Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **x** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|-------|----------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30,2010**

 

**or**

 
| **o** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|----------------------------------------------------------------------------------------------------|

 

**For the transition period from             to             **

** **

**Commission File Number:  0-24557**

 

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Virginia**

(State or other jurisdiction of

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

(I.R.S. Employer

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

 

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

** **

**(703) 584-3400**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

28,756,439 shares of common stock, par value$1.00 per share, outstanding as of July 28, 2010

 

 

 

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Table of Contents

 

**CARDINAL FINANCIAL CORPORATION**

 

**INDEX TO FORM 10-Q**

 
| **PART I — FINANCIAL INFORMATION**                                                                                     |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                       |   |
| Item 1. Financial Statements:                                                                                                    |   |
|                                                                                                                             |   |
| Consolidated  Statements of ConditionAt June 30, 2010 (unaudited) and December 31, 2009                                | 3      |
|                                                                                                                             |   |
| Consolidated  Statements of IncomeFor the three and six months ended June 30, 2010 and 2009  (unaudited)                    | 4      |
|                                                                                                                             |   |
| Consolidated  Statements of Comprehensive IncomeFor the three and six months ended June 30, 2010 and 2009  (unaudited)      | 5      |
|                                                                                                                             |   |
| Consolidated  Statements of Changes in Shareholders’ EquityFor the six months ended June 30, 2010 and 2009 (unaudited) | 6      |
|                                                                                                                             |   |
| Consolidated  Statements of Cash FlowsFor the six months ended June 30, 2010 and 2009 (unaudited)                           | 7      |
|                                                                                                                             |   |
| Notes to Consolidated Financial Statements (unaudited)                                                                           | 8      |
|                                                                                                                             |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition andResults of  Operations                              | 34     |
|                                                                                                                             |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                              | 64     |
|                                                                                                                             |   |
| Item 4. Controls and Procedures                                                                                                  | 66     |
|                                                                                                                             |   |
| **PART II  — OTHER INFORMATION**                                                                                       | 67     |
| ** **                                                                                                                       |   |
| Item  1. Legal Proceedings                                                                                                       | 67     |
| Item 1A. Risk Factors                                                                                                            | 67     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                             | 67     |
| Item 3. Defaults Upon Senior Securities                                                                                          | 67     |
| Item 4. (Removed and Reserved)                                                                                                   | 67     |
| Item  5. Other Information                                                                                                       | 67     |
| Item 6. Exhibits                                                                                                                 | 67     |
|                                                                                                                             |   |
| **SIGNATURES**                                                                                                                   | 68     |

 

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** **

**PART I — FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

** **

**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATED STATEMENTS OF CONDITION

 

June 30,2010 and December 31, 2009

 

(Inthousands, except share data)

 
| ** **                                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                    |       |              |       |                  |       |
| ** **                                                                                                                                    |       |              |       |                  |       |
| Cash  and due from banks                                                                                                                      |       | $                 | 16,779     |                  | $          | 19,804 |   |
| Federal  funds sold                                                                                                                           |       | 7,952             |       | 5,037                 |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  cash and cash equivalents                                                                                                              |       | 24,731            |       | 24,841                |       |
|                                                                                                                                          |       |              |       |                  |       |
| Investment  securities available-for-sale                                                                                                     |       | 319,108           |       | 343,569               |       |
| Investment  securities held-to-maturity (market value of $27,388 and $31,436 at  June 30, 2010 and December 31, 2009, respectively) |       | 30,837            |       | 35,184                |       |
| Investment  securities-trading                                                                                                                |       | 4,233             |       | 3,724                 |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  investment securities                                                                                                                  |       | 354,178           |       | 382,477               |       |
|                                                                                                                                          |       |              |       |                  |       |
| Other  investments                                                                                                                            |       | 16,467            |       | 16,467                |       |
| Loans  held for sale                                                                                                                          |       | 269,467           |       | 179,469               |       |
|                                                                                                                                          |       |              |       |                  |       |
| Loans  receivable, net of deferred fees and costs                                                                                             |       | 1,329,520         |       | 1,293,432             |       |
| Allowance  for loan losses                                                                                                                    |       | (21,058           | )          | (18,636               | )          |
|                                                                                                                                          |       |              |       |                  |       |
| Loans  receivable, net                                                                                                                        |       | 1,308,462         |       | 1,274,796             |       |
|                                                                                                                                          |       |              |       |                  |       |
| Premises  and equipment, net                                                                                                                  |       | 17,032            |       | 15,743                |       |
| Deferred  tax asset, net                                                                                                                      |       | 5,516             |       | 7,691                 |       |
| Goodwill  and intangibles, net                                                                                                                |       | 13,365            |       | 13,935                |       |
| Bank-owned  life insurance                                                                                                                    |       | 34,038            |       | 33,712                |       |
| Prepaid  FDIC insurance premiums                                                                                                              |       | 5,191             |       | 6,683                 |       |
| Other  real estate owned                                                                                                                      |       | 2,915             |       | 4,991                 |       |
| Accrued  interest receivable and other assets                                                                                                 |       | 21,305            |       | 15,380                |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  assets                                                                                                                                 |       | $                 | 2,072,667  |                  | $          | 1,976,185 |   |
|                                                                                                                                          |       |              |       |                  |       |
| **Liabilities and Shareholders’ Equity**                                                                                                 |       |              |       |                  |       |
| ** **                                                                                                                                    |       |              |       |                  |       |
| Non-interest  bearing deposits                                                                                                                |       | $                 | 195,428    |                  | $          | 166,019 |   |
| Interest  bearing deposits                                                                                                                    |       | 1,154,414         |       | 1,130,986             |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  deposits                                                                                                                               |       | 1,349,842         |       | 1,297,005             |       |
|                                                                                                                                          |       |              |       |                  |       |
| Other  borrowed funds                                                                                                                         |       | 473,505           |       | 427,579               |       |
| Mortgage  funding checks                                                                                                                      |       | 14,916            |       | 13,918                |       |
| Escrow  liabilities                                                                                                                           |       | 3,152             |       | 2,079                 |       |
| Accrued  interest payable and other liabilities                                                                                               |       | 14,629            |       | 31,097                |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  liabilities                                                                                                                            |       | 1,856,044         |       | 1,771,678             |       |
|                                                                                                                                          |       |              |       |                  |       |
| ** **                                                                                                                                    | ** ** | **2010**          | ** ** | **2009**              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common  stock, $1 par value                                                                                                                   |       |              |       |                  |       |   |   |   |   |
| Shares  authorized                                                                                                                            |       | 50,000,000        |       | 50,000,000            |       |   |   |   |   |
| Shares  issued and outstanding                                                                                                                |       | 28,754,989        |       | 28,717,839            |       | 28,755 |   | 28,718 |   |
| Additional  paid-in capital                                                                                                                   |       | 160,288           |       | 159,798               |       |
| Retained  earnings                                                                                                                            |       | 20,065            |       | 12,705                |       |
| Accumulated  other comprehensive income, net                                                                                                  |       | 7,515             |       | 3,286                 |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  shareholders’ equity                                                                                                              |       | 216,623           |       | 204,507               |       |
|                                                                                                                                          |       |              |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                              |       | $                 | 2,072,667  |                  | $          | 1,976,185 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATEDSTATEMENTS OF INCOME

 

Threeand six months ended June 30, 2010 and 2009

(Inthousands, except share data)

(Unaudited)

 
| ** **                                                     | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                     | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  income:                                              |       |                                  |       |                                |       |   |   |   |   |
| Loans  receivable                                              |       | $                                     | 18,138     |                                | $          | 16,055 |   | $ | 35,753 |   | $ | 31,384 |   |
| Loans  held for sale                                           |       | 1,957                                 |       | 2,196                               |       | 3,262 |   | 4,021 |   |
| Federal  funds sold                                            |       | 4                                     |       | 31                                  |       | 28 |   | 44 |   |
| Investment  securities available-for-sale                      |       | 3,569                                 |       | 2,429                               |       | 7,251 |   | 5,314 |   |
| Investment  securities held-to-maturity                        |       | 266                                   |       | 419                                 |       | 553 |   | 904 |   |
| Other  investments                                             |       | 10                                    |       | —                              |       | 21 |   | (19 | ) |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Total  interest income                                         |       | 23,944                                |       | 21,130                              |       | 46,868 |   | 41,648 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Interest  expense:                                             |       |                                  |       |                                |       |   |   |   |   |
| Deposits                                                       |       | 3,802                                 |       | 6,047                               |       | 8,437 |   | 12,804 |   |
| Other  borrowed funds                                          |       | 3,013                                 |       | 3,120                               |       | 6,035 |   | 6,262 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Total  interest expense                                        |       | 6,815                                 |       | 9,167                               |       | 14,472 |   | 19,066 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net  interest income                                           |       | 17,129                                |       | 11,963                              |       | 32,396 |   | 22,582 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Provision  for loan losses                                     |       | 2,700                                 |       | 1,484                               |       | 5,125 |   | 2,700 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net  interest income after provision for loan losses           |       | 14,429                                |       | 10,479                              |       | 27,271 |   | 19,882 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Noninterest  income:                                           |       |                                  |       |                                |       |   |   |   |   |
| Service  charges on deposit accounts                           |       | 514                                   |       | 496                                 |       | 971 |   | 968 |   |
| Loan  fees                                                     |       | 440                                   |       | 825                                 |       | 812 |   | 1,658 |   |
| Investment  fee income                                         |       | 1,015                                 |       | 880                                 |       | 2,024 |   | 1,691 |   |
| Realized  and unrealized gains on mortgage banking activities  |       | 3,741                                 |       | 3,403                               |       | 6,530 |   | 6,746 |   |
| Net  realized gain on investment securities-available-for-sale |       | 269                                   |       | —                              |       | 533 |   | 552 |   |
| Net  realized gain (loss) on investment securities-trading     |       | (87                                   | )          | 111                                 |       | (31 | ) | (520 | ) |
| Management  fee income                                         |       | 844                                   |       | 383                                 |       | 1,421 |   | 714 |   |
| Increase  in cash surrender value of bank-owned life insurance |       | 177                                   |       | 157                                 |       | 326 |   | 233 |   |
| Other  income (loss)                                           |       | (66                                   | )          | (4                                  | )          | (25 | ) | (34 | ) |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Total  noninterest income                                      |       | 6,847                                 |       | 6,251                               |       | 12,561 |   | 12,008 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Noninterest  expense:                                          |       |                                  |       |                                |       |   |   |   |   |
| Salary  and benefits                                           |       | 6,717                                 |       | 6,164                               |       | 12,859 |   | 11,650 |   |
| Occupancy                                                      |       | 1,472                                 |       | 1,357                               |       | 2,925 |   | 2,734 |   |
| Professional  fees                                             |       | 537                                   |       | 521                                 |       | 1,006 |   | 1,004 |   |
| Depreciation                                                   |       | 446                                   |       | 510                                 |       | 1,006 |   | 1,051 |   |
| Data  communications                                           |       | 1,244                                 |       | 837                                 |       | 2,140 |   | 1,580 |   |
| Amortization  of intangibles                                   |       | 60                                    |       | 60                                  |       | 119 |   | 119 |   |
| Impairment  of goodwill                                        |       | 451                                   |       | —                              |       | 451 |   | — |   |
| FDIC  insurance assessment                                     |       | 519                                   |       | 1,324                               |       | 1,068 |   | 1,739 |   |
| Mortgage  loan repurchases and settlements                     |       | (165                                  | )          | 594                                 |       | 398 |   | 1,175 |   |
| Other  operating expenses                                      |       | 2,872                                 |       | 2,338                               |       | 5,209 |   | 4,691 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Total  noninterest expense                                     |       | 14,153                                |       | 13,705                              |       | 27,181 |   | 25,743 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net  income before income taxes                                |       | 7,123                                 |       | 3,025                               |       | 12,651 |   | 6,147 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Provision  for income taxes                                    |       | 2,414                                 |       | 883                                 |       | 4,142 |   | 1,836 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Net  income                                                    |       | $                                     | 4,709      |                                | $          | 2,142 |   | $ | 8,509 |   | $ | 4,311 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Earnings  per common share - basic                             |       | $                                     | 0.16       |                                | $          | 0.08 |   | $ | 0.29 |   | $ | 0.17 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Earnings  per common share - diluted                           |       | $                                     | 0.16       |                                | $          | 0.08 |   | $ | 0.29 |   | $ | 0.17 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Weighted-average  common shares outstanding - basic            |       | 29,104,066                            |       | 25,965,314                          |       | 29,084,292 |   | 25,319,694 |   |
|                                                           |       |                                  |       |                                |       |   |   |   |   |
| Weighted-average  common shares outstanding - diluted          |       | 29,641,022                            |       | 26,462,234                          |       | 29,565,862 |   | 25,787,621 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Threeand six months ended June 30, 2010 and 2009

(Inthousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Net  income                                                                                                                                                                                                                                                                                                                                                   |       | $                                     | 4,709      |                                | $          | 2,142 |   | $ | 8,509 |   | $ | 4,311 |   |
| Other  comprehensive income (loss):                                                                                                                                                                                                                                                                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Unrealized  gain (loss) on available-for-sale investment securities:                                                                                                                                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Unrealized  holding gain (loss) arising during the period, net of tax expense of $1.9  million and $2.4 million for the three and six months ended June 30, 2010,  respectively, and net of tax benefit of $27 thousand for the three months  ended June 30, 2009 and net of tax expense of $751 thousand for six  months ended June 30, 2009. |       | 3,907                                 |       | (54                                 | )          | 4,938 |   | 1,760 |   |
|                                                                                                                                                                                                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Less:  reclassification adjustment for net gains included in net income net of tax expense  of $93 thousand and $184 thousand for the three and six months ended June 30,  2010, respectively, and net income net of tax expense of $188 thousand for  the six months ended June 30, 2009.                                                          |       | (176                                  | )          | —                              |       | (349 | ) | (364 | ) |
|                                                                                                                                                                                                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                          |       | 3,731                                 |       | (54                                 | )          | 4,589 |   | 1,396 |   |
|                                                                                                                                                                                                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Unrealized  gain (loss) on derivative instruments designated as cash flow hedges, net of  tax benefit of $94 thousand and $135 thousand for the three and six months  ended June 30, 2010, respectively, and net of tax expense of $31  thousand and tax benefit of $140 thousand for the three and six months ended  June 30, 2009, respectively.  |       | (282                                  | )          | 106                                 |       | (360 | ) | (104 | ) |
|                                                                                                                                                                                                                                                                                                                                                          |       |                                  |       |                                |       |   |   |   |   |
| Comprehensive  income                                                                                                                                                                                                                                                                                                                                         |       | $                                     | 8,158      |                                | $          | 2,194 |   | $ | 12,738 |   | $ | 5,603 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Sixmonths ended June 30, 2010 and 2009

(Inthousands)

(Unaudited)

 
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  December 31, 2008                  |       | 24,014     |       | $          | 24,014     |           | $          | 130,709      |       | $                 | 3,437      |       | $          | (154 | ) | $ | 158,006 |   |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Public  offering shares issued                    |       | 4,378      |       | 4,378      |       | 27,244         |       | —       |       | —            |       | 31,622     |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  compensation expense, net of tax benefits  |       | —     |       | —     |       | 228            |       | —       |       | —            |       | 228        |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  options exercised                          |       | 11         |       | 11         |       | 47             |       | —       |       | —            |       | 58         |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Shares  issued to employee benefits plan          |       | 287        |       | 287        |       | 1,278          |       | —       |       | —            |       | 1,565      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Dividends  on common stock of $0.02 per share     |       | —     |       | —     |       | —         |       | (483         | )          | —            |       | (483       | )          |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Change  in accumulated other comprehensive income |       | —     |       | —     |       | —         |       | —       |       | 1,292             |       | 1,292      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Net  income                                       |       | —     |       | —     |       | —         |       | 4,311        |       | —            |       | 4,311      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  June 30, 2009                      |       | 28,690     |       | $          | 28,690     |           | $          | 159,506      |       | $                 | 7,265      |       | $          | 1,138 |   | $ | 196,599 |   |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  December 31, 2009                  |       | 28,718     |       | $          | 28,718     |           | $          | 159,798      |       | $                 | 12,705     |       | $          | 3,286 |   | $ | 204,507 |   |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  options exercised                          |       | 37         |       | 37         |       | 99             |       | —       |       | —            |       | 136        |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Stock  compensation expense, net of tax benefit   |       | —     |       | —     |       | 391            |       | —       |       | —            |       | 391        |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Dividends  on common stock of $0.04 per share     |       | —     |       | —     |       | —         |       | (1,149       | )          | —            |       | (1,149     | )          |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Change  in accumulated other comprehensive income |       | —     |       | —     |       | —         |       | —       |       | 4,229             |       | 4,229      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Net  income                                       |       | —     |       | —     |       | —         |       | 8,509        |       | —            |       | 8,509      |       |
|                                              |       |       |       |       |       |           |       |         |       |              |       |       |       |
| Balance,  June 30, 2010                      |       | 28,755     |       | $          | 28,755     |           | $          | 160,288      |       | $                 | 20,065     |       | $          | 7,515 |   | $ | 216,623 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATED STATEMENTS OFCASH FLOWS

 

Six Months Ended June 30,2010 and 2009

 

(In thousands)

 

(Unaudited)

 
| ** **                                                                                  | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                                      |       |       |       |       |       |
| Net  income                                                                                 |       | $          | 8,509      |       | $          | 4,311 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:          |       |       |       |       |       |
| Depreciation                                                                                |       | 1,006      |       | 1,051      |       |
| Amortization  of premiums, discounts and intangibles                                        |       | 327        |       | 160        |       |
| Impairment  of goodwill                                                                     |       | 451        |       | —     |       |
| Provision  for loan losses                                                                  |       | 5,125      |       | 2,700      |       |
| Loans  held for sale originated                                                             |       | (1,142,886 | )          | (1,458,487 | )          |
| Proceeds  from the sale of loans held for sale                                              |       | 1,059,418  |       | 1,390,045  |       |
| Realized  and unrealized gains on mortgage banking activities                               |       | (4,920     | )          | (1,641     | )          |
| Proceeds  from sale, maturity and call of investment securities trading                     |       | 140        |       | 1,851      |       |
| Purchase  of investment securities trading                                                  |       | (680       | )          | (6,329     | )          |
| Unrealized  loss on investment securities-trading                                           |       | 31         |       | 520        |       |
| Gain  on sale of investment securities available-for-sale                                   |       | (542       | )          | (769       | )          |
| Loss  on sale of investment securities available-for-sale                                   |       | 9          |       | 217        |       |
| (Gain)  loss on sale of other assets                                                        |       | (3         | )          | 4          |       |
| Loss  on sale of other real estate owned                                                    |       | 54         |       | 36         |       |
| Increase  in cash surrender value of bank-owned life insurance                              |       | (326       | )          | (233       | )          |
| Stock  compensation expense, net of tax benefits                                            |       | 391        |       | 228        |       |
| Decrease  in accrued interest receivable and other assets                                   |       | (6,593     | )          | (10,362    | )          |
| Increase  (decrease) in accrued interest payable, escrow liabilities and other  liabilities |       | (5,396     | )          | 6,720      |       |
|                                                                                        |       |       |       |       |       |
| Net  cash used in operating activities                                                      |       | (85,885    | )          | (69,978    | )          |
|                                                                                        |       |       |       |       |       |
| Cash  flows from investing activities:                                                      |       |       |       |       |       |
| Net  purchases of premises and equipment                                                    |       | (1,188     | )          | (365       | )          |
| Proceeds  from maturity and call of investment securities available-for-sale                |       | 20,077     |       | 25,518     |       |
| Proceeds  from sale of investment securities available-for-sale                             |       | 10,013     |       | 219        |       |
| Proceeds  from sale of mortgage-backed securities available-for-sale                        |       | 21,760     |       | 43,589     |       |
| Proceeds  from maturity and call of investment securities held-to-maturity                  |       | —     |       | 2,000      |       |
| Purchase  of investment securities available-for-sale                                       |       | (20,179    | )          | (31,688    | )          |
| Purchase  of mortgage-backed securities available-for-sale                                  |       | (37,809    | )          | (31,308    | )          |
| Purchase  of other investments                                                              |       | —     |       | (97        | )          |
| Redemptions  of investment securities available-for-sale                                    |       | 27,910     |       | 21,597     |       |
| Redemptions  of investment securities held-to-maturity                                      |       | 4,316      |       | 7,204      |       |
| Proceeds  from the sale of other real estate owned                                          |       | 918        |       | 515        |       |
| Net  increase in loans receivable, net of deferred fees and costs                           |       | (38,791    | )          | (60,391    | )          |
|                                                                                        |       |       |       |       |       |
| Net  cash used in investing activities                                                      |       | (12,973    | )          | (23,207    | )          |
|                                                                                        |       |       |       |       |       |
| Cash  flows from financing activities:                                                      |       |       |       |       |       |
| Net  increase in deposits                                                                   |       | 52,837     |       | 61,736     |       |
| Net  increase in other borrowed funds                                                       |       | 45,926     |       | 13,708     |       |
| Increase  (decrease) in mortgage funding checks                                             |       | 998        |       | (136       | )          |
| Proceeds  from issuance of stock                                                            |       | —     |       | 31,622     |       |
| Proceeds  from FHLB advances                                                                |       | 10,000     |       | —     |       |
| Repayments  of FHLB advances                                                                |       | (10,000    | )          | —     |       |
| Stock  options exercised                                                                    |       | 136        |       | 58         |       |
| Shares  issued to employee benefits plan                                                    |       | —     |       | 1,565      |       |
| Dividends  on common stock                                                                  |       | (1,149     | )          | (483       | )          |
|                                                                                        |       |       |       |       |       |
| Net  cash provided by financing activities                                                  |       | 98,748     |       | 108,070    |       |
|                                                                                        |       |       |       |       |       |
| Net  increase (decrease) in cash and cash equivalents                                       |       | (110       | )          | 14,885     |       |
|                                                                                        |       |       |       |       |       |
| Cash  and cash equivalents at beginning of the year                                         |       | 24,841     |       | 45,928     |       |
|                                                                                        |       |       |       |       |       |
| Cash  and cash equivalents at end of the period                                             |       | $          | 24,731     |       | $          | 60,813 |   |
|                                                                                        |       |       |       |       |       |
| **Supplemental disclosure of cash flow information:**                                       |       |       |       |       |       |
| Cash  paid during the period for interest                                                   |       | $          | 16,076     |       | $          | 19,010 |   |
| Cash  paid for income taxes                                                                 |       | 3,870      |       | 1,308      |       |

 

Seeaccompanying notes to consolidated financial statements.

