
| Real  estate - commercial                                |   | 117,416              |    | 6,197                          |   | 7.04     | %      | 89,634 |   | 5,408 |   | 8.04 | % | 67,475 |   | 4,445 |   | 8.78 | % |
| Real  estate - construction                              |   | 15,899               |    | 662                            |   | 5.55     | %      | 6,185 |   | 282 |   | 6.07 | % | 5,538 |   | 374 |   | 9.01 | % |
| Real  estate - residential                               |   | 36,663               |    | 1,783                          |   | 6.49     | %      | 17,448 |   | 1,033 |   | 7.90 | % | 18,062 |   | 1,133 |   | 8.36 | % |
| Home  equity lines                                       |   | 31,729               |    | 793                            |   | 3.34     | %      | 23,270 |   | 741 |   | 4.26 | % | 17,172 |   | 896 |   | 6.96 | % |
| Consumer                                                 |   | 9,063                |    | 507                            |   | 7.48     | %      | 12,864 |   | 715 |   | 7.43 | % | 14,965 |   | 881 |   | 7.85 | % |
| Total  loans                                             |   | 260,653              |    | 12,298                         |   | 6.29     | %      | 201,557 |   | 10,967 |   | 7.26 | % | 173,922 |   | 11,074 |   | 8.49 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities available-for-sale                |   | 168,735              |    | 4,047                          |   | 3.20     | %      | 91,846 |   | 3,284 |   | 4.77 | % | 5,325 |   | 285 |   | 7.14 | % |
| Investment  securities held-to-maturity                  |   | 40,892               |    | 1,207                          |   | 3.94     | %      | — |   | — |   | 0.00 | % | — |   | — |   | 0.00 | % |
| Other  investments                                       |   | 2,648                |    | 90                             |   | 4.53     | %      | 1,197 |   | 53 |   | 5.90 | % | 1,427 |   | 66 |   | 6.17 | % |
| Federal  funds sold                                      |   | 11,601               |    | 98                             |   | 1.12     | %      | 49,428 |   | 613 |   | 1.66 | % | 27,223 |   | 926 |   | 4.55 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income       |   | 484,529              |    | 17,740                         |   | 4.88     | %      | 344,028 |   | 14,917 |   | 5.78 | % | 207,897 |   | 12,351 |   | 7.92 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earning assets:                            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                 |   | 10,376               |    |                           |   |     |   | 16,955 |   |   |   |   |   | 10,207 |   |   |   |   |   |
| Premises  and equipment, net                             |   | 5,091                |    |                           |   |     |   | 4,843 |   |   |   |   |   | 5,649 |   |   |   |   |   |
| Goodwill  and other intangibles                          |   | 646                  |    |                           |   |     |   | 652 |   |   |   |   |   | 9,337 |   |   |   |   |   |
| Accrued  interest and other assets                       |   | 3,699                |    |                           |   |     |   | 2,003 |   |   |   |   |   | 1,723 |   |   |   |   |   |
| Allowance  for loan losses                               |   | (3,511               | )       |                           |   |     |   | (3,051 | ) |   |   |   |   | (2,038 | ) |   |   |   |   |
| Total  assets                                            |   | $                    | 500,830 |                           |   |     |   |   | $ | 365,430 |   |   |   |   |   | $ | 232,775 |   |   |   |   |   |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing liabilities:                         |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing deposits:                            |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  checking                                       |   | 146,335              |    | 1,841                          |   | 1.68     | %      | 104,351 |   | 2,252 |   | 2.89 | % | 14,188 |   | 203 |   | 1.93 | % |
| Money  markets                                           |   | 26,588               |    | 168                            |   | 0.84     | %      | 28,229 |   | 424 |   | 2.01 | % | 24,485 |   | 617 |   | 3.39 | % |
| Statement  savings                                       |   | 5,210                |    | 27                             |   | 0.69     | %      | 4,275 |   | 40 |   | 1.24 | % | 4,396 |   | 88 |   | 2.70 | % |
| Certificates  of deposit                                 |   | 175,732              |    | 4,492                          |   | 3.42     | %      | 131,106 |   | 4,118 |   | 4.20 | % | 99,781 |   | 4,427 |   | 5.98 | % |
| Total  interest - bearing deposits                       |   | 353,865              |    | 6,528                          |   | 2.47     | %      | 267,961 |   | 6,834 |   | 3.41 | % | 142,850 |   | 5,335 |   | 4.99 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  borrowed funds                                    |   | 35,980               |    | 470                            |   | 1.74     | %      | 6,802 |   | 208 |   | 4.09 | % | 9,817 |   | 368 |   | 5.02 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |   | 389,845              |    | 6,998                          |   | 2.40     | %      | 274,763 |   | 7,042 |   | 3.43 | % | 152,667 |   | 5,703 |   | 5.00 | % |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                         |   | 69,087               |    |                           |   |     |   | 57,915 |   |   |   |   |   | 44,566 |   |   |   |   |   |
| Other  liabilities                                       |   | 1,833                |    |                           |   |     |   | 2,505 |   |   |   |   |   | 2,593 |   |   |   |   |   |
| Preferred  shareholders’ equity                     |   | 6,824                |    |                           |   |     |   | 6,825 |   |   |   |   |   | 7,057 |   |   |   |   |   |
| Common  shareholders’ equity                        |   | 33,241               |    |                           |   |     |   | 23,422 |   |   |   |   |   | 25,892 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity         |   | $                    | 500,830 |                           |   |     |   |   | $ | 365,430 |   |   |   |   |   | $ | 232,775 |   |   |   |   |   |
|                                                     |   |                 |    |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income and net interest margin             |   |                 |    | $                              | 10,742 |     | 2.96   | % |   |   | $ | 7,875 |   | 3.05 | % |   |   | $ | 6,648 |   | 4.26 | % |
|                                                          |        |                      |         |                                |        |          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

