**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

** **

**FORM 10-Q**

** **

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

**of the Securities Exchange Act of 1934**

** **

**For the quarterly periodended March 31, 2007**

** **

**or**

** **

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

**of the Securities Exchange Act of 1934**

** **

**For the transition period from                  to                         **

 

**Commission FileNumber:  0-24557**

** **

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specified 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) |   | (Zip Code)           |

** **

**(703) 584-3400**

(Registrant’s telephone number, including area code)

 

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

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

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

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

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

24,470,001 shares of common stock, par value $1.00 per share,outstanding as of April 25, 2007

 

----

 

**CARDINAL FINANCIAL CORPORATION**

**INDEX TO FORM 10-Q**
| **PART I — FINANCIAL  INFORMATION**                                                            |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|
| ** **                                                                                          |   |   |
| Item  1. Financial Statements:                                                                      |   |   |
|                                                                                                |   |   |
| Consolidated Statements of Condition                                                                |   |   |
| At March 31, 2007 (unaudited) and December 31, 2006                                                 |   | 3      |
|                                                                                                |   |   |
| Consolidated Statements of Income                                                                   |   |   |
| For the three months ended March 31, 2007 and 2006 (unaudited)                                      |   | 4      |
|                                                                                                |   |   |
| Consolidated Statements of Comprehensive Income                                                     |   |   |
| For the three months ended March 31, 2007 and 2006 (unaudited)                                      |   | 5      |
|                                                                                                |   |   |
| Consolidated Statements of Changes in Shareholders’  Equity                                    |   |   |
| For the three months ended March 31, 2007 and 2006 (unaudited)                                      |   | 6      |
|                                                                                                |   |   |
| Consolidated Statements of Cash Flows                                                               |   |   |
| For the three months ended March 31, 2007 and 2006 (unaudited)                                      |   | 7      |
|                                                                                                |   |   |
| Notes to Consolidated Financial Statements (unaudited)                                              |   | 8      |
|                                                                                                |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 17     |
|                                                                                                |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |   | 37     |
|                                                                                                |   |   |
| Item 4. Controls and Procedures                                                                     |   | 38     |
|                                                                                                |   |   |
| **PART  II — OTHER INFORMATION**                                                               |   | 39     |
| ** **                                                                                          |   |   |
| Item  1. Legal Proceedings                                                                          |   | 39     |
|                                                                                                |   |   |
| Item  1A. Risk Factors                                                                              |   | 39     |
|                                                                                                |   |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |   | 39     |
|                                                                                                |   |   |
| Item 3. Defaults Upon Senior Securities                                                             |   | 39     |
|                                                                                                |   |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        |   | 39     |
|                                                                                                |   |   |
| Item  5. Other Information                                                                          |   | 39     |
|                                                                                                |   |   |
| Item 6.  Exhibits                                                                                   |   | 39     |
|                                                                                                |   |   |
| **SIGNATURES**                                                                                      |   | 40     |

 

----

 

**PART I — FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**CARDINAL FINANCIALCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITIONMarch 31, 2007 and December 31, 2006(In thousands, except share data)**
| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|-----------------------|------------|
| **Assets**                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| Cash and due from banks                                                                                                              |       |       |       |       |       | $                  | 20,014     |                  | $          | 24,585 |   |
| Federal funds sold                                                                                                                   |       |       |       |       |       | 78,370             |       | 11,491                |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Total cash and  cash equivalents                                                                                                     |       |       |       |       |       | 98,384             |       | 36,076                |       |
| Investment securities  available-for-sale                                                                                            |       |       |       |       |       | 250,447            |       | 231,631               |       |
| Investment securities  held-to-maturity (market value of $92,557 and $95,450 at March 31, 2007 and  December 31, 2006, respectively) |       |       |       |       |       | 94,329             |       | 97,665                |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Total investment  securities                                                                                                         |       |       |       |       |       | 344,776            |       | 329,296               |       |
| Other investments                                                                                                                    |       |       |       |       |       | 10,890             |       | 9,158                 |       |
| Loans held for sale,  net                                                                                                            |       |       |       |       |       | 314,305            |       | 338,731               |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Loans receivable, net  of deferred fees and costs                                                                                    |       |       |       |       |       | 870,844            |       | 845,449               |       |
| Allowance for loan  losses                                                                                                           |       |       |       |       |       | (9,918             | )          | (9,638                | )          |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Loans  receivable, net                                                                                                               |       |       |       |       |       | 860,926            |       | 835,811               |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Premises and equipment,  net                                                                                                         |       |       |       |       |       | 20,138             |       | 20,039                |       |
| Deferred tax asset                                                                                                                   |       |       |       |       |       | 6,397              |       | 6,415                 |       |
| Goodwill and  intangibles, net                                                                                                       |       |       |       |       |       | 17,430             |       | 17,493                |       |
| Bank-owned life  insurance                                                                                                           |       |       |       |       |       | 31,078             |       | 30,646                |       |
| Accrued interest  receivable and other assets                                                                                        |       |       |       |       |       | 15,304             |       | 14,764                |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Total assets                                                                                                                         |       |       |       |       |       | $                  | 1,719,628  |                  | $          | 1,638,429 |   |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                       |       |       |       |       |       |               |       |                  |       |
| ** **                                                                                                                           |       |       |       |       |       |               |       |                  |       |
| Non-interest bearing  deposits                                                                                                       |       |       |       |       |       | $                  | 142,333    |                  | $          | 123,301 |   |
| Interest bearing  deposits                                                                                                           |       |       |       |       |       | 1,090,069          |       | 1,095,581             |       |
| Other borrowed funds                                                                                                                 |       |       |       |       |       | 261,669            |       | 194,631               |       |
| Mortgage funding checks                                                                                                              |       |       |       |       |       | 44,643             |       | 46,159                |       |
| Escrow liabilities                                                                                                                   |       |       |       |       |       | 5,696              |       | 3,229                 |       |
| Accrued interest  payable and other liabilities                                                                                      |       |       |       |       |       | 17,502             |       | 19,655                |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Total  liabilities                                                                                                                   |       |       |       |       |       | 1,561,912          |       | 1,482,556             |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Common stock, $1 par  value                                                                                                          |       | **2007**   |       | **2006**   |       |               |       |                  |       |
| Shares  authorized                                                                                                                   |       | 50,000,000 |       | 50,000,000 |       |               |       |                  |       |
| Shares issued  and outstanding                                                                                                       |       | 24,468,801 |       | 24,459,155 |       | 24,469             |       | 24,459                |       |
| Additional paid-in  capital                                                                                                          |       |       |       |       |       | 133,025            |       | 132,985               |       |
| Retained earnings                                                                                                                    |       |       |       |       |       | 2,225              |       | 705                   |       |
| Accumulated other  comprehensive loss                                                                                                |       |       |       |       |       | (2,003             | )          | (2,276                | )          |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Total  shareholders’ equity                                                                                                     |       |       |       |       |       | 157,716            |       | 155,873               |       |
|                                                                                                                                 |       |       |       |       |       |               |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                     |       |       |       |       |       | $                  | 1,719,628  |                  | $          | 1,638,429 |   |

 

See accompanyingnotes to consolidated financial statements.

3

----

** **

**CARDINAL FINANCIALCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEThree months ended March 31, 2007 and 2006(In thousands, except per share data)(Unaudited)**
| ** **                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Interest income:                                               |       |     |       |     |       |
| Loans receivable                                               |       | $        | 14,596     |     | $          | 11,505 |   |
| Loans held for sale                                            |       | 4,379    |       | 4,278    |       |
| Federal funds sold                                             |       | 1,020    |       | 649      |       |
| Investment securities available-for-sale                       |       | 2,821    |       | 2,064    |       |
| Investment securities held-to-maturity                         |       | 1,002    |       | 1,125    |       |
| Other investments                                              |       | 127      |       | 89       |       |
|                                                           |       |     |       |     |       |
| Total interest income                                          |       | 23,945   |       | 19,710   |       |
|                                                           |       |     |       |     |       |
| Interest  expense:                                             |       |     |       |     |       |
| Deposits                                                       |       | 12,070   |       | 7,792    |       |
| Other borrowed funds                                           |       | 2,040    |       | 1,523    |       |
|                                                           |       |     |       |     |       |
| Total interest expense                                         |       | 14,110   |       | 9,315    |       |
|                                                           |       |     |       |     |       |
| Net interest income                                            |       | 9,835    |       | 10,395   |       |
|                                                           |       |     |       |     |       |
| Provision for  loan losses                                     |       | 280      |       | 250      |       |
|                                                           |       |     |       |     |       |
| Net interest income after provision for loan losses            |       | 9,555    |       | 10,145   |       |
|                                                           |       |     |       |     |       |
| Non-interest  income:                                          |       |     |       |     |       |
| Service charges on deposit accounts                            |       | 466      |       | 369      |       |
| Loan service charges                                           |       | 386      |       | 623      |       |
| Investment fee income                                          |       | 1,024    |       | 662      |       |
| Net gain on sales of loans                                     |       | 2,630    |       | 2,776    |       |
| Net realized gain on investment securities  available-for-sale |       | 14       |       | —   |       |
| Net realized loss on investment securities trading             |       | (9       | )          | —   |       |
| Management fee income                                          |       | 321      |       | 418      |       |
| Litigation recovery on previously impaired  investment         |       | 33       |       | —   |       |
| Other income                                                   |       | 444      |       | 315      |       |
|                                                           |       |     |       |     |       |
| Total non-interest income                                      |       | 5,309    |       | 5,163    |       |
|                                                           |       |     |       |     |       |
| Non-interest  expense:                                         |       |     |       |     |       |
| Salary and benefits                                            |       | 6,596    |       | 5,931    |       |
| Occupancy                                                      |       | 1,289    |       | 1,208    |       |
| Professional fees                                              |       | 490      |       | 507      |       |
| Depreciation                                                   |       | 800      |       | 749      |       |
| Data processing                                                |       | 344      |       | 325      |       |
| Telecommunications                                             |       | 292      |       | 310      |       |
| Amortization of intangibles                                    |       | 63       |       | 145      |       |
| Other operating expenses                                       |       | 2,488    |       | 2,257    |       |
|                                                           |       |     |       |     |       |
| Total non-interest expense                                     |       | 12,362   |       | 11,432   |       |
|                                                           |       |     |       |     |       |
| Net income before income taxes                                 |       | 2,502    |       | 3,876    |       |
|                                                           |       |     |       |     |       |
| Provision for  income taxes                                    |       | 737      |       | 1,309    |       |
|                                                           |       |     |       |     |       |
| Net income                                                     |       | $        | 1,765      |     | $          | 2,567 |   |
|                                                           |       |     |       |     |       |
| Earnings per  common share — basic                        |       | $        | 0.07       |     | $          | 0.11 |   |
|                                                           |       |     |       |     |       |
| Earnings per  common share — diluted                      |       | $        | 0.07       |     | $          | 0.10 |   |
|                                                           |       |     |       |     |       |
| Weighted-average  common shares outstanding — basic       |       | 24,510   |       | 24,387   |       |
|                                                           |       |     |       |     |       |
| Weighted-average  common shares outstanding — diluted     |       | 25,040   |       | 25,042   |       |

 

See accompanyingnotes to consolidated financial statements.

4

----

**CARDINAL FINANCIALCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEThree months ended March 31, 2007 and 2006(In thousands)(Unaudited)**
| ** **                                                                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income                                                                                                                    |       | $        | 1,765      |     | $          | 2,567 |   |
| Other  comprehensive income:                                                                                                  |       |     |       |     |       |
| Unrealized loss on available-for-sale investment  securities:                                                                 |       |     |       |     |       |
| Unrealized holding gain (loss) arising during the  period, net of tax expense of $127 in 2007 and tax benefit of $383 in 2006 |       | 246      |       | (723 )   |       |
|                                                                                                                          |       |     |       |     |       |
| Less: reclassification adjustment for gains included  in net income net of tax expense of $5 in 2007                          |       | (9       | )          | —   |       |
|                                                                                                                          |       | 237      |       | (723 )   |       |
|                                                                                                                          |       |     |       |     |       |
| Unrealized gain on derivative instruments designated  as cash flow hedges, net of tax expense of $21 in 2007 and $146 in 2006 |       | 36       |       | 284      |       |
|                                                                                                                          |       |     |       |     |       |
| Comprehensive  income                                                                                                         |       | $        | 2,038      |     | $          | 2,128 |   |

 

**Seeaccompanying notes to consolidated financial statements.**

5

----

 

**CARDINAL FINANCIALCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYThree months ended March 31, 2007 and 2006(In thousands)(Unaudited)**
| ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance, December 31,  2005                                                      |       | 24,363     |       | $          | 24,363     |           | $          | 132,150       |       | $                      | (5,269     | )          | $          | (3,365 | ) | $ | 147,879 |   |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Cumulative effect at  January 1, 2006, of change in method of quantifying errors |       | —     |       | —     |       | 25             |       | (438          | )          | —                 |       | (413       | )          |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Stock options exercised                                                          |       | 4          |       | 4          |       | 34             |       | —        |       | —                 |       | 38         |       |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Dividends on common  stock of $0.01 per share                                    |       | —     |       | —     |       | —         |       | (243          | )          | —                 |       | (243       | )          |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Change in accumulated  other comprehensive loss                                  |       | —     |       | —     |       | —         |       | —        |       | (439                   | )          | (439       | )          |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Net income                                                                       |       | —     |       | —     |       | —         |       | 2,567         |       | —                 |       | 2,567      |       |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Balance, March 31, 2006                                                          |       | 24,367     |       | $          | 24,367     |           | $          | 132,209       |       | $                      | (3,383     | )          | $          | (3,804 | ) | $ | 149,389 |   |
| Balance, December 31,  2006                                                      |       | 24,459     |       | $          | 24,459     |           | $          | 132,985       |       | $                      | 705        |       | $          | (2,276 | ) | $ | 155,873 |   |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Stock options exercised                                                          |       | 10         |       | 10         |       | 37             |       | —        |       | —                 |       | 47         |       |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Payment of deferred  compensation shares                                         |       | —     |       | —     |       | 3              |       | —        |       | —                 |       | 3          |       |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Dividends on common  stock of $0.01 per share                                    |       | —     |       | —     |       | —         |       | (245          | )          | —                 |       | (245       | )          |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Change in accumulated  other comprehensive loss                                  |       | —     |       | —     |       | —         |       | —        |       | 273                    |       | 273        |       |
|                                                                             |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Net income                                                                       |       | —     |       | —     |       | —         |       | 1,765         |       | —                 |       | 1,765      |       |
| Balance, March 31, 2007                                                          |       | 24,469     |       | $          | 24,469     |           | $          | 133,025       |       | $                      | 2,225      |       | $          | (2,003 | ) | $ | 157,716 |   |

 

See accompanyingnotes to consolidated financial statements.