 

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

 

Note1

 

*Organization*

 

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

 

*Basisof Presentation*

 

Inthe opinion of management, the accompanying consolidated financial statementshave been prepared in accordance with the requirements of Regulation S-X,Article 10. Accordingly, they do not include all of the information andfootnotes required by U.S. generally accepted accounting principles forcomplete financial statements. However, all adjustments that are, in the opinionof management, necessary for a fair presentation have been included. Theresults of operations for the three and six months ended June 30, 2010 are notnecessarily indicative of the results to be expected for the full year endingDecember 31, 2010. The unaudited interim financial statements should beread in conjunction with the audited financial statements and notes tofinancial statements that are included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2009.

 

Note2

 

*Stock-BasedCompensation*

 

AtJune 30, 2010, the Company had two stock-based employee compensationplans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 EquityCompensation Plan (the “Equity Plan”).

 

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

 

In2002, the Company adopted the Equity Plan. The Equity Plan authorizes thegranting of options, which may be incentive stock options or non-qualifiedstock options, stock appreciation rights, restricted stock awards, phantomstock awards and performance share awards to directors, eligible officers andkey employees of the Company.  The EquityPlan currently authorizes grants and awards with respect to 2,420,000 shares ofthe Company’s common stock.  There were402,168 shares of the Company’s common stock available for future grants andawards in the Equity Plan as of June 30, 2010.

 

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

 

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

 

Totalexpense related to the Company’s share-based compensation plans for the threemonths ended June 30, 2010 and 2009 was $331,000 and $162,000,respectively. Total stock compensation expense for the six months ended June 30,2010 and 2009 was $391,000 and $228,000, respectively. The total income taxbenefit recognized in the income statement for share-based compensationarrangements was $104,000 and $55,000 for the three months ended June 30,2010 and 2009, respectively.  For the sixmonths ended June 30, 2010 and 2009, the total income tax benefit recognized inthe income statement for share-based compensation was $123,000 and $78,000,respectively.

 

Optionsgranted during the three and six months ended June 30, 2010 were 57,000and 62,000, respectively. Options granted during the three and six months endedJune 30, 2009 were 52,500 and 120,650, respectively.  The weighted average per share fair value ofstock option grants during the three and six months ended June 30, 2010was $5.19 and $5.10 respectively. The weighted average per share fair value ofstock option grants during the three and six months ended June 30, 2009was $3.38 and $2.80 respectively.  Thefair values of the options granted during all periods ended June 30, 2010and 2009 were estimated as of the grant date using the Black-Scholesoption-pricing model based on the following weighted average assumptions:

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|----------------------|------------|
| ** **              | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **              | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                    |       |                   |       |                 |       |   |   |   |   |
| Estimated option life   |       | 6.5 years              |       | 6.5 years            |       | 6.5 years |   | 6.5 years |   |
| Risk free interest rate |       | 3.01% - 3.30%          |       | 2.56%                |       | 3.01% - 3.30% |   | 2.10% - 2.56% |   |
|                    |       |                   |       |                 |       |   |   |   |   |
| Expected volatility     |       | 45.90%                 |       | 44.60%               |       | 45.90% |   | 44.60% |   |
| Expected dividend yield |       | 0.89%                  |       | 0.67%                |       | 0.89% |   | 0.67% |   |

 

Expectedvolatility is based upon the average annual historical volatility of theCompany’s common stock. The estimated option life is derived from the “simplifiedmethod” formula as described in Staff Accounting Bulletin No. 110. Therisk free interest rate is based upon the seven-year U.S. Treasury note rate ineffect at the time of grant.  The expected dividend yield is based uponimplied and historical dividend declarations.

 

Stockoption activity during the six months ended June 30, 2010 is summarized asfollows:

 

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| ** **                                 | ** ** | ** **    | ** ** | ** **   | ** ** | **Weighted**     | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------------|------------|---------------|------------|
| ** **                                 | ** ** | ** **    | ** ** | **Weighted** | ** ** | **Average**      | ** ** | **Aggregate** | ** ** |
| ** **                                 | ** ** | ** **    | ** ** | **Average**  | ** ** | **Remaining**    | ** ** | **Intrinsic** | ** ** |
| ** **                                 | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual**  | ** ** | **Value**     | ** ** |
| ** **                                 | ** ** | **Shares**    | ** ** | **Price**    | ** ** | **Term (Years)** | ** ** | **($000)**    | ** ** |
| Outstanding  at December 31, 2009     |       | 2,139,433     |       | $            | 8.43       |             |       |          |       |   |
| Granted                                    |       | 62,000        |       | 11.15        |       |             |       |          |       |
| Exercised                                  |       | (37,150       | )          | 3.66         |       |             |       |          |       |
| Forfeited                                  |       | (17,610       | )          | 9.35         |       |             |       |          |       |
| Expired                                    |       | (6,424        | )          | 4.39         |       |             |       |          |       |
| Outstanding  at June 30, 2010         |       | 2,140,249     |       | $            | 8.60       |             | 4.64       |          | $          | 1,370,894 |   |
| Options  exercisable at June 30, 2010 |       | 1,993,649     |       | $            | 8.61       |             | 4.41       |          | $          | 1,260,196 |   |

 

Theintrinsic value of options exercised during the three and six months ended June 30,2010 was $198,000 and $211,000, respectively. For the options exercised duringthe three and six months ended June 30, 2009, the intrinsic value was$26,000 and $36,000, respectively.

 

Asummary of the status of the Company’s non-vested stock options and changes duringthe six months ended June 30, 2010 is as follows:

 
| ** **                         | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                         | ** ** | ** **    | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**    | ** ** | **Fair Value** | ** ** |
| Balance  at December 31, 2009 |       | 193,700       |       | $              | 4.00       |   |
| Granted                            |       | 62,000        |       | 5.10           |       |
| Vested                             |       | (102,100      | )          | 4.96           |       |
| Forfeited                          |       | (7,000        | )          | 3.67           |       |
| Balance  at June 30, 2010     |       | 146,600       |       | $              | 3.81       |   |

 

AtJune 30, 2010, there was $672,000 of total unrecognized compensation costrelated to non-vested share-based compensation arrangements granted under theplans. The cost is expected to be recognized over a weighted average period of2.20 years. The total fair value of shares that vested during the three monthsended June 30, 2010 and 2009 was $340,000 and $143,000, respectively. Forthe six months ended June 30, 2010 and 2009, the total fair value ofshares that vested was $506,000 and $247,000, respectively.

 

Note3

 

*Segment Information*

 

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

 

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

 

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individuals,including financial planning, retirement/estate planning, trust, estates,custody, investment management, escrows, and retirement plans.

 

Informationabout the reportable segments and reconciliation of this information to theconsolidated financial statements at and for the three and six months ended June 30,2010 and 2009 is as follows:

 

**At and for the Three Months Ended June 30, 2010 (inthousands):**

 
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**               | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net  interest income        |       | $              | 16,738     |         | $          | 597                   |       | $          | —     |             | $          | (206             | )          | $ | — |   | $ | 17,129 |   |
| Provision  for loan losses  |       | 2,700          |       | —       |       | —                |       | —     |       | —           |       | 2,700            |       |
| Non-interest  income        |       | 1,105          |       | 4,821        |       | 1,021                 |       | (83        | )          | (17              | )          | 6,847            |       |
| Non-interest  expense       |       | 9,638          |       | 2,505        |       | 1,358                 |       | 669        |       | (17              | )          | 14,153           |       |
| Provision  for income taxes |       | 1,866          |       | 1,012        |       | (117                  | )          | (347       | )          | —           |       | 2,414            |       |
| Net  income (loss)          |       | $              | 3,639      |         | $          | 1,901                 |       | $          | (220       | )                | $          | (611             | )          | $ | — |   | $ | 4,709 |   |
|                        |       |           |       |         |       |                  |       |       |       |             |       |             |       |
| Total  Assets               |       | $              | 2,044,065  |         | $          | 295,994               |       | $          | 2,993      |             | $          | 228,855          |       | $ | (499,240 | ) | $ | 2,072,667 |   |
| Average  Assets             |       | $              | 1,948,579  |         | $          | 165,347               |       | $          | 3,380      |             | $          | 230,807          |       | $ | (393,579 | ) | $ | 1,954,534 |   |

 

**At and for the Three Months Ended June 30, 2009 (inthousands):**

 
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**               | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net  interest income        |       | $              | 11,412     |         | $          | 779                   |       | $          | —     |             | $          | (228             | )          | $ | — |   | $ | 11,963 |   |
| Provision  for loan losses  |       | 1,416          |       | 68           |       | —                |       | —     |       | —           |       | 1,484            |       |
| Non-interest  income        |       | 820            |       | 4,458        |       | 885                   |       | 116        |       | (28              | )          | 6,251            |       |
| Non-interest  expense       |       | 9,223          |       | 3,005        |       | 784                   |       | 721        |       | (28              | )          | 13,705           |       |
| Provision  for income taxes |       | 387            |       | 744          |       | 35                    |       | (283       | )          | —           |       | 883              |       |
| Net  income (loss)          |       | $              | 1,206      |         | $          | 1,420                 |       | $          | 66         |             | $          | (550             | )          | $ | — |   | $ | 2,142 |   |
|                        |       |           |       |         |       |                  |       |       |       |             |       |             |       |
| Total  Assets               |       | $              | 1,824,990  |         | $          | 259,708               |       | $          | 3,407      |             | $          | 217,798          |       | $ | (441,489 | ) | $ | 1,864,414 |   |
| Average  Assets             |       | $              | 1,769,354  |         | $          | 204,305               |       | $          | 3,434      |             | $          | 198,632          |       | $ | (399,303 | ) | $ | 1,776,422 |   |

 

**At and for the Six Months Ended June 30, 2010 (inthousands):**

 
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**               | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net  interest income        |       | $              | 31,721     |         | $          | 1,081                 |       | $          | —     |             | $          | (406             | )          | $ | — |   | $ | 32,396 |   |
| Provision  for loan losses  |       | 5,125          |       | —       |       | —                |       | —     |       | —           |       | 5,125            |       |
| Non-interest  income        |       | 2,130          |       | 8,459        |       | 2,035                 |       | (23        | )          | (40              | )          | 12,561           |       |
| Non-interest  expense       |       | 17,981         |       | 5,772        |       | 2,176                 |       | 1,292      |       | (40              | )          | 27,181           |       |
| Provision  for income taxes |       | 3,478          |       | 1,308        |       | (50                   | )          | (594       | )          | —           |       | 4,142            |       |
| Net  income (loss)          |       | $              | 7,267      |         | $          | 2,460                 |       | $          | (91        | )                | $          | (1,127           | )          | $ | — |   | $ | 8,509 |   |
|                        |       |           |       |         |       |                  |       |       |       |             |       |             |       |
| Total  Assets               |       | $              | 2,044,065  |         | $          | 295,994               |       | $          | 2,993      |             | $          | 228,855          |       | $ | (499,240 | ) | $ | 2,072,667 |   |
| Average  Assets             |       | $              | 1,928,445  |         | $          | 137,473               |       | $          | 3,388      |             | $          | 231,124          |       | $ | (362,769 | ) | $ | 1,937,661 |   |

 

**At and for the Six Months Ended June 30, 2009 (inthousands):**

 
| ** **                  | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**               | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net  interest income        |       | $              | 21,542     |         | $          | 1,510                 |       | $          | —     |             | $          | (470             | )          | $ | — |   | $ | 22,582 |   |
| Provision  for loan losses  |       | 2,606          |       | 94           |       | —                |       | —     |       | —           |       | 2,700            |       |
| Non-interest  income        |       | 2,159          |       | 8,695        |       | 1,706                 |       | (508       | )          | (44              | )          | 12,008           |       |
| Non-interest  expense       |       | 17,170         |       | 5,962        |       | 1,591                 |       | 1,064      |       | (44              | )          | 25,743           |       |
| Provision  for income taxes |       | 1,064          |       | 1,427        |       | 39                    |       | (694       | )          | —           |       | 1,836            |       |
| Net  income (loss)          |       | $              | 2,861      |         | $          | 2,722                 |       | $          | 76         |             | $          | (1,348           | )          | $ | — |   | $ | 4,311 |   |
|                        |       |           |       |         |       |                  |       |       |       |             |       |             |       |
| Total  Assets               |       | $              | 1,824,990  |         | $          | 259,708               |       | $          | 3,407      |             | $          | 217,798          |       | $ | (441,489 | ) | $ | 1,864,414 |   |
| Average  Assets             |       | $              | 1,740,628  |         | $          | 187,146               |       | $          | 3,455      |             | $          | 189,752          |       | $ | (372,426 | ) | $ | 1,748,555 |   |

 

TheCompany did not have any operating segments other than those reported. Parentcompany financial information is included in the “Other” category andrepresents an overhead function

 

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ratherthan an operating segment. The parent company’s most significant assets are itsnet investments in its subsidiaries. The parent company’s net interest expenseis comprised of interest income from short-term investments and interestexpense on trust preferred securities. The parent company’s non-interestexpense is primarily non-allocable executive salaries and professional servicesrelated to the Company’s regulatory requirements.

 

Note4

 

*Earnings Per Share*

 

Thefollowing is the calculation of basic and diluted earnings per share for thethree and six months ended June 30, 2010 and 2009.  Antidilutive outstanding stock optionsexcluded from weighted average shares outstanding for the diluted earnings pershare calculation were 28,132 and 320,513 for three months ended June 30,2010 and 2009, respectively. For the six months ended June 30, 2010 and2009, antidilutive stock options excluded from weighted average sharesoutstanding for the diluted earnings per share calculation were 47,748 and514,319, respectively.  These stockoptions have exercise prices that were greater than the average market price ofthe Company’s common stock for the periods presented.

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(In thousands,**                           | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **except per share data)**                   | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income available to common shareholders |       | $                      | 4,709      |                 | $          | 2,142 |   | $ | 8,509 |   | $ | 4,311 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares - basic      |       | 29,104                 |       | 25,965               |       | 29,084 |   | 25,320 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares - diluted    |       | 29,641                 |       | 26,462               |       | 29,566 |   | 25,788 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Earnings  per common share - basic           |       | $                      | 0.16       |                 | $          | 0.08 |   | $ | 0.29 |   | $ | 0.17 |   |
|                                         |       |                   |       |                 |       |   |   |   |   |
| Earnings  per common share - diluted         |       | $                      | 0.16       |                 | $          | 0.08 |   | $ | 0.29 |   | $ | 0.17 |   |

 

Weightedaverage shares for basic earnings per share is increased by the number of sharesrequired to be issued under the Company’s various deferred compensationplans.  These plans provide for a Companymatch, such match must be in the common stock of the Company.  Employees who participate in the Company’sdeferred compensation plans can allocate, at their discretion, theircontributions to various investment options, including an option to invest in CompanyCommon Stock.  The incremental weightedaverage shares attributable to the deferred compensation plans included indiluted outstanding shares assumes the participants opt to invest all of theircontributions into the Company’s Common Stock investment option.

 

Thefollowing shows the composition of basic outstanding shares for the three andsix months ended June 30, 2010 and 2009:

 

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| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(in thousands)**                                                       | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                     |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares outstanding                              |       | 28,739                 |       | 25,671               |       | 28,729 |   | 25,037 |   |
| Weighted  average shares attributable to the deferred compensation plans |       | 365                    |       | 294                  |       | 355 |   | 282 |   |
| Total  weighted average shares - basic                                   |       | 29,104                 |       | 25,965               |       | 29,084 |   | 25,319 |   |

 

Thefollowing shows the composition of diluted outstanding shares for the three andsix months ended June 30, 2010 and 2009:

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(in thousands)**                                                               | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                             |       |                   |       |                 |       |   |   |   |   |
| Weighted  average shares outstanding - basic (from above)                        |       | 29,104                 |       | 25,965               |       | 29,084 |   | 25,319 |   |
| Incremental  weighted average shares attributable to deferred compensation plans |       | 279                    |       | 355                  |       | 252 |   | 355 |   |
| Weighted  average shares attributable to vested stock options                    |       | 258                    |       | 142                  |       | 230 |   | 114 |   |
| Incremental  shares attributable to unvested stock options                       |       | —                 |       | —               |       | — |   | — |   |
| Total  weighted average shares - diluted                                         |       | 29,641                 |       | 26,462               |       | 29,566 |   | 25,788 |   |

 

Note5

 

*InvestmentSecurities*

 

Thefair value and amortized cost of investment securities at June 30, 2010and December 31, 2009 are shown below.

 

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| ** **                                 | ** ** | **June 30, 2010** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Gross**              | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                         | ** ** | **cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **value** | ** ** |
| *Investment Securities Available-for-Sale* | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  government-sponsored agencies        |       | $                      | 30,964     |   | $ | 1,404 |   | $ | — |   | $ | 32,368 |   |
| Mortgage-backed  securities                |       | 206,270                |       | 9,738 |   | (210 | ) | 215,798 |   |
| Municipal  securities                      |       | 64,802                 |       | 1,293 |   | (243 | ) | 65,852 |   |
| U.S.  treasury securities                  |       | 4,912                  |       | 178 |   | — |   | 5,090 |   |
| Total                                      |       | $                      | 306,948    |   | $ | 12,613 |   | $ | (453 | ) | $ | 319,108 |   |
|                                       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Investment Securities Held-to-Maturity*   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage-backed  securities                |       | 22,833                 |       | 1,090 |   | — |   | 23,923 |   |
| Corporate  bonds                           |       | 8,004                  |       | — |   | (4,539 | ) | 3,465 |   |
| Total                                      |       | $                      | 30,837     |   | $ | 1,090 |   | $ | (4,539 | ) | $ | 27,388 |   |

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

 

Thefair value and amortized cost of investment securities by contractual maturityat June 30, 2010 and December 31, 2009 are shown below.  Expected maturities may differ fromcontractual maturities because many issuers have the right to call or prepayobligations with or without call or prepayment penalties. 

 
| ** **                         | ** ** | **June 30, 2010** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Available-for-Sale** | ** ** | **Held-to-Maturity** | ** ** |
| ** **                         | ** ** | **Amortized**          | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **(In thousands)**                 | ** ** | **cost**               | ** ** | **Value** | ** ** | **cost** | ** ** | **Value** | ** ** |
| After  1 year but within 5 years   |       | $                      | 4,912      |   | $ | 5,090 |   | $ | — |   | $ | — |   |
| After  5 years but within 10 years |       | 29,368                 |       | 31,045 |   | — |   | — |   |
| After  10 years                    |       | 66,398                 |       | 67,175 |   | 8,004 |   | 3,465 |   |
| Mortgage-backed  securities        |       | 206,270                |       | 215,798 |   | 22,833 |   | 23,923 |   |
| Total                              |       | $                      | 306,948    |   | $ | 319,108 |   | $ | 30,837 |   | $ | 27,388 |   |

 

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

 

Thefollowing table shows the Company’s investment securities’ gross unrealizedlosses and their fair value, aggregated by investment category and the lengthof time that individual securities have been in a continuous unrealized lossposition at June 30, 2010 and December 31, 2009.

