Table of Contents

 

 

 

**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 thequarterly period ended March 31, 2009**

** **

**or**

** **

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

 

**For thetransition period from              to          **

** **

**CommissionFile Number:  0-24557**

 

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Virginia**                              | ** ** | **54-1874630**      |
|-------------------------------------------|------------|---------------------|
| (State or other jurisdiction of           |       | (I.R.S. Employer    |
| incorporation or organization)            |       | Identification No.) |
|                                      |       |                |
| **8270 Greensboro Drive, Suite 500** |       |                |
| **McLean, Virginia**                      |       | **22102**           |
| (Address of principal executive offices)  |       | (Zip Code)          |

 

**(703) 584-3400**

(Registrant’s telephone number, includingarea code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe 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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-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) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)    Yes o   No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

24,303,133 shares of common stock, par value $1.00 per share, outstandingas of April 28, 2009

 

 

 

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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 Condition  At March 31, 2009 (unaudited) and December 31, 2008                                  | 3 |
|                                                                                                |                                                                                                                                 |   |
|                                                                                                | Consolidated Statements of Income  For the three months ended March 31, 2009 and 2008 (unaudited)                               | 4 |
|                                                                                                |                                                                                                                                 |   |
|                                                                                                | Consolidated Statements of Comprehensive  Income  For the three months ended March 31, 2009 and 2008 (unaudited)                | 5 |
|                                                                                                |                                                                                                                                 |   |
|                                                                                                | Consolidated Statements of Changes in  Shareholders’ EquityFor the three months ended  March 31, 2009 and 2008 (unaudited) | 6 |
|                                                                                                |                                                                                                                                 |   |
|                                                                                                | Consolidated Statements of Cash FlowsFor the three months ended  March 31, 2009 and 2008 (unaudited)                            | 7 |
|                                                                                                |                                                                                                                                 |   |
|                                                                                                | Notes to Consolidated Financial Statements  (unaudited)                                                                              | 8 |
|                                                                                                |                                                                                                                                 |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 22                                                                                                                                   |
|                                                                                                |                                                                                                                                 |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 | 53                                                                                                                                   |
|                                                                                                |                                                                                                                                 |   |
| Item 4. Controls and Procedures                                                                     | 55                                                                                                                                   |
|                                                                                                |                                                                                                                                 |   |
| **PART II – OTHER INFORMATION**                                                           | 56                                                                                                                                   |
|                                                                                                |                                                                                                                                 |   |
| Item 1. Legal Proceedings                                                                           | 56                                                                                                                                   |
| Item 1A. Risk Factors                                                                               | 56                                                                                                                                   |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                | 56                                                                                                                                   |
| Item 3. Defaults Upon Senior Securities                                                             | 56                                                                                                                                   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        | 56                                                                                                                                   |
| Item 5. Other Information                                                                           | 56                                                                                                                                   |
| Item 6. Exhibits                                                                                    | 56                                                                                                                                   |
|                                                                                                |                                                                                                                                 |
| **SIGNATURES**                                                                                      | 58                                                                                                                                   |

 

2

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**PART I– FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

** **

**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCONDITION

March 31, 2009 and December 31, 2008

(In thousands, except share data)

 
| ** **                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                     |       |               |       |                  |       |
| Cash and due from banks                                                                                                                        |       | $                  | 17,189     |                  | $          | 14,919 |   |
| Federal funds sold                                                                                                                             |       | 60,722             |       | 31,009                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total cash and cash equivalents                                                                                                                |       | 77,911             |       | 45,928                |       |
| Investment securities available-for-sale                                                                                                       |       | 194,210            |       | 265,356               |       |
| Investment securities held-to-maturity  (market value of $43,184 and $45,759 at March 31, 2009 and  December 31, 2008, respectively) |       | 46,835             |       | 50,183                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total investment securities                                                                                                                    |       | 241,045            |       | 315,539               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other investments                                                                                                                              |       | 16,467             |       | 16,370                |       |
| Loans held for sale                                                                                                                            |       | 212,070            |       | 157,009               |       |
|                                                                                                                                           |       |               |       |                  |       |
| Loans receivable, net of deferred fees and  costs                                                                                              |       | 1,172,681          |       | 1,139,348             |       |
| Allowance for loan losses                                                                                                                      |       | (15,303            | )          | (14,518               | )          |
|                                                                                                                                           |       |               |       |                  |       |
| Loans receivable, net                                                                                                                          |       | 1,157,378          |       | 1,124,830             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Premises and equipment, net                                                                                                                    |       | 16,028             |       | 16,463                |       |
| Deferred tax asset, net                                                                                                                        |       | 8,130              |       | 8,799                 |       |
| Goodwill and intangibles, net                                                                                                                  |       | 14,113             |       | 14,173                |       |
| Bank-owned life insurance                                                                                                                      |       | 33,251             |       | 33,176                |       |
| Accrued interest receivable and other  assets                                                                                                  |       | 17,050             |       | 11,470                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total assets                                                                                                                                   |       | $                  | 1,793,443  |                  | $          | 1,743,757 |   |
|                                                                                                                                           |       |               |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                 | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Non-interest bearing deposits                                                                                                                  |       | $                  | 147,724    |                  | $          | 147,529 |   |
| Interest bearing deposits                                                                                                                      |       | 1,062,339          |       | 1,032,315             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total deposits                                                                                                                                 |       | 1,210,063          |       | 1,179,844             |       |
|                                                                                                                                           |       |               |       |                  |       |
| Other borrowed funds                                                                                                                           |       | 368,621            |       | 367,198               |       |
| Mortgage funding checks                                                                                                                        |       | 27,145             |       | 19,178                |       |
| Escrow liabilities                                                                                                                             |       | 2,859              |       | 1,832                 |       |
| Accrued interest payable and other  liabilities                                                                                                |       | 21,942             |       | 17,699                |       |
|                                                                                                                                           |       |               |       |                  |       |
| Total liabilities                                                                                                                              |       | 1,630,630          |       | 1,585,751             |       |

 
| ** **                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Common stock, $1 par value                      |       |       |       |       |       |       |       |       |       |
| Shares authorized                               |       | 50,000,000 |       | 50,000,000 |       |       |       |       |       |
| Shares issued and outstanding                   |       | 24,303,133 |       | 24,013,663 |       | 24,303     |       | 24,014     |       |
| Additional paid-in capital                      |       | 132,058    |       | 130,709    |       |
| Retained earnings                               |       | 5,366      |       | 3,437      |       |
| Accumulated other comprehensive loss, net       |       | 1,086      |       | (154       | )          |
|                                            |       |       |       |       |       |
| Total shareholders’ equity                 |       | 162,813    |       | 158,006    |       |
|                                            |       |       |       |       |       |
| Total liabilities and shareholders’ equity |       | $          | 1,793,443  |       | $          | 1,743,757  |       |
|                                                 |            |            |            |            |            |            |            |            |            |  |  |

 

See accompanying notes toconsolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFINCOME

Three months ended March 31, 2009 and 2008

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Interest income:                                               |       |     |       |     |       |
| Loans receivable                                               |       | $        | 15,329     |     | $          | 16,614 |   |
| Loans held for sale                                            |       | 1,825    |       | 2,129    |       |
| Federal funds sold                                             |       | 13       |       | 137      |       |
| Investment securities available-for-sale                       |       | 2,886    |       | 3,308    |       |
| Investment securities held-to-maturity                         |       | 484      |       | 749      |       |
| Other investments                                              |       | (19      | )          | 218      |       |
|                                                           |       |     |       |     |       |
| Total interest income                                          |       | 20,518   |       | 23,155   |       |
|                                                           |       |     |       |     |       |
| Interest expense:                                              |       |     |       |     |       |
| Deposits                                                       |       | 6,757    |       | 9,347    |       |
| Other borrowed funds                                           |       | 3,142    |       | 3,473    |       |
|                                                           |       |     |       |     |       |
| Total interest expense                                         |       | 9,899    |       | 12,820   |       |
|                                                           |       |     |       |     |       |
| Net interest income                                            |       | 10,619   |       | 10,335   |       |
|                                                           |       |     |       |     |       |
| Provision for loan losses                                      |       | 1,216    |       | 320      |       |
|                                                           |       |     |       |     |       |
| Net interest income after provision for  loan losses           |       | 9,403    |       | 10,015   |       |
|                                                           |       |     |       |     |       |
| Non-interest income:                                           |       |     |       |     |       |
| Service charges on deposit accounts                            |       | 472      |       | 527      |       |
| Loan service charges                                           |       | 833      |       | 310      |       |
| Investment fee income                                          |       | 810      |       | 900      |       |
| Realized and unrealized gains on mortgage  banking activities  |       | 3,343    |       | 2,317    |       |
| Net realized gain on investment securities  available-for-sale |       | 552      |       | —   |       |
| Net realized loss on investment  securities-trading            |       | (631     | )          | (3       | )          |
| Management fee income                                          |       | 331      |       | 84       |       |
| Increase in cash surrender value of  bank-owned life insurance |       | 75       |       | 323      |       |
| Litigation recovery on previously impaired  investment         |       | —   |       | 190      |       |
| Other income                                                   |       | (29      | )          | (37      | )          |
|                                                           |       |     |       |     |       |
| Total non-interest income                                      |       | 5,756    |       | 4,611    |       |
|                                                           |       |     |       |     |       |
| Non-interest expense:                                          |       |     |       |     |       |
| Salary and benefits                                            |       | 5,486    |       | 6,003    |       |
| Occupancy                                                      |       | 1,377    |       | 1,399    |       |
| Professional fees                                              |       | 483      |       | 583      |       |
| Depreciation                                                   |       | 540      |       | 646      |       |
| Data processing                                                |       | 455      |       | 442      |       |
| Telecommunications                                             |       | 289      |       | 234      |       |
| Amortization of intangibles                                    |       | 60       |       | 63       |       |
| Other operating expenses                                       |       | 3,347    |       | 2,453    |       |
|                                                           |       |     |       |     |       |
| Total non-interest expense                                     |       | 12,037   |       | 11,823   |       |
|                                                           |       |     |       |     |       |
| Net income before income taxes                                 |       | 3,122    |       | 2,803    |       |
|                                                           |       |     |       |     |       |
| Provision for income taxes                                     |       | 953      |       | 761      |       |
|                                                           |       |     |       |     |       |
| Net income                                                     |       | $        | 2,169      |     | $          | 2,042 |   |
|                                                           |       |     |       |     |       |
| Earnings per common share - basic                              |       | $        | 0.09       |     | $          | 0.08 |   |
|                                                           |       |     |       |     |       |
| Earnings per common share - diluted                            |       | $        | 0.09       |     | $          | 0.08 |   |
|                                                           |       |     |       |     |       |
| Weighted-average common shares outstanding  - basic            |       | 24,374   |       | 24,482   |       |
|                                                           |       |     |       |     |       |
| Weighted-average common shares outstanding  - diluted          |       | 24,805   |       | 24,892   |       |

 

See accompanying notes toconsolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME

Three months ended March 31, 2009 and 2008

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                    |       |     |       |     |       |
| Net income                                                                                                                                                              |       | $        | 2,169      |     | $          | 2,042 |   |
| Other comprehensive income:                                                                                                                                             |       |     |       |     |       |
| Unrealized gain on available-for-sale  investment securities:                                                                                                           |       |     |       |     |       |
| Unrealized holding gain arising during the  period, net of tax expense of $778 thousand in 2009 and tax expense of $1.1  million in 2008                                |       | 1,814    |       | 2,070    |       |
|                                                                                                                                                                    |       |     |       |     |       |
| Less: reclassification adjustment for net  gains for available for sale securities sold and included in net income net  of tax expense of $188 thousand in 2009         |       | (364     | )          | —   |       |
|                                                                                                                                                                    |       |     |       |     |       |
|                                                                                                                                                                    |       | 1,450    |       | 2,070    |       |
|                                                                                                                                                                    |       |     |       |     |       |
| Unrealized loss on derivative instruments  designated as cash flow hedges, net of tax benefit of $109 thousand in 2009  and net of tax benefit of $143 thousand in 2008 |       | (210     | )          | (239     | )          |
|                                                                                                                                                                    |       |     |       |     |       |
| Comprehensive income                                                                                                                                                    |       | $        | 3,409      |     | $          | 3,873 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

Three months ended March 31, 2009 and 2008

(In thousands)

(Unaudited)

 
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Balance, December 31, 2007                                                             |       | 24,202     |       | $          | 24,202     |           | $          | 131,516       |       | $                      | 4,213      |       | $          | (468 | ) | $ | 159,463 |   |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Cumulative effect adjustment at  January 1, 2008 for the adoption of SFAS No. 157 |       | —     |       | —     |       | —         |       | (96           | )          | —                 |       | (96        | )          |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Stock compensation expense, net of tax  benefits                                            |       | —     |       | —     |       | 75             |       | —        |       | —                 |       | 75         |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Purchase and retirement of common stock                                                     |       | (38        | )          | (38        | )          | (252           | )          | —        |       | —                 |       | (290       | )          |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Dividends on common stock of $0.01 per  share                                               |       | —     |       | —     |       | —         |       | (242          | )          | —                 |       | (242       | )          |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Change in accumulated other comprehensive  gain (loss)                                      |       | —     |       | —     |       | —         |       | —        |       | 1,831                  |       | 1,831      |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Net income                                                                                  |       | —     |       | —     |       | —         |       | 2,042         |       | —                 |       | 2,042      |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Balance, March 31, 2008                                                                |       | 24,164     |       | $          | 24,164     |           | $          | 131,339       |       | $                      | 5,917      |       | $          | 1,363 |   | $ | 162,783 |   |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Balance, December 31, 2008                                                             |       | 24,014     |       | $          | 24,014     |           | $          | 130,709       |       | $                      | 3,437      |       | $          | (154 | ) | $ | 158,006 |   |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Stock options exercised                                                                     |       | 2          |       | 2          |       | 5              |       | —        |       | —                 |       | 7          |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Stock compensation expense, net of tax  benefits                                            |       | —     |       | —     |       | 66             |       | —        |       | —                 |       | 66         |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Shares issued to employee benefits plan                                                     |       | 287        |       | 287        |       | 1,278          |       | —        |       | —                 |       | 1,565      |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Dividends on common stock of $0.01 per  share                                               |       | —     |       | —     |       | —         |       | (240          | )          | —                 |       | (240       | )          |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Change in accumulated other comprehensive  gain (loss)                                      |       | —     |       | —     |       | —         |       | —        |       | 1,240                  |       | 1,240      |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Net income                                                                                  |       | —     |       | —     |       | —         |       | 2,169         |       | —                 |       | 2,169      |       |
|                                                                                        |       |       |       |       |       |           |       |          |       |                   |       |       |       |
| Balance, March 31, 2009                                                                |       | 24,303     |       | $          | 24,303     |           | $          | 132,058       |       | $                      | 5,366      |       | $          | 1,086 |   | $ | 162,813 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCASH FLOWS