6

----

**CARDINAL FINANCIALCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSThree Months Ended March 31, 2007 and 2006(In thousands)(Unaudited)**
| ** **                                                                                                                                                                                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                                                                                                                                                             |       |     |       |     |       |
| Net income                                                                                                                                                                                                                                         |       | $        | 1,765      |     | $          | 2,567 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                                                                                                                                                 |       |     |       |     |       |
| Depreciation                                                                                                                                                                                                                                       |       | 800      |       | 749      |       |
| Amortization of premiums, discounts and intangibles                                                                                                                                                                                                |       | 172      |       | 365      |       |
| Provision for loan losses                                                                                                                                                                                                                          |       | 280      |       | 250      |       |
| Loans held for sale originated                                                                                                                                                                                                                     |       | (618,047 | )          | (673,469 | )          |
| Proceeds from the sale of loans held for sale                                                                                                                                                                                                      |       | 645,103  |       | 737,719  |       |
| Gain on sales of loans held for sale                                                                                                                                                                                                               |       | (2,630   | )          | (2,776   | )          |
| Proceeds from sale, maturity and call of investment  securities trading                                                                                                                                                                            |       | 1,992    |       | —   |       |
| Purchase of investment securities trading                                                                                                                                                                                                          |       | (2,001   | )          | —   |       |
| Loss on sale of investments securities trading                                                                                                                                                                                                     |       | 9        |       | —   |       |
| Gain on sale of investment securities  available-for-sale                                                                                                                                                                                          |       | (14      | )          | —   |       |
| Loss on sale of other assets                                                                                                                                                                                                                       |       | —   |       | 2        |       |
| Increase in cash surrender value of bank-owned life insurance                                                                                                                                                                                      |       | (432     | )          | —   |       |
| Increase in accrued interest receivable, other  assets and deferred tax asset                                                                                                                                                                      |       | (602     | )          | (2,202   | )          |
| Increase (decrease) in accrued interest payable,  escrow liabilities and other liabilities                                                                                                                                                         |       | 774      |       | (7,801   | )          |
| Net cash provided by operating activities                                                                                                                                                                                                          |       | 27,169   |       | 55,404   |       |
| Cash flows from  investing activities:                                                                                                                                                                                                             |       |     |       |     |       |
| Net purchases of premises and equipment                                                                                                                                                                                                            |       | (899     | )          | (558     | )          |
| Proceeds from sale, maturity and call of investment  securities available-for-sale                                                                                                                                                                 |       | 26,346   |       | —   |       |
| Proceeds from sale of other investments                                                                                                                                                                                                            |       | 270      |       | —   |       |
| Purchase of investment securities available-for-sale                                                                                                                                                                                               |       | (47,167  | )          | (17,794  | )          |
| Purchase of mortgage-backed securities  available-for-sale                                                                                                                                                                                         |       | (3,355   | )          | (26,545  | )          |
| Purchase of other investments                                                                                                                                                                                                                      |       | (2,002   | )          | (691     | )          |
| Redemptions of investment securities available-for-sale                                                                                                                                                                                            |       | 5,223    |       | 5,767    |       |
| Redemptions of investment securities  held-to-maturity                                                                                                                                                                                             |       | 3,271    |       | 4,612    |       |
| Net cash paid in acquisition                                                                                                                                                                                                                       |       | —   |       | (342     | )          |
| Net increase in loans receivable, net of deferred  fees and costs                                                                                                                                                                                  |       | (25,395  | )          | (24,369  | )          |
| Net cash used in investing activities                                                                                                                                                                                                              |       | (43,708  | )          | (59,920  | )          |
| Cash flows from  financing activities:                                                                                                                                                                                                             |       |     |       |     |       |
| Net increase in deposits                                                                                                                                                                                                                           |       | 13,520   |       | 2,085    |       |
| Net increase in other borrowed funds - short term                                                                                                                                                                                                  |       | 23,663   |       | 13,122   |       |
| Net increase (decrease) in mortgage funding checks                                                                                                                                                                                                 |       | (1,516   | )          | 10,442   |       |
| Proceeds from FHLB advances - long term                                                                                                                                                                                                            |       | 45,000   |       | 5,000    |       |
| Repayments of FHLB advances - long term                                                                                                                                                                                                            |       | (1,625   | )          | —   |       |
| Stock options exercised                                                                                                                                                                                                                            |       | 47       |       | 38       |       |
| Deferred compensation payments                                                                                                                                                                                                                     |       | 3        |       | —   |       |
| Dividends on common stock                                                                                                                                                                                                                          |       | (245     | )          | (243     | )          |
| Net cash provided by financing activities                                                                                                                                                                                                          |       | 78,847   |       | 30,444   |       |
| Net increase in  cash and cash equivalents                                                                                                                                                                                                         |       | 62,308   |       | 25,928   |       |
| Cash and cash  equivalents at beginning of the period                                                                                                                                                                                              |       | 36,076   |       | 36,589   |       |
| Cash and cash  equivalents at end of the period                                                                                                                                                                                                    |       | $        | 98,384     |     | $          | 62,517 |   |
| **Supplemental  disclosure of cash flow information:**                                                                                                                                                                                             |       |     |       |     |       |
| Cash paid during the period for interest                                                                                                                                                                                                           |       | $        | 13,959     |     | $          | 9,490 |   |
| Cash paid for income taxes                                                                                                                                                                                                                         |       | 2,181    |       | 3,090    |       |
|                                                                                                                                                                                                                                               |       |     |       |     |       |
| **Supplemental  schedule of noncash investing and financing activities:**                                                                                                                                                                          |       |     |       |     |       |
| Unsettled purchases of investment securities  available-for-sale                                                                                                                                                                                   |       | $        | —     |     | $          | 12,668 |   |
|                                                                                                                                                                                                                                               |       |     |       |     |       |
| On February 9, 2006, the Company acquired certain  fiduciary and other assets and assumed the liabilities of FBR National Trust  Company. In conjunction with the acquisition, the following noncash changes to  our financial condition occurred: |       |     |       |     |       |
| Fair value of non-cash assets acquired                                                                                                                                                                                                             |       |     |       | $        | 507        |   |
| Fair value of liabilities assumed                                                                                                                                                                                                                  |       |     |       | 127      |       |

 

**Seeaccompanying notes to consolidated financial statements.**

7

----

 

**CARDINAL FINANCIALCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2007(Unaudited)**

Note 1

*Organization*

Cardinal Financial Corporation (the ”Company”) is incorporatedunder the laws of the Commonwealth of Virginia as a financial holding companywhose activities consist of investment in its wholly-owned subsidiaries. Theprincipal operating subsidiary of the Company is Cardinal Bank (the “Bank”), astate-chartered institution. On July 7, 2004, the Bank acquired GeorgeMason Mortgage, LLC (“George Mason”), a mortgage banking company based inFairfax, Virginia. On June 9, 2005, the Company acquired Wilson/BennettCapital Management, Inc. (“Wilson/Bennett”), an asset management firm. TheCompany also owns Cardinal Wealth Services, Inc. (“CWS”), an investmentservices subsidiary. On February 9, 2006, the Bank acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, RamseyGroup, Inc.

*Basis ofPresentation*

In the opinion of management, the accompanying consolidated financialstatements have been prepared in accordance with the requirements of RegulationS-X, Article 10. Accordingly, they do not include all of the informationand footnotes required by U.S. generally accepted accounting principles forcomplete financial statements. However, all adjustments that are, in theopinion of management, necessary for a fair presentation have been included.The results of operations for the three months ended March 31, 2007 are notnecessarily indicative of the results to be expected for the full year endingDecember 31, 2007. The unaudited interim financial statements should beread in conjunction with the audited financial statements and notes to financialstatements that are included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006.

Note 2

*Summary of Significant Accounting Policies*

*Investment Securities Held for Trading*

The Company established a new investment securities category,investment securities held for trading, during the period ending March 31,2007. Investment securities held for trading are those securities for which theCompany has purchased and holds for the purpose of selling in the near future.

Investment securities held for trading are carried atestimated fair value. Unrealized market value adjustments, fees, and realizedgains or losses, net of applicable tax, on trading securities are reported innoninterest income.  Interest income ontrading securities is included in interest income from investment securitieswithin the consolidated statements of income.

8

----

**Note 3**

***Stock-BasedCompensation***

At March 31, 2007, the Company had two stock-based employeecompensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002Equity Compensation Plan (the “Equity Plan”).

In 1998, the Company adopted the Option Plan pursuant to which theCompany may grant stock options for up to 625,000 shares of the Company’scommon stock to employees and members of the Company’s and its subsidiaries’boards of directors. There are 17,644 shares of the Company’s common stockavailable for future grants in the Option Plan as of March 31, 2007.

In 2002, the Company adopted the Equity Plan. The Equity Planauthorizes the granting and award of incentive stock options, non-qualifiedstock options, stock appreciation rights, restricted stock awards, phantomstock awards and performance share awards to directors, eligible officers andkey employees of the Company.  The EquityPlan currently authorizes grants and awards with respect to 2,420,000 shares ofthe Company’s common stock.  There are250,283 shares of the Company’s common stock available for future grants andawards in the Equity Plan as of March 31, 2007.

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

The Company has only made awards of stock options under the Option Planand the Equity Plan.

Total expense related to the Company’s share-based compensation plansfor the three months ended March 31, 2007 and 2006 was $100,000 and $62,000,respectively. The total income tax benefit recognized in the income statementfor share-based compensation arrangements was $35,000 and $22,000 for the threemonths ended March 31, 2007 and 2006, respectively.

The weighted average per share fair values of stock option grants madeduring the three months ended March 31, 2007 and 2006 were $4.89 and $5.80,respectively.  The fair values of theoptions granted for these periods were estimated as of the grant date using theBlack-Scholes option-pricing model based on the following weighted averageassumptions:

|                          | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Estimated option  life   |       | 6.5 years                        |       | 6.5 years |   |
| Risk free  interest rate |       | 4.81%                            |       | 4.44 - 4.69% |   |
| Expected  volatility     |       | 42.10%                           |       | 43.20% |   |
| Expected dividend yield  |       | 0.40%                            |       | 0.50% |   |

 

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

9

----

Stock option activity during the three months ended March 31, 2007 issummarized as follows:
| ** **                             | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**          | ** ** | ** **    | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------|------------|-----------------------|------------|---------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**           | ** ** | **Aggregate** | ** ** |
| ** **                             | ** ** | ** **         | ** ** | **Average**  | ** ** | **Remaining**         | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual**       | ** ** | **Value**     | ** ** |
| ** **                             | ** ** | **Shares**         | ** ** | **Price**    | ** ** | **Term (Years)** | ** ** | **($000)**    | ** ** |
| Outstanding at  December 31, 2006      |       | 2,419,274          |       | $            | 8.70       |                  |       |          |       |   |
| Granted                                |       | 500                |       | 10.18        |       |                  |       |          |       |
| Exercised                              |       | (9,646             | )          | 4.79         |       |                  |       |          |       |
| Forfeited                              |       | (3,000             | )          | 10.24        |       |                  |       |          |       |
| Outstanding at  March 31, 2007         |       | 2,407,128          |       | $            | 8.70       |                  | 7.39       |          | $          | 3,070 |   |
| Options exercisable at  March 31, 2007 |       | 2,097,000          |       | $            | 8.41       |                  | 7.22       |          | $          | 3,293 |   |

 

Total intrinsic values of options exercised during the three monthsended March 31, 2007 and 2006 were $50,000 and $53,000, respectively.

A summary of the status of the Company’s non-vestedstock options and changes during the three months ended March 31, 2007 is asfollows:

|                               | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                    | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                    | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                    | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Balance at  December 31, 2006 |       | 410,606            |       | $                   | 4.63       |   |
| Granted                       |       | 500                |       | 4.89                |       |
| Vested                        |       | (98,978            | )          | 3.29                |       |
| Forfeited                     |       | (2,000             | )          | 4.83                |       |
| Balance at March 31,  2007    |       | 310,128            |       | $                   | 5.06       |   |

 

At March 31, 2007, there were $1.5 million of total unrecognizedcompensation cost related to non-vested share-based compensation arrangementsgranted under the plans. The cost is expected to be recognized over a weightedaverage period of 3.7 years. The total fair value of shares that vested duringthe three months ended March 31, 2007 and 2006 were $360,000 and $211,000,respectively.