 

**June30, 2010**

 
| **Investment Securities Available-for-** | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** **          | ** ** | ** **               | ** ** | ** **          | ** ** | ** **               | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|---------------------|------------|--------------------------|------------|---------------------|------------|--------------------------|------------|
| **Sale**                                           | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**           | ** ** |
| **(In thousands)**                            | ** ** | **Fair Value**                    | ** ** | **Unrealized loss**             | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| U.S. treasury securities                           |       | $                                      | —     |                                 | $          | —              |       | $                        | —     |                | $          | —                   |       | — |   | — |   |
| U.S. government - sponsored agencies               |       | —                                 |       | —                               |       | —              |       | —                   |       | —              |       | —                   |       |
| Mortgage-backed securities                         |       | 4,917                                  |       | (101                                 | )          | 1,992               |       | (109                     | )          | 6,909               |       | (210                     | )          |
| Municipal securities                               |       | 5,399                                  |       | (107                                 | )          | 9,624               |       | (136                     | )          | 15,023              |       | (243                     | )          |
| Total temporarily impaired securities              |       | $                                      | 10,316     |                                 | $          | (208                | )          | $                        | 11,616     |                | $          | (245                     | )          | $ | 21,932 |   | $ | (453 | ) |
|                                                    |            |                                        |            |                                      |            |                     |            |                          |            |                     |            |                          |            |  |  |  |  |  |  |

 
| **Investment Securities Held-to-** | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** **          | ** ** | ** **               | ** ** | ** **          | ** ** | ** **               | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|---------------------|------------|--------------------------|------------|---------------------|------------|--------------------------|------------|
| **Maturity**                                 | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**           | ** ** |
| **(In thousands)**                      | ** ** | **Fair Value**                    | ** ** | **Unrealized loss**             | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| Mortgage-backed securities                   |       | $                                      | 20         |                                 | $          | —              |       | $                        | 43         |                | $          | —                   |       | $ | 63 |   | $ | — |   |
| Corporate bonds                              |       | —                                 |       | —                               |       | 3,465               |       | (4,539                   | )          | 3,465               |       | (4,539                   | )          |
| Total temporarily impaired securities        |       | $                                      | 20         |                                 | $          | —              |       | $                        | 3,508      |                | $          | (4,539                   | )          | $ | 3,528 |   | $ | (4,539 | ) |

 

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**December 31,2009**

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

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

 

TheCompany completes reviews for other-than-temporary impairment at leastquarterly.  As of June 30, 2010, themajority of the investment securities portfolio consisted of securities ratedAAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of thebest quality and carry the smallest degree of investment risk.  At June 30, 2010, 96% of the Company’smortgage-related securities are guaranteed by the Federal National MortgageAssociation (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and theGovernment National Mortgage Association (GNMA).

 

TheCompany has $8.5 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA toAA.  The various protective elements onthe non agency securities may change in the future if market conditions or thefinancial stability of credit insurers changes, which could impact the ratingsof these securities.

 

AtJune 30, 2010, certain of the Company’s investment grade securities werein an unrealized loss position. Investment securities with unrealized losses are a result of pricingchanges due to recent and negative conditions in the current market environmentand not as a result of permanent credit impairment.  Contractual cash flows for the agencymortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities andmunicipal securities have third party protective elements and there are nonegative indications that the contractual cash flows will not be received whendue.  The Company does not intend to sellnor does the Company believe it is probable that it will be required sell anyof these temporarily impaired securities prior to the recovery of the amortizedcost.

 

Theheld-to-maturity portfolio includes investments in four pooled trust preferredsecurities, totaling $8.0 million of par value at June 30, 2010 (each securityhas a par value of $2.0 million).  Thesesecurities are presented as corporate bonds in the above table.  The collateral underlying these structuredsecurities are instruments issued by financial institutions or insurers.  The

 

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Companyowns the A-3 tranches in each issuance. Each of the bonds is rated by more than one rating agency.  Two of the securities have a composite ratingof AA, one of the securities has a composite rating of BB and the othersecurity has a composite rating of B. There is minimal observable trading activity for these types ofsecurities.  The Company has estimatedthe fair value of the securities through the use of internal calculations andthrough information provided by external pricing services.  Given the level of subordination below theA-3 tranches, and the actual and expected performance of the underlyingcollateral, the Company expects to receive all contractual interest andprincipal payments recovering the amortized cost basis of each of the foursecurities, and concluded that these securities are not other-than-temporarilyimpaired. The Company does not intend to sell nor does the Company believe itis probable that it will be required to sell these corporate bonds prior to therecovery of its investment.

 

Inone of the pooled trust preferred securities issues, 40% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 48% of the performing collateraldefaulted or deferred payment.  Inanother of the pooled trust preferred securities issues, 39% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 31% of the performing collateraldefaulted or deferred payment.  In thethird of the pooled trust preferred securities issues, 66% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 84% of the performing collateraldefaulted or deferred payment.  In thefourth of the pooled trust preferred securities issues, 50% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if 73% of the performing collateraldefaulted to deferred payment.

 

Noother-than-temporary impairment has been recognized on the securities in theCompany’s investment portfolio for the three and six month ended June 30,2010, and the Company does not continue to hold any investment securities forwhich the Company previously recognized other than temporary impairment.

 

Note6

 

*Allowance for Loan Losses*

 

Activityin the Company’s allowance for loan losses for the three and six months endedJune 30, 2010 and 2009 is shown below.

 
| ** **                                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In  thousands)**                                | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Allowance for loan losses, beginning of the period |       | $                                    | 19,287     |                               | $          | 15,303 |   | $ | 18,636 |   | $ | 14,518 |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Provision for loan losses                          |       | 2,700                                |       | 1,484                              |       | 5,125 |   | 2,700 |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Loans charged off:                                 |       |                                 |       |                               |       |   |   |   |   |
| Commercial and industrial                          |       | —                               |       | (15                                | )          | (1,362 | ) | (15 | ) |
| Residential                                        |       | (918                                 | )          | (332                               | )          | (1,307 | ) | (1,055 | ) |
| Consumer                                           |       | (13                                  | )          | (290                               | )          | (48 | ) | (3 | ) |
| Total loans charged off                            |       | (931                                 | )          | (637                               | )          | (2,717 | ) | (1,073 | ) |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Recoveries:                                        |       |                                 |       |                               |       |   |   |   |   |
| Commercial and industrial                          |       | —                               |       | —                             |       | 3 |   | 5 |   |
| Residential                                        |       | 1                                    |       | —                             |       | 10 |   | — |   |
| Consumer                                           |       | 1                                    |       | —                             |       | 1 |   | — |   |
| Total recoveries                                   |       | 2                                    |       | —                             |       | 14 |   | 5 |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Net (charge offs) recoveries                       |       | (929                                 | )          | (637                               | )          | (2,703 | ) | (1,068 | ) |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Ending balance, June 30,                      |       | $                                    | 21,058     |                               | $          | 16,150 |   | $ | 21,058 |   | $ | 16,150 |   |

 

Theallowance for loan losses at June 30, 2010 and December 31, 2009 was $21.1million and $18.6 million, respectively. Allowance for loan losses ratio toloans receivable, net was 1.58% and 1.44% at June 30, 2010 and December 31,2009, respectively.  Nonperforming loansat June 30, 2010 and December 31, 2009, were $4.6 million and $847,000,respectively. The increase in nonaccrual loans was a result of one commercialloan which had previously been impaired, having deteriorated further due to adiscrete event in 2010.

 

During2010, the Company charged off residential loans totaling $1.3 million.  In addition, consumer loans totaling $48,000have been charged-off during 2010.  TheCompany recorded charge-offs on three previously impaired commercial loans toone borrower totaling $1.4 million during 2010. 

 

During2009, the Company charged off three residential loans held at George Masontotaling $454,000 and four residential loans at the Bank totaling$601,000.  In addition, installment loansat the Bank totaling $3,000 were charged off during 2009.  The Bank recorded a partial charge off of acommercial loan totaling $15,000 during the second quarter of 2009.

 

Note7

 

*Derivative Instruments and Hedging Activities*

 

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

 

AtJune 30, 2010, accumulated other comprehensive income included anunrealized loss, net of tax, of $181,000 related to forward loan salescontracts designated as the hedging instrument in the cash flow hedge. Loansheld for sale are generally sold within sixty days of closing and, therefore,substantially all of the amount recorded in accumulated other comprehensiveincome at June 30, 2010 that is related to the Company’s cash flow hedgeswill be recognized in earnings during the third quarter of 2010.

 

AtJune 30, 2010, the Company had $135.6 million in residential mortgage ratelock commitments and associated forward sales and $246.0****millionin forward loan sales associated with $269.5 million of loans that had closedand presented as held for sale.

 

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TheCompany has interest rate swaps to mitigate its exposure to interest raterisk.  These interest rate swaps have anaggregate notional amount of $10.0 million to hedge against changes in cashflows caused by movement in interest rates related to the Company’s issuance of$20.0 million in trust preferred securities. In addition, the Company has an interest rate swap to mitigate thevariability in the fair value for one loan receivable.  At June 30, 2010, accumulated othercomprehensive income included an after-tax unrealized loss of $185,000 relatedto these interest rate swaps.

 

*Note 8*

 

*Fair Value of DerivativeInstruments and Hedging Activities*

 

Thefollowing tables disclose the derivative instruments’ location on the Company’sstatement of condition and the fair value of those instruments at June 30,2010 and December 31, 2009.  Inaddition, the gains and losses related to these derivative instruments isprovided for the six months ended June 30, 2010 and 2009.

 

**Derivative Instruments and Hedging Activities**

**At June 30, 2010**

**(in thousands)**

 
| ** **                                                  | ** ** | **Asset Derivatives**                         | ** ** | **Liability Derivatives** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|
| ** **                                                  | ** ** | **Balance Sheet  Location**                   | ** ** | **Fair Value**            | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value** | ** ** |
| **Derivatives Designated as Hedging Instruments**           |       |                                          |       |                      |       |   |   |   |   |
| Interest  Rate Swaps                                        |       | Accrued Interest  Receivable and Other Assets |       | $                         | —     |   | Accrued Interest Payable  and Other Liabilities |   | $ | 1,934 |   |
| Forward  Loan Sales Commitments                             |       | Accrued Interest  Receivable and Other Assets |       | 2,119                     |       | Accrued Interest Payable  and Other Liabilities |   | 2,177 |   |
| **Total Derivatives Designated as Hedging Instruments**     |       |                                          |       | 2,119                     |       |   |   | 4,111 |   |
|                                                        |       |                                          |       |                      |       |   |   |   |   |
| **Derivatives Not Designated as Hedging Instruments**       |       |                                          |       |                      |       |   |   |   |   |
| Forward  Loan Sales Commitments                             |       | Accrued Interest  Receivable and Other Assets |       | 4,921                     |       | Accrued Interest Payable  and Other Liabilities |   | 145 |   |
| Rate  Lock Commitments                                      |       | Accrued Interest  Receivable and Other Assets |       | 145                       |       | Accrued Interest Payable  and Other Liabilities |   | 461 |   |
| **Total Derivatives Not Designated as Hedging Instruments** |       |                                          |       | 5,066                     |       |   |   | 606 |   |
|                                                        |       |                                          |       |                      |       |   |   |   |   |
| **Total Derivatives**                                       |       |                                          |       | $                         | 7,185      |   |   |   | $ | 4,717 |   |

 

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** **

**DerivativeInstruments and Hedging Activities**

**At December 31, 2009**

**(in thousands)**

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

 

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

**For theThree Months Ended June 30, 2010**

**(in thousands)**

 
| **Derivatives  in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|------------------------------------------------------------------|------------|
|                                                  |       |                                                               |       |                                                           |       |                                                               |         |                                                             |       |
| Interest  Rate Swaps                                  |       | Other Income                                                       |       | $                                                              | 159        |                                                               | Other Income |                                                             | $          | (159 | ) |
| **Total**                                             |       |                                                               | ** ** | **$**                                                          | **159**    |                                                               |         | ** **                                                       | **$**      | **(159** | **)** |

 
| **Derivatives in Cash Flow Hedging  Relationships** | ** ** | **Amount  of Gain  (Loss) Recognized  in Other  Comprehensive  Income on  Derivative (Effective  Portion)** | ** ** | **Location  of Gain  (Loss) Reclassified  from Accumulated  Other Comprehensive  Income into Income  (Effective Portion)** | ** **   | **Amount  of Gain  (Loss) Reclassified  from Accumulated  Other  Comprehensive  Income into Income  (Effective Portion)** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Interest Rate Swaps                                 |       | $                                                                                                           | (108       | )                                                                                                                          | Other Income |                                                                                                                      | $          | —                                                                                                                                       |       | Other Income                                                                                                                               |       | $ | — |   |
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Forward Loan Sales  Commitments                     |       | (174                                                                                                        | )          | Other Income                                                                                                               |         | 3,144                                                                                                                     |       | Other Income                                                                                                                                 |       | 1                                                                                                                                          |       |
| **Total**                                           | ** ** | **$**                                                                                                       | **(282**   | **)**                                                                                                                      |         | ** **                                                                                                                | **$**      | **3,144**                                                                                                                                    |       |                                                                                                                                       | ** ** | **$** | **1** | ** ** |

 
| ** **                                            | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    |
|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|---------------------------------------------------------------|
| **Derivatives Not Designated as Hedging Instruments** |       |                                                            |       |                                                             |                                                          |
| Forward Loan Sales Commitments                        |       | $                                                               | 4,460      |                                                             | Realized and unrealized  gains on mortgage banking activities |   |
| Forward  Loan Sales Commitments                       |       | 319                                                             |       | Other Income                                                     |                                                          |
| Rate  Lock Commitments                                |       | (319                                                            | )          | Other Income                                                     |                                                          |
| **Total**                                             | ** ** | **$**                                                           | **4,460**  |                                                             |                                                          |   |

 

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

**For the SixMonths Ended June 30, 2010**

**(in thousands)**

 
| **Derivatives  in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|------------------------------------------------------------------|------------|
|                                                  |       |                                                               |       |                                                           |       |                                                               |         |                                                             |       |
| Interest  Rate Swaps                                  |       | Other Income                                                       |       | $                                                              | 220        |                                                               | Other Income |                                                             | $          | (220 | ) |
| **Total**                                             |       |                                                               | ** ** | **$**                                                          | **220**    |                                                               |         | ** **                                                       | **$**      | **(220** | **)** |

 
| **Derivatives in Cash Flow Hedging  Relationships** | ** ** | **Amount  of Gain  (Loss) Recognized  in Other  Comprehensive  Income on  Derivative (Effective  Portion)** | ** ** | **Location  of Gain  (Loss) Reclassified  from Accumulated  Other Comprehensive  Income into Income  (Effective Portion)** | ** **   | **Amount  of Gain  (Loss) Reclassified  from Accumulated  Other  Comprehensive  Income into Income  (Effective Portion)** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Interest Rate Swaps                                 |       | $                                                                                                           | (185       | )                                                                                                                          | Other Income |                                                                                                                      | $          | —                                                                                                                                       |       | Other Income                                                                                                                               |       | $ | — |   |
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Forward Loan Sales  Commitments                     |       | (175                                                                                                        | )          | Other Income                                                                                                               |         | 939                                                                                                                       |       | Other Income                                                                                                                                 |       | 1                                                                                                                                          |       |
| **Total**                                           | ** ** | **$**                                                                                                       | **(360**   | **)**                                                                                                                      |         | ** **                                                                                                                | **$**      | **939**                                                                                                                                      |       |                                                                                                                                       | ** ** | **$** | **1** | ** ** |

 
| ** **                                            | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    |
|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|---------------------------------------------------------------|
| **Derivatives Not Designated as Hedging Instruments** |       |                                                            |       |                                                             |                                                          |
| Forward  Loan Sales Commitments                       |       | $                                                               | 7,401      |                                                             | Realized and unrealized  gains on mortgage banking activities |   |
| Forward  Loan Sales Commitments                       |       | 509                                                             |       | Other Income                                                     |                                                          |
| Rate  Lock Commitments                                |       | (509                                                            | )          | Other Income                                                     |                                                          |
| **Total**                                             | ** ** | **$**                                                           | **7,401**  |                                                             |                                                          |   |

 

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

**For theThree Months Ended June 30, 2009**

**(in thousands)**

 
| **Derivatives  in Fair Value Hedging Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** |   |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|------------------------------------------------------------------|--------|
|                                                 |       |                                                               |       |                                                           |       |                                                               |         |                                                             |   |
| Interest  Rate Swaps                                 |       | Other Income                                                       |       | $                                                              | (434       | )                                                                  | Other Income |                                                             | $      | 434 |   |
| **Total**                                            |       |                                                               | ** ** | **$**                                                          | **(434**   | **)**                                                              |         | ** **                                                       | **$**  | **434** |   |

 
| **Derivatives in Cash Flow Hedging  Relationships** | ** ** | **Amount  of Gain  (Loss) Recognized  in Other  Comprehensive  Income on  Derivative (Effective  Portion)** | ** ** | **Location  of Gain  (Loss) Reclassified  from Accumulated  Other Comprehensive  Income into Income  (Effective Portion)** | ** **   | **Amount  of Gain  (Loss) Reclassified  from Accumulated  Other  Comprehensive  Income into Income  (Effective Portion)** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Interest Rate Swaps                                 |       | $                                                                                                           | 165        |                                                                                                                       | Other Income |                                                                                                                      | $          | —                                                                                                                                       |       | Other Income                                                                                                                               |       | $ | — |   |
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Forward Loan Sales  Commitments                     |       | (59                                                                                                         | )          | Other Income                                                                                                               |         | (791                                                                                                                      | )          | Other Income                                                                                                                                 |       | 1                                                                                                                                          |       |
| **Total**                                           | ** ** | **$**                                                                                                       | **106**    |                                                                                                                       |         | ** **                                                                                                                | **$**      | **(791**                                                                                                                                     | **)**      |                                                                                                                                       | ** ** | **$** | **1** | ** ** |

 
| ** **                                            | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    |
|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|---------------------------------------------------------------|
| **Derivatives Not Designated as Hedging Instruments** |       |                                                            |       |                                                             |                                                          |
| Forward  Loan Sales Commitments                       |       | $                                                               | 1,591      |                                                             | Realized and unrealized  gains on mortgage banking activities |   |
| Forward  Loan Sales Commitments                       |       | (101                                                            | )          | Other Income                                                     |                                                          |
| Rate  Lock Commitments                                |       | 101                                                             |       | Other Income                                                     |                                                          |
| **Total**                                             | ** ** | **$**                                                           | **1,591**  |                                                             |                                                          |   |

 

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

**For the SixMonths Ended June 30, 2009**

**(in thousands)**

 
| **Derivatives  in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** |   |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------------|--------------|------------------------------------------------------------------|--------|
|                                                  |       |                                                              |       |                                                           |       |                                                               |         |                                                             |   |
| Interest  Rate Swaps                                  |       | Other Income                                                      |       | $                                                              | (463       | )                                                                  | Other Income |                                                             | $      | 463 |   |
| **Total**                                             |       |                                                              | ** ** | **$**                                                          | **(463**   | **)**                                                              |         | ** **                                                       | **$**  | **463** |   |

 
| **Derivatives in Cash Flow Hedging  Relationships** | ** ** | **Amount  of Gain  (Loss) Recognized  in Other  Comprehensive  Income on  Derivative (Effective  Portion)** | ** ** | **Location  of Gain  (Loss) Reclassified  from Accumulated  Other Comprehensive  Income into Income  (Effective Portion)** | ** **   | **Amount  of Gain  (Loss) Reclassified  from Accumulated  Other  Comprehensive  Income into Income  (Effective Portion)** | ** ** | **Location  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** | **Amount  of Gain  (Loss) Recognized  in Income on  Derivative  (Ineffective Portion  and Amount  Excluded from  Effectiveness  Testing)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Interest Rate Swaps                                 |       | $                                                                                                           | 162        |                                                                                                                       | Other Income |                                                                                                                      | $          | —                                                                                                                                       |       | Other Income                                                                                                                               |       | $ | — |   |
|                                                |       |                                                                                                        |       |                                                                                                                       |         |                                                                                                                      |       |                                                                                                                                         |       |                                                                                                                                       |       |
| Forward Loan Sales  Commitments                     |       | (266                                                                                                        | )          | Other Income                                                                                                               |         | (1,070                                                                                                                    | )          | Other Income                                                                                                                                 |       | 1                                                                                                                                          |       |
| **Total**                                           | ** ** | **$**                                                                                                       | **(104**   | **)**                                                                                                                      |         | ** **                                                                                                                | **$**      | **(1,070**                                                                                                                                   | **)**      |                                                                                                                                       | ** ** | **$** | **1** | ** ** |

 
| ** **                                            | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    |
|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|---------------------------------------------------------------|
| **Derivatives Not Designated as Hedging Instruments** |       |                                                            |       |                                                             |                                                          |
| Forward  Loan Sales Commitments                       |       | $                                                               | 3,628      |                                                             | Realized and unrealized  gains on mortgage banking activities |   |
| Forward  Loan Sales Commitments                       |       | 303                                                             |       | Other Income                                                     |                                                          |
| Rate  Lock Commitments                                |       | (303                                                            | )          | Other Income                                                     |                                                          |
| **Total**                                             | ** ** | **$**                                                           | **3,628**  |                                                             |                                                          |   |

 

Note9

 

*Goodwill and Other Intangibles*

 

Informationconcerning total amortizable other intangible assets at June 30, 2010 isas follows:

 

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| ** **                         | ** ** | ** **                  | ** ** | ** **                    | ** ** | **Wealth Management**       | ** ** | ** **                    | ** ** | ** **                  | ** ** |
|------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **Mortgage Banking**        | ** ** | **and Trust Services**        | ** ** | **Total**                   | ** ** |
| **(In  thousands)**                | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance  at December 31, 2009 |       | $                           | 1,781      |                          | $          | 1,039                       |       | $                             | 795        |                        | $          | 576 |   | $ | 2,576 |   | $ | 1,615 |   |
| 2010  activity:                    |       |                        |       |                          |       |                        |       |                          |       |                        |       |   |   |
| Customer  relationship intangibles |       | —                      |       | 99                            |       | —                      |       | 20                            |       | —                      |       | 119 |   |
| Balance  at June 30, 2010     |       | $                           | 1,781      |                          | $          | 1,138                       |       | $                             | 795        |                        | $          | 596 |   | $ | 2,576 |   | $ | 1,734 |   |

 

Theaggregate amortization expense was $60,000 for each of the three months ended June 30,2010 and 2009. For each of the six months ended June 30, 2010 and 2009,the aggregate amortization expense was $119,000.