26

----

 

Table5a.

 

Rate and Volume Analysis (TaxEquivalent Basis)

(Dollars in thousands)

 
|                                      |   | **Nine  Months Ended September 30,  2003 Compared to 2002** |   | **Nine  Months Ended September 30,  2002 Compared to 2001** |   |
|-------------------------------------------|--------|-------------------------------------------------------------|--------|-------------------------------------------------------------|--------|
|                                      |   | **Average  Volume**                                         |   | **Average  Rate**                                           |   | **Increase  (Decrease)** |   | **Average  Volume** |   | **Average  Rate** |   | **Increase  (Decrease)** |   |
| **Interest  income:**                     |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Loans:                                    |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Commercial                                |   | $                                                           | (122   | )                                                           | $      | (310 | ) | $ | (432 | ) | $ | 95 |   | $ | (652 | ) | $ | (557 | ) |
| Real estate - commercial                  |   | 1,676                                                       |   | (887                                                        | )      | 789 |   | 1,460 |   | (497 | ) | 963 |   |
| Real estate - construction                |   | 442                                                         |   | (62                                                         | )      | 380 |   | 44 |   | (136 | ) | (92 | ) |
| Real estate - residential                 |   | 1,138                                                       |   | (388                                                        | )      | 750 |   | (39 | ) | (61 | ) | (100 | ) |
| Home equity lines                         |   | 269                                                         |   | (217                                                        | )      | 52 |   | 317 |   | (472 | ) | (155 | ) |
| Consumer                                  |   | (211                                                        | )      | 3                                                           |   | (208 | ) | (123 | ) | (43 | ) | (166 | ) |
| Total loans                               |   | 3,192                                                       |   | (1,861                                                      | )      | 1,331 |   | 1,754 |   | (1,861 | ) | (107 | ) |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Investment securities  available-for-sale |   | 2,749                                                       |   | (1,986                                                      | )      | 763 |   | 4,631 |   | (1,632 | ) | 2,999 |   |
| Investment securities  held-to-maturity   |   | —                                                      |   | 1,207                                                       |   | 1,207 |   | — |   | — |   | — |   |
| Other investments                         |   | 64                                                          |   | (27                                                         | )      | 37 |   | (11 | ) | (2 | ) | (13 | ) |
| Federal funds sold                        |   | (469                                                        | )      | (46                                                         | )      | (515 | ) | 755 |   | (1,068 | ) | (313 | ) |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Total interest income                     |   | 5,536                                                       |   | (2,713                                                      | )      | 2,823 |   | 7,129 |   | (4,563 | ) | 2,566 |   |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| **Interest  expense:**                    |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:              |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Interest checking                         |   | 906                                                         |   | (1,317                                                      | )      | (411 | ) | 1,300 |   | 749 |   | 2,049 |   |
| Money markets                             |   | (25                                                         | )      | (231                                                        | )      | (256 | ) | 95 |   | (288 | ) | (193 | ) |
| Statement savings                         |   | 9                                                           |   | (22                                                         | )      | (13 | ) | (2 | ) | (46 | ) | (48 | ) |
| Certificates of deposit                   |   | 1,402                                                       |   | (1,028                                                      | )      | 374 |   | 1,400 |   | (1,709 | ) | (309 | ) |
| Total interest - bearing  deposits        |   | 2,292                                                       |   | (2,598                                                      | )      | (306 | ) | 2,793 |   | (1,294 | ) | 1,499 |   |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                      |   | 892                                                         |   | (630                                                        | )      | 262 |   | (113 | ) | (47 | ) | (160 | ) |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Total interest expense                    |   | 3,184                                                       |   | (3,228                                                      | )      | (44 | ) | 2,680 |   | (1,341 | ) | 1,339 |   |
|                                      |   |                                                        |   |                                                        |   |   |   |   |   |   |   |   |   |
| Net interest income                       |   | $                                                           | 2,352  |                                                        | $      | 515 |   | $ | 2,867 |   | $ | 4,449 |   | $ | (3,222 | ) | $ | 1,227 |   |