Three Months Ended March 31, 2009 and 2008

(In thousands)

(Unaudited)

 
| ** **                                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                    |       |     |       |     |       |
| Cash flows from operating activities:                               |       |     |       |     |       |
| Net income                                                                              |       | $        | 2,169      |     | $          | 2,042 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:      |       |     |       |     |       |
| Depreciation                                                                            |       | 540      |       | 646      |       |
| Amortization of premiums, discounts and  intangibles                                    |       | 75       |       | 113      |       |
| Provision for loan losses                                                               |       | 1,216    |       | 320      |       |
| Loans held for sale originated                                                          |       | (616,167 | )          | (320,979 | )          |
| Proceeds from the sale of loans held for  sale                                          |       | 564,449  |       | 339,533  |       |
| Realized and unrealized gains on mortgage  banking activities                           |       | (3,343   | )          | (2,317   | )          |
| Proceeds from sale, maturity and call of  investment securities trading                 |       | 1,809    |       | 4,916    |       |
| Purchase of investment securities trading                                               |       | (6,100   | )          | (4,919   | )          |
| Loss on sale of investments securities  trading                                         |       | 631      |       | 3        |       |
| Net gain on sale of investment securities  available-for-sale                           |       | (552     | )          | —   |       |
| Stock compensation expense, net of tax  benefits                                        |       | 66       |       | 75       |       |
| Increase in cash surrender value of  bank-owned life insurance                          |       | (75      | )          | (323     | )          |
| (Increase) decrease in accrued interest  receivable and other assets                    |       | (2,238   | )          | 890      |       |
| Increase in accrued interest payable, escrow  liabilities and other liabilities         |       | 5,269    |       | 3,677    |       |
|                                                                                    |       |     |       |     |       |
| Net cash provided by (used in) operating  activities                                    |       | (52,251  | )          | 23,677   |       |
|                                                                                    |       |     |       |     |       |
| Cash flows from investing activities:                                                   |       |     |       |     |       |
| Net purchases of premises and equipment                                                 |       | (105     | )          | (121     | )          |
| Proceeds from sale, maturity and call of  investment securities available-for-sale      |       | 19,399   |       | 50,695   |       |
| Proceeds from sale, maturity and call of  mortgage-backed securities available-for-sale |       | 43,589   |       | —   |       |
| Proceeds from maturity and call of  investment securities held-to-maturity              |       | —   |       | 13,492   |       |
| Purchase of investment securities  available-for-sale                                   |       | —   |       | (54,778  | )          |
| Purchase of mortgage-backed securities  available-for-sale                              |       | —   |       | (22,437  | )          |
| Purchase of other investments                                                           |       | (97      | )          | (2,000   | )          |
| Redemptions of investment securities available-for-sale                                 |       | 10,962   |       | 7,300    |       |
| Redemptions of investment securities  held-to-maturity                                  |       | 3,309    |       | 3,625    |       |
| Net increase in loans receivable, net of  deferred fees and costs                       |       | (33,764  | )          | (2,533   | )          |
|                                                                                    |       |     |       |     |       |
| Net cash provided by (used in) investing  activities                                    |       | 43,293   |       | (6,757   | )          |
|                                                                                    |       |     |       |     |       |
| Cash flows from financing activities:                                                   |       |     |       |     |       |
| Net increase in deposits                                                                |       | 30,219   |       | 42,997   |       |
| Net increase (decrease) in other borrowed  funds - short term                           |       | 1,423    |       | (83,366  | )          |
| Net increase (decrease) in mortgage funding  checks                                     |       | 7,967    |       | (3,103   | )          |
| Proceeds from FHLB advances - long term                                                 |       | —   |       | 45,000   |       |
| Repayments of FHLB advances - long term                                                 |       | —   |       | (625     | )          |
| Stock options exercised                                                                 |       | 7        |       | —   |       |
| Purchase and retirement of common stock                                                 |       | —   |       | (290     | )          |
| Shares issued to employee benefits plan                                                 |       | 1,565    |       | —   |       |
| Dividends on common stock                                                               |       | (240     | )          | (242     | )          |
|                                                                                    |       |     |       |     |       |
| Net cash provided by financing activities                                               |       | 40,941   |       | 371      |       |
|                                                                                    |       |     |       |     |       |
| Net increase in cash and cash equivalents                                               |       | 31,983   |       | 17,291   |       |
|                                                                                    |       |     |       |     |       |
| Cash and cash equivalents at beginning of  the year                                     |       | 45,928   |       | 22,421   |       |
|                                                                                    |       |     |       |     |       |
| Cash and cash equivalents at end of the  period                                         |       | $        | 77,911     |     | $          | 39,712 |   |
|                                                                                    |       |     |       |     |       |
| **Supplemental disclosure of cash flow  information:**                                  |       |     |       |     |       |
| Cash paid during the period for interest                                                |       | $        | 9,876      |     | $          | 12,724 |   |
| Cash paid for income taxes                                                              |       | —   |       | 4        |       |

 

See accompanying notes to consolidated financial statements.

 

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)

 

Note 1

 

*Organization*

 

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

 

*Basis of Presentation*

 

Inthe opinion of management, the accompanying consolidated financial statementshave been prepared in accordance with the requirements of Regulation S-X, Article 10.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements. However, all adjustments that are, in the opinion of management,necessary for a fair presentation have been included. The results of operationsfor the three months ended March 31, 2009 are not necessarily indicativeof the results to be expected for the full year ending December 31, 2009.The unaudited interim financial statements should be read in conjunction withthe audited financial statements and notes to financial statements that areincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

Note 2

 

*Stock-BasedCompensation*

 

AtMarch 31, 2009, 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 were223,658 shares of the Company’s common stock available for future grants andawards in the Equity Plan as of March 31, 2009.

 

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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% incrementsbeginning as of the grant date.  Inaddition, the Company has granted stock options to employees of the Companythat have ten year terms and vest and become fully exercisable in 20%increments beginning after their first year of service.

 

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

 

Totalexpense related to the Company’s share-based compensation plans for the threemonths ended March 31, 2009 and 2008 were $66,000 and $75,000,respectively. The total income tax benefit recognized in the income statementfor share-based compensation arrangements were $22,000 and $26,000 for the threemonths ended March 31, 2009 and 2008, respectively.

 

Optionsgranted for the three months ended March 31, 2009 were 68,150. There wereno options granted during the three months ended March 31, 2008.  The weighted average per share fair value ofstock option grants during the three months ended March 31, 2009 was$2.60.  The fair values of the optionsgranted during the three months ended March 31, 2009 were estimated as ofthe grant date using the Black-Scholes option-pricing model based on thefollowing weighted average assumptions:

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 31, 2009**     | ** ** |
| ** **              | ** ** | ** **                       | ** ** |
| Estimated option life   |       | 6.5 Years                        |       |
| Risk free interest rate |       | 2.10                             | %          |
| Expected volatility     |       | 44.60                            | %          |
| Expected dividend yield |       | 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 three months ended March 31, 2009 is summarizedas follows:

 

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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, 2008      |       | 2,364,733          |       | $            | 8.70       |                  |       |          |       |   |
| Granted                                    |       | 68,150             |       | 5.95         |       |                  |       |          |       |
| Exercised                                  |       | (2,373             | )          | 3.37         |       |                  |       |          |       |
| Forfeited                                  |       | (7,000             | )          | 9.87         |       |                  |       |          |       |
| Expired                                    |       | (8,773             | )          | 6.38         |       |                  |       |          |       |
| Outstanding at March 31, 2009         |       | 2,414,737          |       | $            | 8.47       |                  | 5.29       |          | $          | (6,796,846 | ) |
| Options exercisable at March 31, 2009 |       | 2,209,887          |       | $            | 8.52       |                  | 5.34       |          | $          | (5,957,602 | ) |

 

Total intrinsic value ofoptions exercised during the three months ended March 31, 2009 was$6,000.  No options were exercised duringthe three months ended March 31, 2008.