 

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

 
| **(In  thousands)**              | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| 2010 (July – December) |       | $          | 119        |   |
| 2011                             |       | 238        |       |
| 2012                             |       | 238        |       |
| 2013                             |       | 189        |       |
| 2014                             |       | 41         |       |
| 2015 and thereafter              |       | 17         |       |
|                                  |            |            |            |  |

 

Thecarrying amount of goodwill at June 30, 2010 was as follows:

 
| **(In thousands)**                 | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and Trust  Services** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance  at December 31, 2009 |       | $                       | 22         |                  | $          | 10,120                                      |       | $         | 2,832      |   | $ | 12,974 |   |
| Goodwill  impairment charge        |       | —                  |       | —                |       | (451                                        | )          | (451      | )          |
| Balance  at June 30, 2010     |       | $                       | 22         |                  | $          | 10,120                                      |       | $         | 2,381      |   | $ | 12,523 |   |

 

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

 

Forthe period ended June 30, 2010, the Company performed its annual review ofgoodwill at Wilson/Bennett, a reporting unit within its Wealth Management andTrust Services segment, and recognized an impairment charge of $451,000. Theanalysis included the use of the expected present value technique.  This technique uses the probability-weightedaverage of expected cash flows.  The cashflow assumptions have been determined based upon recent and expected experiencein growth or declines of assets under management, 

 

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recentexpense trends and recent valuations of other asset management firms and thecosts associated with executing our business plan.  These cash flows are then discounted at arisk free rate that is adjusted by a risk premium as represented by the beta ofa portfolio of other publically traded asset management firms. Also, in 2006,the Company recorded impairment of goodwill and other intangible assets of$2.96 million associated with this reporting unit.

 

Historically,Wilson/Bennett and Cardinal Trust and Investments have been separate reportingunits within the Wealth Management and Trust Services business segment.  Both of these units manage financial assetsfor institutional clients and for upper middle class to wealthyindividuals.  The Company now uses one “wealthmanagement” sales team to present financial products to prospects and also toservice our existing clients.  The “backoffice” for each of these components is performed by the same administrativestaff, and there is one member of management that oversees the combined saleseffort and manages the operations.  Prospectivelyand beginning in the third quarter of 2010, the Wilson/Bennett and CardinalTrust and Investments reporting units will be combined into a single reportingunit and future evaluations of the recoverability of goodwill and otherintangible assets will be based on the combined cash flows of these businesses.

 

Note10

 

*Commitmentsand Contingencies*

 

TheCompany is a party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit and financial guarantees. Commitments to extend credit are agreementsto lend to a customer so long as there is no violation of any conditionestablished in the contract.  Commitmentsusually have fixed expiration dates up to one year or other termination clausesand may require payment of a fee.  Sincemany of the commitments are expected to expire without being drawn upon, thetotal commitment amounts do not necessarily represent future cashrequirements.  These instruments representobligations of the Company to extend credit or guarantee borrowings and are notrecorded on the consolidated statements of financial condition.  The rates and terms of these instruments arecompetitive with others in the market in which the Company operates.

 

Standbyletters of credit are conditional commitments issued by the Company toguarantee the performance of the contractual obligations by a customer to athird party.  The majority of theseguarantees extend until satisfactory completion of the customer’s contractualobligations.  All standby letters ofcredit outstanding at June 30, 2010 are collateralized.

 

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

 

Commitmentsto extend credit of $137.4 million as of June 30, 2010 are related toGeorge Mason’s mortgage loan funding commitments and are of a short termnature.  Commitments to extend credit totaling $390.2 million primarilyhave floating rates as of June 30, 2010.  At June 30, 2010, standbyletters of credit were $15.8 million.

 

Theseoff-balance sheet financial instruments may involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated statements of 

 

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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 exposureto credit loss under standby letters of credit and commitments to extend creditis represented by the contractual amounts of those instruments. It is uncertainas to the amounts that we will be required to fund on these commitments as manysuch arrangements expire with no amounts drawn.

 

GeorgeMason provides for its estimated exposure to repurchase loans previously soldto investors for which borrowers failed to provide full and accurateinformation on their loan application or for which appraisals have not beenacceptable or where the loan was not underwritten in accordance with the loanprogram specified by the loan investor, and for other exposure to its investorsrelated to loan sales activities.  AtJune 30, 2010, this reserve had a balance of $1.3 million.  The Company evaluates the merits of eachclaim and estimates its reserve based on actual and expected claims receivedand considers the historical amounts paid to settle such claims.

 

Inaddition, George Mason, as part of the service it provides to its managedcompanies, purchases the loans originated by the managed companies at the timeof origination.  These loans are then sold by George Mason to investors. George Mason has agreements with its managed companies requiring that, for anyloans that were originated by a managed company and for which investors haverequested George Mason to repurchase due to the borrowers’ failure to providefull and accurate information on or related to their loan application or forwhich appraisals have not been acceptable or when the loan was not underwrittenin accordance with the loan program these loans from investors specified by theloan investor, the managed company be responsible for buying back theloan.  In the event that the managed company’s financial conditiondeteriorates and it is unable to fund the repurchase of such loans, GeorgeMason may have to provide the funds to repurchase these loans from investors. In this instance, George Mason would establish an allowance on the receivablefrom the managed company.  There is no such allowance recorded atJune 30, 2010 as management fully recovered all amounts owed by managedcompanies as of June 30, 2010.

 

TheCompany has derivative counter-party risk that may arise from the possibleinability of George Mason’s third party investors to meet the terms of theirforward sales contracts.  George Mason works with third-party investorsthat are generally well-capitalized, are investment grade and exhibit strongfinancial performance to mitigate this risk.  The Company does not expectany third-party investor to fail to meet its obligation.  In addition, theCompany has derivative counterparty risk relating to certain interest rateswaps it has with third parties.  This risk may arise from the inabilityof the third party to meet the terms of the contracts.  The Companymonitors the financial condition of these third parties on an annualbasis.  The Company does not expect any of these third parties to fail tomeet its obligations.

 

Note11

 

*FairValue Measurements*

 

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

 

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ofunobservable inputs when measuring the fair value.  There are three levels of inputs that may beused to measure fair value:

 

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

 

Level2 — Quoted prices for similar assets or liabilities in active markets; quotedprices for identical or similar assets or liabilities in markets that are notactive; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets.

 

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

 

*RecurringFair Value Measurements*

 

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

 

TheCompany has an interest rate swap to hedge against the change in fair value ofone fixed rate commercial loan.  Thisloan is recorded at fair value using published yield curve rates from anational valuation service.  Theseobservable rates and inputs are applied to a third party industry-widevaluation model, and therefore, the valuations fall into a Level 2category.  Commercial and residentialloans are evaluated for impairment and the carrying value of such loans isrecorded at fair value based on appraisals of the underlying collateralcompleted by third parties using Level 2 valuation inputs.

 

TheCompany’s interest rate swap derivatives in fair value and cash flow hedges arerecorded at fair value using published yield curve rates from a nationalvaluation service.  These observablerates and inputs are applied to a third party industry-wide valuation model,and therefore, the valuations fall into a Level 2 category.

 

TheCompany records its interest rate lock commitments and forward loan salescommitments at fair value determined as the amount that would be required tosettle each of these derivative financial instruments at the balance sheetdate.  In the normal course of business,George Mason and Cardinal First (collectively, the “mortgage companies”) enterinto contractual interest rate lock commitments to extend credit to borrowerswith fixed expiration dates.  The commitments become effective when theborrowers “lock-in” a specified interest rate within the time framesestablished by the mortgage companies.  All borrowers are evaluated forcredit worthiness prior to the extension of the commitment.  Market riskarises if interest rates move adversely between the time of the interest ratelock by the borrower and the sale date of the loan to an investor.  Tomitigate the effect of the interest rate risk inherent in providing rate lockcommitments to borrowers, the mortgage companies enter into best effortsforward sales contracts to sell loans to investors.  The forward sales contractslock in an interest rate and price for the sale of loans similar to thespecific rate lock commitments.  Both the rate lock commitments to theborrowers and the forward sales contracts to investors through to the date theloan closes are undesignated derivatives and accordingly, are marked to fairvalue through earnings.  These valuationsfall into a Level 2 category.

 

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Therewere no significant transfers into and out of Level 1, Level 2 and Level 3measurements in the fair value hierarchy during the three and six months ended June 30,2010.  Transfers between levels arerecognized at the end of each reporting period. The valuation technique used for fair value measurements usingsignificant other observable inputs (Level 2) is the market approach for eachclass of assets and liabilities.

 

Assetsand liabilities measured at fair value on a recurring basis as of June 30,2010 and December 31, 2009 are shown below:

 

**At June 30, 2010 (in thousands)**

 
| ** **                                                  | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                     | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------------------------------------------------------------------|------------|
| **Description**                                             | ** ** | **Balance** | ** ** | **Quoted Prices in  Active markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Investment securities available-for-sale:                   |       |        |       |                                                                  |       |   |   |   |   |
| U.S. treasury securities                                    |       | $           | 5,090      |                                                                  | $          | 5,090 |   | $ | — |   | $ | — |   |
| U.S. government- sponsored agencies                         |       | 32,368      |       | —                                                                |       | 32,368 |   | — |   |
| Mortgage-backed securities                                  |       | 215,798     |       | —                                                                |       | 215,798 |   | — |   |
| Municipal securities                                        |       | 65,852      |       | —                                                                |       | 65,852 |   | — |   |
| Investment securities - trading                             |       | 4,233       |       | —                                                                |       | 4,233 |   | — |   |
| Loans receivable                                            |       | 13,204      |       | —                                                                |       | 13,204 |   | — |   |
| Bank-owned life insurance                                   |       | 34,038      |       | —                                                                |       | 34,038 |   | — |   |
| Derivative liability - interest rate swaps                  |       | 1,934       |       | —                                                                |       | 1,934 |   | — |   |
| Derivative asset - forward loan sales commitments           |       | 7,040       |       | —                                                                |       | 7,040 |   | — |   |
| Derivative asset — interest rate lock commitments      |       | 145         |       | —                                                                |       | 145 |   | — |   |
| Derivative liability - forward loan sales  commitments      |       | 2,322       |       | —                                                                |       | 2,322 |   | — |   |
| Derivative liability — interest rate lock  commitments |       | 461         |       | —                                                                |       | 461 |   | — |   |
|                                                             |            |             |            |                                                                       |            |  |  |  |  |  |  |  |  |

 

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

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

 

*Nonrecurring Fair ValueMeasurements*

 

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

 

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**At June 30, 2010 (in thousands)**

 
| ** **                     | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                      | ** ** |
|--------------------------------|------------|-------------|------------|------------------------------------------------------------------------|------------|
| **Description**                | ** ** | **Balance** | ** ** | **Quoted Prices  in Active  markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Wilson/Bennett — goodwill |       | $           | 2,431      |                                                                   | $          | — |   | $ | — |   | $ | 2,431 |   |
| Corporate bonds                |       | 3,465       |       | —                                                                 |       | — |   | 3,465 |   |
| Nonaccrual loans               |       | 4,560       |       | —                                                                 |       |   | 4,560 |   | — |   |
| Other real estate owned        |       | 2,915       |       | —                                                                 |       | 2,915 |   | — |   |
|                                |            |             |            |                                                                        |            |  |  |  |  |  |  |  |  |

 

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

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

 

SeeNote 9 for additional information related to the valuation of theWilson/Bennett goodwill fair value. Note 5 provides information on thevaluation of the Company’s corporate bonds.

 

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TheCompany’s nonaccrual loans are measured at the present value of its expectedfuture cash flows discounted at the loan’s coupon rate, or at the loan’sobservable market price or fair value of the collateral if the loan iscollateral dependent.  The Company measures the collateral value onimpaired loans by obtaining an updated appraisal of the underlying collateraland may discount further the appraised value, if necessary, to an amount equalto the expected cash proceeds in the event the loan is foreclosed upon and thecollateral is sold.  In addition, an estimate of costs to sell thecollateral is assumed.  The Company values other real estate owned byobtaining an updated appraisal of the property foreclosed upon, and discountsfurther the appraised value to an amount equal to the expected cash proceedsupon the sale of the property.  Both nonaccrual loans and other real estateowned are valued using adjusted market quotes and therefore fall into the Level2 category.

 

Although management uses itsbest judgment in estimating the fair value of financial instruments, there areinherent limitations in any estimation technique.  Because of the widerange of valuation techniques and the numerous estimates and assumptions whichmust be made, it may be difficult to make reasonable comparisons between theCompany’s fair value information and that of other banking institutions. It is important that the many uncertainties be considered when using theestimated fair value disclosures and that, because of these uncertainties, theaggregate fair value amount should not be construed as representative of theunderlying value of the Company

 

**Fair Value of Financial Instruments**

 

The assumptions used and the estimates disclosedrepresent management’s best judgment of appropriate valuation methods forestimating the fair value of financial instruments.  These estimates are based on pertinentinformation available to management at the valuation date.  In certain cases, fair values are not subjectto precise quantification or verification and may change as economic and marketfactors and management’s evaluation of those factors change.

 

The following summarizes the significantmethodologies and assumptions used in estimating the fair values presented inthe following table, and not disclosed elsewhere in this footnote.

 

*Cashand Cash Equivalents*

 

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

 

*InvestmentSecurities Held-to-Maturity and Other Investments*

 

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

 

*LoansHeld for Sale*

 

Loansheld for sale are carried at the lower of cost or estimated fair value.  The estimated fair value is based upon therelated purchase price commitments from secondary market investors.

 

*LoansReceivable, Net*

 

Inorder to determine the fair market value for loans receivable, the loanportfolio was segmented based on loan type, credit quality and maturities.  For certain variable rate loans with nosignificant credit concerns and frequent repricings, estimated fair values arebased on current carrying amounts.  Thefair values of other loans are estimated using discounted cash flow analyses,at interest rates currently being offered for loans with similar terms toborrowers of 

 

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similarcredit quality.  This method ofestimating fair value does not incorporate the exit-price concept of fair valuewhich is appropriate for this disclosure.

 

*Deposits*

 

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

 

*OtherBorrowed Funds*

 

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

 

*AccruedInterest Receivable*

 

Thecarrying amount of accrued interest receivable approximates its fair value.

 

Thefollowing summarizes the carrying amount of these financial assets andliabilities that the Company has not recorded at fair value on a recurringbasis at June 30, 2010 and December 31, 2009:

* *
| ** **                                                    | ** ** | **June 30, 2010** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **Carrying**           | ** ** | **Estimated** | ** ** |
| **(In thousands)**                                            | ** ** | **Amount**             | ** ** | **Fair Value** | ** ** |
| Financial  assets:                                            |       |                   |       |   |   |
| Cash  and cash equivalents                                    |       | $                      | 24,731     |   | $ | 24,731 |   |
| Investment  securities held-to-maturity and other investments |       | 47,304                 |       | 43,855 |   |
| Loans  held for sale                                          |       | 269,467                |       | 269,467 |   |
| Loans  receivable, net                                        |       | 1,311,882              |       | 1,323,819 |   |
| Accrued  interest receivable                                  |       | 6,664                  |       | 6,664 |   |
|                                                          |       |                   |       |   |   |
| Financial  liabilities:                                       |       |                   |       |   |   |
| Demand  deposits                                              |       | $                      | 195,428    |   | $ | 195,428 |   |
| Interest  checking                                            |       | 133,437                |       | 133,437 |   |
| Money  market and statement savings                           |       | 363,026                |       | 363,026 |   |
| Certificates  of deposit                                      |       | 657,952                |       | 668,013 |   |
| Other  borrowed funds                                         |       | 473,505                |       | 499,040 |   |
| Accrued  interest payable                                     |       | 1,456                  |       | 1,456 |   |

 

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

 

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

 

Thefollowing presents management’s discussion and analysis of our consolidatedfinancial condition at June 30, 2010 and December 31, 2009 and theunaudited results of our operations for the three and six months ended June 30,2010 and 2009. This discussion should be read in conjunction with our unauditedconsolidated financial statements and the notes thereto appearing elsewhere inthis report and the audited consolidated financial statements and the notes toconsolidated financial statements included in our Annual Report onForm 10-K for the year ended December 31, 2009.

 

**CautionAbout Forward-Looking Statements**

 

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

 

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

 

·                  the risks of changes in interest rates onlevels, composition and costs of deposits, loan demand, and the values andliquidity of loan collateral, securities, and interest sensitive assets andliabilities;

·                  changes in assumptions underlying theestablishment of reserves for possible loan losses, reserves for repurchases ofmortgage loans sold and other estimates;

·                  changes in market conditions, specificallydeclines in the residential and commercial real estate market, volatility anddisruption of the capital and credit markets, soundness of other financialinstitutions we do business with;

·                  risks inherent in making loans such asrepayment risks and fluctuating collateral values;

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

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

·                  changes in operations of George MasonMortgage, LLC as a result of the activity in the residential real estate marketand any associated impact on the fair value of goodwill in the future;

·                  exposure to repurchase loans sold toinvestors for which borrowers failed to provide full and accurate informationon or related to their loan application or for which appraisals have not beenacceptable or when the loan was not underwritten in accordance with the loanprogram specified by the loan investor;

 

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·                  the risks of mergers, acquisitions anddivestitures, including, without limitation, the related time and costs ofimplementing such transactions, integrating operations as part of thesetransactions and possible failures to achieve expected gains, revenue growthand/or expense savings from such transactions;

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

·                  governmental monetary and fiscal policies;

·                  legislative and regulatory changes, includingchanges in banking, securities, and tax laws and regulations and theirapplication by our regulators, and changes in the scope and cost of FDICinsurance and other coverages;

·                  changes in accounting policies, rules andpractices;

·                  maintaining cost controls and asset qualityas we open or acquire new branches;

·                  maintaining capital levels adequate tosupport our growth;

·                  reliance on our management team, includingour ability to attract and retain key personnel;

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

·                  risks and uncertainties related to futuretrust operations;

·                  demand, development and acceptance of newproducts and services;

·                  problems with technology utilized by us;

·                  changing trends in customer profiles andbehavior; and

·                  other factors described from time to time inour reports filed with the SEC.

 

Becauseof these uncertainties, our actual future results may be materially differentfrom the results indicated by these forward-looking statements.  In addition, our past results of operationsdo not necessarily indicate our future results.

 

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

 

**Overview**

 

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

 

Weown Cardinal Bank (the “Bank”), a Virginia state-chartered community bank with26 banking offices located in Northern Virginia and the greater Washington D.C.metropolitan area.  The Bank offers awide range of traditional bank loan and deposit products and services to bothour commercial and retail customers.  Ourcommercial relationship managers focus on attracting small and medium sizedbusinesses as well as government contractors, commercial real estate developersand builders and professionals, such as physicians, accountants and attorneys.

 

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

 

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

 

Netinterest income is our primary source of revenue. We define revenue as netinterest income plus noninterest income. As discussed further in the interestrate sensitivity section, we manage our balance sheet and interest rate riskexposure to maximize, and concurrently stabilize, net interest income. We dothis by monitoring our liquidity position and the spread between the interestrates earned on interest-earning assets and the interest rates paid oninterest-bearing liabilities. We attempt to minimize our exposure to interestrate risk, but are unable to eliminate it entirely.  In addition tomanagement of interest rate risk, we analyze our loan portfolio for exposure tocredit risk. Loan defaults and foreclosures are inherent risks in the bankingindustry, and we attempt to limit our exposure to these risks by carefullyunderwriting and then monitoring our extensions of credit. In addition to netinterest income, noninterest income is an important source of revenue for usand includes, among other things, service charges on deposits and loans,investment fee income, which includes trust revenues, gains and losses on salesof investment securities available-for-sale, gains on sales of mortgage loans,and management fee income.

 

**CriticalAccounting Policies**

 

*General*

 

U. S. generally accepted accounting principles arecomplex and require management to apply significant judgment to variousaccounting, reporting, and disclosure matters. Management must use assumptions, judgments and estimates when applyingthese principles where precise 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 arethose relating to judgments, assumptions and estimates regarding thedetermination of the allowance for loan losses, the fair value measurements ofcertain assets and liabilities, accounting for economic hedging activities,accounting for impairment testing of goodwill, accounting for the impairment ofamortizing intangible assets and other long-lived assets, and the valuation ofdeferred tax assets.