 

27

----

 

Table6.

 

**Allowance for LoanLosses**

For the Nine Months Ended September30, 2003 and 2002

(Dollars in thousands)

 
|                                                       |   | **2003**          |    | **2002**          |   |
|------------------------------------------------------------|--------|-------------------|---------|-------------------|--------|
| Beginning balance, January 1                               |   | $                 | 3,372   |              | $      | 3,104 |   |
|                                                       |   |              |    |              |   |
| Provision for loan losses                                  |   | 602               |    | 134               |   |
|                                                       |   |              |    |              |   |
| Transfer to bank’s liability  on unfunded commitments |   | —            |    | (74               | )      |
|                                                       |   |              |    |              |   |
| Loans charged off:                                         |   |              |    |              |   |
| Commercial                                                 |   | (74               | )       | (63               | )      |
| Real estate - commercial                                   |   | —            |    | —            |   |
| Real estate - construction                                 |   | —            |    | —            |   |
| Real estate - residential                                  |   | —            |    | —            |   |
| Home equity lines                                          |   | —            |    | —            |   |
| Consumer                                                   |   | (6                | )       | (41               | )      |
| Total loans charged off                                    |   | (80               | )       | (104              | )      |
|                                                       |   |              |    |              |   |
| Recoveries:                                                |   |              |    |              |   |
| Commercial                                                 |   | 42                |    | 2                 |   |
| Real estate - commercial                                   |   | —            |    | —            |   |
| Real estate - construction                                 |   | —            |    | —            |   |
| Real estate - residential                                  |   | —            |    | —            |   |
| Home equity lines                                          |   | —            |    | —            |   |
| Consumer                                                   |   | 7                 |    | 11                |   |
| Total recoveries                                           |   | 49                |    | 13                |   |
|                                                       |   |              |    |              |   |
| Net charge-offs                                            |   | (31               | )       | (91               | )      |
|                                                       |   |              |    |              |   |
| Ending balance                                             |   | $                 | 3,943   |              | $      | 3,073 |   |
|                                                       |   |              |    |              |   |
|                                                       |   |              |    |              |   |
|                                                       |   | **September 30,** |    | **September 30,** |   |
|                                                       |   | **2003**          |    | **2002**          |   |
| Loans:                                                     |   |              |    |              |   |
| Balance at period end                                      |   | $                 | 290,811 |              | $      | 216,337 |   |
| Allowance for loan losses to period end loans  receivable  |   | 1.36              | %       | 1.42              | %      |

 

28

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Table 7.