 

A summary of the status of theCompany’s non-vested stock options and changes during the three months ended March 31,2009 is as follows:

 
| ** **                        | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                        | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Balance at December 31, 2008 |       | 166,600            |       | $                   | 5.62       |   |
| Granted                           |       | 68,150             |       | 2.60                |       |
| Vested                            |       | (29,000            | )          | 5.86                |       |
| Forfeited                         |       | (900               | )          | 5.96                |       |
| Balance at March 31, 2009    |       | 204,850            |       | $                   | 4.58       |   |

 

AtMarch 31, 2009, there was $1.0 million of total unrecognized compensationcost related to non-vested share-based compensation arrangements granted underthe plans. The cost is expected to be recognized over a weighted average periodof 2.5 years. The total fair value of shares that vested during the threemonths ended March 31, 2009 and 2008 were $170,000 and $169,000,respectively.

 

Note 3

 

*SegmentInformation*

 

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

 

Thecommercial banking segment includes both commercial and consumer lending 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. The wealthmanagement and trust services segment provides investment and financialadvisory services to businesses and individuals, including financial planning,retirement/estate planning, trust, estates, custody, investment management,escrows, and retirement plans.

 

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CardinalFirst is included in the mortgage banking segment for the three months ended March 31,2009.

 

Informationabout the reportable segments and reconciliation of this information to theconsolidated financial statements at and for the three months ended March 31,2009 and 2008 is as follows:

 

**At and forthe Three Months Ended March 31, 2009 (in thousands):**

 
| ** **                 | ** ** | ** **     | ** ** | ** **   | ** ** | **Wealth Management** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------|------------|----------------|------------|--------------|------------|----------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **and**                    | ** ** | ** ** | ** ** | **Intersegment** | ** ** | ** **       | ** ** |
| ** **                 | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Trust Services**    | ** ** | **Other**  | ** ** | **Elimination**  | ** ** | **Consolidated** | ** ** |
| Net interest income        |       | $              | 10,129     |         | $          | 731                        |       | $          | —     |             | $          | (241             | )          | $ | — |   | $ | 10,619 |   |
| Provision for loan losses  |       | 1,190          |       | 26           |       | —                     |       | —     |       | —           |       | 1,216            |       |
| Non-interest income        |       | 1,338          |       | 4,237        |       | 821                        |       | (624       | )          | (16              | )          | 5,756            |       |
| Non-interest expense       |       | 7,946          |       | 2,957        |       | 806                        |       | 344        |       | (16              | )          | 12,037           |       |
| Provision for income taxes |       | 676            |       | 683          |       | 5                          |       | (411       | )          | —           |       | 953              |       |
| Net income (loss)          |       | $              | 1,655      |         | $          | 1,302                      |       | $          | 10         |             | $          | (798             | )          | $ | — |   | $ | 2,169 |   |
|                       |       |           |       |         |       |                       |       |       |       |             |       |             |       |
| Total Assets               |       | $              | 1,746,756  |         | $          | 224,577                    |       | $          | 3,463      |             | $          | 185,789          |       | $ | (367,142 | ) | $ | 1,793,443 |   |
| Average Assets             |       | $              | 1,711,584  |         | $          | 169,795                    |       | $          | 3,476      |             | $          | 180,774          |       | $ | (345,250 | ) | $ | 1,720,379 |   |

 

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

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

 

 

TheCompany did not have any operating segments other than those reported. Parentcompany financial information is included in the “Other” category andrepresents an overhead function rather than an operating segment. The parent company’smost significant assets are its net investments in its subsidiaries. The parentcompany’s net interest expense is comprised of interest income from short-terminvestments and interest expense on trust preferred securities. The parentcompany’s non-interest expense is primarily non-allocable executive salariesand professional services related to the Company’s regulatory requirements.

 

Note 4

 

*EarningsPer Share*

 

Thefollowing is the calculation of basic and diluted earnings per share for thethree months ended March 31, 2009 and 2008.  Antidilutive outstanding stock optionsexcluded from the weighted average shares outstanding for the diluted earningsper share calculation were 787,721 and 223,765 at March 31, 2009 and 2008,respectively.  These stock options haveexercise prices that were greater than the average market price of the Company’scommon stock for the periods presented. In addition, there were no incremental shares related to stock optionsas calculated under Statement of Financial Accounting Standards (“SFAS”) No. 123Rbecause the addition of these shares to the diluted weighted average sharecalculation would be antidilutive.

 

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| **(In thousands,**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| **except per share data)**   | ** ** | **2009**   | ** ** | **2008**   | ** ** |
| Net income available to common shareholders |       | $          | 2,169      |       | $          | 2,042 |   |
| Weighted  average common shares - basic     |       | 24,374     |       | 24,482     |       |
| Weighted average common shares - diluted    |       | 24,805     |       | 24,892     |       |
| Earnings per common share - basic           |       | $          | 0.09       |       | $          | 0.08 |   |
| Earnings per common share - diluted         |       | $          | 0.09       |       | $          | 0.08 |   |

 

Basicearnings per share is impacted by the number of shares required to be issuedunder the Company’s various deferred compensation plans.  Employees who participate in the Company’sdeferred compensation plans can allocate their contributions to variousinvestment options, including a Company Common Stock investment option.  The incremental weighted average sharesattributable to the deferred compensation plans included in diluted outstandingshares assumes the participants opt to invest all of their contributions intothe Company’s Common Stock investment option.

 

Thefollowing shows the composition of basic outstanding shares for the threemonths ended March 31, 2009 and 2008:

 
| **(in thousands)**                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Weighted average common shares outstanding                               |       | 24,103   |       | 24,189   |       |
| Weighted average shares attributable to the  deferred compensation plans |       | 271      |       | 293      |       |
| Total weighted average shares - basic                                    |       | 24,374   |       | 24,482   |       |

 

Thefollowing shows the composition of diluted outstanding shares for the threemonths ended March 31, 2009 and 2008:

 
| **(in thousands)**                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |
| Weighted average shares outstanding - basic  (from above)                        |       | 24,374   |       | 24,482   |       |
| Incremental weighted average shares  attributable to deferred compensation plans |       | 354      |       | 250      |       |
| Weighted average shares attributable to  vested stock options                    |       | 77       |       | 160      |       |
| Incremental shares attributable to unvested  stock options                       |       | —   |       | —   |       |
| Total weighted average shares - diluted                                          |       | 24,805   |       | 24,892   |       |

 

Note 5

 

*DerivativeInstruments and Hedging Activities*

 

TheCompany is a party to forward loan sales contracts, which are utilized tomitigate exposure to fluctuations in interest rates related to closed loanswhich are held for sale and designated in a cash flow hedge relationship.