Note 4

# *Segment Information*

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

The Commercial Banking segment includes both commercial and consumerlending and provides customers with such products as commercial loans, realestate loans, business financing and consumer loans. In addition, this segmentprovides customers with several choices of deposit 

10

----

products including demand deposit accounts, savings accounts andcertificates of deposit. The Mortgage Banking segment engages primarily in theorigination and acquisition of residential mortgages for sale into thesecondary market on a best efforts basis. The Wealth Management and TrustServices segment provides investment and financial advisory services tobusinesses and individuals, including financial planning, retirement/estateplanning, trust, estates, custody, investment management, escrows, andretirement plans.

Results related to the assets acquired, and liabilities assumed, fromFBR National Trust Company are reflected in the Wealth Management and TrustServices segment since the date of their acquisition and assumption,February 9, 2006.

Information about the reportable segments and reconciliation of thisinformation to the consolidated financial statements at and for the threemonths ended March 31, 2007 and 2006 is as follows:

**At and for the Three Months Ended March 31, 2007 (inthousands):**
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth  Management**  | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|-------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                 | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services** | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 9,366      |         | $          | 751                     |       | $          | —     |             | $          | (282             | )          | $ | — |   | $ | 9,835 |   |
| Provision for  loan losses  |       | 280            |       | —       |       | —                  |       | —     |       | —           |       | 280              |       |
| Non-interest  income        |       | 996            |       | 3,277        |       | 1,024                   |       | 12         |       | —           |       | 5,309            |       |
| Non-interest  expense       |       | 7,489          |       | 3,191        |       | 1,040                   |       | 642        |       | —           |       | 12,362           |       |
| Provision for  income taxes |       | 799            |       | 299          |       | (47                     | )          | (314       | )          | —           |       | 737              |       |
| Net income  (loss)          |       | $              | 1,794      |         | $          | 538                     |       | $          | 31         |             | $          | (598             | )          | $ | — |   | $ | 1,765 |   |
|                        |       |           |       |         |       |                    |       |       |       |             |       |             |       |
| Total Assets                |       | $              | 1,654,253  |         | $          | 330,558                 |       | $          | 5,282      |             | $          | 163,384          |       | $ | (433,849 | ) | $ | 1,719,628 |   |
| Average Assets              |       | $              | 1,599,202  |         | $          | 253,094                 |       | $          | 5,345      |             | $          | 163,762          |       | $ | (407,609 | ) | $ | 1,613,794 |   |

 

**At andfor the Three Months Ended March 31, 2006 (in thousands):**
|                        |       |           |       | ** **   |       | **Wealth   Management** |       |       |       |             |       |             |       |
|-----------------------------|------------|----------------|------------|--------------|------------|-------------------------|------------|------------|------------|------------------|------------|------------------|------------|
|                        | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                 | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
|                        | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust  Services**     | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 9,529      |         | $          | 1,137                   |       | $          | —     |             | $          | (271             | )          | $ | — |   | $ | 10,395 |   |
| Provision for  loan losses  |       | 250            |       | —       |       | —                  |       | —     |       | —           |       | 250              |       |
| Non-interest  income        |       | 903            |       | 3,587        |       | 662                     |       | 11         |       | —           |       | 5,163            |       |
| Non-interest  expense       |       | 6,198          |       | 4,077        |       | 655                     |       | 502        |       | —           |       | 11,432           |       |
| Provision for  income taxes |       | 1,385          |       | 228          |       | (19                     | )          | (285       | )          | —           |       | 1,309            |       |
| Net income  (loss)          |       | $              | 2,599      |         | $          | 419                     |       | $          | 26         |             | $          | (477             | )          | $ | — |   | $ | 2,567 |   |
|                        |       |           |       |         |       |                    |       |       |       |             |       |             |       |
| Total Assets                |       | $              | 1,408,161  |         | $          | 318,583                 |       | $          | 7,605      |             | $          | 159,905          |       | $ | (412,576 | ) | $ | 1,481,678 |   |
| Average Assets              |       | $              | 1,355,941  |         | $          | 236,484                 |       | $          | 6,922      |             | $          | 161,285          |       | $ | (394,134 | ) | $ | 1,366,498 |   |

 

At March 31, 2007, the Company did not have any operating segmentsother than those reported. Parent company financial information is included inthe “Other” category and represents an overhead function rather than anoperating segment. The parent company’s most significant assets are its netinvestments in its subsidiaries. The parent company’s net interest expense iscomprised of interest income from short-term investments and interest expenseon trust preferred securities. The parent company’s non-interest expense isprimarily non-allocable executive salaries and professional services related tothe Company’s regulatory requirements.

11

----

 

#### Note 5

##### *Earnings Per Share*

The following is the calculation of basic and diluted earnings pershare for the three months ended March 31, 2007 and 2006. Stock optionsoutstanding at March 31, 2007 and 2006 were 2,407,128 and 2,409,671,respectively. Stock options issued that were not included in the calculation ofdiluted earnings per share because the exercise prices were greater than theaverage market price were 32,510 and 487 for the three months ended March 31,2007 and 2006, respectively.
| **(In thousands,**                        | ** ** | **March 31,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|
| **except per share data)**      | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Net income available to  common shareholders   |       | $                  | 1,765      |   | $ | 2,567 |   |
| Weighted average common  shares – basic   |       | 24,510             |       | 24,387 |   |
| Weighted average common  shares – diluted |       | 25,040             |       | 25,042 |   |
| Earnings per common  share – basic        |       | $                  | 0.07       |   | $ | 0.11 |   |
| Earnings per common share – diluted       |       | $                  | 0.07       |   | $ | 0.10 |   |

 

Basic earnings per share is impacted by the number of shares requiredto be issued under the Company’s various deferred compensation plans, anddiluted earnings per share is impacted by those common shares which may be, butare not required to be, issued (depending on the elections of the participants)under these plans.

The following shows the calculation of basic outstanding shares for thethree months ended March 31, 2007 and 2006:

| (in thousands)                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average common  shares outstanding  |       | 24,463   |       | 24,364   |       |
| Weighted average shares  attributable to the |       |     |       |     |       |
| deferred  compensation plan match            |       | 47       |       | 23       |       |
| Total weighted average  shares – basic  |       | 24,510   |       | 24,387   |       |

 

12

----

Thefollowing shows the calculation of diluted outstanding shares for the threemonths ended March 31, 2007 and 2006:

| (in thousands)                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average shares  outstanding – basic (from above) |       | 24,510   |       | 24,387   |       |
| Weighted average shares  attributable to deferred              |       |     |       |     |       |
| compensation  plan contributions                               |       | 243      |       | 174      |       |
| Weighted average shares  attributable to vested stock options  |       | 287      |       | 458      |       |
| Incremental shares  attributable to unvested stock options     |       | —   |       | 23       |       |
| Total weighted average  shares – diluted                  |       | 25,040   |       | 25,042   |       |

 

#### Note 6

##### *Derivatives and Hedging Activities*

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

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

At March 31, 2007, accumulated other comprehensive income included anafter-tax unrealized gain of $36,000 related to forward loan sales contracts.Loans held for sale are generally sold within sixty days of closing and,therefore, substantially all of the amount recorded in accumulated othercomprehensive income at March 31, 2007 that is related to the Company’s cashflow hedges will be recognized in earnings during the second quarter of 2007.For the three months ended March 31, 2007, the hedge ineffectiveness recordedthrough earnings was immaterial.

At March 31, 2007, the derivative asset was $2.4 million and thederivative liability was $1.4 million. The Company had $125.0 million in loancommitments and $274.2 million in associated forward loan sales. TheCompany also had $274.2 million in forward loan sales contracts hedging themajority of its loans held for sale portfolio.

13

----

#### Note 7

*Goodwilland Other Intangibles*

Information concerning total amortizable other intangible assets atMarch 31, 2007 is as follows:
| ** **                         | ** ** | **Mortgage Banking** | ** ** | **Wealth Management  and Trust Services** | ** ** | **Total**            | ** ** |
|------------------------------------|------------|---------------------------|------------|----------------------------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Gross**                 | ** ** | ** **                                               | ** ** | **Gross **      | ** ** | ** ** | ** ** | **Gross ** | ** ** | ** ** | ** ** |
| **(In thousands)**            | ** ** | **Carrying  Amount**      | ** ** | **Accumulated  Amortization**                            | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at December 31,  2006      |       | $                         | 1,781      |                                                     | $          | 445                  |       | $ | 795 |   | $ | 433 |   | $ | 2,576 |   | $ | 878 |   |
| 2007 activity:                     |       |                      |       |                                                     |       |                 |       |   |   |   |   |   |   |
| Customer  relationship intangibles |       | —                    |       | 49                                                       |       | —               |       | 10 |   | — |   | 59 |   |
| Trade name                         |       | —                    |       | —                                                   |       | —               |       | 4 |   | — |   | 4 |   |
| Balance at March 31,  2007         |       | $                         | 1,781      |                                                     | $          | 494                  |       | $ | 795 |   | $ | 447 |   | $ | 2,576 |   | $ | 941 |   |

 

The aggregate amortization expense for the three months ended March 31,2007 and 2006 was $63,000 and $145,000, respectively.

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

|                              | ** ** | **(In thousands)** | ** ** |
|------------------------------|------------|-------------------------|------------|
| 2007 (April — December) |       | $                       | 190        |   |
| 2008                         |       | 245                     |       |
| 2009                         |       | 238                     |       |
| 2010                         |       | 238                     |       |
| 2011                         |       | 238                     |       |
| 2012                         |       | 238                     |       |
|                              |            |                         |            |  |

 

The carrying amount of goodwill at March 31, 2007 was as follows:
| **(In thousands)**       | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and Trust  Services** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at December 31,  2006 |       | $                       | 22         |                  | $          | 12,941                                           |       | $         | 2,832      |   | $ | 15,795 |   |
| 2007 activity                 |       | —                  |       | —                |       | —                                           |       | —    |       |
| Balance at March 31,  2007    |       | $                       | 22         |                  | $          | 12,941                                           |       | $         | 2,832      |   | $ | 15,795 |   |

 

The Company evaluates impairment of goodwill annually. During theperiod ending March 31, 2007, the Company performed an impairment evaluation onthe assets acquired and liabilities assumed from FBR National Trust Company,and no impairment was indicated.

Note 8

*Commitmentsand Contingencies*

The Company is a party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers. These financial instruments include commitments to extend credit andstandby letters of credit. Commitments to extend credit are agreements to lendto a customer so long as there is no violation of any condition established in 

14

----

the contract.  Commitmentsgenerally have fixed expiration dates up to one year or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future fundingrequirements.

Standby letters of credit are conditional commitments issued by theCompany to guarantee the performance of the contractual obligations by acustomer to a third party.  Thoseguarantees are primarily issued to support public and private borrowingarrangements, including commercial paper, bond financing, and similartransactions. The credit risk involved in issuing standby letters of credit isessentially the same as that involved in extending loan facilities tocustomers. The Company holds certificates of deposit, deposit accounts, andreal estate as collateral supporting those commitments when collateral isdeemed necessary.  The majority of theseguarantees extend until satisfactory completion of the customer’s contractualobligations.  All standby letters ofcredit outstanding at March 31, 2007 are collateralized.

These instruments represent obligations of the Company to extend creditor guarantee borrowings and are not recorded on the consolidated statements offinancial condition.  The rates and termsof these instruments are competitive with others in the market in which theCompany operates.  These instrumentsinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the consolidated statements of financialcondition. Credit risk is defined as the possibility of sustaining a lossbecause the other parties to a financial instrument fail to perform inaccordance with the terms of the contract. The Company’s maximum exposure to credit loss under standby letters ofcredit and commitments to extend credit is represented by the contractualamounts of those instruments.  TheCompany uses the same credit policies in making commitments and conditionalobligations as it does for on-balance sheet instruments. The Company evaluateseach customer’s creditworthiness on a case-by-case basis and requirescollateral to support financial instruments when deemed necessary. The amountof collateral obtained upon extension of credit is based on management’s creditevaluation of the counterparty. Collateral held varies but may include accountsreceivable, inventory, property and equipment, and income-producing commercialproperties.

At March 31, 2007, commitments to extend credit were $422.5 million andstandby letters of credit were $9.0 million. The Company has not recorded aliability associated with standby letters of credit at March 31, 2007 as suchamounts were immaterial.

George Mason maintains a reserve for loans sold that pay off earlierthan the contractual agreed upon period, thereby requiring that George Masonrefund part of the service release premium and/or premium pricing received fromthe investor.  The reserve as of March31, 2007 was $63,000.

The Company has derivative counter-party risk that may arise from thepossible inability of George Mason’s third party investors to meet the terms oftheir forward sales contracts.  GeorgeMason works with third-party investors that are generally well-capitalized, areinvestment grade and exhibit strong financial performance to mitigate thisrisk.  The Company does not expect anythird-party investor to fail to meet its obligation.