 

**Allocation ofthe Allowance for Loan Losses**

As of September 30, 2003 andDecember 31, 2002

(Dollars in thousands)

 
|                             |   | **September  30,  2003** |   | **December  31,  2002** |   |
|----------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                             |   | **Allocation**           |   | **% of Total***         |   | **Allocation** |   | **% of Total*** | ** ** |
| Commercial                       |   | $                        | 975    |                    | 14.88  | % | $ | 1,301 |   | 23.40 | % |
| Real estate - commercial         |   | 1,833                    |   | 45.14                   | %      | 1,386 |   | 46.63 | % |
| Real estate - construction       |   | 180                      |   | 10.42                   | %      | 19 |   | 2.32 | % |
| Real estate - residential        |   | 371                      |   | 14.29                   | %      | 241 |   | 12.77 | % |
| Home equity lines                |   | 371                      |   | 12.44                   | %      | 201 |   | 10.77 | % |
| Consumer                         |   | 213                      |   | 2.83                    | %      | 224 |   | 4.11 | % |
|                             |   |                     |   |                    |   |   |   |   |   |
| Total allowance for loan  losses |   | $                        | 3,943  |                    | 100.00 | % | $ | 3,372 |   | 100.00 | % |

 

----

*Percentage of loan type to the total loan portfolio.

 

29

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Table8.

 

**Capital Components**

As of September 30, 2003 and December31, 2002

(Dollars in thousands)

 
|                                                             |   | **Actual** |   | **For  Capital  Adequacy Purposes** |   | **To Be Well  Capitalized Under  Prompt Corrective  Action Provision** |   |
|------------------------------------------------------------------|--------|------------|--------|-------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                                             |   | **Amount** |   | **Ratio**                           |   | **Amount**                                                             |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                                             |   |       |   |                                |   |                                                                   |   |   |   |   |   |   |   |
| **As of  September 30, 2003**                                    |   |       |   |                                |   |                                                                   |   |   |   |   |   |   |   |
| Total risk based capital/  Total capital to risk-weighted assets |   | $          | 43,364 |                                | 11.68  | %                                                                      | $      | 29,708 |   | > | 8.00 | % | $ | 37,135 |   | > | 10.00 | % |
| Tier I capital/ Tier I  capital to risk-weighted assets          |   | 39,420     |   | 10.62                               | %      | 14,854                                                                 |   | > | 4.00 | % | 22,281 |   | > | 6.00 | % |
| Total risk based capital/  Total capital to average assets       |   | 43,364     |   | 7.95                                | %      | 21,821                                                                 |   | > | 4.00 | % | 27,276 |   | > | 5.00 | % |
|                                                             |   |       |   |                                |   |                                                                   |   |   |   |   |   |   |   |
| **As of  December 31, 2002**                                     |   |       |   |                                |   |                                                                   |   |   |   |   |   |   |   |
| Total risk based capital/  Total capital to risk-weighted assets |   | $          | 41,093 |                                | 13.35  | %                                                                      | $      | 24,625 |   | > | 8.00 | % | $ | 30,781 |   | > | 10.00 | % |
| Tier I capital/ Tier I  capital to risk-weighted assets          |   | 37,721     |   | 12.25                               | %      | 12,313                                                                 |   | > | 4.00 | % | 18,469 |   | > | 6.00 | % |
| Total risk based capital/  Total capital to average assets       |   | 41,093     |   | 8.97                                | %      | 18,330                                                                 |   | > | 4.00 | % | 22,913 |   | > | 5.00 | % |

 

30

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Table9.

 

**Interest RateSensitivity Gap Analysis**

As of September 30, 2003

(Dollars in thousands)