 

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TheCompany designates these derivatives as cash flow hedges in accordance withSFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended. These hedges arerecorded at fair value in the statement of condition as an other asset or otherliability with a corresponding offset to accumulated other comprehensive incomein shareholders’ equity. Amounts are reclassified from accumulated other comprehensiveincome to the income statement in the period or periods that the loan sale isreflected in income.

 

AtMarch 31, 2009, accumulated other comprehensive income included anafter-tax unrealized loss of $207,000 related to forward loan sales contracts.Loans held for sale are generally sold within sixty days of closing and,therefore, substantially all of the amount recorded in accumulated othercomprehensive income at March 31, 2009 that is related to the Company’scash flow hedges will be recognized in earnings during the second quarter of2009. For the three months ended March 31, 2009, the hedge ineffectivenessrecorded through earnings was immaterial.

 

AtMarch 31, 2009, the Company had $147.0 million in loan commitments andassociated forward sales and had $175.5****million inforward sales associated with $175.5 million of loans held for sale. Loans heldfor sale that are classified as construction-to-permanent total $36.6 millionat March 31, 2009 and are not sold forward until the construction phasehas been completed.  At March 31,2009, the fair value of the derivative asset was $3.2 million and thederivative liability was $4.2 million.

 

TheCompany has interest rate swaps to mitigate its exposure to interest rate riskfor certain loans receivable.  Inaddition, the Company has two interest rate swaps for $10.0 million of the$20.0 million it has in trust preferred securities.  At March 31, 2009, accumulated othercomprehensive income included an after-tax unrealized loss of $3,000 related tothese interest rate swaps.  For the threemonths ended March 31, 2009, the hedge ineffectiveness recorded throughearnings was immaterial.

 

Note 6

 

*Goodwilland Other Intangibles*

 

Informationconcerning total amortizable other intangible assets at March 31, 2009 isas follows:

 
| ** **                        | ** ** | ** **                | ** ** | **Wealth Management**       | ** ** | ** **   | ** ** |
|-----------------------------------|------------|---------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                        | ** ** | **Mortgage Banking** | ** ** | **and Trust Services** | ** ** | **Total**    | ** ** |
| ** **                        | ** ** | **Gross**                 | ** ** | ** **                       | ** ** | **Gross**    | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Carrying**              | ** ** | **Accumulated**                  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| **(In thousands)**           | ** ** | **Amount**                | ** ** | **Amortization**                 | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Balance at December 31, 2008 |       | $                         | 1,781      |                             | $          | 841          |       | $ | 795 |   | $ | 536 |   | $ | 2,576 |   | $ | 1,377 |   |
| 2009 activity:                    |       |                      |       |                             |       |         |       |   |   |   |   |   |   |
| Customer relationship intangibles |       | —                    |       | 50                               |       | —       |       | 10 |   | — |   | 60 |   |
| Balance at March 31, 2009    |       | $                         | 1,781      |                             | $          | 891          |       | $ | 795 |   | $ | 546 |   | $ | 2,576 |   | $ | 1,437 |   |

 

Theaggregate amortization expense was $60,000 and $63,000 for the three monthsended March 31, 2009 and 2008, respectively.

 

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

 

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| **(In thousands)**           | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2009 (April – December) |       | $          | 179        |   |
| 2010                              |       | 238        |       |
| 2011                              |       | 238        |       |
| 2012                              |       | 238        |       |
| 2013                              |       | 189        |       |
| 2014 and thereafter               |       | 57         |       |
|                                   |            |            |            |  |

 

Thecarrying amount of goodwill at March 31, 2009 was as follows:

 
| **(In thousands)**           | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth  Management  and Trust  Services** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at December 31, 2008 |       | $                       | 22         |                  | $          | 10,120                                           |       | $         | 2,832      |   | $ | 12,974 |   |
| Goodwill impairment charge        |       | —                  |       | —                |       | —                                           |       | —    |       |
| Balance at March 31, 2009    |       | $                       | 22         |                  | $          | 10,120                                           |       | $         | 2,832      |   | $ | 12,974 |   |

 

Goodwillof each of the Company’s business segments is tested for impairment on anannual basis or more frequently if events or circumstances warrant. During theperiod ended March 31, 2009, the Company performed an evaluation of thegoodwill associated with its acquisition of its Trust Division, which isincluded in the wealth management and trust services segment, and no impairmentwas indicated.

 

Note 7

 

*Commitments and Contingencies*

 

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

 

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 support financialinstruments when deemed necessary.  Theamount of collateral obtained upon extension of credit is based upon management’sevaluation 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.

 

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 these

 

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guaranteesextend until satisfactory completion of the customer’s contractualobligations.  All standby letters ofcredit outstanding at March 31, 2009 are collateralized.

 

AtMarch 31, 2009, commitments to extend credit were $485.7 million andstandby letters of credit were $13.0 million. The Company has a liability of$15,000 associated with standby letters of credit at March 31, 2009.  Commitments to extend credit of $147.0million as of March 31, 2009 are related to the mortgage banking segment’spipeline and are of a short term nature.

 

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

 

GeorgeMason estimates a reserve (early pay-off reserve) for mortgage loans sold thatare repaid by the borrower within a certain number of days following the loansale, thereby requiring that George Mason refund part of the service releasepremium and/or premium pricing received from the investor.  The reserve as of March 31, 2009 was$9,000.

 

GeorgeMason has a reserve for its estimated exposure to repurchase loans previouslysold to 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. At March 31, 2009, this reserve had a balance of $1.9 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 managed companies,purchases the loans originated by the managed companies at the time oforigination.  These loans are then soldby George Mason to investors.  GeorgeMason has agreements with its managed companies requiring that, for any loansthat 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 specified by the loan investor, the managedcompany be responsible for buying back the loan.  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 March 31, 2009 as management expects to fully recover amountsowed by managed companies as of March 31, 2009.

 

Duringthe second quarter of 2008, George Mason entered into an agreement with amortgage correspondent related to the loan purchase agreement between the twoparties.  This agreement provided for therelease of known and unknown claims by the mortgage correspondent in exchangefor a $2.8 million payment to the correspondent.  The terms of this agreement require that theCompany may be obligated to make additional payments to the correspondent infuture periods based on certain conditions. The Company believes the additional exposure under this agreement is notmaterial.  The amount of this relatedexposure declines with the passage of time.

 

TheCompany has counter-party risk that may arise from the possible inability ofGeorge Mason’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.  The Company does not expect any third-party

 

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investorto fail to meet its obligation.  Inaddition, the Company has derivative counterparty risk relating to certaininterest rate swaps it has third parties. This risk may arise from the inability of the third party to meet theterms of the contracts.  The Companymonitors the financial condition of these third parties on an annualbasis.  The Company does not expect anyof these third parties to fail to meet its obligations.

 

Note8

 

*FairValue Measurements*

 

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

 

SFASNo. 157 defines fair value as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.  SFAS No. 157 also establishes a fairvalue hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring the fairvalue.  There are three levels of inputsthat may be used to measure fair value:

 

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

 

Level2 – Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-derived valuations in which all significant inputs and significant valuedrivers are observable in active markets.

 

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

 

Duringthe three months ended March 31, 2009, the Company did not designate anyasset or liability to be measured at fair value under SFAS No. 159.