 

*Allowance for Loan Losses*

 

Wemaintain the allowance for loan losses at a level that represents management’sbest estimate of known and inherent losses in our loan portfolio.  Both the amount of the provision expense andthe level of the allowance for loan losses are impacted by many factors,including general and industry-specific economic conditions, actual andexpected credit losses, historical trends and specific conditions of individualborrowers.  Unusual and infrequentlyoccurring events, such as weather-related disasters, may impact our assessmentof possible credit losses.  As a part ofour analysis, we use comparative peer group data and qualitative factors suchas levels of and trends in delinquencies and nonaccrual loans, national andlocal economic trends and conditions and concentrations of loans exhibitingsimilar risk profiles to support our estimates.

 

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

 

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

 

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

 

*FairValue Measurements*

 

Wedetermine the fair values of financial instruments based on the fair valuehierarchy, which requires an entity to maximize the use of observable inputsand minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputsthat may be used to measure fair value. Our investment securities available-for-sale are recorded at fair valueusing reliable and unbiased evaluations by an industry-wide valuationservice.  This service uses evaluatedpricing models that vary based on asset class and include available trade, bid,and other market information.  Generally,the methodology includes broker quotes, proprietary models, vast descriptiveterms and conditions databases, as well as extensive quality controlprograms.  For certain of ourheld-to-maturity investment securities where there is minimal observabletrading activity, we use a discounted cash flow approach to estimate fair valuebased on internal calculations and compare our results to information providedby external pricing sources.  Ourinterest rate swap derivatives are recorded at fair value using observableinputs from a national valuation service. These inputs are applied to a third party industry-wide valuation model.

 

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

 

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*Accountingfor Economic Hedging Activities*

 

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

 

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

 

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

 

Tomitigate the effect of the interest rate risk inherent in providing rate lockcommitments, we economically hedge our commitments by entering into bestefforts delivery forward loan sales contracts. During the rate lock commitmentperiod, these forward loan sales contracts are marked to market throughearnings and are not designated as accounting hedges. The fair values of loancommitments and the fair values of forward loan sales contracts generally movein opposite directions, and the net impact of changes in 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.   The forward salescontract is then designated as a hedge against the variability in cash to bereceived from the loan sale.  Loans heldfor sale are accounted for at the lower of cost or fair value*.*

 

*Accounting for Impairment Testing of Goodwill*

 

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

 

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

 

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

 

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

 

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

 

*Valuation of Deferred TaxAssets*

 

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

 

**New Financial Accounting Standards**

 

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

 

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

 

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quantitative assessment to aqualitative assessment designed to identify a controlling financial interest,and increases the frequency of required reassessments to determine whether acompany is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, thecharacteristics that identify a VIE. This statement requires additional year-end and interim disclosures forpublic companies.  The adoption of thisstandard did not have a material impact on our consolidated financial conditionor results of operations.

 

In January 2010, weadopted ASU 2010-06, *Fair Value Measurementsand Disclosures (Topic 820): Improving Disclosures about Fair ValueMeasurements,*which requires disclosures about recurring ornonrecurring fair value measurements including significant transfers into andout of Level 1 and Level 2 fair value measurements and information aboutpurchases, sales, issuances and settlements on a gross basis in thereconciliation of Level 3 fair value measurements.  This standard also clarifies existing fairvalue measurement disclosure guidance about the level of disaggregation,inputs, and valuation techniques.

 

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

 

In July 2010, the FASBissued ASU No. 2010-20, *Receivables (Topic 310):Disclosures about the Credit Quality of Financing Receivables and the Allowancefor Credit Losses. *Thisguidance significantly expands required disclosures for the allowance for loanlosses and the credit quality of financing receivables.  The disclosures will provide informationabout the nature of credit risks inherent in entities’ financing receivables,how credit risk is analyzed and assessed when determining the allowance forloan losses, and the reasons for the change in the allowance for loanlosses.  Public entities will need tobegin providing disclosures for all periods ending on or after December 15,2010, and we will provide the required disclosures in our financial statementsfor the year ending December 31, 2010.

 

**2010 Economic Environment**

 

Our credit quality remains strongdespite the challenging economic environment. At June 30, 2010, we have non-accrual loans totaling $4.6 millionand no loans contractually past due 90 days or more as to principal orinterest.  Annualized net charge-offswere 0.42% of our average loans receivable for the six months ended June 30,2010. Loan originations from our mortgage banking segment have decreasedcompared to the first six months of 2009, even though the first-time homebuyers credit was extended to April 30, 2010.  However, net income from our mortgage bankingsegment increased to $1.9 million for the three months ended June 30,2010, respectively, compared to net income of $1.4 million for the same periodof 2009.  The increase in net income is aresult of expense containment we implemented during 2009 and into 2010.

 

Financialmarket disturbances over the past two years continue to impact our results.Market illiquidity continues to impact certain portions of our investmentsecurities portfolio, specifically the ratings of certain corporate bonds inour portfolio. We hold investments of $8.0 million in par value of pooled trustpreferred securities, 

 

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whichare significantly below book value as of June 30, 2010 due to the lack ofliquidity in the market and investor apprehension for investing in these typesof investments.

 

We expect very challenging economicand operating conditions to continue for the foreseeable future. Theseconditions could continue to affect the markets in which we do business andcould adversely impact our results for the remainder of 2010. The degree of theimpact is dependent upon the duration and severity of the aforementionedconditions.

 

While our loan growth has continuedto be strong, continued negative economic conditions could adversely affect ourloan portfolio, including causing increases in delinquencies and default rates,which we expect could impact our charge-offs and provision for loanlosses.  Deterioration in real estatevalues and household incomes could result in higher credit losses for us.  Also, in the ordinary course of business, wemay be subject to a concentration of credit risk to a particular industry,counterparty, borrower or issuer.  Adeterioration in the financial condition or prospects of a particular industryor a failure or downgrade of, or default by, any particular entity or group ofentities could negatively impact our businesses, perhaps materially. Thesystems by which we set limits and monitor the level of our credit exposure toindividual entities and industries also may not function as we have anticipated.

 

Liquidity is essential to ourbusiness.  The primary sources of fundingfor our Bank include customer deposits and wholesale funding.  Our liquidity could be impaired by an inabilityto access the capital markets or by unforeseen outflows of cash, includingdeposits.  This situation may arise dueto circumstances that we may be unable to control, such as general marketdisruption, negative views about the financial services industry generally, oran operational problem that affects a third party or us.  Our ability to borrow from other financialinstitutions on favorable terms or at all could be adversely affected byfurther disruptions in the capital markets or other events.  While we believe we have a healthy liquidityposition, any of the above factors could materially impact our liquidityposition in the future.

 

The U.S. government continues to enactlegislation and develop various programs and initiatives designed to stabilizethe housing markets and stimulate the economy. In July 2010, the Dodd-Frank WallStreet Reform and Consumer Protection Act (the “Act”) was signed into law. Weare unsure of the impact this Act will have on our business, operations or ourfinancial condition.

 

**Statements of Income**

 

*General*

 

Forthe three months ended June 30, 2010 and 2009, we reported net income of$4.7 million and $2.1 million, respectively. Net interest income after the provision for loan losses increased $4.0million to $14.4 million for the three months ended June 30, 2010 comparedto $10.5 million for the three months ended June 30, 2009.  Despite an increase in our provision for loanlosses, the increase in net interest income after provision for loan losses wasdue to an increase in our net interest income of $5.2 million to $17.1 million forthe three months ended 

 

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June 30,2010.  Provision for loan losses for thethree months ended June 30, 2010 was $2.7 million, an increase of $1.2million, compared to $1.5 million for the same period of 2009.  Noninterest income for the three months endedJune 30, 2010 and 2009 was $6.8 million and $6.3 million, respectively, anincrease of $596,000.  Realized andunrealized gains on mortgage banking activities increased $338,000 for thethree months ended June 30, 2010 as compared to the three months ended June 30,2009.  In addition, income from managedcompanies increased $461,000 to $844,000 for the three months ended June 30,2010 compared to $383,000 for the same three month period of 2009.  For the three months ended June 30,2010, noninterest expense increased to $14.2 million, compared to $13.7 millionfor the same period of 2009.  Theincrease in noninterest expense is attributable to increases in salary andbenefits expense as we have added personnel in our wealth management andmortgage banking operations.

 

Forthe three months ended June 30, 2010, basic and diluted income per commonshare were each $0.16.  Basic and dilutedearnings per common share for the three months ended June 30, 2009 wereeach $0.08.  Weighted average fullydiluted shares outstanding for the three months ended June 30, 2010 and2009 were 29,641,022 and 26,462,234, respectively.

 

Returnon average assets for the three months ended June 30, 2010 and 2009 was0.96% and 0.48%, respectively. Return on average equity for the three monthsended June 30, 2010 and 2009 was 8.84% and 4.82%, respectively.

 

Netincome for the six months ended June 30, 2010 and 2009 was $8.5 millionand $4.3 million, respectively, an increase of $4.2 million, or 97%.  Net interest income after provision for loanlosses for the six months ended June 30, 2010 increased $7.4 million to$27.3 million, compared to $19.9 million for the same six month period of2009.  The increase in net interestincome after provision for loan losses is directly related to our increase innet interest income for the periods presented, despite an increase in provisionfor loan losses.  Net interest incomeincreased to $32.4 million for the six months ended June 30, 2010,compared to $22.6 million for the six months ended June 30, 2009.  Provision for loan losses for the six monthsended June 30, 2010 and 2009 were $5.1 million and $2.7 million, respectively,an increase of $2.4 million.  Noninterestincome increased $553,000 to $12.6 million for the six months ended June 30,2010, compared to $12.0 million for the same period of 2009.  The increase in noninterest income isprimarily related to an increase in fee income from our managed companies dueto increased loan origination activity from this business line.  Noninterest expense was $27.2 million for thesix months ended June 30, 2010, an increase of $1.4 million compared to$25.7 million for the six months ended June 30, 2009.

 

Forthe six months ended June 30, 2010, basic and diluted income per commonshare were each $0.29.  Basic and dilutedearnings per common share for the six months ended June 30, 2009 were each$0.17.  Weighted average fully dilutedshares outstanding for the six months ended June 30, 2010 and 2009 were29,565,862 and 25,787,621, respectively.

 

Returnon average assets for the six months ended June 30, 2010 and 2009 was0.88% and 0.49%, respectively. Return on average equity for the six monthsended June 30, 2010 and 2009 was 8.10% and 5.08%, respectively.

 

*General—Business Segments*

 

We operate in three businesssegments: commercial banking, mortgage banking, and wealth management and trustservices.  Net income attributable to thecommercial banking segment for the three months ended June 30, 2010 was$3.6 million compared to net income of 

 

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$1.2 million for the threemonths ended June 30, 2009.  Netinterest income increased $5.3 million to $16.7 million for the three monthsended June 30, 2010, compared to $11.4 million for the same period of2009.  Provision for loan lossesincreased $1.3 million to $2.7 million for the three months ended June 30,2010 compared to $1.4 million for the same period of 2009.  The increase in provision expense is relatedto current economic and market conditions and an increase in loan charge-offsduring 2010.  Noninterest incomeincreased to $1.1 million for the three months ended June 30, 2010compared to $820,000 for the three months ended June 30, 2009.  During the second quarter of 2010, gains of$269,000 were recorded on sales of investment securities available-for-sale,compared to none for the three months ended June 30, 2009.  Noninterest expense was $9.6 million for thethree months ended June 30, 2010, compared to $9.2 million for the sameperiod of 2009.  The increase innoninterest expense for the second quarter of 2010 as compared to the sameperiod of 2009 is primarily due to expenses related to our core systemconversion, branch expansion and additions to our staffing levels at the Bank.

 

For the six months ended June 30,2010, net income attributable to the commercial banking segment was $7.3million, and increase of $4.4 million, from $2.9 million for the same six monthperiod of 2009.  The increase in netincome is attributable to the increase in our net interest income for theperiods presented.  Net interest incomeincreased $10.2 million to $31.7 million for the six month ended June 30,2010, compared to $21.5 million for the six months ended June 30,2009.  Provision for loan lossesincreased $2.5 million to $5.1 million for the six months ended June 30,2010, again as a result of the current economic and market conditions and theseimpacts on our borrowers.  Noninterestincome for the six months ended June 30, 2010 and 2009 was $2.1 millionand $2.2 million, respectively. Noninterest expense increased to $18.0 million from $17.2 million forthe six months ended June 30, 2010 compared to the same period of 2009.

 

Themortgage banking segment reported net income of $1.9 million for the threemonths ended June 30, 2010 compared to a net income of $1.4 million forthe three months ended June 30, 2009. The increase in net income for the three months ended June 30, 2010was primarily attributable to certain cost containment initiatives implementedduring 2009.  For the six months ended June 30,2010, net income was $2.5 million, a decrease of $262,000 as compared to $2.7million for the six months ended June 30, 2009.

 

Thewealth management and trust services segment, which includes CWS,Wilson/Bennett and the trust division of the Bank, recorded a net loss of$220,000 for the three months ended June 30, 2010, compared to net incomeof $66,000 for the three months ended June 30, 2009.  For the six months ended June 30, 2010,this business segment recorded a net loss of $91,000 compared to net income of$76,000 for the same period of 2009.  Thedecrease in net income during 2010 is primarily attributable to our recordingan impairment charge of $451,000 as a result of our annual impairmentassessment related to the Wilson/Bennett goodwill.

 

*NetInterest Income*

 

Netinterest income is our primary source of revenue, representing the differencebetween interest and fees earned on interest-earning assets and the interestpaid on deposits and other interest-bearing liabilities. The level of net interestincome is impacted primarily by variations in the volume and mix of theseassets and liabilities, as well as changes in interest rates.  Net interest income for the three monthsended June 30, 2010 and 2009 was $17.1 million and $12.0 million, respectively,a period-to-period increase of $5.2 million, or 43%. For the six months ended June 30,2010, our net interest income was $32.4 million, compared to $22.6 million forthe same period 

 

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of2009, an increase of $9.8 million, or 43%. The net yields on our assets increased as a result of our moderatelyincreasing interest-earning assets while lowering the interest rates on ourdeposit liabilities.

 

Specifically,interest income on loans receivable, increased $2.1 million for the threemonths ended June 30, 2010 compared to the same three month period of2009.  For the six months ended June 30,2010, interest income on loans receivable increased $4.4 million as compared tothe six months ended June 30, 2009. The increase in interest income on loans receivable is a result of anincrease in the volume of our loans receivable portfolio.  Interest income on loans held for saledecreased $239,000 to $2.0 million for the three months ended June 30,2010, a direct result of a period-to-period decrease in loan originations inour held for sale portfolio.  For the sixmonths ended June 30, 2010, interest income from loans held for saledecreased $759,000 to $3.3 million compared to $4.0 million for the six monthsended June 30, 2009.

 

Interestincome on investment securities, increased $987,000 for the three months ended June 30,2010 as compared to the three months ended June 30, 2009.  For the six months ended June 30, 2010,interest income on investment securities increased $1.6 million.  The increase in interest income on investmentsecurities is directly related to an increase of purchases of investmentsecurities over the past year.

 

Totalinterest expense has decreased $2.4 million for the three months ended June 30,2010 as compared to the same period of 2009. For the six months ended June 30, 2010, total interest expensedecreased $4.6 million as compared to the same six month period of 2009.  The decrease in total interest expense ismostly related to the decreases we have taken in the interest rates we pay onour interest checking and savings deposit accounts.  In addition, our certificates of deposit arerepricing at lower interest rates.

 

Ournet interest margin, on a tax-equivalent basis, which equals net interestincome divided by average interest earning assets, was 3.74% and 2.84% for thethree months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010and 2009, net interest margin was 3.56% and 2.73%, respectively.  The increases in our net interest margin areagain attributable to our balance sheet management and strategically decreasingthe interest rates we pay on our deposit liabilities.  The following tables present an analysis ofaverage earning assets and interest-bearing liabilities with related componentsof interest income and interest expense on a tax equivalent basis.

 

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** **

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

Three Months Ended June 30,2010, 2009 and 2008

(In thousands)

 
| ** **                                               | ** ** | **2010**    | ** ** | **2009**     | ** ** | **2008**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | **Yield/**  | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                 |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $           | 153,902    |         | $          | 1,837       |       | 4.77 | % | $ | 158,159 |   | $ | 1,849 |   | 4.67 | % | $ | 126,374 |   | $ | 1,882 |   | 5.96 | % |
| Real estate - commercial                                 |       | 610,283     |       | 9,467        |       | 6.21        | %          | 538,079 |   | 8,440 |   | 6.27 | % | 428,435 |   | 7,018 |   | 6.55 | % |
| Real estate -  construction                              |       | 196,685     |       | 2,740        |       | 5.57        | %          | 174,903 |   | 2,078 |   | 4.75 | % | 191,377 |   | 2,799 |   | 5.85 | % |
| Real estate -  residential                               |       | 225,010     |       | 2,961        |       | 5.26        | %          | 197,985 |   | 2,670 |   | 5.39 | % | 213,725 |   | 2,984 |   | 5.58 | % |
| Home equity lines                                        |       | 118,437     |       | 1,108        |       | 3.75        | %          | 109,430 |   | 994 |   | 3.64 | % | 90,352 |   | 1,049 |   | 4.66 | % |
| Consumer                                                 |       | 2,604       |       | 36           |       | 5.55        | %          | 2,426 |   | 39 |   | 6.61 | % | 2,675 |   | 39 |   | 5.85 | % |
| Total loans                                              |       | 1,306,921   |       | 18,149       |       | 5.55        | %          | 1,180,982 |   | 16,070 |   | 5.44 | % | 1,052,938 |   | 15,771 |   | 5.99 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for sale                                      |       | 159,316     |       | 1,957        |       | 4.91        | %          | 202,499 |   | 2,196 |   | 4.34 | % | 141,583 |   | 1,955 |   | 5.52 | % |
| Investment securities  available-for-sale                |       | 329,358     |       | 3,740        |       | 4.54        | %          | 198,129 |   | 2,533 |   | 5.11 | % | 269,136 |   | 3,572 |   | 5.31 | % |
| Investment securities  held-to-maturity                  |       | 31,814      |       | 266          |       | 3.34        | %          | 44,753 |   | 419 |   | 3.75 | % | 59,631 |   | 628 |   | 4.21 | % |
| Other investments                                        |       | 15,728      |       | 10           |       | 0.26        | %          | 15,728 |   | — |   | 0.00 | % | 15,066 |   | 215 |   | 5.72 | % |
| Federal funds sold                                       |       | 8,372       |       | 4            |       | 0.24        | %          | 56,997 |   | 31 |   | 0.22 | % | 31,348 |   | 178 |   | 2.29 | % |
| Total interest-earning  assets and interest income (2)   |       | 1,851,509   |       | 24,126       |       | 5.21        | %          | 1,699,088 |   | 21,249 |   | 5.00 | % | 1,569,702 |   | 22,319 |   | 5.69 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest earning  assets:                             |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | $           | 11,236     |         |       |        |       |   | $ | 1,762 |   |   |   |   |   | $ | 6,710 |   |   |   |   |   |
| Premises and equipment,  net                             |       | 15,901      |       |         |       |        |       | 15,907 |   |   |   |   |   | 17,743 |   |   |   |   |   |
| Goodwill and other  intangibles, net                     |       | 13,847      |       |         |       |        |       | 14,093 |   |   |   |   |   | 17,147 |   |   |   |   |   |
| Accrued interest and  other assets                       |       | 81,595      |       |         |       |        |       | 61,305 |   |   |   |   |   | 53,573 |   |   |   |   |   |
| Allowance for loan  losses                               |       | (19,554     | )          |         |       |        |       | (15,733 | ) |   |   |   |   | (12,005 | ) |   |   |   |   |
| Total assets                                             |       | $           | 1,954,534  |         |       |        |       |   | $ | 1,776,422 |   |   |   |   |   | $ | 1,652,870 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  liabilities:                         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:                            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 136,023     |       | 108          |       | 0.32        | %          | 123,000 |   | 302 |   | 0.98 | % | 124,892 |   | 661 |   | 2.12 | % |
| Money markets                                            |       | 98,776      |       | 138          |       | 0.56        | %          | 49,553 |   | 137 |   | 1.11 | % | 39,825 |   | 242 |   | 2.44 | % |
| Statement savings                                        |       | 277,607     |       | 303          |       | 0.44        | %          | 282,285 |   | 1,103 |   | 1.57 | % | 378,143 |   | 2,632 |   | 2.79 | % |
| Certificates of deposit                                  |       | 650,729     |       | 3,253        |       | 2.00        | %          | 618,865 |   | 4,505 |   | 2.92 | % | 455,095 |   | 4,324 |   | 3.81 | % |
| Total interest - bearing  deposits                       |       | 1,163,135   |       | 3,802        |       | 1.31        | %          | 1,073,703 |   | 6,047 |   | 2.26 | % | 997,955 |   | 7,859 |   | 3.16 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                                     |       | 369,896     |       | 3,013        |       | 3.27        | %          | 353,883 |   | 3,120 |   | 3.54 | % | 347,775 |   | 3,273 |   | 3.77 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities and interest expense |       | 1,533,031   |       | 6,815        |       | 1.78        | %          | 1,427,586 |   | 9,167 |   | 2.58 | % | 1,345,730 |   | 11,132 |   | 3.32 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 187,279     |       |         |       |        |       | 148,407 |   |   |   |   |   | 124,757 |   |   |   |   |   |
| Other liabilities                                        |       | 21,165      |       |         |       |        |       | 22,515 |   |   |   |   |   | 18,998 |   |   |   |   |   |
| Common shareholders’  equity                        |       | 213,059     |       |         |       |        |       | 177,914 |   |   |   |   |   | 163,385 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity         |       | $           | 1,954,534  |         |       |        |       |   | $ | 1,776,422 |   |   |   |   |   | $ | 1,652,870 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income and  net interest margin (2)         |       |        |       | $            | 17,311     |        | 3.74       | % |   |   | $ | 12,082 |   | 2.84 | % |   |   | $ | 11,187 |   | 2.85 | % |

 

----

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

(2) Interest incomefor loans receivable and investment securities available-for-sale is reportedon a fully taxable-equivalent basis at a rate of 32%.