 
|                                                              |   | **Immediate  Repricing** |    | **2-90  Days** |   | **91-180  Days** |   | **181-365  Days** |    | **1-3  Years** |   | **Over 3  Years** |   | **TOTAL** |    |
|-------------------------------------------------------------------|--------|--------------------------|---------|----------------|--------|------------------|--------|-------------------|---------|----------------|--------|-------------------|--------|-----------|---------|
| **Assets**                                                        |   |                     |    |           |   |             |   |              |    |           |   |              |   |      |    |
| Investment  securities available-for-sale & other investments |   | $                        | 28,553  |           | $      | 7,000            |   | $                 | 1,877   |           | $      | —            |   | $         | 3,573   |   | $ | 59,919 |   | $ | 100,922 |   |
| Investment  securities held-to-maturity                           |   | 76,379                   |    | 10,832         |   | 1,002            |   | 2,900             |    | 8,068          |   | 46,711            |   | 145,892   |    |
| Federal  funds sold                                               |   | 10,748                   |    | —         |   | —           |   | —            |    | —         |   | —            |   | 10,748    |    |
| **Loans Receivable, net of fees and loans held for sale**         |   |                     |    |           |   |             |   |              |    |           |   |              |   |      |    |
| Commercial  & industrial                                      |   | 28,832                   |    | 6,275          |   | 4,239            |   | 13,590            |    | 39,579         |   | 81,962            |   | 174,477   |    |
| Residential                                                       |   | 1,111                    |    | 624            |   | 404              |   | 8,035             |    | 7,459          |   | 23,942            |   | 41,575    |    |
| Home  equity lines                                                |   | 4,288                    |    | 28,621         |   | 3,613            |   | 418               |    | 21             |   | —            |   | 36,961    |    |
| Construction                                                      |   | 21,563                   |    | —         |   | 1,900            |   | 1,694             |    | 5,162          |   | —            |   | 30,319    |    |
| All  other                                                        |   | 2,341                    |    | 232            |   | 121              |   | 365               |    | 533            |   | 4,672             |   | 8,264     |    |
| **Total loans receivable, net of fees and loans held for sale**   |   | 58,135                   |    | 35,752         |   | 10,277           |   | 24,102            |    | 52,754         |   | 110,576           |   | 291,596   |    |
| **Total earning assets**                                          |   | 173,815                  |    | 53,584         |   | 13,156           |   | 27,002            |    | 64,395         |   | 217,206           |   | 549,158   |    |
| **Cumulative rate sensitive assets**                              |   | $                        | 173,815 |           | $      | 227,399          |   | $                 | 240,555 |           | $      | 267,557           |   | $         | 331,952 |   | $ | 549,158 |   |   |   |
|                                                              |   |                     |    |           |   |             |   |              |    |           |   |              |   |      |    |
| **Liabilities**                                                   |   |                     |    |           |   |             |   |              |    |           |   |              |   |      |    |
| **Deposits**                                                      |   |                     |    |           |   |             |   |              |    |           |   |              |   |      |    |
| Noninterest-bearing  demand                                       |   | $                        | —  |           | $      | —           |   | $                 | —  |           | $      | —            |   | $         | —  |   | $ | 84,833 |   | $ | 84,833 |   |
| Interest-bearing  transaction accounts                            |   | 36,489                   |    | 18,245         |   | 18,245           |   | 18,245            |    | 18,245         |   | 72,976            |   | 182,445   |    |
| Certificates  of deposit - fixed                                  |   | 117                      |    | 7,485          |   | 7,648            |   | 25,641            |    | 55,024         |   | 11,844            |   | 107,759   |    |
| Certificates  of deposit - no penalty                             |   | —                   |    | 19,224         |   | 22,708           |   | 21,178            |    | 21,064         |   | —            |   | 84,174    |    |
| **Total deposits**                                                |   | 36,606                   |    | 44,954         |   | 48,601           |   | 65,064            |    | 94,333         |   | 169,653           |   | 459,211   |    |
| Other  borrowed funds                                             |   | 12,170                   |    | 6,625          |   | 11,625           |   | 7,250             |    | 13,875         |   | 11,208            |   | 62,753    |    |
| **Total deposits & other borrowed funds**                     |   | 48,776                   |    | 51,579         |   | 60,226           |   | 72,314            |    | 108,208        |   | 180,861           |   | 521,964   |    |
| **Cumulative rate sensitive liabilities**                         |   | $                        | 48,776  |           | $      | 100,355          |   | $                 | 160,581 |           | $      | 232,895           |   | $         | 341,103 |   | $ | 521,964 |   |   |   |
|                                                              |   |                     |    |           |   |             |   |              |    |           |   |              |   |      |    |
| **Gap**                                                           |   | $                        | 125,039 |           | $      | 2,005            |   | $                 | (47,070 | )              | $      | (45,312           | )      | $         | (43,813 | ) | $ | 36,345 |   |   |   |
| **Cumulative gap**                                                |   | 125,039                  |    | 127,044        |   | 79,974           |   | 34,662            |    | (9,151         | )      | 27,194            |   |      |    |
| **Gap/ total assets**                                             |   | 22.20                    | %       | 0.36           | %      | -8.36            | %      | -8.04             | %       | -7.78          | %      | 6.45              | %      |      |    |
| **Cumulative gap/ total assets**                                  |   | 22.20                    | %       | 22.55          | %      | 14.20            | %      | 6.15              | %       | -1.62          | %      | 4.83              | %      |      |    |
| **Rate sensitive assets/ rate sensitive liabilities**             |   | 3.56                     |    | 1.04           |   | 0.22             |   | 0.37              |    | 0.60           |   | 1.20              |   |      |    |
| **Cumulative rate sensitive assets/ rate sensitive  liabilities** |   | 3.56                     |    | 2.27           |   | 1.50             |   | 1.15              |    | 0.97           |   | 1.05              |   |      |    |