15

----

Note9

*New Accounting Pronouncement*

The Company adopted the provisions of Financial Accounting StandardsBoard Interpretation No. 48 (“FIN No. 48”), *Accounting for Uncertaintyin Income Taxes*, on January 1, 2007. This interpretation clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with SFASNo. 109,*Accounting for Income Taxes.* FIN No. 48prescribes a recognition threshold and measurement principles for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. FIN No. 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition.

As of March 31, 2007 and December 31, 2006, the Company had nounrecognized tax benefits.  The Companyalso had no interest expense and/or tax penalties during the three months endedMarch 31, 2007.  If the Company had suchexpenses, they would be classified in the consolidated statements of income aspart of the provision for income tax expense.

** **

16

----

 

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

The following presents management’s discussion andanalysis of our consolidated financial condition at March 31, 2007 andDecember 31, 2006 and the unaudited results of our operations for thethree months ended March 31, 2007 and 2006. This discussion should be read inconjunction with our unaudited consolidated financial statements and the notesthereto appearing elsewhere in this report and the audited consolidatedfinancial statements and the notes to consolidated financial statementsincluded in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

**CautionAbout Forward-Looking Statements**

We make forward-looking statements in this Form 10-Q that aresubject to risks and uncertainties. These forward-looking statements include statements regarding ourprofitability, liquidity, allowance for loan losses, interest rate sensitivity,market risk, growth strategy, and financial and other goals.  The words “believes,” “expects,” “may,” “will,”“should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” orother similar words or terms are intended to identify forward-lookingstatements.

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

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

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

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

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

·                  maintainingcapital levels adequate to support our growth;

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

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

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

·                  risks and uncertainties related to futuretrust operations;

·                  changes in the operations of Wilson/BennettCapital Management, Inc., its customer base and assets under management and anyassociated impact on the fair value of goodwill in the future;

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

·                  problemswith technology utilized by us;

·                  changingtrends in customer profiles and behavior; and

·                  changesin banking and other laws and regulations applicable to us.

17

----

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

In addition, this section should be read in conjunction withthe description of our “Risk Factors” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2006.

**Overview**

We are a locally managed financial holding companyheadquartered in Tysons Corner, Virginia, committed to providing superiorcustomer service, a diversified mix of financial products and services, andconvenient banking to our retail and business customers. We own Cardinal Bank(the “Bank”), a Virginia state-chartered community bank, Cardinal WealthServices, Inc. (“CWS”), an investment services subsidiary, and Wilson/BennettCapital Management, Inc. (“Wilson/Bennett”), an asset management firm.Through these three subsidiaries and George Mason Mortgage, LLC (“George Mason”),a mortgage banking subsidiary of the Bank, we offer a wide range of traditionalbanking products and services to both our commercial and retail customers. Ourcommercial relationship managers focus on attracting small and medium-sizedbusinesses as well as government contractors, commercial real estate developersand builders and professionals, such as physicians, accountants and attorneys.We have 25 branch office locations and seven mortgage banking office locationsand provide competitive products and services. We complement our core bankingoperations by offering a full range of investment products and services to ourcustomers through our third-party brokerage relationship with Raymond JamesFinancial Services, Inc. and asset management services throughWilson/Bennett.

On February 9, 2006, we acquired certainfiduciary and other assets and assumed certain liabilities of FBR NationalTrust Company, formerly a subsidiary of Friedman, Billings, RamseyGroup, Inc. Our trust division acts as trustee or custodian for assets inexcess of $6.1 billion as of March 31, 2007. Services provided by this divisioninclude trust, estates, custody, investment management, escrows, and retirementplans. The trust division is included, along with CWS and Wilson/Bennett, inthe Wealth Management and Trust Services segment. In prior periods, thissegment was called Investment Services or Trust and Investment Services.

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

18

----

**CriticalAccounting Policies**

*General*

U. S. generally accepted accounting principles are complex and requiremanagement to apply significant judgment to various accounting, reporting, anddisclosure matters.  Management must useassumptions, judgments and estimates when applying these principles whereprecise measurements are not possible or practical.  These policies are critical because they arehighly dependent upon subjective or complex judgments, assumptions andestimates.  Changes in such judgments,assumptions and estimates may have a significant impact on the consolidatedfinancial statements.  Actual results, infact, could differ from initial estimates.

The accounting policies we view as critical are those relating to judgments,assumptions and estimates regarding the determination of the allowance for loanlosses, accounting for economic hedging activities, accounting for businesscombinations and impairment testing of goodwill, accounting for the impairmentof intangible assets, and the valuation of deferred tax assets.

#### *Allowance for LoanLosses*

**We maintain the allowance for loan losses at a level thatrepresents management’s best estimate of known and inherent losses in our loanportfolio.  Both the amount of the provisionexpense and the level of the allowance for loan losses are impacted by manyfactors, including general and industry-specific economic conditions, actualand expected credit losses, historical trends and specific conditions ofindividual borrowers.  Unusual andinfrequently occurring events, such as weather-related disasters, may impactour assessment of possible credit losses. As a part of our analysis, we use comparative peer group data andqualitative factors such as levels of and trends in delinquencies andnonaccrual loans, national and local economic trends and conditions andconcentrations of loans exhibiting similar risk profiles to support ourestimates.**

For purposes of our analysis, we categorize ourloans into one of five categories:  commercial and industrial, commercialreal estate (including construction), home equity lines of credit, residentialmortgages, and consumer loans. In the absence of meaningful historical lossfactors, peer group loss factors are applied and are adjusted by the qualitativefactors mentioned above. The indicated loss factors resulting from thisanalysis are applied for each of the five categories of loans. In addition, weindividually assign loss factors to all loans that have been identified ashaving loss attributes, as indicated by deterioration in the financialcondition of the borrower or a decline in underlying collateral value if theloan is collateral dependent. Since we have limited historical data on which tobase loss factors for classified loans, we apply, in accordance with regulatoryguidelines, a 5% loss factor to all loans classified as special mention, a 15%loss factor to all loans classified as substandard and a 50% loss factor to allloans classified as doubtful. Loans classified as loss loans are fully reservedor charged off.

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

19

----

*Accounting for Economic Hedging Activities*

We account for our derivatives and hedgingactivities in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 133, *Accounting for Derivative Instruments andCertain Hedging Activities,* as amended, which requires that allderivative instruments be recorded on the statement of condition at their fairvalues*.*We do not enter into derivative transactions for speculative purposes.For derivatives designated as hedges, we contemporaneously document the hedgingrelationship, including the risk management objective and strategy forundertaking the hedge, how effectiveness will be assessed at inception and ateach reporting period and the method for measuring ineffectiveness.  We evaluate the effectiveness of thesetransactions at inception and on an ongoing basis.  Ineffectiveness is recorded throughearnings.  For derivatives designated ascash flow hedges, the fair value adjustment is recorded as a component of othercomprehensive income, except for the ineffective portion.  For derivatives designated as fair valuehedges, the fair value adjustments for both the hedged item and the hedginginstrument are recorded through the income statement with any differenceconsidered the ineffective portion of the hedge.

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

To mitigate the effect of the interest rate riskinherent in providing rate lock commitments, we economically hedge ourcommitments by entering into a best efforts delivery forward loan salescontracts. During the rate lock commitment period, these forward loan salescontracts are marked to market through earnings and are not designated asaccounting hedges under SFAS No. 133, as amended. The fair values of loancommitments and the fair values of forward loan sales contracts generally movein opposite directions, and the net impact of changes of these valuations onnet income during the loan commitment period is generally inconsequential. Atthe closing of the loan, the loan commitment derivative expires and we record aloan held for sale and continue to be obligated under the same forward loansales contract. Loans held for sale are accounted for at the lower of cost ormarket in accordance with SFAS No. 65, *Accountingfor Certain Mortgage Banking Activities.*

We discontinue hedge accounting prospectively whenit is determined that the derivative is no longer highly effective inoffsetting changes in anticipated cash flows of the loans held for sale. Insituations in which hedge accounting is discontinued, we continue to carry thederivative at its fair value on the statements of condition and recognize anysubsequent changes in fair value in earnings. When hedge accounting isdiscontinued because it is probable an anticipated loan sale will not occur, werecognize immediately in earnings any gains and losses that were accumulated inother comprehensive income.

*Accounting for Business Combinations and ImpairmentTesting of Goodwill*

We account for acquisitions of other businesses inaccordance with SFAS No. 141, *BusinessCombinations*. This statement mandates the use of purchase accountingand, accordingly, assets and liabilities, including previously unrecordedassets and liabilities, are recorded at fair values as of the acquisition date.We utilize a variety of valuation methods to estimate fair value of acquiredassets and liabilities. These methodologies are often based upon 

20

----

assumptions and estimates which may change at a future date and requirethat the carrying amount of assets and liabilities acquired be adjusted. Tosupport our purchase allocations, we have utilized independent consultants toidentify and value identifiable purchased intangibles. The difference betweenthe fair value of assets acquired and the liabilities assumed is recorded asgoodwill. Goodwill and other intangible assets are accounted for in accordancewith SFAS No. 142, *Goodwill and OtherIntangible Assets*. In accordance with this statement, goodwill willnot be amortized but will be tested on at least an annual basis for impairment.

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

*Accounting for the Impairment of Intangible Assets*

In accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, we continually review our long-lived assets forimpairment whenever events or changes in circumstances indicate that theremaining estimated useful life of such assets might warrant revision or thatthe balances may not be recoverable. We evaluate possible impairment bycomparing estimated future cash flows, before interest expense and on anundiscounted basis, with the net book value of long-term assets, includingamortizable intangible assets. If undiscounted cash flows are insufficient torecover assets, further analysis is performed in order to determine the amountof the impairment.

An impairment loss is then recorded for the excessof the carrying amount of the assets over their fair values. Fair value isusually determined based on the present value of estimated expected future cashflows using a discount rate commensurate with the risks involved.

#### *Valuation ofDeferred Tax Assets*

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

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

On July 13, 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48(“FIN No. 48”), *Accounting for Uncertainty in Income Taxes:an interpretation of FASB Statement No. 109.* This interpretationclarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes.* FIN No. 48 prescribes arecognition threshold and 

21

----

measurement principlesfor financial statement disclosure of tax positions taken or expected to betaken on a tax return. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. The adoption of FIN No. 48 did not have anyimpact on our consolidated financial position or results of operations.

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

In September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans.*  SFASNo. 158 amends SFAS Nos. 87, 88, 106 and 132R. SFAS No. 158 requires employers to recognize in its statement offinancial position an asset for a plan’s overfunded status or a liability for aplan’s underfunded status.  Secondly, itrequires employers to measure the plan assets and obligations that determineits funded status as of the end of the fiscal year.  Lastly, employers are required to recognizechanges in the funded status of a defined benefit postretirement plan in theyear that the changes occur with the changes reported in comprehensiveincome.  The standard was effective forfiscal years ending December 15, 2006. Adoption of this standard did not haveany impact on our consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities —including an amendment of FAS 115.* SFAS No. 159 allows entities to choose, at specified election dates, tomeasure eligible financial assets and liabilities at fair value that are nototherwise required to be measured at fair value.  If a company elects the fair value option foran eligible item, changes in that item’s fair value in subsequent reportingperiods must be recognized in current earnings. SFAS No. 159 also establishes presentation and disclosure requirementsdesigned to draw comparison between entities that elect different measurementattributes for similar assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  We are currently evaluating therequirements of this standard.

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

*General*

Net income for the three monthsended March 31, 2007 and 2006 was $1.8 million and $2.6 million, respectively,a decrease of $802,000, or 31%.  Thedecrease in net income for the three months ended March 31, 2007 compared tothe same period of 2006 is primarily a result of decreases in net interestincome and increases in non-interest expense.

22

----

 

Net interest income afterprovision for loan losses decreased $590,000, or 6%, to $9.6 million for thethree months ended March 31, 2007 compared to $10.1 million for the same periodof 2006.  This decrease is primarily aresult of increases in interest expense which were greater than the increasesin interest income.  Non-interest incomeincreased $146,000 to $5.3 million for the three months ended March 31, 2007compared to $5.2 million for the same period of 2006.  Non-interest expense increased $930,000, or8%, to $12.4 million for the three months ended March 31, 2007, compared to$11.4 million for the same period of 2006.

Basic earnings per sharewere $0.07 and $0.11 for the three months ended March 31, 2007 and 2006,respectively. For the three months ended March 31, 2007 and 2006, dilutedearnings per share were $0.07 and $0.10, respectively. Weighted average fullydiluted shares outstanding for the three months ended March 31, 2007 and 2006were 25,039,757 and 25,041,694, respectively.

Return on average assets for the three months endedMarch 31, 2007 and 2006 was 0.44% and 0.75%, respectively. Return on averageequity for the three months ended March 31, 2007 and 2006 was 4.50% and 6.87%,respectively.

Net income attributable to the Commercial Bankingsegment for the three months ended March 31, 2007 and 2006 was $1.8 million and$2.6 million, respectively.  The decreasein net income for the three months ended March 31, 2007 compared to the sameperiod of 2006 in the Commercial Banking segment is primarily attributable toan increase in non-interest expense related to the additional branch officesopened over the past twelve months and a decline in net interest income.

Net income attributable to the Mortgage Bankingsegment for the three months ended March 31, 2007 and 2006 was $538,000 and$419,000, respectively.  The increase inthe Mortgage Banking segment’s net income for the three months ended March 31,2007 compared to the same period of 2006 was due to decreases in non-interestexpense related to expense controls put in place during the second half of2006.