 

45

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** **

**Rate andVolume Analysis**

Three Months Ended June 30,2010, 2009 and 2008

(In thousands)

 
| ** **                               | ** ** | **2010  Compared to 2009** | ** ** | **2009  Compared to 2008** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **Change  Due to**         | ** ** | ** **                 | ** ** | **Change  Due to** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Average**                | ** ** | **Average**                | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                               | ** ** | **Volume  (3)**            | ** ** | **Rate**                   | ** ** | **(Decrease)** | ** ** | **Volume  (3)** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest  income:**                    |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans (1):                               |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Commercial and  industrial               |       | $                          | (50        | )                          | $          | 38 |   | $ | (12 | ) | $ | 477 |   | $ | (510 | ) | $ | (33 | ) |
| Real estate -  commercial                |       | 1,133                      |       | (106                       | )          | 1,027 |   | 1,796 |   | (374 | ) | 1,422 |   |
| Real estate -  construction              |       | 259                        |       | 403                        |       | 662 |   | (241 | ) | (480 | ) | (721 | ) |
| Real estate -  residential               |       | 364                        |       | (73                        | )          | 291 |   | (220 | ) | (94 | ) | (314 | ) |
| Home equity lines                        |       | 82                         |       | 32                         |       | 114 |   | 223 |   | (278 | ) | (55 | ) |
| Consumer                                 |       | 3                          |       | (6                         | )          | (3 | ) | (5 | ) | 5 |   | (0 | ) |
| Total loans                              |       | 1,791                      |       | 288                        |       | 2,079 |   | 2,030 |   | (1,731 | ) | 299 |   |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans held for sale                      |       | (468                       | )          | 229                        |       | (239 | ) | 841 |   | (600 | ) | 241 |   |
| Investment securities available-for-sale |       | 1,678                      |       | (471                       | )          | 1,207 |   | (942 | ) | (97 | ) | (1,039 | ) |
| Investment securities  held-to-maturity  |       | (121                       | )          | (32                        | )          | (153 | ) | (157 | ) | (52 | ) | (209 | ) |
| Other investments                        |       | 0                          |       | 10                         |       | 10 |   | 10 |   | (225 | ) | (215 | ) |
| Federal funds sold                       |       | (27                        | )          | 0                          |       | (27 | ) | 148 |   | (295 | ) | (147 | ) |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total interest income  (2)               |       | 2,853                      |       | 24                         |       | 2,877 |   | 1,930 |   | (3,000 | ) | (1,070 | ) |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                   |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:            |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | 32                         |       | (226                       | )          | (194 | ) | (10 | ) | (349 | ) | (359 | ) |
| Money markets                            |       | 136                        |       | (135                       | )          | 1 |   | 59 |   | (164 | ) | (105 | ) |
| Statement savings                        |       | (18                        | )          | (782                       | )          | (800 | ) | (667 | ) | (862 | ) | (1,529 | ) |
| Certificates of deposit                  |       | 232                        |       | (1,484                     | )          | (1,252 | ) | 1,556 |   | (1,375 | ) | 181 |   |
| Total interest -  bearing deposits       |       | 382                        |       | (2,627                     | )          | (2,245 | ) | 938 |   | (2,750 | ) | (1,812 | ) |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 141                        |       | (248                       | )          | (107 | ) | 57 |   | (210 | ) | (153 | ) |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total interest expense                   |       | 523                        |       | (2,875                     | )          | (2,352 | ) | 995 |   | (2,960 | ) | (1,965 | ) |
|                                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                          | 2,330      |                       | $          | 2,899 |   | $ | 5,229 |   | $ | 935 |   | $ | (40 | ) | $ | 895 |   |

 

----

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

(2) Interestincome for loans receivable and investment securities available-for-sale isreported on a fully taxable-equivalent basis at a rate of 32%.

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

 

46

----

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

Six Months Ended June 30,2010, 2009 and 2008

(In thousands)

 
| ** **                                               | ** ** | **2010**    | ** ** | **2009**     | ** ** | **2008**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | **Yield/**  | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                 |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $           | 156,924    |         | $          | 3,677       |       | 4.69 | % | $ | 164,302 |   | $ | 3,941 |   | 4.80 | % | $ | 131,455 |   | $ | 4,237 |   | 6.45 | % |
| Real estate - commercial                                 |       | 604,878     |       | 18,615       |       | 6.15        | %          | 514,029 |   | 16,091 |   | 6.26 | % | 422,046 |   | 13,857 |   | 6.57 | % |
| Real estate -  construction                              |       | 193,632     |       | 5,355        |       | 5.53        | %          | 177,292 |   | 3,844 |   | 4.34 | % | 191,130 |   | 6,021 |   | 6.30 | % |
| Real estate -  residential                               |       | 225,526     |       | 5,884        |       | 5.22        | %          | 202,455 |   | 5,498 |   | 5.43 | % | 212,845 |   | 5,986 |   | 5.62 | % |
| Home equity lines                                        |       | 118,505     |       | 2,168        |       | 3.69        | %          | 107,659 |   | 1,970 |   | 3.69 | % | 87,761 |   | 2,208 |   | 5.06 | % |
| Consumer                                                 |       | 2,646       |       | 76           |       | 5.79        | %          | 2,469 |   | 75 |   | 6.21 | % | 2,717 |   | 89 |   | 6.59 | % |
| Total loans                                              |       | 1,302,111   |       | 35,775       |       | 5.49        | %          | 1,168,206 |   | 31,419 |   | 5.38 | % | 1,047,954 |   | 32,398 |   | 6.18 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for sale                                      |       | 129,766     |       | 3,262        |       | 5.03        | %          | 187,241 |   | 4,021 |   | 4.29 | % | 140,459 |   | 4,084 |   | 5.81 | % |
| Investment securities  available-for-sale                |       | 330,559     |       | 7,490        |       | 4.53        | %          | 215,140 |   | 5,521 |   | 5.13 | % | 267,192 |   | 6,978 |   | 5.22 | % |
| Investment securities  held-to-maturity                  |       | 32,892      |       | 553          |       | 3.36        | %          | 46,894 |   | 904 |   | 3.86 | % | 65,065 |   | 1,377 |   | 4.23 | % |
| Other investments                                        |       | 15,728      |       | 21           |       | 0.26        | %          | 15,681 |   | (19 | ) | -0.25 | % | 14,840 |   | 433 |   | 5.84 | % |
| Federal funds sold                                       |       | 23,572      |       | 28           |       | 0.24        | %          | 40,173 |   | 44 |   | 0.22 | % | 25,022 |   | 316 |   | 2.54 | % |
| Total interest-earning  assets and interest income (2)   |       | 1,834,628   |       | 47,129       |       | 5.14        | %          | 1,673,335 |   | 41,890 |   | 5.01 | % | 1,560,532 |   | 45,586 |   | 5.84 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest earning  assets:                             |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                  |       | $           | 12,908     |         |       |        |       |   | $ | 931 |   |   |   |   |   | $ | 7,671 |   |   |   |   |   |
| Premises and equipment,  net                             |       | 15,838      |       |         |       |        |       | 16,106 |   |   |   |   |   | 18,011 |   |   |   |   |   |
| Goodwill and other  intangibles, net                     |       | 13,880      |       |         |       |        |       | 14,123 |   |   |   |   |   | 17,180 |   |   |   |   |   |
| Accrued interest and  other assets                       |       | 79,734      |       |         |       |        |       | 59,293 |   |   |   |   |   | 52,827 |   |   |   |   |   |
| Allowance for loan  losses                               |       | (19,327     | )          |         |       |        |       | (15,233 | ) |   |   |   |   | (11,903 | ) |   |   |   |   |
| Total assets                                             |       | $           | 1,937,661  |         |       |        |       |   | $ | 1,748,555 |   |   |   |   |   | $ | 1,644,318 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  liabilities:                         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:                            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 134,087     |       | 318          |       | 0.48        | %          | 121,098 |   | 678 |   | 1.13 | % | 124,864 |   | 1,496 |   | 2.41 | % |
| Money markets                                            |       | 91,315      |       | 299          |       | 0.66        | %          | 46,945 |   | 284 |   | 1.22 | % | 41,076 |   | 534 |   | 2.61 | % |
| Statement savings                                        |       | 282,512     |       | 915          |       | 0.65        | %          | 271,925 |   | 2,288 |   | 1.70 | % | 376,582 |   | 5,933 |   | 3.17 | % |
| Certificates of deposit                                  |       | 648,468     |       | 6,905        |       | 2.15        | %          | 612,760 |   | 9,554 |   | 3.14 | % | 452,793 |   | 9,244 |   | 4.11 | % |
| Total interest - bearing  deposits                       |       | 1,156,382   |       | 8,437        |       | 1.47        | %          | 1,052,728 |   | 12,804 |   | 2.45 | % | 995,315 |   | 17,207 |   | 3.48 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed funds                                     |       | 369,568     |       | 6,035        |       | 3.29        | %          | 363,946 |   | 6,263 |   | 3.47 | % | 343,719 |   | 6,745 |   | 3.95 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing  liabilities and interest expense |       | 1,525,950   |       | 14,472       |       | 1.91        | %          | 1,416,674 |   | 19,067 |   | 2.71 | % | 1,339,034 |   | 23,952 |   | 3.60 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 180,448     |       |         |       |        |       | 141,132 |   |   |   |   |   | 123,583 |   |   |   |   |   |
| Other liabilities                                        |       | 21,221      |       |         |       |        |       | 21,050 |   |   |   |   |   | 19,327 |   |   |   |   |   |
| Common shareholders’  equity                        |       | 210,042     |       |         |       |        |       | 169,699 |   |   |   |   |   | 162,374 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity         |       | $           | 1,937,661  |         |       |        |       |   | $ | 1,748,555 |   |   |   |   |   | $ | 1,644,318 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income and  net interest margin (2)         |       |        |       | $            | 32,657     |        | 3.56       | % |   |   | $ | 22,823 |   | 2.73 | % |   |   | $ | 21,634 |   | 2.77 | % |

 

----

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

(2) Interest incomefor loans receivable and investment securities available-for-sale is reportedon a fully taxable-equivalent basis at a rate of 32%.

 

47

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Tableof Contents

 

**Rate andVolume Analysis**

Six Months Ended June 30,2010, 2009 and 2008

(In thousands)

 
| ** **                                | ** ** | **2010  Compared to 2009** | ** ** | **2009  Compared to 2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **Change  Due to**         | ** ** | ** **                 | ** ** | **Change  Due to** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Average**                | ** ** | **Average**                | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                                | ** ** | **Volume  (3)**            | ** ** | **Rate**                   | ** ** | **(Decrease)** | ** ** | **Volume  (3)** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest  income:**                     |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans (1):                                |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Commercial and  industrial                |       | $                          | (177       | )                          | $          | (87 | ) | $ | (264 | ) | $ | 1,059 |   | $ | (1,355 | ) | $ | (296 | ) |
| Real estate -  commercial                 |       | 2,844                      |       | (320                       | )          | 2,524 |   | 3,020 |   | (786 | ) | 2,234 |   |
| Real estate -  construction               |       | 354                        |       | 1,157                      |       | 1,511 |   | (436 | ) | (1,741 | ) | (2,177 | ) |
| Real estate -  residential                |       | 627                        |       | (241                       | )          | 386 |   | (292 | ) | (196 | ) | (488 | ) |
| Home equity lines                         |       | 198                        |       | (0                         | )          | 198 |   | 495 |   | (733 | ) | (238 | ) |
| Consumer                                  |       | 5                          |       | (4                         | )          | 1 |   | (9 | ) | (5 | ) | (14 | ) |
| Total loans                               |       | 3,851                      |       | 505                        |       | 4,356 |   | 3,837 |   | (4,816 | ) | (979 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Loans held for sale                       |       | (1,234                     | )          | 475                        |       | (759 | ) | 1,351 |   | (1,414 | ) | (63 | ) |
| Investment securities  available-for-sale |       | 2,962                      |       | (993                       | )          | 1,969 |   | (1,359 | ) | (98 | ) | (1,457 | ) |
| Investment securities  held-to-maturity   |       | (270                       | )          | (81                        | )          | (351 | ) | (385 | ) | (88 | ) | (473 | ) |
| Other investments                         |       | (0                         | )          | 40                         |       | 40 |   | 25 |   | (477 | ) | (452 | ) |
| Federal funds sold                        |       | (18                        | )          | 2                          |       | (16 | ) | 189 |   | (461 | ) | (272 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total interest income  (2)                |       | 5,291                      |       | (52                        | )          | 5,239 |   | 3,658 |   | (7,354 | ) | (3,696 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                    |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest - bearing  deposits:             |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Interest checking                         |       | 73                         |       | (433                       | )          | (360 | ) | (49 | ) | (769 | ) | (818 | ) |
| Money markets                             |       | 268                        |       | (253                       | )          | 15 |   | 75 |   | (325 | ) | (250 | ) |
| Statement savings                         |       | 89                         |       | (1,462                     | )          | (1,373 | ) | (1,661 | ) | (1,984 | ) | (3,645 | ) |
| Certificates of deposit                   |       | 557                        |       | (3,206                     | )          | (2,649 | ) | 3,231 |   | (2,921 | ) | 310 |   |
| Total interest -  bearing deposits        |       | 987                        |       | (5,354                     | )          | (4,367 | ) | 1,596 |   | (5,999 | ) | (4,403 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                      |       | 97                         |       | (325                       | )          | (228 | ) | 377 |   | (859 | ) | (482 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total interest expense                    |       | 1,084                      |       | (5,679                     | )          | (4,595 | ) | 1,973 |   | (6,858 | ) | (4,885 | ) |
|                                      |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                   |       | $                          | 4,207      |                       | $          | 5,627 |   | $ | 9,834 |   | $ | 1,685 |   | $ | (496 | ) | $ | 1,189 |   |

 

----

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

(2) Interest income for loans receivable andinvestment securities available-for-sale is reported on a fullytaxable-equivalent basis at a rate of 32%.

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

 

48

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*Provisionfor Loan Losses*

 

Theprovision for loan losses for the three months ended June 30, 2010 and2009 was $2.7 million and $1.5 million, respectively. For the six months ended June 30,2010 and 2009, our provision for loan losses was $5.1 million and $2.7 million,respectively.  The increase in ourprovision expense during 2010 compared to 2009 is a direct result of increasesin non-performing loans and the adverse migration of certain loans through ourallowance for loan losses calculation model because of ongoing adverse economicconditions.  While we continue to reportstrong credit quality in our loan portfolio, we have experienced increases inour watch list credits and net charge-offs. Our provision expense was also impacted by net new loan growth inaddition to our evaluation of the credit quality in our loan portfolio and thequalitative factors we use to determine the adequacy of our loan loss reservesas described above in “Critical Accounting Policies—Allowance for Loan Losses.”

 

During2010, we charged off residential loans totaling $1.3 million.  In addition, consumer loans totaling $48,000have been charged-off during 2010.  Werecorded charge-offs on three previously impaired commercial loans to oneborrower totaling $1.4 million during 2010.

 

Theallowance for loan losses at June 30, 2010 and December 31, 2009 was$21.1 million and $18.6 million, respectively. Our allowance for loan lossesratio to loans receivable, net was 1.58% and 1.44% at June 30, 2010 andDecember 31, 2009, respectively. Nonperforming loans at June 30, 2010 and December 31, 2009,were $4.6 million and $847,000, respectively. The increase in our nonaccrualloans was a result of one commercial loan which had previously been impaired,having deteriorated further due to a discrete event in 2010.

 

Continued challenging economicconditions could adversely affect our home equity loans of credit, credit cardand other loan portfolios, including causing increases in delinquencies anddefault rates, which we expect could impact our charge-offs and provision forloan losses.  Continued deterioration incommercial and residential real estate values, employment data and householdincomes could result in higher credit losses for us.  Also, in the ordinary course of business, wemay also be subject to a concentration of credit risk to a particular industry,counterparty, borrower or issuer.  At June 30,2010, our commercial real estate portfolio was 47% of our total loanportfolio.  A deterioration in thefinancial condition or prospects of a particular industry or a failure ordowngrade of, or default by, any particular entity or group of entities could negativelyimpact our businesses, perhaps materially, and the systems by which we setlimits and monitor the level of our credit exposure to individual entities andindustries, may not function as we have anticipated.

 

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

 

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**Allowance for Loan Losses**

Three amd Six Months Ended June 30, 2010 and 2009

(In thousands)

 
| ** **                                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance, beginning of the period                            |       | $                                    | 19,287     |                               | $          | 15,303 |   | $ | 18,636 |   | $ | 14,518 |   |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Provision for loan losses                                   |       | 2,700                                |       | 1,484                              |       | 5,125 |   | 2,700 |   |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Loans charged off:                                          |       |                                 |       |                               |       |   |   |   |   |
| Commercial and industrial                                   |       | —                               |       | (15                                | )          | (1,362 | ) | (15 | ) |
| Residential                                                 |       | (918                                 | )          | (332                               | )          | (1,307 | ) | (1,055 | ) |
| Consumer                                                    |       | (13                                  | )          | (290                               | )          | (48 | ) | (3 | ) |
| Total loans charged off                                     |       | (931                                 | )          | (637                               | )          | (2,717 | ) | (1,073 | ) |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Recoveries:                                                 |       |                                 |       |                               |       |   |   |   |   |
| Commercial and industrial                                   |       | —                               |       | —                             |       | 3 |   | 5 |   |
| Residential                                                 |       | 1                                    |       | —                             |       | 10 |   | — |   |
| Consumer                                                    |       | 1                                    |       | —                             |       | 1 |   | — |   |
| Total recoveries                                            |       | 2                                    |       | —                             |       | 14 |   | 5 |   |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Net (charge offs) recoveries                                |       | (929                                 | )          | (637                               | )          | (2,703 | ) | (1,068 | ) |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Ending balance, June 30,                               |       | $                                    | 21,058     |                               | $          | 16,150 |   | $ | 21,058 |   | $ | 16,150 |   |
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** |   |   |   |   |
| ** **                                                  | ** ** | **June 30,**                    | ** ** | **June 30,**                  | ** ** |   |   |   |   |
| ** **                                                  | ** ** | **2010**                             | ** ** | **2009**                           | ** ** |   |   |   |   |
| Loans:                                                      |       |                                 |       |                               |       |   |   |   |   |
| Balance at period end                                       |       | $                                    | 1,329,520  |                               | $          | 1,198,671 |   |   |   |   |   |
| Allowance for loan losses to loans receivable, net  of fees |       | 1.58                                 | %          | 1.76                               | %          |   |   |   |   |
| Annualized net charge-offs to average loans  receivable     |       | 0.42                                 | %          | 0.18                               | %          |   |   |   |   |

 

**Allocation of the Allowance for LoanLosses**

At June 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,**     | ** ** |
|----------------------------------|------------|-------------------|------------|---------------------------|------------|
| ** **                       | ** ** | **2010**          | ** ** | **2009**                  | ** ** |
| ** **                       | ** ** | **Allocation**    | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and  industrial       |       | $                 | 2,310      |                      | 12.03      | % | $ | 2,797 |   | 12.45 | % |
| Real estate -  commercial        |       | 10,143            |       | 46.69                     | %          | 9,666 |   | 45.80 | % |
| Real estate -  construction      |       | 5,280             |       | 14.76                     | %          | 2,829 |   | 14.80 | % |
| Real estate - residential        |       | 2,051             |       | 17.39                     | %          | 2,096 |   | 17.67 | % |
| Home equity lines                |       | 1,219             |       | 8.91                      | %          | 1,182 |   | 9.07 | % |
| Consumer                         |       | 55                |       | 0.22                      | %          | 66 |   | 0.21 | % |
|                             |       |              |       |                      |       |   |   |   |   |
| Total allowance for  loan losses |       | $                 | 21,058     |                      | 100.00     | % | $ | 18,636 |   | 100.00 | % |

 

----

* Percentage of loan typeto the total loan portfolio.