 

FairValue of Investment Securities Available-for-Sale and Interest Rate SwapDerivatives

 

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

 

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

 

Assetsand liabilities measured at fair value on a recurring basis as of March 31,2009 are shown below:

 

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**At March 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                |       | 194,210     |       |                                                                                                |       | 194,210 |   |   |   |
| Loans receivable                                        |       | 13,766      |       |                                                                                                |       | 13,766 |   |   |   |
| Derivative liability – interest rate swaps         |       | 2,038       |       |                                                                                                |       | 2,038 |   |   |   |
| Derivative asset – forward loan sales  commitments |       | 3,222       |       |                                                                                                |       | 3,222 |   |   |   |
| Derivative liability - forward loan sales  commitments  |       | 2,168       |       |                                                                                                |       | 2,168 |   |   |   |

 

Asof January 1, 2009, the Company adopted SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities. *SFAS No. 161 amends SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities,* requires companies with derivative instruments todisclose information about how and why a company uses derivative instruments,how derivative instruments and related hedged items are accounted for underSFAS No. 133, and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance, and cashflows.  The required disclosures includethe fair value of derivative instruments and their gains and losses in tabularformat, information about credit-risk-related contingent features in derivativeagreements, counterparty credit risk, and the Company’s strategies andobjectives for using derivative instruments. Below is a table disclosing the derivative instruments’ location on theCompany’s statement of condition and the fair value of those instruments at March 31,2009.  In addition, the gains and lossesrelated to these derivative instruments is provided for the three months ended March 31,2009.

 

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**DerivativeInstruments and Hedging Activities**

**At of March 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 |       | $                              | —     |   | Accrued Interest Payable  and Other Liabilities |   | $ | 2,039 |   |
| Forward Loan Sales Commitments                              |       | Accrued Interest  Receivable and Other Assets |       | 1,951                          |       | Accrued Interest Payable  and Other Liabilities |   | 1,792 |   |
| **Total Derivatives Designated as**                         |       |                                          |       |                           |       |   |   |   |   |
| **Hedging Instruments**                                     |       |                                          |       | 1,951                          |       |   |   | 3,831 |   |
|                                                        |       |                                          |       |                           |       |   |   |   |   |
| **Derivatives Not Designated as**                           |       |                                          |       |                           |       |   |   |   |   |
| **Hedging Instruments**                                     |       |                                          |       |                           |       |   |   |   |   |
| Forward Rate Lock Commitments                               |       | Accrued Interest  Receivable and Other Assets |       | 1,270                          |       | Accrued Interest Payable  and Other Liabilities |   | 375 |   |
| **Total Derivatives Not Designated as Hedging Instruments** |       |                                          |       | 1,270                          |       |   |   | 375 |   |
|                                                        |       |                                          |       |                           |       |   |   |   |   |
| **Total Derivatives**                                       |       |                                          |       | $                              | 3,221      |   |   |   | $ | 4,206 |   |

 

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

**For theThree Months Ended March 31, 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                                                                                    |       | $                                                                                            | (214       | )                                                                                                | Other Income |                                                                                           | $          | 214 |   |
| **Total**                                                                | ** ** | ** **                                                                                      | ** ** | **$**                                                                                        | **(214**   | **)**                                                                                            |         |                                                                                           | **$**      | **214** |   |

 
| **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                                                     |       | $                                                                                                                                            | (202       | )                                                                                                                                                                 | Other Income |                                                                                                                                                        | $          | —                                                                                                                                                                                    |       | Other Income                                                                                                                                                                           |       | $ | — |   |
|                                                                    |       |                                                                                                                                         |       |                                                                                                                                                              |         |                                                                                                                                                        |       |                                                                                                                                                                                      |       |                                                                                                                                                                                   |       |
| Forward Loan Sales Commitments                                          |       | (431                                                                                                                                         | )          | Other Income                                                                                                                                                      |         | (1,029                                                                                                                                                      | )          | Other Income                                                                                                                                                                              |       | 1,029                                                                                                                                                                                  |       |
| **Total**                                                               | ** ** | **$**                                                                                                                                        | **(633**   | **)**                                                                                                                                                             | ** **   | ** **                                                                                                                                                  | **$**      | **(1,029**                                                                                                                                                                                | **)**      |                                                                                                                                                                                   |       | **$** | **1,029** |   |

 

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

 

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

 

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

 

Theeffects of fair value measurements for the interest rate lock commitmentderivatives and forward sales contract derivatives on earnings for the threemonths ended March 31, 2009 were as follows and were all based on Level 2inputs:

 
| **(in thousands)** | ** ** | **Notional  or  Principal  Amount** | ** ** | **Expected  Premium  (Discount)  to Par** | ** ** | **Movement  of  Interest  Rates** | ** ** | **Security  Price  Change** | ** ** | **Total Fair  Value  Adjustment** | ** ** |
|-------------------------|------------|-------------------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|
|                    |       |                                |       |                                      |       |                              |       |                        |       |                                   |       |
| Rate lock commitments   |       | $                                   | 146,480    |                                      | $          | 895                               |       | $                           | 375        |                                   | $          | — |   | $ | 1,270 |   |
|                    |       |                                |       |                                      |       |                              |       |                        |       |                                   |       |
| Forward sales contracts |       | 293,477                             |       | —                                    |       | —                            |       | (1,356                      | )          | (1,356                                 | )          |
|                         |            |                                     |            |                                           |            |                                   |            |                             |            |                                        |            |  |  |  |  |  |

 

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

 

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

 

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

 

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

 

Priorto the adoption of SAB No. 109 and SFAS No. 157, the fair valuecalculation for interest rate lock commitments and forward sales contracts onlyconsidered the effects of interest rate changes between the date of the ratelock and either the loan closing date or the balance sheet date.  For the three months ended March 31,2009, the change in fair value of the interest rate lock commitments, loansheld for sale, and forward loan sales contracts based only on changes in marketinterest rates was $1.4 million.   Interestrate movements have an offsetting impact on the security prices that serve tomeasure the fair value of these instruments.

 

ManagedCompany Loans

 

George Mason serves as apass through conduit for the managed companies to sell loans to investors on thesecondary market.  Concurrent withentering into a rate lock agreement with a borrower, the managed company loanis sold forward to an investor in the secondary market.  After the managed company closes the loan, itis assigned to George Mason.  George Masonthen facilitates the transfer of the loan to the investor.  George Mason does not earn any spread orother fees from the loan assignment nor from the transfer to the investor.  All gains in the loan sale are earned by themanaged company.  At March 31, 2009,loans held for sale includes $75.8 million of loans originated by the managedcompanies that will be delivered to the investors by George Mason.  Any change in the fair value of the loansheld for sale originated by the managed company will result in an equal andoffsetting change in liability to the managed company.

 

Note 9

 

*Net Gains on InvestmentSecurities Available-for-Sale and Held- for-Trading*

 

For the three months ended March 31,2009, the Company sold all shares of its Fannie Mae perpetual preferred stockfor a net loss of $217,000.  The Companyelected to sell these shares as a result of these shares being traded well belowtheir par value following the placement of Fannie Mae into conservatorship byfederal regulators during 2008.  The Companyrecognized an other-than-temporary impairment of $4.4 million on thisinvestment in 2008.  Because of theminimal likelihood that these shares would recover, the Company made thedecision to exit this type of investment security and no longer owns anysimilar equity investment in its investment securities portfolio.

 

At March 31, 2009,certain of the Company’s mortgage-backed and municipal investment gradesecurities were in 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-backedsecurities and municipal securities have third party protective elements andthere are no negative indications that the contractual cash flows will not bereceived when due.  The Company has theability and intent to hold these investments for a period of time sufficient toallow for an anticipated recovery in value.