The Wealth Management and Trust Services segment,which includes CWS, Wilson/Bennett and the trust division of the Bank, recordednet income of $31,000 for the three months ended March 31, 2007, compared tonet income of $26,000 for the same period 2006. The trust division of the Bank is included in the results of operationssince the date of acquisition, February 9, 2006.

*NetInterest Income*

Net interest income represents the differencebetween interest and fees earned on interest-earning assets and the interestpaid on deposits and other interest-bearing liabilities. The level of netinterest income is impacted primarily by variations in the volume and mix ofthese assets and liabilities, as well as changes in interest rates. Netinterest income for the three months ended March 31, 2007 and 2006 was $9.8million and $10.4 million, respectively, a period-to-period decrease of$560,000, or 5%. The decrease in net interest income is primarily the result ofthe current interest margin pressure resulting from the inverted yield curvewhich is causing a higher increase in our cost of interest-bearing liabilitiesthan our increase in the yields earned for average earning assets.  Net interest income on a tax equivalent basisfor the three months ended March 31, 2007 and 2006 was $9.9 million and $10.4million, respectively.

Our net interest margin, which equals net interestincome divided by average earning assets, was 2.60% and 3.16%, respectively,for the three months ended March 31, 2007 and 2006. The decrease in the netinterest margin for the three months ended March 31, 2007 compared to the sameperiod of 2006 is a result of a higher increase in the cost of interest-bearingliabilities 

23

----

than the increase in yields earned for average earning assets.  Tables 1 and 2 present an analysis of averageearning assets and interest-bearing liabilities with related components ofinterest income and interest expense on a tax equivalent basis.

**Table 1.**

**Average BalanceSheets and Interest Rates on Earning Assets and Interest - Bearing LiabilitiesThree Months Ended March 31, 2007, 2006 and 2005(In thousands)**
| ** **                                               | ** ** | **2007**    | ** ** | **2006**     | ** ** | **2005**   | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | ** ** | ** ** | **Average** | ** ** | **Income/** | ** ** | ** ** | ** ** | **Average** | ** ** | **Income/** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and industrial                                |       | $           | 103,408    |         | $          | 1,949      |       | 7.54 | % | $ | 73,098 |   | $ | 1,305 |   | 7.14 | % | $ | 60,873 |   | $ | 856 |   | 5.62 | % |
| Real estate - commercial                                 |       | 324,412     |       | 5,340        |       | 6.58       |       | 271,044 |   | 4,392 |   | 6.48 |   | 223,879 |   | 3,380 |   | 6.04 |   |
| Real estate - construction                               |       | 160,346     |       | 3,382        |       | 8.44       |       | 129,026 |   | 2,539 |   | 7.87 |   | 68,969 |   | 1,117 |   | 6.48 |   |
| Real estate - residential                                |       | 197,781     |       | 2,676        |       | 5.41       |       | 158,040 |   | 2,005 |   | 5.07 |   | 84,962 |   | 1,143 |   | 5.38 |   |
| Home equity lines                                        |       | 63,827      |       | 1,167        |       | 7.31       |       | 76,449 |   | 1,172 |   | 6.22 |   | 61,268 |   | 684 |   | 4.53 |   |
| Consumer                                                 |       | 4,880       |       | 94           |       | 7.70       |       | 4,999 |   | 92 |   | 7.36 |   | 5,909 |   | 100 |   | 6.77 |   |
| Total loans                                              |       | 854,654     |       | 14,608       |       | 6.84       |       | 712,656 |   | 11,505 |   | 6.46 |   | 505,860 |   | 7,280 |   | 5.76 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for sale, net                                 |       | 248,962     |       | 4,379        |       | 7.04       |       | 233,560 |   | 4,278 |   | 7.33 |   | 289,024 |   | 3,358 |   | 4.65 |   |
| Investment securities - trading                          |       | 45          |       | 1            |       | 4.56       |       | — |   | — |   | 0.00 |   | — |   | — |   | 0.00 |   |
| Investment securities - available-for-sale               |       | 241,383     |       | 2,896        |       | 4.80       |       | 192,106 |   | 2,072 |   | 4.32 |   | 153,907 |   | 1,431 |   | 3.72 |   |
| Investment securities held-to-maturity                   |       | 96,158      |       | 1,002        |       | 4.17       |       | 113,294 |   | 1,125 |   | 3.97 |   | 135,945 |   | 1,307 |   | 3.85 |   |
| Other investments                                        |       | 8,727       |       | 127          |       | 5.82       |       | 6,563 |   | 89 |   | 5.43 |   | 5,172 |   | 54 |   | 4.19 |   |
| Federal funds sold                                       |       | 79,911      |       | 1,024        |       | 5.13       |       | 59,569 |   | 649 |   | 4.42 |   | 11,162 |   | 61 |   | 2.20 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets and interest income        |       | 1,529,840   |       | 24,037       |       | 6.28       | %          | 1,317,748 |   | 19,718 |   | 5.99 | % | 1,101,070 |   | 13,491 |   | 4.90 | % |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest earning assets:                             |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | $           | 9,390      |         |       |       |       |   | $ | 7,278 |   |   |   |   |   | $ | 2,519 |   |   |   |   |   |
| Premises and equipment, net                              |       | 20,180      |       |         |       |       |       | 18,157 |   |   |   |   |   | 17,000 |   |   |   |   |   |
| Goodwill and other intangibles, net                      |       | 17,469      |       |         |       |       |       | 20,471 |   |   |   |   |   | 14,501 |   |   |   |   |   |
| Accrued interest and other assets                        |       | 46,659      |       |         |       |       |       | 11,269 |   |   |   |   |   | 7,804 |   |   |   |   |   |
| Allowance for loan losses                                |       | (9,744      | )          |         |       |       |       | (8,425 | ) |   |   |   |   | (5,988 | ) |   |   |   |   |
| Total assets                                             |       | $           | 1,613,794  |         |       |       |       |   | $ | 1,366,498 |   |   |   |   |   | $ | 1,136,906 |   |   |   |   |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           | ** ** | ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest -  bearing liabilities:                         |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:                            |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 129,251     |       | 921          |       | 2.88       | %          | 125,284 |   | 722 |   | 2.34 | % | 139,160 |   | 429 |   | 1.25 | % |
| Money markets                                            |       | 63,739      |       | 379          |       | 2.38       |       | 185,874 |   | 1,186 |   | 2.55 |   | 43,021 |   | 170 |   | 1.58 |   |
| Statement savings                                        |       | 351,121     |       | 4,168        |       | 4.76       |       | 9,476 |   | 32 |   | 1.36 |   | 8,688 |   | 22 |   | 1.01 |   |
| Certificates of deposit                                  |       | 568,904     |       | 6,602        |       | 4.64       |       | 620,123 |   | 5,852 |   | 3.77 |   | 553,079 |   | 4,056 |   | 2.93 |   |
| Total interest - bearing deposits                        |       | 1,113,015   |       | 12,070       |       | 4.40       |       | 940,757 |   | 7,792 |   | 3.36 |   | 743,948 |   | 4,677 |   | 2.55 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 199,725     |       | 2,040        |       | 4.14       |       | 145,102 |   | 1,523 |   | 4.25 |   | 153,580 |   | 992 |   | 2.59 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,312,740   |       | 14,110       |       | 4.36       |       | 1,085,859 |   | 9,315 |   | 3.48 |   | 897,528 |   | 5,669 |   | 2.56 |   |
|                                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 123,567     |       |         |       |       |       | 110,321 |   |   |   |   |   | 103,883 |   |   |   |   |   |
| Other liabilities                                        |       | 20,496      |       |         |       |       |       | 20,842 |   |   |   |   |   | 37,980 |   |   |   |   |   |
| Common shareholders’ equity                         |       | 156,991     |       |         |       |       |       | 149,476 |   |   |   |   |   | 97,515 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $           | 1,613,794  |         |       |       |       |   | $ | 1,366,498 |   |   |   |   |   | $ | 1,136,906 |   |   |   |   |   |
| Net interest income and  net interest margin (2)         |       |        |       | $            | 9,927      |       | 2.60       | % |   |   | $ | 10,403 |   | 3.16 | % |   |   | $ | 7,822 |   | 2.84 | % |

----

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

(2)             Interest income for loans receivable,investment securities available-for-sale and fed funds sold (which includesinvestments in money market preferred stock) is reported on a fullytaxable-equivalent basis at a rate of 35%.

24

----

 

**Table 2.**

**Rate and VolumeAnalysisThree Months Ended March 31, 2007, 2006 and 2005(In thousands)**
| ** **                                  | ** ** | **2007 Compared to 2006** | ** ** | **2006 Compared to 2005** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **Change Due to**              | ** ** | ** **                               | ** ** | **Change Due to** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Average**                              | ** ** | **Average**                              | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                                  | ** ** | **Volume**                               | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest  income:**                       |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| ** **                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans (1):                                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                   |       | $                                        | 541        |                                     | $          | 103 |   | $ | 644 |   | $ | 172 |   | $ | 277 |   | $ | 449 |   |
| Real estate - commercial                    |       | 865                                      |       | 83                                       |       | 948 |   | 712 |   | 300 |   | 1,012 |   |
| Real estate - construction                  |       | 616                                      |       | 227                                      |       | 843 |   | 973 |   | 449 |   | 1,422 |   |
| Real estate - residential                   |       | 504                                      |       | 167                                      |       | 671 |   | 983 |   | (121 | ) | 862 |   |
| Home equity lines                           |       | (179                                     | )          | 174                                      |       | (5 | ) | 168 |   | 320 |   | 488 |   |
| Consumer                                    |       | (2                                       | )          | 4                                        |       | 2 |   | (15 | ) | 7 |   | (8 | ) |
| Total loans                                 |       | 2,345                                    |       | 758                                      |       | 3,103 |   | 2,993 |   | 1,232 |   | 4,225 |   |
|                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                   |       | 282                                      |       | (181                                     | )          | 101 |   | (644 | ) | 1,564 |   | 920 |   |
| Investment  securities - trading            |       | 1                                        |       | —                                   |       | 1 |   | — |   | — |   | — |   |
| Investment  securities - available-for-sale |       | 538                                      |       | 286                                      |       | 824 |   | 355 |   | 286 |   | 641 |   |
| Investment  securities held-to-maturity     |       | (170                                     | )          | 47                                       |       | (123 | ) | (218 | ) | 36 |   | (182 | ) |
| Other  investments                          |       | 30                                       |       | 8                                        |       | 38 |   | 15 |   | 20 |   | 35 |   |
| Federal funds  sold                         |       | 236                                      |       | 139                                      |       | 375 |   | 262 |   | 326 |   | 588 |   |
| Total interest income                       |       | 3,262                                    |       | 1,057                                    |       | 4,319 |   | 2,763 |   | 3,464 |   | 6,227 |   |
|                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                      |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:               |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest checking                           |       | 25                                       |       | 174                                      |       | 199 |   | (42 | ) | 335 |   | 293 |   |
| Money markets                               |       | (780                                     | )          | (27                                      | )          | (807 | ) | 564 |   | 452 |   | 1,016 |   |
| Statement savings                           |       | 1,195                                    |       | 2,941                                    |       | 4,136 |   | 2 |   | 8 |   | 10 |   |
| Certificates of deposit                     |       | (466                                     | )          | 1,216                                    |       | 750 |   | 497 |   | 1,299 |   | 1,796 |   |
| Total interest - bearing deposits           |       | (26                                      | )          | 4,304                                    |       | 4,278 |   | 1,021 |   | 2,094 |   | 3,115 |   |
| Other borrowed  funds                       |       | 573                                      |       | (56                                      | )          | 517 |   | (58 | ) | 589 |   | 531 |   |
| Total interest expense                      |       | 547                                      |       | 4,248                                    |       | 4,795 |   | 963 |   | 2,683 |   | 3,646 |   |
| Net interest income (2)                     |       | $                                        | 2,715      |                                     | $          | (3,191 | ) | $ | (476 | ) | $ | 1,800 |   | $ | 781 |   | $ | 2,581 |   |

----

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

(2)             Interestincome for loans receivable, investment securities available-for-sale and fedfunds sold (which includes investments in money market preferred stock) isreported on a fully taxable-equivalent basis at a rate of 35%.

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

25

----

 

*Provisionfor Loan Losses*

The provision for loan losses for the three monthsended March 31, 2007 and 2006 was $280,000 and $250,000, respectively. Theslight increase in provision expense for the three months ended March 31, 2007compared to the same period of 2006 is primarily the result of our evaluationof the credit quality in our loan portfolio and the qualitative factors we useto determine the adequacy of our loan loss reserves as described above in “CriticalAccounting Policies—Allowance for Loan Losses.” The allowance for loan lossesat March 31, 2007 and December 31, 2006 was $9.9 million and $9.6 million,respectively. Our allowance for loan losses ratio to loans receivable, net was1.14% at each of March 31, 2007 and December 31, 2006. Non-performingloans were equal to 0.01% of total loans receivable for each of March 31, 2007and December 31, 2006.