 

31

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**Item 3.  Controls and Procedures**

 

Based upon an evaluation by ourChief Executive Officer and Chief Financial Officer as of the end of the periodcovered by this Quarterly Report, they have concluded that our disclosurecontrols and procedures, as defined in Rule 13a-15 under the SecuritiesExchange Act of 1934, as amended, are effective in ensuring that all materialinformation required to be disclosed in this Quarterly Report has been madeknown to them in a timely fashion.

 

Our management is alsoresponsible for establishing and maintaining adequate internal control over ourfinancial reporting.  There were nochanges in our internal control over financial reporting identified in connectionwith our evaluation of it that occurred during our last fiscal quarter thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

32

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**Part II - Other Information**

** **

**Item 1.  Legal Proceedings**

** **

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

 

**Item 2.  Changes inSecurities and Use of Proceeds**

** **

(a)  None

(b)  None

(c)  None

(d)  Not applicable

 

**Item 3.  Defaults UponSenior Securities**

** **

(a)  None

(b)  None

 

**Item 4.  Submission ofMatters to a Vote of Security Holders**

** **

(a)  None.

(b)  Not applicable.

(c)  None.

(d)  None

 

**Item 5.  Other Information**

** **

None

 

**Item 6.  Exhibits andReports on Form 8-K**

** **

|                                                                                                                                                                                      | (a)   Exhibits:            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
|                                                                                                                                                                                      |                                 |
|                                                                                                                                                                                      |                                 | 31.1 | Rule  13a-14(a) Certification of Chief Executive Officer |
|                                                                                                                                                                                      |                                 | 31.2 | Rule  13a-14(a) Certification of Chief Financial Officer |
|                                                                                                                                                                                      |                                 | 32.1 | Statement  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|                                                                                                                                                                                      |                                 | 32.2 | Statement  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
|                                                                                                                                                                                      |                                 |   |
|                                                                                                                                                                                      | (b)   Reports  on Form 8-K |
|                                                                                                                                                                                      |                                 |   |
| On July 15, 2003 the Company  furnished to the SEC a Current Report on Form 8-K dated July 15, 2003 under  Item 12, including its financial results for the quarter ended June  30, 2003. |
|                                                                                                                                                                                           |                                      |  |  |  |

 

33

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                    | **CARDINAL FINANCIAL CORPORATION** |
|-------------------------|------------------------------------|
|                    | (Registrant)                       |
|                    |                               |
| Date: November 13, 2003 | /s/  Bernard H. Clineburg          |   |
|                    | Bernard H. Clineburg               |
|                    | Chairman, President and            |
|                    | Chief Executive Officer            |
|                    |                               |
|                    |                               |
| Date: November 13, 2003 | /s/  Domingo Rodriguez             |   |
|                    | Domingo Rodriguez                  |
|                    | Senior Vice President and          |
|                    | Chief Financial Officer            |
|                    | (Principal  Financial Officer)     |
|                    |                               |
|                    |                               |
| Date: November 13, 2003 | /s/  Jennifer L. Deacon            |   |
|                    | Jennifer L. Deacon                 |
|                    | Vice President and                 |
|                    | Controller                         |
|                    | (Principal  Accounting Officer)    |

 

34

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**EXHIBIT INDEX**

 

| **Exhibit No.** |   | **Description**                                                          |
|-----------------|--------|--------------------------------------------------------------------------|
|            |   |                                                                     |
| 31.1            |   | Rule  13a-14(a) Certification of Chief Executive Officer                 |
|            |   |                                                                     |
| 31.2            |   | Rule  13a-14(a) Certification of Chief Financial Officer                 |
|            |   |                                                                     |
| 32.1            |   | Statement  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|            |   |                                                                     |
| 32.2            |   | Statement  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |

 

35

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