 

Additionally,the Company had trading losses of $631,000 as a result of the purchase ofinvestments to economically hedge against fair value changes of the Company’snonqualified deferred compensation plan liability.  Those investments were designated as tradingsecurities under SFAS No.115, and changes in the fair value are reflected inearnings.  The trading losses wereprimarily the result of lower stock prices and were partially offset by areduction in the period’s compensation expense associated with this benefitplan.

 

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Note 10

 

*Common Stock Issued to EmployeeBenefit Plans*

 

The Company issued 287,000shares of common stock during the three month period ended March 31,2009.  These shares were issued to fund theCompany’s obligation to its participants that had elected the Cardinal Common Stockinvestment option in its various nonqualified deferred compensation plans.  These shares were issued at $5.45 per sharefor a total addition to shareholders’ equity of $1.6 million.

 

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**PART I – FINANCIAL INFORMATION**

 

**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 March 31, 2009 and December 31, 2008 and theunaudited results of our operations for the three months ended March 31,2009 and 2008. This discussion should be read in conjunction with our unauditedconsolidated financial statements and the notes thereto appearing elsewhere inthis report and the audited consolidated financial statements and the notes toconsolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**CautionAbout Forward-Looking Statements**

 

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

 

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

 
| · | the ability to successfully manage our growth or implement our growth  strategies if we are unable to identify attractive markets, locations or  opportunities to expand in the future;                                                                                                                                   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | changes in interest rates and the successful management of interest rate  risk;                                                                                                                                                                                                                                           |
| · | risks inherent in making loans such as repayment risks and  fluctuating collateral values;                                                                                                                                                                                                                                |
| · | changes in market conditions, specifically declines in the  residential real estate market, volatility and disruption of the capital and  credit markets, soundness of other financial institutions we do business  with;                                                                                                 |
| · | there is no assurance that recently enacted legislation, in  particular the Emergency Economic Stabilization Act of 2008 and the American  Recovery and Reinvestment Act of 2009, will stabilize the U.S. financial  system and there is uncertainty in the implementation of this legislation by  federal regulators;    |
| · | sudden declines, significant volatility in market prices and market  illiquidity may cause us to record an other-than-temporary impairment,  specifically in our pooled trust preferred securities portfolio;                                                                                                             |
| · | exposure to repurchase loans sold to investors for which borrowers  failed to provide full and accurate information on or related to their loan  application or for which appraisals have not been acceptable or when the loan  was not underwritten in accordance with the loan program specified by the  loan investor; |
| · | maintaining cost controls and asset quality as we open or acquire new  branches;                                                                                                                                                                                                                                          |
| · | maintaining capital levels adequate to support our growth;                                                                                                                                                                                                                                                                |
| · | reliance on our management team, including our ability to attract and  retain key personnel;                                                                                                                                                                                                                              |

 

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| · | competition with other banks and financial institutions, and  companies outside of the banking industry, including those companies that  have substantially greater access to capital and other resources; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | changes in general economic and business conditions in our market  area including the local and national economy;                                                                                          |
| · | changes in operations of George Mason Mortgage, LLC as a result of  the activity in the residential real estate market and any associated impact  on the fair value of goodwill in the future;             |
| · | risks and uncertainties related to future  trust operations;                                                                                                                                               |
| · | changes  in the operations of Wilson/Bennett Capital Management, Inc., its  customer base and assets under management and any associated impact on the  fair value of goodwill in the future;         |
| · | demand, development and acceptance of new products and services;                                                                                                                                           |
| · | problems with technology utilized by us;                                                                                                                                                                   |
| · | changing trends in customer profiles and behavior; and                                                                                                                                                     |
| · | changes in banking and other laws and regulations applicable to us.                                                                                                                                        |

 

Because of theseuncertainties, our actual future results may be materially different from theresults 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 the Quarterly Report on Form 10-Qand our Annual Report on Form 10-K for the year ended December 31,2008.

 

**Overview**

 

Weare a locally managed financial holding company headquartered in Tysons Corner,Virginia, committed to providing superior customer service, a diversified mixof financial products and services, and convenient banking to our retail andbusiness customers. We own Cardinal Bank (the “Bank”), a Virginiastate-chartered community bank, Cardinal Wealth Services, Inc. (“CWS”), aninvestment services subsidiary, and Wilson/Bennett Capital Management, Inc.(“Wilson/Bennett”), an asset management firm. Through these three subsidiariesand George Mason Mortgage, LLC (“George Mason”), a mortgage banking subsidiaryof the Bank, we offer a wide range of traditional banking products and servicesto both our commercial and retail customers. In January 2009, the Bankopened a second mortgage subsidiary, Cardinal First Mortgage, LLC (“CardinalFirst”).  Cardinal First originatesmortgage loans for new homes and refinancing in Virginia, Maryland andWashington, D.C. principally for existing Cardinal Bank customers. Ourcommercial relationship managers focus on attracting small and medium-sizedbusinesses as well as government contractors, commercial real estate developersand builders and professionals, such as physicians, accountants and attorneys.We have 25 branch office locations and six mortgage banking office locationsand provide competitive products and services. We complement our core bankingoperations by offering a full range of investment products and services to ourcustomers through our third-party brokerage relationship with Raymond JamesFinancial Services, Inc., asset management services through Wilson/Bennettand services through our trust division which include trust, estates, custody,investment management, escrows, and retirement plans. The trust division isincluded, along with CWS and Wilson/Bennett, in the wealth management and trustservices segment.

 

Netinterest income is our primary source of revenue. We define revenue as netinterest income plus noninterest income. As discussed further in the interestrate sensitivity section, we manage our balance sheet and interest rate riskexposure to maximize, and concurrently stabilize,

 

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netinterest income. We do this by monitoring our liquidity position and the spreadbetween the interest rates earned on interest-earning assets and the interestrates paid on interest-bearing liabilities. We attempt to minimize our exposureto interest rate risk, but are unable to eliminate it entirely.  Inaddition to management of interest rate risk, we analyze our loan portfolio forexposure to credit risk. Loan defaults and foreclosures are inherent risks inthe banking industry, and we attempt to limit our exposure to these risks bycarefully underwriting and then monitoring our extensions of credit. Inaddition to net interest income, noninterest income is an important source ofrevenue for us and includes, among other things, service charges on depositsand loans, investment fee income, which includes trust revenues, gains andlosses on sales of investment securities available-for-sale, gains on sales ofmortgage loans, and management fee income.

 

**CriticalAccounting Policies**

 

*General*

 

U. S. generally acceptedaccounting principles are complex and require management to apply significantjudgment to various accounting, reporting, and disclosure matters.  Management must use assumptions, judgmentsand estimates when applying these principles where precise measurements are notpossible or practical.  These policiesare critical because they are highly dependent upon subjective or complexjudgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have asignificant impact on the consolidated financial statements.  Actual results, in fact, could differ frominitial estimates.

 

The accounting policieswe view as critical are those relating to judgments, assumptions and estimatesregarding the determination of the allowance for loan losses, accounting foreconomic hedging activities, accounting for impairment testing of goodwill,accounting for the impairment of amortizing intangible assets and otherlong-lived assets, and the valuation of deferred tax assets, and the fair valuemeasurements of certain assets and liabilities.