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

**Table3.**

**Allowance for LoanLosses** Three Months Ended March 31, 2007 and 2006 (In thousands)

|                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Beginning balance,  January 1 |       | $        | 9,638      |     | $          | 8,301 |   |
|                          |       |     |       |     |       |
| Provision for loan  losses    |       | 280      |       | 250      |       |
|                          |       |     |       |     |       |
| Loans charged off:            |       |     |       |     |       |
| Commercial and  industrial    |       | —   |       | (42      | )          |
| Consumer                      |       | —   |       | (1       | )          |
| Total loans  charged off      |       | —   |       | (43      | )          |
|                          |       |     |       |     |       |
| Recoveries:                   |       |     |       |     |       |
| Commercial and  industrial    |       | —   |       | 12       |       |
| Consumer                      |       | —   |       | —   |       |
| Total recoveries              |       | —   |       | 12       |       |
|                          |       |     |       |     |       |
| Net (charge offs) recoveries  |       | —   |       | (31      | )          |
|                          |       |     |       |     |       |
| Ending balance, March  31,    |       | $        | 9,918      |     | $          | 8,520 |   |

 

|                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Loans:                                                  |       |               |       |                  |       |
| Balance at  period end                                  |       | $                  | 870,844    |                  | $          | 845,449 |   |
| Allowance for  loan losses to                           |       |               |       |                  |       |
| loans  receivable, net of fees                          |       | 1.14               | %          | 1.14                  | %          |
| Annualized net  charge-offs to average loans receivable |       | 0.00               | %          | 0.00                  | %          |
|                                                         |            |                    |            |                       |            |  |  |

 

**Table4.**

**Allocation of theAllowance for Loan Losses** At March 31, 2007 and December 31, 2006 (In thousands)

|                                  | ** ** | **March 31,** | ** ** | **December 31,**     | ** ** |
|----------------------------------|------------|--------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **2007**           | ** ** | **2006**                  | ** ** |
| ** **                       | ** ** | **Allocation**     | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and  industrial       |       | $                  | 1,593      |                      | 11.77      | % | $ | 1,670 |   | 12.09 | % |
| Real estate —  commercial   |       | 4,283              |       | 39.96                     |       | 3,687 |   | 37.50 |   |
| Real estate —  construction |       | 1,884              |       | 18.11                     |       | 1,764 |   | 18.27 |   |
| Real estate —  residential  |       | 1,582              |       | 22.64                     |       | 2,025 |   | 23.80 |   |
| Home equity lines                |       | 471                |       | 6.97                      |       | 384 |   | 7.75 |   |
| Consumer                         |       | 105                |       | 0.55                      |       | 108 |   | 0.59 |   |
| Total allowance for loan losses  |       | $                  | 9,918      |                      | 100.00     | % | $ | 9,638 |   | 100.00 | % |

----

*                    Percentageof loan type to the total loan portfolio.

**Table5.**

**NonperformingLoans Receivable At March 31, 2007 and December 31, 2006(In thousands)**

|                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Nonaccruing loans                             |       | $                  | 69         |                  | $          | 82 |   |
|                                          |       |               |       |                  |       |
| Loans contractually  past-due 90 days or more |       | —             |       | —                |       |
| Total nonperforming loans receivable          |       | $                  | 69         |                  | $          | 82 |   |

 

26

----

*Non-Interest Income*

Non-interest income includes, among other things,service charges on deposits and loans, gains on the sale of mortgage loans,investment fee income, and management fee income, and continues to be animportant factor in our operating results. Non-interest income for the threemonths ended March 31, 2007 and 2006 was $5.3 million and $5.2 million,respectively, an increase of $146,000, or 3%. Net gains on sales of loans heldfor sale by George Mason for the three months ended March 31, 2007 and 2006were $2.6 million and $2.8 million, respectively, a decrease of $146,000, or5%.  Included in the net gains on salesof loans held for sale are any origination, underwriting, and discount pointsand other funding fees received and deferred at loan origination. Costs includedirect costs associated with the loan origination, such as commissions andsalaries that are deferred at the time of origination.   Management feeincome for the three months ended March 31, 2007 and 2006 was $321,000 and$418,000, respectively, a decrease of $97,000, or 23%. Management fee incomerepresents the income earned for services George Mason provides to othermortgage companies owned by local home builders and generally fluctuates basedon the volume of loan sales.

Service charges on deposit accounts increased$97,000 to $466,000 for the three months ended March 31, 2007 compared to$369,000 for the same period of 2006. The increase in service charges ondeposit accounts is primarily the result of an increased number of depositaccounts in 2007 compared to 2006. Loan service charge income decreased$237,000 to $386,000 for the three months ended March 31, 2007, compared to$623,000 for the same period of 2006. The decrease in loan service charge income is related to a decrease inprepayment penalties at the Bank and a decrease in service charges recorded inthe mortgage banking segment, which is related to the slowdown in the regionalhousing market.

Investment fee income increased $362,000 to $1.0million for the three months ended March 31, 2007 compared to $662,000 for thesame period of 2006. The increases in investment fee income are primarilyattributable to the trust division whose operations are included for the fullthree months of 2007, but only the first two months in the first quarter of2006.

Non-interest income for the three months ended March31, 2007 and 2006 represented 35% and 33% of our total revenues, respectively.

*Non-Interest Expense*

Non-interest expense includes, among other things,salaries and benefits, occupancy costs, professional fees, depreciation, dataprocessing, telecommunications and miscellaneous expenses. Non-interest expensefor the three months ended March 31, 2007 was $12.4 million, compared to $11.4million for the same period of 2006, an increase of $930,000, or 8%.  Non-interest expense has increased as aresult of our branch office expansion during the past twelve months. Expensesrelated to the branch expansion are represented in the increases in oursalaries and benefits expense, occupancy expense and depreciation expense.

*Income Taxes*

For the three months ended March 31, 2007, werecorded a provision for income tax expense of $737,000, compared to income taxexpense of $1.3 million for the same period of 2006.  Our effective tax rate for the three monthsended March 31, 2007 and 2006 was 29.5% and 33.8%, respectively.  The decrease in the effective tax rate from2006 to 2007 is primarily the result of our adding tax-exempt investmentsduring the second half of 2006 and continuing into 2007.  See also “Critical Accounting Policies —Valuation of Deferred Tax Assets.”

**Statementsof Condition**

Total assets were $1.72 billion at March 31, 2007,compared to $1.64 billion at December 31, 2006, an increase of $81.0million, or 5%. This growth was driven primarily by increases in loansreceivable and the investment securities portfolio, which were funded by growthin our deposits and other borrowed funds.

*Investment Securities*

Investment securities were $344.8 million at March31, 2007, compared to $329.3 million at December 31, 2006, an increase of$15.5 million, or 5%. The investment portfolio consists of investmentsecurities available-for-sale and investment securities held-to-maturity.Investment securities available-for-sale are those securities that we intend tohold for an indefinite period of time, but not necessarily until maturity.These securities are carried at fair value and may be sold as part of anasset/liability strategy, liquidity management or regulatory capitalmanagement.  Investment securitiesheld-to-maturity are those securities that we have the intent and ability tohold to maturity and are carried at amortized cost. At March 31, 2007,investment securities available-for-sale were $250.4 million and investmentsecurities held-to-maturity were $94.3 million. See Table 6 for additionalinformation on our investment securities portfolio.

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

27

----

**Table6.**

**InvestmentSecurities**At March 31, 2007 and December 31, 2006**(In thousands)**
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Available-for-sale at March 31, 2007**        |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies              |       |          |       |      |       |        |       |
| One to five years                               |       | $             | 51,977     |      | $          | 51,609      |       | 4.90 | % |
| Five to ten years                               |       | 30,884        |       | 30,826    |       | 5.78        |       |
| Total U.S. government-sponsored agencies        |       | 82,861        |       | 82,435    |       | 5.23        |       |
|                                            |       |          |       |      |       |        |       |
| Mortgage-backed securities*                     |       |          |       |      |       |        |       |
| One to five years                               |       | 4,167         |       | 4,072     |       | 4.18        |       |
| Five to ten years                               |       | 12,283        |       | 11,976    |       | 3.79        |       |
| After ten years                                 |       | 123,832       |       | 121,580   |       | 4.81        |       |
| Total mortgage-backed securities                |       | 140,282       |       | 137,628   |       | 4.70        |       |
|                                            |       |          |       |      |       |        |       |
| Municipal securities                            |       |          |       |      |       |        |       |
| After ten years                                 |       | 29,940        |       | 29,788    |       | 4.08        |       |
| Total municipal securities                      |       | 29,940        |       | 29,788    |       | 4.08        |       |
|                                            |       |          |       |      |       |        |       |
| U. S. treasury securities                       |       |          |       |      |       |        |       |
| One to five years                               |       | 596           |       | 596       |       | 5.15        |       |
| Total U.S. treasury securities                  |       | 596           |       | 596       |       | 5.15        |       |
| Total  investment securities available-for-sale |       | $             | 253,679    |      | $          | 250,447     |       | 4.80 | % |

 
| ** **                                   | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                   | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Held-to-maturity at March 31, 2007**       |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies           |       |          |       |      |       |        |       |
| One to five years                            |       | $             | 8,967      |      | $          | 8,774       |       | 3.50 | % |
| Five to ten years                            |       | 13,016        |       | 12,814    |       | 4.73        |       |
| After ten years                              |       | 2,000         |       | 1,979     |       | 5.27        |       |
| Total U.S. government-sponsored agencies     |       | 23,983        |       | 23,567    |       | 4.31        |       |
|                                         |       |          |       |      |       |        |       |
| Mortgage-backed securities*                  |       |          |       |      |       |        |       |
| Five to ten years                            |       | 6,225         |       | 6,096     |       | 4.21        |       |
| After ten years                              |       | 56,116        |       | 55,007    |       | 4.37        |       |
| Total mortgage-backed securities             |       | 62,341        |       | 61,103    |       | 4.35        |       |
|                                         |       |          |       |      |       |        |       |
| Corporate bonds                              |       |          |       |      |       |        |       |
| After ten years                              |       | 8,005         |       | 7,887     |       | 4.21        |       |
| Total corporate bonds                        |       | 8,005         |       | 7,887     |       | 4.21        |       |
| Total investment securities held-to-maturity |       | 94,329        |       | 92,557    |       | 4.33        |       |
| Total  investment securities                 |       | $             | 348,008    |      | $          | 343,004     |       | 4.67 | % |

 

28

----

 
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Available-for-sale at December 31, 2006**     |       |          |       |      |       |        |       |
| U.S. government-sponsored agencies              |       |          |       |      |       |        |       |
| One to five years                               |       | $             | 51,973     |      | $          | 51,517      |       | 4.90 | % |
| Five to ten years                               |       | 15,520        |       | 15,480    |       | 5.72        |       |
| Total U.S. government-sponsored agencies        |       | 67,493        |       | 66,997    |       | 5.09        |       |
|                                            |       |          |       |      |       |        |       |
| Mortgage-backed securities*                     |       |          |       |      |       |        |       |
| One to five years                               |       | 4,406         |       | 4,312     |       | 4.18        |       |
| Five to ten years                               |       | 10,599        |       | 10,291    |       | 3.76        |       |
| After ten years                                 |       | 127,197       |       | 124,511   |       | 4.76        |       |
| Total mortgage-backed securities                |       | 142,202       |       | 139,114   |       | 4.67        |       |
|                                            |       |          |       |      |       |        |       |
| Municipal securities                            |       |          |       |      |       |        |       |
| After ten years                                 |       | 25,047        |       | 25,031    |       | 4.10        |       |
| Total municipal securities                      |       | 25,047        |       | 25,031    |       | 4.10        |       |
|                                            |       |          |       |      |       |        |       |
| U. S. treasury securities                       |       |          |       |      |       |        |       |
| One to five years                               |       | 489           |       | 489       |       | 5.14        |       |
| Total U.S. treasury securities                  |       | 489           |       | 489       |       | 5.14        |       |
| Total  investment securities available-for-sale |       | $             | 235,231    |      | $          | 231,631     |       | 4.73 | % |

 
| ** **                                    | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-----------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| ** **                                    | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| **Held-to-maturity at December  31, 2006**    |       |          |       |      |       |        |       |
| U.S.  government-sponsored agencies           |       |          |       |      |       |        |       |
| One to five  years                            |       | $             | 8,967      |      | $          | 8,734       |       | 3.50 | % |
| Five to ten  years                            |       | 13,018        |       | 12,777    |       | 4.44        |       |
| After ten years                               |       | 2,000         |       | 1,971     |       | 5.30        |       |
| Total U.S.  government-sponsored agencies     |       | 23,985        |       | 23,482    |       | 4.16        |       |
|                                          |       |          |       |      |       |        |       |
| Mortgage-backed  securities*                  |       |          |       |      |       |        |       |
| Five to ten  years                            |       | 6,702         |       | 6,544     |       | 4.21        |       |
| After ten years                               |       | 58,974        |       | 57,560    |       | 4.35        |       |
| Total  mortgage-backed securities             |       | 65,676        |       | 64,104    |       | 4.34        |       |
|                                          |       |          |       |      |       |        |       |
| Corporate bonds                               |       |          |       |      |       |        |       |
| After ten years                               |       | 8,004         |       | 7,864     |       | 4.21        |       |
| Total corporate  bonds                        |       | 8,004         |       | 7,864     |       | 4.21        |       |
| Total investment  securities held-to-maturity |       | 97,665        |       | 95,450    |       | 4.28        |       |
|                                          |       |          |       |      |       |        |       |
| Total investment  securities                  |       | $             | 332,896    |      | $          | 327,081     |       | 4.60 | % |

----

*                    Basedon contractual maturities

 

29

----

 

*Loans*

Loans receivable, net of deferred fees and costs,increased by $25.4 million, or 3%, to $870.8 million at March 31, 2007 from$845.4 million at December 31, 2006. See Table 7 for details on the loansreceivable portfolio. We experienced growth in our real estate commercial andreal estate construction loan portfolios. We expect continued growth withinthese loan categories over the reminder of 2007 due to our increased legallending limit of $21.7 million at March 31, 2007 and the volume of loans we havescheduled for funding. During the first quarter of 2007, we had decreases inresidential real estate and home equity loans as there were net payoffs withinthese loan categories during the quarter. In addition, we had $314.3 million in loans held for sale, net at March31, 2007, compared to $338.7 million at December 31, 2006, a decrease of$24.4 million. Loans that are held for sale, net are valued at the lower ofcost or market value. The decrease in loans held for sale at March 31, 2007compared to December 31, 2006 is directly related to the slowdown in theregional housing market.