 

**Nonperforming Loans Receivable**

At June 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Nonaccruing loans                                                |       | $                 | 4,560      |                  | $          | 696 |   |
|                                                             |       |              |       |                  |       |
| Loans contractually  past-due 90 days or more and still accruing |       | —            |       | 151                   |       |
|                                                             |       |              |       |                  |       |
| Total nonperforming  loans receivable                            |       | $                 | 4,560      |                  | $          | 847 |   |

 

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*NoninterestIncome*

 

Noninterestincome includes service charges on deposits and loans, realized and unrealizedgains on mortgage banking activities, investment fee income, management feeincome, and gains on sales of investment securities available-for-sale, andcontinues to be an important factor in our operating results. Noninterestincome for the three months ended June 30, 2010 and 2009 was $6.8 millionand $6.3 million, respectively.  Realizedand unrealized gains on mortgage banking activities by our mortgage bankingsegment for the three months ended June 30, 2010 and 2009 were $3.7million and $3.4 million, respectively, an increase of $338,000, or 10%.  While our loan origination volume hasdecreased, the margin we earn on loan sales has significantly increased whichhas resulted in the increase in our gains. Included in realized and unrealized gains on mortgage banking activitiesare any origination, underwriting, and discount points and other funding feesand gains associated with our sales of loans to third party investors.  Costs include direct costs associated withthe loan origination, such as commissions and salaries that are deferred at thetime of origination.  For the six monthsended June 30, 2010 and 2009, realized and unrealized gains on mortgagebanking activities were $6.5 million and $6.7 million, respectively.  This decrease is attributable to the decreasein loan origination and sales volume for the year to date 2010 compared to2009.

 

Managementfee income, which represents the income earned for services George Masonprovides to other mortgage companies owned by local home builders and generallyfluctuates based on the volume of loan sales, increased $461,000 to $844,000for the three months ended June 30, 2010 as compared to $383,000 for thethree months ended June 30, 2009. For the six months ended June 30, 2010 and 2009, management feeincome was $1.4 million and $714,000, respectively.  This component of our mortgage bankingbusiness has seen increases in loan origination and sales volume whichcontributes to the increase in our management fee income.

 

Loanfees decreased $385,000 to $440,000 for the three months ended June 30,2010 as compared to the same period of 2009. For the six months ended June 30, 2010 and 2009, loan fees were$812,000 and $1.7 million, respectively, a decrease of $846,000.  The decrease is primarily related to adecrease in loan originations and sales at our mortgage banking segment,specifically at George Mason’s title company.

 

Investmentfee income increased $135,000 to $1.0 million for the three months ended June 30,2010 compared to $825,000 for the same period of 2009. For the six months endedJune 30, 2010 and 2009, investment fee income was $2.0 million and $1.7million, respectively.  The increase ininvestment fee income is attributable to increases in the market values ofmanaged and custodial assets and an increase in customer relationships in ourtrust division and Wilson/Bennett.

 

Theincrease in the cash surrender value of our bank-owned life insurance for thethree and six months ended June 30, 2010 and 2009 was $177,000 and$326,000, respectively.  For the samethree and six month periods of 2009, income from our bank-owned life insurancewas $157,000 and $233,000, respectively. The increase is directly related to increases in the underlying value ofthe investments.

 

Forthe three and six months ended June 30, 2010, we recorded net gains onsales of investment securities available-for-sale of $269,000 and $533,000,respectively.  No gains from sales ofinvestment securities were recorded for the three months ended June 30,2009.  For the six months ended June 30,2009, gains of $552,000 were recorded on sales of investment securities.  We recorded a net realized loss of $87,000and $31,000 for the three and six months ended June 30, 2010, respectively,on our trading securities portfolio.  Forthe three and six months ended June 30, 2009, we recorded a net gain of$111,000 and a net loss of $520,000, respectively, on our trading securitiesportfolio.  The loss recorded during 2009was a result of our purchase of investments to economically hedge against fairvalue changes of our nonqualified deferred compensation plan liability.  These investments are designated as tradingsecurities, and as such, the changes in fair value are reflected in earnings.  These trading losses were primarily theresult of lower stock prices and were partially offset by a reduction in theperiod’s compensation expense associated with this benefit plan.

 

Noninterestincome represented 29% and 34% of our total revenues for the three months endedJune 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, noninterest incomeas a percentage of our total revenues was 28% and 35%, respectively.

 

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*NoninterestExpense*

 

Noninterestexpense includes, among other things, salaries and benefits, occupancy costs,professional fees, depreciation, data processing, telecommunications andmiscellaneous expenses. Noninterest expense for the three months ended June 30,2010 was $14.2 million, compared to $13.7 million for the same period of 2009,an increase of $448,000.  For the sixmonths ended June 30, 2010 and 2009, noninterest expense was $27.2 millionand $25.7 million, respectively, an increase of $1.4 million, or 6%.

 

Forthe quarter ended June 30, 2010, salaries and benefits expense increasedto $6.7 million up from $6.2 million for the quarter ended June 30, 2009.  The increase in salaries and benefits expenseis mostly related to increases in personnel at our wealth management andmortgage banking segments.  Datacommunications expense increased $407,000 to $1.2 million for the three monthsended June 30, 2010 as compared to $837,000 for the same period of 2009, aresult of deconversion costs charged by our existing vendor for our upcomingsystems conversion to a new applications vendor which occurred during thesecond quarter of 2010.  Alsocontributing to the increase in our noninterest expense for 2010 was animpairment charge of $451,000 related to our annual impairment analysis of thegoodwill associated with our Wilson/Bennett reporting unit.  Additional increases in noninterest expenseare related to branch expansion as we added a banking office and a mortgagebanking office during the 2010 quarter. FDIC insurance premiums decreased $805,000 to $519,000 for the threemonths ended June 30, 2010 compared to $1.3 million for the same period of2009.  The decrease in the assessment isdue to the FDIC’s special assessment which occurred during the second quarterof 2009.  In addition, mortgage loanrepurchases and settlement decreased $759,000 during the three months ended June 30,2010 as compared to the same period of 2009 as a result of completing asettlement with a mortgage correspondent during the second quarter of 2010.

 

Forthe year to date June 30, 2010, salaries and benefits expense increased to$12.9 million up from $11.7 million for the six months ended June 30,2009.  Data communications expenseincreased $560,000 to $2.1 million for the six months ended June 30, 2010as compared to $1.6 million for the same period of 2009.  These increases were attributable to theaforementioned increases in personnel and our core system conversion.  Additional increases in noninterest expenseare related to branch expansion as we added a banking office and a mortgagebanking office during the 2010 quarter. FDIC insurance premiums decreased $671,000 to $1.1 million for the sixmonths ended June 30, 2010 compared to $1.7 million for the same period of2009.  Mortgage loan repurchases andsettlement decreased $777,000 during the six months ended June 30, 2010 ascompared to the same period of 2009.

 

*IncomeTaxes*

 

Forthe three months ended June 30, 2010, we recorded a provision for incometaxes of $2.4 million, compared to $883,000 for the same period of 2009.  Our effective tax rate for the three monthsended June 30, 2010 and 2009 was 34% and 29%, respectively.  For the six months ended June 30, 2010,we recorded a provision for income taxes of $4.1 million, compared to $1.8million for the same period of 2009.  Oureffective tax rate for the six months ended June 30, 2010 and 2009 was 33%and 30%, respectively.  Our effectiverate as of June 30, 2010 increased as compared to our effective rate as of June30, 2009 because the income we realize on our tax-exempt investments is asmaller portion of our overall net income. Our effective tax rate is less than the statutory rate because of incomewe receive from certain tax-exempt investments. See also “Critical Accounting Policies — Valuation of Deferred TaxAssets.”

 

**Statementsof Condition**

 

Totalassets were $2.07 billion and $1.98 billion at June 30, 2010 andDecember 31, 2009, respectively.

 

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*InvestmentSecurities*

 

Ourinvestment securities portfolio is used as a source of income andliquidity.  Investment securities were$354.2 million at June 30, 2010, compared to $382.5 million atDecember 31, 2009, a decrease of $28.3 million. The investment securitiesportfolio consists of investment securities available-for-sale, investmentsecurities held-to-maturity and trading securities. Investment securitiesavailable-for-sale are those securities that we intend to hold for anindefinite period of time, but not necessarily until maturity. These securitiesare carried at fair value and may be sold as part of an asset/liabilitystrategy, liquidity management or regulatory capital management.  Investment securities held-to-maturity arethose securities that we have the intent and ability to hold to maturity andare carried at amortized cost. Investment securities-trading are securities wepurchase to economically hedge against fair value changes in our nonqualifieddeferred compensation plan liability. These securities include cash equivalents, equities and mutualfunds.  At June 30, 2010, investmentsecurities available-for-sale were $319.1 million, investment securitiesheld-to-maturity were $30.8 million and investment securities-trading were $4.2million. At December 31, 2009, investment securities available-for-salewere $343.6 million, investment securities held-to-maturity were $35.2 million,and investment securities-trading were $3.7 million.  See the following table for additionalinformation on our investment securities portfolio.

 

Wecomplete reviews for other-than-temporary impairment at least quarterly.  As of June 30, 2010, the majority of ourinvestment securities portfolio consisted of securities rated AAA by a leadingrating agency.  Investment securitieswhich carry a AAA rating are judged to be of the best quality and carry thesmallest degree of investment risk.  At June 30,2010, 96% of our mortgage-related investment securities portfolio is guaranteedby the Federal National Mortgage Association (FNMA), the Federal Home LoanMortgage Corporation (FHLMC) and the Government National Mortgage Association(GNMA).

 

Wehave $8.5 million in non-government non-agency mortgage-relatedsecurities.  These securities are ratedfrom AAA to AA.  The various protectiveelements on the non-agency securities may change in the future if marketconditions or the financial stability of credit insurers changes, which couldimpact the ratings of these securities.

 

AtJune 30, 2010 certain of our investment grade securities were in anunrealized loss position.  Investmentsecurities with unrealized losses are a result of pricing changes due to recentand negative conditions in the current market environment and not as a resultof permanent credit impairment. Contractual cash flows for the agencymortgage-backed securities are guaranteed and/or funded by the U.S.government.  Other mortgage-backedsecurities and municipal securities have third party protective elements andthere are no negative indications that the contractual cash flows will not bereceived when due.  

 

Inaddition, our held-to-maturity portfolio includes investments in four pooledtrust preferred securities, totaling $8.0 million of par value at June 30,2010 (each security has a par value of $2.0 million).  These securities are presented as corporatebonds in the table below.  The collateralunderlying these structured securities are instruments issued by financialinstitutions or insurers.  We own the A-3tranches in each issuance.  Each of thebonds are rated by more than one rating agency. Two of the securities have a composite rating of AA, one of thesecurities has a composite rating of BBB and the other security has a compositerating of BB.  These ratings areconsistent with the grades from the other rating agencies.  There is minimal observable trading activityfor these types of securities.  We haveestimated the fair value of these securities through the use of internalcalculations and through information provided by external pricingservices.  Given the level ofsubordination below our A-3 tranches, and the actual and expected performanceof the underlying collateral, we expect to receive all contractual interest andprincipal payments recovering the amortized cost basis of each of the foursecurities, and concluded that these securities are not other-than-temporarilyimpaired.

 

Noother-than-temporary impairment has been recognized on the securities in ourinvestment portfolio during 2010. We do not intend to sell nor do we believe itis probable that we will be required to sell any of our temporarily impairedsecurities prior to the recovery of the amortized cost.

 

Wehold $15.7 million in FHLB stock at June 30, 2010, which is included inother investments on the statement of condition.  During 2008, the FHLB of Atlanta announced achange in their dividend declaration and payment schedule beginning during thefourth quarter of 2008.  The change wasinitiated so that the dividend can be declared and paid to member banks afterthe FHLB has calculated their net income for the preceding quarter.  During 2009, the FHLB announced changes toits capital stock requirements. Specifically, the Board of Directors increased the dollar cap on itsstock purchases from $25 million to $26 million and repurchases of memberexcess stock will be evaluated on a quarterly basis instead of a dailybasis.  We do not expect the abovechanges to materially impact our liquidity position.

 

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**InvestmentSecurities**

At June 30, 2010 andDecember 31, 2009

(In thousands)

 
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
|-------------------------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Available-for-sale  at June 30, 2010**   | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| U.S.  government-sponsored agencies             |       |          |       |       |       |        |       |
| Five to ten years                               |       | $             | 20,964     |       | $          | 22,357      |       | 4.14 | % |
| After ten years                                 |       | 10,000        |       | 10,011     |       | 5.00        | %          |
| Total U.S.  government-sponsored agencies       |       | 30,964        |       | 32,368     |       | 4.42        | %          |
|                                            |       |          |       |       |       |        |       |
| Mortgage-backed  securities (1)                 |       |          |       |       |       |        |       |
| One to five years                               |       | 8             |       | 8          |       | 9.00        | %          |
| Five to ten years                               |       | 26,099        |       | 27,409     |       | 4.20        | %          |
| After ten years                                 |       | 180,163       |       | 188,381    |       | 4.53        | %          |
| Total mortgage-backed  securities               |       | 206,270       |       | 215,798    |       | 4.49        | %          |
|                                            |       |          |       |       |       |        |       |
| Tax exempt municipal  securities(2)             |       |          |       |       |       |        |       |
| Five to ten years                               |       | 7,039         |       | 7,230      |       | 3.41        | %          |
| After ten years                                 |       | 53,444        |       | 54,185     |       | 3.98        | %          |
| Taxable municipal  securities                   |       |          |       |       |       |        |       |
| Five to ten years                               |       | 1,365         |       | 1,458      |       | 4.83        | %          |
| After ten years                                 |       | 2,954         |       | 2,979      |       | 5.07        | %          |
| Total municipal  securities                     |       | 64,802        |       | 65,852     |       | 3.99        | %          |
|                                            |       |          |       |       |       |        |       |
| U. S. treasury  securities                      |       |          |       |       |       |        |       |
| One to five years                               |       | 4,912         |       | 5,090      |       | 2.36        | %          |
| Total U.S. treasury  securities                 |       | 4,912         |       | 5,090      |       | 2.36        | %          |
| Total investment  securities available-for-sale |       | $             | 306,948    |       | $          | 319,108     |       | 4.34 | % |

 
| ** **                                    | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
|-----------------------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                    | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Held-to-maturity  at June 30, 2010**   | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| Mortgage-backed  securities (1)               |       |          |       |       |       |        |       |
| One to five years                             |       | $             | 1,379      |       | $          | 1,420       |       | 4.30 | % |
| Five to ten years                             |       | 5,330         |       | 5,641      |       | 4.62        | %          |
| After ten years                               |       | 16,124        |       | 16,862     |       | 4.00        | %          |
| Total mortgage-backed  securities             |       | 22,833        |       | 23,923     |       | 4.16        | %          |
|                                          |       |          |       |       |       |        |       |
| Corporate bonds                               |       |          |       |       |       |        |       |
| After ten years                               |       | 8,004         |       | 3,465      |       | 1.30        | %          |
| Total corporate bonds                         |       | 8,004         |       | 3,465      |       | 1.30        | %          |
| Total investment  securities held-to-maturity |       | 30,837        |       | 27,388     |       | 3.42        | %          |
|                                          |       |          |       |       |       |        |       |
| Total investment  securities                  |       | $             | 337,785    |       | $          | 346,496     |       | 4.26 | % |

 

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| ** **                                        | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
|---------------------------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                        | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Available-for-sale  at December 31, 2009** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| U.S.  government-sponsored agencies               |       |          |       |       |       |        |       |
| Five to ten years                                 |       | $             | 26,074     |       | $          | 26,030      |       | 4.15 | % |
| After ten years                                   |       | 29,974        |       | 29,629     |       | 5.01        | %          |
| Total U.S.  government-sponsored agencies         |       | 56,048        |       | 55,659     |       | 4.61        | %          |
|                                              |       |          |       |       |       |        |       |
| Mortgage-backed  securities (1)                   |       |          |       |       |       |        |       |
| One to five years                                 |       | 9             |       | 9          |       | 8.97        | %          |
| Five to ten years                                 |       | 33,079        |       | 33,964     |       | 4.21        | %          |
| After ten years                                   |       | 184,635       |       | 189,432    |       | 4.84        | %          |
| Total mortgage-backed  securities                 |       | 217,723       |       | 223,405    |       | 4.74        | %          |
|                                              |       |          |       |       |       |        |       |
| Tax exempt municipal  securities(2)               |       |          |       |       |       |        |       |
| Five to ten years                                 |       | 6,090         |       | 6,156      |       | 3.34        | %          |
| After ten years                                   |       | 50,270        |       | 50,227     |       | 4.01        | %          |
| Taxable municipal  securities                     |       |          |       |       |       |        |       |
| After ten years                                   |       | 3,331         |       | 3,225      |       | 4.96        | %          |
| Total municipal  securities                       |       | 59,691        |       | 59,608     |       | 3.99        | %          |
|                                              |       |          |       |       |       |        |       |
| U. S. treasury  securities                        |       |          |       |       |       |        |       |
| One to five years                                 |       | 4,901         |       | 4,897      |       | 2.36        | %          |
| Total U.S. treasury  securities                   |       | 4,901         |       | 4,897      |       | 2.36        | %          |
| Total investment  securities available-for-sale   |       | $             | 338,363    |       | $          | 343,569     |       | 4.55 | % |
|                                              |       |          |       |       |       |        |       |
| ** **                                        | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
| ** **                                        | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Held-to-maturity  at December 31, 2009**   | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| Mortgage-backed  securities (1)                   |       |          |       |       |       |        |       |
| One to five years                                 |       | $             | 1,833      |       | $          | 1,884       |       | 4.43 | % |
| Five to ten years                                 |       | 6,244         |       | 6,478      |       | 4.59        | %          |
| After ten years                                   |       | 19,103        |       | 19,731     |       | 4.26        | %          |
| Total mortgage-backed  securities                 |       | 27,180        |       | 28,093     |       | 4.35        | %          |
|                                              |       |          |       |       |       |        |       |
| Corporate bonds                                   |       |          |       |       |       |        |       |
| After ten years                                   |       | 8,004         |       | 3,343      |       | 1.33        | %          |
| Total corporate bonds                             |       | 8,004         |       | 3,343      |       | 1.33        | %          |
| Total investment  securities held-to-maturity     |       | 35,184        |       | 31,436     |       | 3.66        | %          |
|                                              |       |          |       |       |       |        |       |
| Total investment  securities                 |       | $             | 373,547    |       | $          | 375,005     |       | 4.47 | % |

 

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(1) Based oncontractual maturities.

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

 

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*LoansReceivable*

 

Totalloans receivable, net of deferred fees and costs, were $1.33 billion at June 30,2010 and $1.29 billion at December 31, 2009, an increase of $36.1million.  See the following table fordetails on the loans receivable portfolio. Loans held for sale at June 30,2010 were $269.5 million compared to $179.5 million at December 31,2009.  Loans held for sale are valued atthe lower of cost or fair value.

 

**LoansReceivable**

At June 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                       | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                             |       |                    |       |                        |       |   |   |   |   |
| Commercial and  industrial       |       | $                       | 160,041    |                        | 12.03      | % | $ | 161,156 |   | 12.45 | % |
| Real estate -  commercial        |       | 621,288                 |       | 46.69                       | %          | 592,780 |   | 45.80 | % |
| Real estate -  construction      |       | 196,375                 |       | 14.76                       | %          | 191,523 |   | 14.80 | % |
| Real estate -  residential       |       | 231,400                 |       | 17.39                       | %          | 228,693 |   | 17.67 | % |
| Home equity lines                |       | 118,582                 |       | 8.91                        | %          | 117,392 |   | 9.07 | % |
| Consumer                         |       | 2,881                   |       | 0.22                        | %          | 2,859 |   | 0.21 | % |
|                             |       |                    |       |                        |       |   |   |   |   |
| Gross loans                      |       | $                       | 1,330,567  |                        | 100.00     | % | 1,294,403 |   | 100.00 | % |
|                             |       |                    |       |                        |       |   |   |   |   |
| Net deferred (fees)  costs       |       | (1,047                  | )          |                        |       | (971 | ) |   |   |
| Less: allowance for  loan losses |       | (21,058                 | )          |                        |       | (18,636 | ) |   |   |
|                             |       |                    |       |                        |       |   |   |   |   |
| Loans receivable, net            |       | $                       | 1,308,462  |                        |       |   | $ | 1,274,796 |   |   |   |

 

*Deposits*

 

Totaldeposits were $1.35 billion at June 30, 2010 compared to $1.30billion at December 31, 2009. During 2010, we had increases in ournoninterest bearing checking products, interest bearing and money marketchecking, savings and certificates of deposit. We have had success in attractingdeposit balances from customers seeking to deposit their money with smaller,local banks and depositors are increasing balances held with financialinstitutions as a result of the increased protection of their money by theFDIC.  See the following table fordetails on certificates of deposit with balances of $100,000 or more. We are amember of the Certificates of Deposit Account Registry Service (“CDARS”).   CDARS allows our customers to access FDICinsurance protection on multi-million dollar certificates of deposit throughour Bank.  When a customer places a largedeposit through CDARS, we place their funds into certificates of deposit withother banks in the CDARS network in increments of less than $250,000 so thatprincipal and interest are eligible for FDIC insurance protection.  At June 30, 2010 and December 31,2009, we had $75.4 million and $59.4 million, respectively, in CDARS deposits,which are considered to be brokered deposits. Brokered certificates of deposit not in the CDARS network were $15.0million and $28.2 million at June 30, 2010 and December 31, 2009,respectively.