**Table7.**

**Loans Receivable At March 31, 2007 and December 31, 2006(In thousands)**

|                                  | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Commercial and industrial        |       | $                            | 102,574    |                            | 11.77      | % | $ | 102,284 |   | 12.09 | % |
| Real estate –  commercial   |       | 348,098                      |       | 39.96                           |       | 317,201 |   | 37.50 |   |
| Real estate –  construction |       | 157,802                      |       | 18.11                           |       | 154,525 |   | 18.27 |   |
| Real estate –  residential  |       | 197,215                      |       | 22.64                           |       | 201,320 |   | 23.80 |   |
| Home equity lines                |       | 60,726                       |       | 6.97                            |       | 65,557 |   | 7.75 |   |
| Consumer                         |       | 4,783                        |       | 0.55                            |       | 4,904 |   | 0.59 |   |
|                             |       |                         |       |                            |       |   |   |   |   |
| Gross loans                      |       | $                            | 871,198    |                            | 100.00     | % | 845,791 |   | 100.00 | % |
|                             |       |                         |       |                            |       |   |   |   |   |
| Net deferred (fees)  costs       |       | (354                         | )          |                            |       | (342 | ) |   |   |
| Less: allowance for  loan losses |       | (9,918                       | )          |                            |       | (9,638 | ) |   |   |
|                             |       |                         |       |                            |       |   |   |   |   |
| Loans receivable, net            |       | $                            | 860,926    |                            |       |   | $ | 835,811 |   |   |   |

 

*Deposits*

Total deposits were $1.23 billion at March 31,2007 compared to $1.22 billion at December 31, 2006. We experiencedincreases in our non-interest bearing checking and savings deposit products,which offset decreases in our interest-bearing checking and money marketdeposits and certificates of deposit. See Table 8 for details on certificatesof deposit with balances of $100,000 or more. Our savings deposits continue toincrease as a result of our Simply Savings product, which allows new customersto earn a yield of 5.01% on funds deposited with us.  We had brokered certificates of deposit of$5.0 million at each of March 31, 2007 and December 31, 2006.

**Table8.**

**Certificates ofDeposit of $100,000 or MoreAt March 31, 2007(In thousands)**
| ** **                             | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| **Maturities:**                        |       |                |       |            |       |      |       |
| Three months or less                   |       | $                   | 107,977    |            | $          | 29,675    |       | $ | 137,652 |   |
| Over three months  through six months  |       | 29,786              |       | 18,287          |       | 48,072    |       |
| Over six months through  twelve months |       | 34,470              |       | 13,553          |       | 48,023    |       |
| Over twelve months                     |       | 21,478              |       | 694             |       | 22,172    |       |
|                                   |       | $                   | 193,711    |            | $          | 62,209    |       | $ | 255,920 |   |

----

*                    No-Penaltycertificates of deposit can be redeemed at anytime at the request of thedepositor.

* *

30

----

*Borrowings*

Other borrowed funds increased $67.0 million to$261.7 million at March 31, 2007, compared to $194.6 million atDecember 31, 2006. Treasury, Tax & Loan Note option borrowingsdecreased $1.1 million to $3.9 million at March 31, 2007 compared to $5.0million at December 31, 2006.  FHLBadvances increased $37.4 million to $160.1 million at March 31, 2007 comparedto $122.7 million at December 31, 2006. Customer repurchase agreementsincreased $30.8 million to $77.1 million at March 31, 2007 compared to $46.3million at December 31, 2006.  Table 9provides information on our borrowings.

**Table9.**

**Short-TermBorrowings and Other Borrowed FundsAt March 31, 2007(In thousands)**
| **Short-term FHLB advances:**                              | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **        | ** **  | **Amount**             | ** **  |
|----------------------------------------------------------------------|------------|------------|------------|-------------------------------|------------|-------------------|-------------|------------------------|-------------|
| **Advance Date**                                                | ** ** | ** ** | ** ** | **Term of Advance** | ** ** | **Date Due** | ** **  | **Interest Rate** | ** **  | **Outstanding** | ** ** |
| Apr-04                                                               |       | 3  years   |       | Apr-07                        |       | 3.15              | %           | $                      | 3,000       |   |
| Jun-05                                                               |       | 2  years   |       | Jun-07                        |       | 4.12              |        | 10,000                 |        |
| Jul-03                                                               |       | 4  years   |       | Jul-07                        |       | 2.63              |        | 6,250                  |        |
| Nov-06                                                               |       | 1  year    |       | Nov-07                        |       | 4.06              |        | 5,000                  |        |
| Dec-04                                                               |       | 3  years   |       | Dec-07                        |       | 3.59              |        | 7,500                  |        |
| Dec-06                                                               |       | 1  year    |       | Dec-07                        |       | 4.24              |        | 5,000                  |        |
| May-04                                                               |       | 3  years   |       | May-07                        |       | 3.50              |        | 10,000                 |        |
| Jan-06                                                               |       | 2  years   |       | Jan-08                        |       | 3.93              |        | 5,000                  |        |
| Mar-07                                                               |       | 1  year    |       | Mar-08                        |       | 4.06              |        | 10,000                 |        |
| Mar-07                                                               |       | 1  year    |       | Mar-08                        |       | 4.01              |        | 5,000                  |        |
| **Total short-term FHLB advances  and weighted average rate**        | ** ** | **3.76**   | **%**      | **$**                         | **66,750** | ** **        |
| ** **                                                           |       |       |       |                          |       |              |        |                   |        |
| **Other short-term borrowed  funds:**                                |       |       |       |                          |       |              |        |                   |        |
| TT&L Note option                                                 |       |       |       |                          |       | 3.19              | %           | $                      | 3,892       |   |
| Customer repurchase  agreements                                      |       |       |       |                          |       | 2.63              |        | 77,075                 |        |
| **Total other short-term borrowed  funds and weighted average rate** | ** ** | **2.66**   | **%**      | **$**                         | **80,967** | ** **        |
| ** **                                                           |       |       |       |                          |       |              |        |                   |        |
| **Other borrowed funds:**                                            |       |       |       |                          |       |              |        |                   |        |
| Trust preferred                                                      |       |       |       |                          |       | 7.63              | %           | $                      | 20,619      |   |
| FHLB advances - long  term                                           |       |       |       |                          |       | 4.29              |        | 93,333                 |        |
| **Other borrowed funds and  weighted average rate**                  | ** ** | ** ** | ** ** | ** **                    | ** ** | **4.89**          | **%**       | **$**                  | **113,952** | ** ** |
|                                                                 |       |       |       |                          |       |              |        |                   |        |
| **Total other borrowed funds and weighted average  rate**            | ** ** | ** ** | ** ** | **3.91**                      | **%**      | **$**             | **261,669** | ** **             |
|                                                                 |       |       |       |                          |       |              |        |                   |        |
|                                                                      |            |            |            |                               |            |                   |             |                        |             |  |  |  |

 

AtMarch 31, 2007, mortgage funding checks decreased by $1.5 million to $44.6million, compared to $46.2 million at December 31, 2006. These liabilitiesare related to George Mason and are used to fund the loans in process of beingsold. George Mason has credit facilities with the Bank and also has a thirdparty facility of $250 million. There were no borrowings outstanding under thisthird party facility at March 31, 2007.

31

----

 

*Shareholders’ Equity*

Shareholders’ equity at March 31, 2007 was $157.7million, an increase of $1.8 million, compared to $155.9 million atDecember 31, 2006. The increase from the year end was primarily a resultof net income of $1.8 million for the three months ended March 31, 2007. Bookvalue per share at March 31, 2007 was $6.45 compared to $6.37 atDecember 31, 2006. Tangible book value per share at March 31, 2007 was$5.82 compared to $5.75 at December 31, 2006.

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

We provide banking and non-banking financialservices and products through our subsidiaries. We operate in three businesssegments, commercial banking, mortgage banking and wealth management and trustservices.

*Commercial Banking*

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

For the three months ended March 31, 2007, theCommercial Banking segment recorded net income of $1.8 million compared to $2.6million for the same period of 2006, a decrease of $805,000. The decrease innet income is primarily related to our decrease in net interest margin andincreases in non-interest expense related to the branch expansion that hasoccurred over the past twelve months.  AtMarch 31, 2007, total assets for this segment were $1.65 billion, loansreceivable, net of deferred fees and costs, were $870.8 million and totaldeposits were $1.23 billion. At March 31, 2006, total assets were $1.41billion, loans receivable, net of deferred fees and costs, were $730.0 millionand total deposits were $1.07 billion.

*Mortgage Banking*

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

For the three months ended March 31, 2007 and 2006,the Mortgage Banking segment recorded net income of $538,000 and $419,000,respectively. The increase in net income is directly related to the expensecontrols put into place during the second half of 2006, partially offset bydecreases in non-interest income related to our decreased volume of loans heldfor sale.  Non-interest expense decreased$886,000, or 22%, to $3.2 million for the three months ended March 31, 2007compared to $4.1 million for the same three month period of 2006.  At March 31, 2007, total assets for thissegment were $330.6 million, loans held for sale, net were $314.3 million andmortgage funding checks were $44.6 million. At March 31, 2006, total assets were$318.6 million, loans held for sale, net were $300.2 million and mortgagefunding checks were $52.1 million.

32

----

*Wealth Management and TrustServices*

The Wealth Management and Trust Services segmentprovides investment and financial services to business and individuals,including financial planning, retirement/estate planning, trusts, estates,custody, investment management, escrows, and retirement plans. Operations ofthe Bank’s trust division is included in this operating segment since the datewe acquired certain fiduciary and other assets and assumed certain liabilitieson February 9, 2006.

For the three months ended March 31, 2007, theWealth Management and Trust Services segment recorded net income of $31,000,compared to net income of $26,000 for the same period of 2006. At March 31,2007, total assets were $5.3 million and managed and custodial assets were $6.2billion. At March 31, 2006, total assets for this segment were $7.6 million andmanaged and custodial assets were $6.0 billion.

Information pertaining to our business segments canbe found in Note 4 to the Notes to Consolidated Financial Statements.

## **Capital Resources**

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

Regulatory agencies measure capital adequacyutilizing a formula that takes into account the individual risk profile of thefinancial institution. The guidelines define capital as both Tier 1 (whichincludes common shareholders’ equity, defined to include certain debtobligations) and Tier 2 (which includes certain other debt obligations, aportion of the allowance for loan losses, and 45% of any unrealized gains inequity securities).

At March 31, 2007, our Tier 1 and total (Tier 1 andTier 2) risk-based capital ratios were 13.03% and 13.84%, respectively. AtDecember 31, 2006, our Tier 1 and total risk-based capital ratios were13.25% and 14.06%, respectively.  Ourregulatory capital levels for the Bank and bank holding company meet thoseestablished for well-capitalized institutions. Table 10 provides additionalinformation pertaining to our capital ratios.

**Table10.**

**CapitalComponents**

**At March 31, 2007 and December31, 2006**

**(Inthousands)**
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **Cardinal  Financial Corporation (Consolidated):**              | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At  March 31, 2007**                                           |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based  capital/ Total capital to risk-weighted assets |       | $          | 172,371    |                       | 13.84      | %                          | $          | 99,636                     |       | >8.00                   | %          | $ | 124,545 |   | >10.00 | % |
| Tier I capital/  Tier I capital to risk-weighted assets          |       | 162,289    |       | 13.03                      | %          | 49,818                     |       | >4.00                   | %          | 74,727                     |       | >6.00 | % |
| Tier I capital/  Total capital to average assets                 |       | 162,289    |       | 10.17                      | %          | 63,853                     |       | >4.00                   | %          | 79,816                     |       | >5.00 | % |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At  December 31, 2006**                                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based  capital/ Total capital to risk-weighted assets |       | $          | 170,457    |                       | 14.06      | %                          | $          | 97,010                     |       | >8.00                   | %          | $ | 121,263 |   | >10.00 | % |
| Tier I capital/  Tier I capital to risk-weighted assets          |       | 160,656    |       | 13.25                      | %          | 48,505                     |       | >4.00                   | %          | 72,758                     |       | >6.00 | % |
| Tier I capital/ Total  capital to average assets                 |       | 160,656    |       | 10.68                      | %          | 60,180                     |       | >4.00                   | %          | 75,225                     |       | >5.00 | % |

 

33

----

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **Cardinal Bank:**                                          | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At  March 31, 2007**                                           |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based  capital/ Total capital to risk-weighted assets |       | $          | 144,670    |                       | 11.65      | %                          | $          | 99,345                     |       | >8.00                   | %          | $ | 124,181 |   | >10.00 | % |
| Tier I capital/  Tier I capital to risk-weighted assets          |       | 134,588    |       | 10.84                      | %          | 49,673                     |       | >4.00                   | %          | 74,509                     |       | >6.00 | % |
| Tier I capital/  Total capital to average assets                 |       | 134,588    |       | 8.45                       | %          | 63,739                     |       | >4.00                   | %          | 79,673                     |       | >5.00 | % |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At  December 31, 2006**                                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based  capital/ Total capital to risk-weighted assets |       | $          | 141,885    |                       | 11.73      | %                          | $          | 96,742                     |       | >8.00                   | %          | $ | 120,927 |   | >10.00 | % |
| Tier I capital/  Tier I capital to risk-weighted assets          |       | 132,084    |       | 10.92                      | %          | 48,371                     |       | >4.00                   | %          | 72,556                     |       | >6.00 | % |
| Tier I capital/  Total capital to average assets                 |       | 132,084    |       | 8.80                       | %          | 60,038                     |       | >4.00                   | %          | 75,048                     |       | >5.00 | % |

 

**ContractualObligations**

We have entered into a number of long-termcontractual obligations to support our ongoing business activities. Thesecontractual obligations will be funded through operating revenues and liquiditysources held or available to us. The required payments under such obligationsare detailed in Table 11.

**Table11.**

**ContractualObligations**

**At March 31, 2007**

**(In thousands)**

 
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 - 2  Years** | ** ** | **3 - 5  Years** | ** ** | **More than 5  Years** | ** ** |
| Certificates of  deposit                             |       | $                                         | 541,280    |   | $ | 479,058 |   | $ | 40,432 |   | $ | 21,681 |   | $ | 109 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Brokered  certificates of deposit                    |       | 4,969                                     |       | — |   | — |   | 4,969 |   | — |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Advances from  the Federal Home Loan Bank of Atlanta |       | 160,083                                   |       | 66,750 |   | 58,333 |   | 35,000 |   | — |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Trust preferred  securities                          |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations                         |       | 15,288                                    |       | 3,481 |   | 2,786 |   | 4,476 |   | 4,545 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                                         | 742,239    |   | $ | 549,289 |   | $ | 101,551 |   | $ | 66,126 |   | $ | 25,273 |   |

 

**Commitmentsand Contingencies**

In the normal course of business, we are a party tofinancial instruments with off-balance sheet risk to meet the financing needsof our customers. These financial instruments include commitments to extendcredit and standby letters of credit. These instruments represent ourobligation to extend credit or guarantee borrowings that are not recorded onthe consolidated statements of financial condition.  The rates and terms of these instruments arecompetitive with others in the market in which we operate.  The instruments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated statements of financial condition.

The Bank’s maximum exposure to credit loss in theevent of nonperformance by the other party to the financial instrument forcommitments to extend credit and standby letters of credit is represented bythe contractual amount of those instruments. The Bank uses the same creditpolicies in making commitments and conditional obligations as it does foron-balance sheet instruments.

At March 31, 2007, commitments to extend credit were$422.5 million and standby letters of credit were $9.0 million. We have notrecorded a liability associated with standby letters of credit at March 31,2007 as such amounts were immaterial.

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

34

----

 

Standby letters of credit are conditionalcommitments we issued to guarantee the performance of the contractualobligations by a customer to a third party. Those guarantees are primarilyissued to support public and private borrowing arrangements, includingcommercial paper, bond financing, and similar transactions. The credit riskinvolved in issuing standby letters of credit is essentially the same as thatinvolved in extending loan facilities to customers. We hold certificates ofdeposit, deposit accounts, and real estate as collateral supporting thosecommitments when collateral is deemed necessary.  The majority of these guarantees extend untilsatisfactory completion of the customer’s contractual obligations.  All standby letters of credit outstanding atMarch 31, 2007 are collateralized.

George Mason maintains a reserve for loans sold thatpay off earlier than the contractual agreed upon period, thereby requiring thatGeorge Mason refund part of the service release premium and/or premium pricingreceived from the investor.  The reserveas of March 31, 2007 was $63,000.

We have derivative counter-party risk that may arisefrom the possible inability of George Mason’s third party investors to meet theterms of their forward sales contracts. George Mason works with third-party investors that are generallywell-capitalized, are investment grade and exhibit strong financial performanceto mitigate this risk.  We do not expectany third-party investor to fail to meet its obligation.

## **Liquidity**

Liquidity in the banking industry is defined as theability to meet the demand for funds of both depositors and borrowers. We mustbe able to meet these needs by obtaining funding from depositors or otherlenders or by converting non-cash items into cash.  The objective of our liquidity managementprogram is to ensure that we always have sufficient resources to meet thedemands of our depositors and borrowers. Stable core deposits and a strong capitalposition provide the base for our liquidity position. We believe we havedemonstrated our ability to attract deposits because of our convenient branchlocations, personal service and pricing.

In addition to deposits, we have access to variouswholesale funding markets. These markets include the brokered CD market, therepurchase agreement market and the federal funds market. We also maintainsecured lines of credit with the Federal Reserve Bank of Richmond and theFederal Home Loan Bank of Atlanta. Having diverse funding alternatives reducesour reliance on any one source for funding.

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

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

George Mason and the Bank have a one year $150million floating rate revolving credit and security agreement with a thirdparty. The purpose of this credit facility is to fund residential mortgageloans made by George Mason prior to their sale into the secondary market. Thecredit facility requires, among other things, that George Mason and the Bankhave positive quarterly net income and maintain specified minimum tangible andregulatory net worth levels. The Company has guaranteed repayment of this debt.The interest rate on this credit facility is LIBOR plus between 1.50% and1.875%. At March 31, 2007, none of this line was utilized.

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

Liquid assets, which include cash and due frombanks, federal funds sold and investment securities available for sale, totaled$348.8 million at March 31, 2007 or 20% of total assets. We held investmentsthat are classified as held-to-maturity in the amount of $94.3 million at March31, 2007. To maintain ready access to the Bank’s secured lines of credit, theBank has pledged the majority of its investment securities to the Federal HomeLoan Bank of Atlanta with additional investment securities pledged to theFederal Reserve Bank of Richmond. Additional borrowing capacity at the FederalHome Loan Bank of Atlanta at March 31, 2007 was $188.7 million. Borrowingcapacity with the Federal Reserve Bank of Richmond was $14.4 million at March31, 2007. As described above, George Mason has $250 million of lines of creditavailable from outside sources.  Weanticipate maintaining liquidity at a level sufficient to protect depositors,provide for reasonable growth and fully comply with all regulatoryrequirements.

35

----

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

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

We employ an independent consulting firm to modelour interest rate sensitivity.  We use anet interest income simulation model as our primary tool to measure interestrate sensitivity. Many assumptions are developed based on expected activity inthe balance sheet. For maturing assets, assumptions are created for theredeployment of these assets. For maturing liabilities, assumptions aredeveloped for the replacement of these funding sources. Assumptions are alsodeveloped for assets and liabilities that could reprice during the modeled timeperiod. These assumptions also cover how we expect rates to change onnon-maturity deposits such as NOW, Money Market, savings accounts and certificatesof deposit. Based on inputs that include the current balance sheet, the currentlevel of interest rates and the developed assumptions, the model then producesan expected level of net interest income assuming that market rates remainunchanged. This is considered the base case. Next, the model determines whatnet interest income would be based on specific changes in interest rates. Therate simulations are performed for a two year period and include ramped ratechanges of down 200 basis points and up 200 basis points. In the ramped downrate change, the model moves rates gradually down 200 basis points over thefirst year and then rates remain flat in the second year. For the up 200 basispoint scenario, rates are gradually moved up 200 basis points in the first yearand then rates remain flat in the second year. In both the up and downscenarios, the model assumes a parallel shift in the yield curve. The resultsof these simulations are then compared to the base case.

At March 31, 2007, we were liability sensitive forthe entire two year simulation period.  Liability sensitive means that we had more liabilities repricing thanassets. We have more of our liabilities in non-maturity or short-term depositproducts than we have in floating rate assets. In a decreasing interest rate environment, net interest income wouldgrow for a liability sensitive bank.  Inthe down 200 basis point scenario, net interest income improves by not morethan 6.7% for the one year period and by not more than 8.3% over the two yeartime horizon. In the up 200 basis point scenario, for a liability sensitivebank, net interest income should contract in a rising rate environment.  In the up 200 basis point scenario, netinterest income declines by not more than 1% in the first year and declines bynot more than 3% over the two year time horizon.

** **

36

----

 

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

Our Asset/Liability Committee is responsible forreviewing our liquidity requirements and maximizing our net interest incomeconsistent with capital requirements, liquidity, interest rate and economicoutlooks, competitive factors and customer needs. Interest rate risk arisesbecause the assets of the Bank and the liabilities of the Bank have differentmaturities and characteristics. In order to measure this interest rate risk, weuse a simulation process that measures the impact of changing interest rates onnet interest income. This model is run for the Bank by an independentconsulting firm. The simulations incorporate assumptions related to expectedactivity in the balance sheet. For maturing assets, assumptions are developedfor the redeployment of these assets. For maturing liabilities, assumptions aredeveloped for the replacement of these funding sources. Assumptions are alsodeveloped for assets and liabilities that reprice during the modeled timeperiod. These assumptions also cover how we expect rates to change onnon-maturity deposits such as NOW, Money Market, savings accounts andcertificates of deposit. Based on inputs that include the most recent periodend balance sheet, the current level of interest rates and the developedassumptions, the model then produces an expected level of net interest incomeassuming that interest rates remain unchanged. This becomes the base case.Next, the model determines the impact on net interest income given specifiedchanges in interest rates. The rate simulations are performed for a two yearperiod and include ramped rate changes of down 200 basis points and up 200basis points. In the ramped down rate change, the model moves rates gradually down200 basis points over the first year and then rates remain flat in the secondyear. For the up 200 basis point scenario, rates are gradually increased by 200basis points in the first year and remain flat in the second year. In both theup and down scenarios, the model assumes a parallel shift in the yield curve.The results of these simulations are then compared to the base case.

At March 31, 2007, we were liability sensitive forthe entire two year simulation period.  Liability sensitive means that we had more liabilities repricing thanassets. We have more of our liabilities in non-maturity or short-term depositproducts than we have in floating rate assets. In a decreasing interest rate environment, net interest income wouldgrow for a liability sensitive bank.  Inthe down 200 basis point scenario, net interest income improves by not morethan 6.7% for the one year period and by not more than 8.3% over the two yeartime horizon.  In the up 200 basis pointscenario, for a liability sensitive bank, net interest income should contractin a rising rate environment.  In the up200 basis point scenario, net interest income declines by not more than 1% inthe first year and declines by not more than 3% over the two year time horizon.

See also “Interest Rate Sensitivity” in Item 2 abovefor a discussion of our interest rate risk.

37

----

**Item 4. Controls and Procedures**

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

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

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

38

----

**PART II —OTHER INFORMATION**

**Item 1. Legal Proceedings**

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

**Item1A.  Risk Factors**

Ouroperations are subject to many risks that could adversely affect our futurefinancial condition and performance and, therefore, the market value of oursecurities.  The risk factors that areapplicable to us are outlined in our Annual Report on Form 10-K for the yearended December 31, 2006.  These riskfactors have not changed as of the date of this report.

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

(a)  None.

(b)  Not applicable.

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

**Item 3.  Defaults Upon Senior Securities**

(a)  None.

(b)  None.

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

(a)  None.

(b)  Not applicable.

(c)  None.

(d)  None.

**Item 5.  Other Information**

(a)  None.

(b)  None.

**Item 6.  Exhibits**

31.1         Rule 13a-14(a) Certification of ChiefExecutive Officer

31.2         Rule 13a-14(a) Certification of ChiefFinancial Officer

32.1         Statement of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350

32.2         Statement of Chief Financial OfficerPursuant to 18 U.S.C. Section 1350

39

----

**SIGNATURES**

**Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.**
|         |       | CARDINAL FINANCIAL CORPORATION                                                      |
|-------------------|------------|-------------------------------------------------------------------------------------|
|         |       | (Registrant)                                                                        | ** ** | ** ** |
|              |       |                                                                                | ** ** | ** ** |
| Date: May 9, 2007 |       | /s/ Bernard H. Clineburg                                                            |   |   |
|         |       | Bernard H. Clineburg                                                                |   |   |
|         |       | Chairman and Chief Executive Officer                                                | ** ** | ** ** |
|              | ** ** | (Principal Executive Officer)                                                       | ** ** | ** ** |
|              | ** ** |                                                                                | ** ** | ** ** |
|              | ** ** |                                                                                | ** ** | ** ** |
|              | ** ** | **/**s**/**Mark  A. Wendel                                                          | ** ** | ** ** |
| Date: May 9, 2007 |       | Mark A. Wendel                                                                      |   |   |
|              | ** ** | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) | ** ** | ** ** |
|              | ** ** |                                                                                | ** ** | ** ** |
|              | ** ** | /s/ Jennifer L. Deacon                                                              | ** ** | ** ** |
| Date: May 9, 2007 |       | Jennifer L. Deacon                                                                  |   |   |
|              | ** ** | Senior Vice President and Controller                                                | ** ** | ** ** |
|              | ** ** | (Principal Accounting Officer)                                                      | ** ** | ** ** |
|                   |            |                                                                                     |  |  |  |

 

40

----