 

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

At June 30,2010

(In thousands)

 
| ** **                            | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total**  | ** ** |
|---------------------------------------|------------|----------------|------------|-----------------|------------|------------|------------|
| **Maturities:**                       | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** ** |
| Three months or less                  |       | $              | 80,326     |            | $          | 9,650      |       | $ | 89,976 |   |
| Over three months through six months  |       | 50,909         |       | 15,465          |       | 66,374     |       |
| Over six months through twelve months |       | 63,317         |       | 3,643           |       | 66,960     |       |
| Over twelve months                    |       | 100,850        |       | 44,008          |       | 144,858    |       |
|                                  |       | $              | 295,402    |            | $          | 72,766     |       | $ | 368,168 |   |

 

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

 

*Borrowings*

 

Otherborrowed funds increased $45.9 million to $473.5 million at June 30, 2010,compared to $427.6 million at December 31, 2009.  Treasury, Tax & Loan Note optionborrowings decreased $987,000 to $999,000 at June 30, 2010 compared to$2.0 million at December 31, 2009. FHLB advances remained at $280.0 million at June 30, 2010 comparedto December 31, 2009. Customer repurchase agreements increased $1.9million to $81.9 million at June 30, 2010 compared to $80.0 million at December 31,2009.  We had federal funds purchased of$90.0 million at June 30, 2010 compared to $45.0 million at December 31,2009.  The following table providesinformation on our borrowings.

 

**Short-TermBorrowings and Other Borrowed Funds**

At June 30,2010

(In thousands)

** **
| ** **                                                     | ** ** | **Yield** | ** ** | **Amount** | ** **  |
|----------------------------------------------------------------|------------|-----------|------------|------------|-------------|
| **Short-term borrowed funds:**                                 |       |      |       |       |        |
| TT&L note option                                           |       | 0.00      | %          | $          | 999         |   |
| Customer repurchase  agreements                                |       | 0.25      | %          | 81,887     |        |
| Federal Funds Purchased                                        |       | 0.33      | %          | 90,000     |        |
| **Total  short-term borrowed funds and weighted average rate** | ** ** | **0.29**  | **%**      | **$**      | **172,886** | ** ** |
| **Other  borrowed funds:**                                     |       |      |       |       |        |
| Trust preferred                                                |       | 3.96      | %          | $          | 20,619      |   |
| FHLB advances - long  term                                     |       | 3.90      | %          | 280,000    |        |
| **Other  borrowed funds and weighted average rate**            | ** ** | **3.90**  | **%**      | **$**      | **300,619** | ** ** |
|                                                           |       |      |       |       |        |
| **Total  other borrowed funds and weighted average rate**      | ** ** | **2.58**  | **%**      | **$**      | **473,505** | ** ** |

 

*Shareholders’Equity*

 

Shareholders’equity at June 30, 2010 was $216.6 million compared to $204.5 million atDecember 31, 2009, an increase of $12.1 million, or 6%. The increase inshareholders’ equity at June 30, 2010 compared to December 31, 2009is primarily attributable to net income of $8.5 million for the six monthsended June 30, 2010.  In addition,accumulated other comprehensive income increased $4.2 million for the sixmonths ended June 30, 2010.  Bookvalue per share at June 30, 2010 was $7.53 compared to $7.12 atDecember 31, 2009. Tangible book value per share (which is book value pershare adjusted for changes in other comprehensive income, less goodwill andother intangible assets) at June 30, 2010 was $6.81 compared to $6.52 atDecember 31, 2009.

 

**Business Segment Operations**

 

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

 

*Commercial Banking*

 

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

 

Forthe three months ended June 30, 2010, the commercial banking segmentrecorded net income of $3.6 million compared to $1.2 million for the sameperiod of 2009. For the six months ended June 30, 2010, the commercialbanking segment recorded net income of $7.3 million compared to $2.9 millionfor the six months ended June 30, 2009. See “**Statements of Income** — *General—Business**Segments*” abovefor additional information regarding the operating results for the commercialbanking segment for the periods presented. At June 30, 2010, total assets for this segment were $2.04 billion,loans receivable, net of deferred fees and costs, were $1.33 billion and totaldeposits were $1.35 billion. At June 30, 2009, total assets were $1.82billion, loans receivable, net of deferred fees and costs, were $1.20 billionand total deposits were $1.24 billion.

 

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*MortgageBanking*

 

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

 

Forthe three months ended June 30, 2010 and 2009, the mortgage bankingsegment recorded net income of $1.9 million and $1.4 million, respectively. Forthe six months ended June 30, 2010 and 2009, the mortgage banking segmentrecorded net income of $2.5 million and 2.7 million, respectively.  See “**Statements of Income**— *General—Business**Segments*”above for additional information regarding the operating results for themortgage banking segment for the periods presented.  At June 30, 2010, total assets for thissegment were $296.0 million; loans held for sale were $269.5 million andmortgage funding checks were $14.9 million. At June 30, 2009, total assetswere $259.7 million; loans held for sale were $232.2 million and mortgagefunding checks were $19.0 million.

 

*Wealth Management and Trust Services*

 

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

 

Forthe three months ended June 30, 2010 and 2009, the wealth management andtrust services segment recorded a net loss of $220,000 and net income of $66,000,respectively. For the six months ended June 30, 2009, the wealthmanagement and trust services segment recorded a net loss of $91,000 and netincome of $76,000, respectively.  Werecorded an impairment charge of $451,000 in this business segment during thesecond quarter of 2010 related to the goodwill associated withWilson/Bennett.  During the secondquarter, we reviewed and updated our projections of the growth rate of assetsunder management and the anticipated costs associated with our continued effortsto grow this business. Following several years of significant growth in assetsunder management, we expect the rate of growth to decrease somewhat.  Based upon the current cash flowsexpectations, the resultant valuation did not exceed Wilson/Bennett’s carryingvalue and See “**Statements of Income** — *General—Business**Segments*” abovefor additional information regarding the operating results for this businesssegment for the periods presented.  At June 30,2010, total assets were $3.0 million and managed and custodial assets were $3.2billion. At June 30, 2009, total assets for this segment were $3.4 millionand managed and custodial assets were $2.9 billion.

 

Additionalinformation pertaining to our business segments can be found in Note 3 to thenotes to consolidated financial statements.

 

**Capital Resources**

 

Capitaladequacy is an important measure of financial stability and performance. Ourobjectives are to maintain a level of capitalization that is sufficient tosustain asset growth and promote depositor and investor confidence.

 

Regulatoryagencies measure capital adequacy utilizing a formula that takes into accountthe individual risk profile of the financial institution. The guidelines definecapital as both Tier 1 (which includes common shareholders’ equity and certaindebt obligations) and Tier 2 (which includes certain other debt obligations, aportion of the allowance for loan losses, and 45% of any unrealized gains inequity securities).

 

AtJune 30, 2010, our Tier 1 and total (Tier 1 and Tier 2) risk-based capitalratios were 12.75% and 14.01%, respectively. At December 31, 2009, ourTier 1 and total risk-based capital ratios were 12.97% and 14.15%,respectively.  Our regulatory capitallevels for the Bank and

 

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bankholding company meet those established for well-capitalized institutions.  The decrease in our risk-based capital ratioswas primarily a result of the increase in assets on our balance sheet during2010, partially offset by an increase in shareholders’ equity at June 30,2010 compared to December 31, 2009.

 

Thefollowing table provides additional information pertaining to our capitalratios.

 

**Capital Components**

AtJune 30, 2010 and December 31, 2009

(Inthousands)

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | **To Be Well**        | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | ** **            | ** ** | **Ratio**  | ** ** | **Amount**            | ** ** | ** ** | ** ** | **Ratio** | ** ** |
| **Cardinal Financial Corporation  (Consolidated):**              |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| ** **                                                       |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| **At  June 30, 2010**                                       |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| Total risk-based  capital/Total capital to risk-weighted assets  |       | $          | 237,054    |                  | 14.01      | %                     | $          | 135,328               |       | >  |       | 8.00                  | %          | $ | 169,161 |   | >  |   | 10.00 | % |
| Tier I capital/Tier I  capital to risk-weighted assets           |       | 215,743    |       | 12.75                 | %          | 67,664                |       | >             |       | 4.00       | %          | 101,496               |       | >  |   | 6.00 | % |
| Tier I capital/Total  capital to average assets                  |       | 215,743    |       | 11.12                 | %          | 77,627                |       | >             |       | 4.00       | %          | 97,034                |       | >  |   | 5.00 | % |
|                                                             |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| **At  December 31, 2009**                                   |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| Total risk-based  capital/ Total capital to risk-weighted assets |       | $          | 226,137    |                  | 14.15      | %                     | $          | 127,869               |       | >  |       | 8.00                  | %          | $ | 159,837 |   | >  |   | 10.00 | % |
| Tier I capital/ Tier I  capital to risk-weighted assets          |       | 207,286    |       | 12.97                 | %          | 63,935                |       | >             |       | 4.00       | %          | 95,902                |       | >  |   | 6.00 | % |
| Tier  I capital/ Total capital to average assets                 |       | 207,286    |       | 11.03                 | %          | 75,185                |       | >             |       | 4.00       | %          | 93,981                |       | >  |   | 5.00 | % |

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | **To Be Well**        | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | ** **            | ** ** | **Ratio**  | ** ** | **Amount**            | ** ** | ** ** | ** ** | **Ratio** | ** ** |
| **Cardinal  Bank:**                                              |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| ** **                                                       |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| **At June 30, 2010**                                        |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| Total  risk-based capital/Total capital to risk-weighted assets  |       | $          | 219,336    |                  | 13.03      | %                     | $          | 134,659               |       | >  |       | 8.00                  | %          | $ | 168,324 |   | >  |   | 10.00 | % |
| Tier  I capital/Tier I capital to risk-weighted assets           |       | 198,026    |       | 11.76                 | %          | 67,330                |       | >             |       | 4.00       | %          | 100,995               |       | >  |   | 6.00 | % |
| Tier  I capital/Total capital to average assets                  |       | 198,026    |       | 10.25                 | %          | 77,306                |       | >             |       | 4.00       | %          | 96,633                |       | >  |   | 5.00 | % |
|                                                             |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| **At December 31, 2009**                                    |       |       |       |                  |       |                  |       |                  |       |       |       |                  |       |   |   |   |   |
| Total  risk-based capital/ Total capital to risk-weighted assets |       | $          | 206,413    |                  | 12.98      | %                     | $          | 127,257               |       | >  |       | 8.00                  | %          | $ | 159,071 |   | >  |   | 10.00 | % |
| Tier  I capital/ Tier I capital to risk-weighted assets          |       | 187,562    |       | 11.79                 | %          | 63,629                |       | >             |       | 4.00       | %          | 95,443                |       | >  |   | 6.00 | % |
| Tier  I capital/ Total capital to average assets                 |       | 187,562    |       | 10.02                 | %          | 74,884                |       | >             |       | 4.00       | %          | 93,605                |       | >  |   | 5.00 | % |

 

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**ContractualObligations**

 

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

 

**ContractualObligations**

At June 30,2010

(In thousands)

 
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **Total**                  | ** ** | **Less than 1  Year** | ** ** | **1 - 2 Years** | ** ** | **3 - 5 Years** | ** ** | **More than 5  Years** | ** ** |
| Long-Term Debt Obligations:                          | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Certificates of deposit                              |       | $                          | 567,465    |   | $ | 310,277 |   | $ | 116,959 |   | $ | 106,255 |   | $ | 33,974 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Brokered certificates  of deposit                    |       | 90,487                     |       | 82,524 |   | 7,963 |   | — |   | — |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Advances from the Federal  Home Loan Bank of Atlanta |       | 280,000                    |       | — |   | 15,000 |   | 110,000 |   | 155,000 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Trust preferred  securities                          |       | 20,619                     |       | — |   | — |   | — |   | 20,619 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations                         |       | 29,662                     |       | 4,111 |   | 3,464 |   | 9,205 |   | 12,882 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                          | 988,233    |   | $ | 396,912 |   | $ | 143,386 |   | $ | 225,460 |   | $ | 222,475 |   |

 

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

 

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

 

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

 

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

 

GeorgeMason provides for its estimated exposure to repurchase loans previously soldto investors for which borrowers failed to provide full and accurateinformation on their loan application or for which appraisals have not beenacceptable or when the loan was not underwritten in accordance with the loanprogram specified by the loan investor, and for other exposures to itsinvestors related to loan sales activities. At June 30, 2010, this reservehad a balance of $1.3 million.  Weevaluate the merits of each claim and estimate the reserve based on actual andexpected claims received and consider the historical

 

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amountspaid to settle such claims.  We havetaken actions with respect to our investor arrangements in an attempt to limitthe number of future claims.

 

Inaddition, George Mason, as part of the service it provides to its managedcompanies, purchases the loans originated by managed companies at the time oforigination.  These loans are then soldby George Mason to investors.  GeorgeMason has agreements with its managed companies requiring that the managedcompany fund the repurchase or settle the claim, for any loans that wereoriginated by the managed company and for which investors have requested GeorgeMason to repurchase due to the borrowers failure to provide full and accurateinformation on or related to their loan application or for which appraisalshave not been acceptable or when the loan was not underwritten in accordancewith the loan program specified by the loan investor.  In the event that the managed company’sfinancial condition deteriorates and it is unable to fund the repurchase ofsuch loans, George Mason may have to provide the funds to repurchase theseloans from investors.  In this instance,George Mason would establish an allowance on the receivable from the managedcompany.  There is no such allowancerecorded at June 30, 2010 as management fully recovered all amounts owedby managed companies as of that date.

 

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

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generallyhave expiration dates or other termination clauses and may require payment of afee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future fundingrequirements. We evaluate each customer’s credit worthiness on a case-by-casebasis.  The amount of collateral obtainedis based on management’s credit evaluation of the counterparty.  Collateral held varies but may includeaccounts receivable, inventory, property and equipment, and income-producingcommercial properties.

 

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

 

Standbyletters of credit are conditional commitments we issued to guarantee theperformance of a customer to a third party. Those guarantees are primarilyissued to support public and private borrowing arrangements, includingcommercial paper, bond financing, and similar transactions. The credit riskinvolved in issuing standby letters of credit is essentially the same as thatinvolved in extending loan facilities to customers. We hold certificates ofdeposit, deposit accounts, and real estate as collateral supporting thosecommitments for which collateral is deemed necessary.

 

AtJune 30, 2010, commitments to extend credit were $390.2 million andstandby letters of credit were $15.8 million. Commitments to extend credit of$137.4 million as of June 30, 2010 are related to the mortgage bankingsegment’s mortgage loan funding commitments and are of a short term nature.

 

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**Liquidity**

 

Liquidityin the banking industry is defined as the ability to meet the demand for fundsof both depositors and borrowers. We must be able to meet these needs byobtaining funding from depositors or other lenders or by converting non-cashitems into cash.  The objective of ourliquidity management program is to ensure that we always have sufficientresources to meet the demands of our depositors and borrowers. Stable coredeposits and a strong capital position provide the base for our liquidityposition. We believe we have demonstrated our ability to attract depositsbecause of our convenient branch locations, personal service and pricing.

 

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

 

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

 

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

 

Liquidassets, which include cash and due from banks, federal funds sold andinvestment securities available for sale, totaled $343.8 million at June 30,2010 or 17% of total assets. We held investments that are classified asheld-to-maturity in the amount of $30.8 million at June 30, 2010. Tomaintain ready access to the Bank’s secured lines of credit, the Bank haspledged roughly half of its investment securities and a portion of itsresidential real estate loan portfolio to the Federal Home Loan Bank of Atlantawith additional investment securities and certain loans in its commercial realestate and commercial & industrial portfolios pledged to the FederalReserve Bank of Richmond. Additional borrowing capacity at the Federal HomeLoan Bank of Atlanta at June 30, 2010 was $14.3 million. Borrowingcapacity with the Federal Reserve Bank of Richmond was $378 million at June 30,2010. These facilities are subject to the FHLB and the Federal Reserve approvingdisbursement to us.  In addition, we haveunsecured federal funds purchased lines of $315 million available to us.  We anticipate maintaining liquidity at alevel sufficient to protect depositors, provide for reasonable growth and fullycomply with all regulatory requirements.

 

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**Interest Rate Sensitivity**

 

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

 

Weemploy an independent consulting firm to model our interest rate sensitivity.  We use a net interest income simulation modelas our primary tool to measure interest rate sensitivity. Many assumptions aredeveloped based on expected activity in the balance sheet. For maturing assets,assumptions are created for the redeployment of these assets. For maturingliabilities, assumptions are developed for the replacement of these fundingsources. Assumptions are also developed for assets and liabilities that couldreprice during the modeled time period. These assumptions also cover how weexpect rates to change on non-maturity deposits such as interest checking,money market checking, savings accounts as well as certificates of deposit.With the funding markets still lacking liquidity, forecasts for deposit ratemovements carry greater uncertainty than when this market is functioningnormally.  Based on inputs that includethe current balance sheet, the current level of interest rates and thedeveloped assumptions, the model then produces an expected level of netinterest income assuming that market rates remain unchanged. This is consideredthe base case. Next, the model determines what net interest income would bebased on specific changes in interest rates. The rate simulations are performedfor a two year period and include ramped rate changes of down 100 basis pointsand up 200 basis points. The down 200 basis point scenario was discontinuedgiven the current level of interest rates. In the ramped down rate change, the model moves rates gradually down 100basis points over the first year and then rates remain flat in the second year.

 

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

 

AtJune 30, 2010, our asset/liability position was neutral based on ourinterest rate sensitivity model. Currently, our net interest income would decrease by less than 1.2% in adown 100 basis point scenario and would be neutral in an up 200 basis pointscenario over a one-year time frame.  Ina two-year time horizon, our net interest income would decrease by less than2.4% in a down 100 basis point scenario and would be neutral in an up 200 basispoint scenario.

 

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

 

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

 

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

 

AtJune 30, 2010, our asset/liability position was neutral based on ourinterest rate sensitivity model. Currently, our net interest income would decrease by less than 1.2% in adown 100 basis point scenario and would be neutral in an up 200 basis point scenarioover a one-year time frame.  In atwo-year time horizon, our net interest income would decrease by less than 2.4%in a down 100 basis point scenario and would be neutral in an up 200 basispoint scenario.

 

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

 

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

 

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

 

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**Item 4. Controls and Procedures**

 

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

 

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

 

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

 

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**PART II — OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

**Item 1A.  Risk Factors**

 

Our operations are subjectto many risks that could adversely affect our future financial condition andperformance and, therefore, the market value of our securities, including therisk factors that are outlined in our Annual Report on Form 10-K for the yearended December 31, 2009.  There have beenno material changes in our risk factors from those disclosed.

 

The U.S. governmentcontinues to enact legislation and develop various programs and initiativesdesigned to stabilize the housing markets and stimulate the economy. In July2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”)was signed into law.  We are unsure ofthe impact this Act will have on our business, operations or our financialcondition.

 

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

 

(a)  None.

(b)  Notapplicable.

(c)  For the three months ended June 30, 2010, wedid not purchase shares of our common stock.

 

**Item 3.  Defaults Upon Senior Securities**

 

(a)  None.

(b)  None.

 

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

 

**Item 5.  Other Information**

 

(a)  None.

(b)  None.

 

**Item 6.  Exhibits**

 

31.1         Rule 13a-14(a) 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

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                  | CARDINAL  FINANCIAL CORPORATION                       |
|-----------------------|-------------------------------------------------------|
|                  | (Registrant)                                          |
|                  |                                                  |
| Date:  August 6, 2010 | /s/  Bernard H. Clineburg                             |
|                  | Bernard  H. Clineburg                                 |
|                  | Chairman  and Chief Executive Officer                 |
|                  | (Principal  Executive Officer)                        |
|                  |                                                  |
|                  |                                                  |
| Date:  August 6, 2010 | /s/  Mark A. Wendel                                   |
|                  | Mark  A. Wendel                                       |
|                  | Executive  Vice President and Chief Financial Officer |
|                  | (Principal  Financial Officer)                        |
|                  |                                                  |
|                  |                                                  |
| Date:  August 6, 2010 | /s/  Jennifer L. Deacon                               |
|                  | Jennifer  L. Deacon                                   |
|                  | Senior  Vice President and Chief Accounting Officer   |
|                  | (Principal Accounting  Officer)                       |

 

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**EXHIBIT INDEX**

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

 

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