 

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

#### ** **

**We maintain the allowance for loan losses at a level thatrepresents management’s best estimate of known and inherent losses in our loanportfolio.  Both the amount of theprovision expense and the level of the allowance for loan losses are impactedby many factors, including general and industry-specific economic conditions,actual and expected credit losses, historical trends and specific conditions ofindividual borrowers.  Unusual andinfrequently occurring events, such as weather-related disasters, may impactour assessment of possible credit losses. As a part of our analysis, we use comparative peer group data andqualitative factors such as levels of and trends in delinquencies and nonaccrualloans, national and local economic trends and conditions and concentrations ofloans exhibiting similar 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 credit, residential mortgages, and consumerloans. In the absence of meaningful historical loss factors, peer group lossfactors are applied and are adjusted by the qualitative factors mentionedabove. The indicated loss factors resulting from this analysis are applied foreach of the five categories of loans. In addition, we individually assign lossfactors to all loans that have been identified as having loss attributes, asindicated by deterioration in the financial condition of the borrower or adecline in underlying collateral value if the loan is collateral dependent.Since we have limited historical data on which to base loss factors forclassified loans, we typically apply, in accordance with regulatory guidelines,a 5% loss factor to loans classified as special mention, a

 

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15%loss factor to loans classified as substandard and a 50% loss factor to loansclassified as doubtful. Loans classified as loss loans are fully reserved orcharged off.   In certain instances, weevaluate the impairment of certain loans on a loan by loan basis.  For these loans, we analyze the fair value ofthe collateral underlying the loan and consider estimated costs to sell thecollateral on a discounted basis.  If thenet collateral value is less than the loan balance (including accrued interestand any unamortized premium or discount associated with the loan) we recognizean impairment and establish a specific reserve for the impaired loan.

 

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

 

*Accountingfor Economic Hedging Activities*

 

Weaccount for our derivatives and hedging activities in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 133, *Accountingfor Derivative Instruments and Certain Hedging Activities,* asamended, which requires that all derivative instruments be recorded on thestatement of condition at their fair values*.*We do not enter intoderivative transactions for speculative purposes. For derivatives designated ashedges, we contemporaneously document the hedging relationship, including therisk management objective and strategy for undertaking the hedge, howeffectiveness will be assessed at inception and at each reporting period andthe method for measuring ineffectiveness. We evaluate the effectiveness of these transactions at inception and onan ongoing basis.  Ineffectiveness isrecorded through earnings.  Forderivatives designated as cash flow hedges, the fair value adjustment isrecorded as a component of other comprehensive income, except for theineffective portion which is recorded in earnings.  For derivatives designated as fair valuehedges, the fair value adjustments for both the hedged item and the hedginginstrument are recorded through the income statement with any differenceconsidered the ineffective portion of the hedge.

 

Wediscontinue hedge accounting prospectively when it is determined that thederivative is no longer highly effective. In situations in which cash flowhedge accounting is discontinued, we continue to carry the derivative at itsfair value on the statement of condition and recognize any subsequent changesin fair value in earnings over the term of the forecasted transaction. Whenhedge accounting is discontinued because it is probable that a forecastedtransaction will not occur, we recognize immediately in earnings any gains and lossesthat were 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 change betweenthe 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.

 

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Tomitigate the effect of the interest rate risk inherent in providing rate lockcommitments, we economically hedge our commitments by entering into bestefforts delivery forward loan sales contracts. During the rate lock commitmentperiod, these forward loan sales contracts are marked to market throughearnings and are not designated as accounting hedges under SFAS No. 133,as amended. The fair values of loan commitments and the fair values of forwardloan sales contracts generally move in opposite directions, and the net impactof changes of these valuations on net income during the loan commitment periodis generally inconsequential. At the closing of the loan, the loan commitmentderivative expires and we record a loan held for sale and continue to beobligated under the same forward loan sales contract.   The forward sales contract is then designatedas a hedge against the variability in cash to be received from the loansale.  Loans held for sale are accountedfor at the lower of cost or fair value in accordance with SFAS No. 65, *Accounting for Certain Mortgage Banking Activities.*

 

*Accounting for Impairment Testingof Goodwill*

 

Goodwilland other intangible assets are accounted for in accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*.In accordance with this statement, goodwill will not be amortized but will betested on at least an annual basis for impairment.

 

Totest goodwill for impairment, we perform an analysis to compare the fair valueof the reporting unit to which the goodwill is assigned to the carrying valueof the reporting unit. We make estimates of the discounted cash flows from theexpected future operations of the reporting unit. If the analysis indicatesthat the fair value of the reporting unit is less than its carrying value, wedo an analysis to compare the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill. The implied fair value ofthe goodwill is determined by allocating the fair value of the reporting unitto all its assets and liabilities. If the implied fair value of the goodwill isless than the carrying value, an impairment loss is recognized.

 

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

 

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

 

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

 

#### ***Valuation of Deferred Tax Assets***

#### ** **

Werecord a provision for income tax expense based on the amounts of current taxespayable or refundable and the change in net deferred tax assets or liabilitiesduring the year. Deferred tax assets and liabilities are recognized for the taxeffects of differing carrying values of assets and liabilities for tax andfinancial statement purposes that will reverse in future periods. Whensubstantial uncertainty exists concerning the recoverability of a deferred taxasset, the carrying value of the asset is reduced by a valuation allowance. Theamount of any valuation

 

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allowanceestablished is based upon an estimate of the deferred tax asset that is morelikely than not to be recovered. Increases or decreases in the valuationallowance result in increases or decreases to the provision for income taxes.

 

*Fair ValueMeasurements*

 

Wedetermine the fair values of financial instruments based on the fair valuehierarchy established in SFAS No. 157, *Fair Value Measurements*,which requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs when measuring fair value.  The standard describes three levels of inputsthat may be used to measure fair value. We carry our investment securities available-for-sale portfolio, certainloans receivable, derivative assets and derivative liabilities at fairvalue.  Our investment securitiesavailable-for-sale are recorded at fair value using reliable and unbiasedevaluations by an industry-wide valuation service.  This service uses evaluated pricing modelsthat vary based on asset class and include available trade, bid, and othermarket information.  Generally, themethodology includes broker quotes, proprietary models, vast descriptive termsand conditions databases, as well as extensive quality control programs.  Our interest rate swap derivatives arerecorded at fair value using observable inputs from a national valuationservice.  These inputs are applied to athird party industry-wide valuation model.

 

Wealso fair value our interest rate lock commitments, forwards loan sales andmortgage loans held for sale.  The fairvalue of our interest rate lock commitments considers the expected premium(discount) to par and we apply certain fallout rates for those rate lockcommitments for which we do not close a mortgage loan.  In addition, we calculate the effects of thechanges in interest rates from the date of the commitment through loanorigination, and then period end, using applicable published mortgage-backedinvestment security prices.  The fairvalue of the forward sales contracts to investors considers the market pricemovement of the same type of security between the trade date and the balancesheet date.  At loan closing, the fairvalue of the interest rate lock commitment is included in the cost basis ofloans held for sale, which are carried at the lower of cost or market value.

 

Wehave not designated any asset or liability to be measured at fair value underSFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — including an amendment for FAS115. *For additionalinformation on the fair value of these assets, refer to Note 8 in our notes tothe consolidated financial statements.

 

###### **NewFinancial Accounting Standards**

###### ** **

Effective January 1,2009, we adopted SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities. *SFAS No. 161 amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities,*requires companies with derivative instruments to disclose information abouthow and why a company uses derivative instruments, how derivative instrumentsand related hedged items are accounted for under SFAS No. 133, and howderivative instruments and related hedged items affect a company’s financialposition, financial performance, and cash flows.  The required disclosures include the fairvalue of derivative instruments and their gains and losses in tabular format,information about credit-risk-related contingent features in derivativeagreements, counterparty credit risk, and the Company’s strategies andobjectives for using derivative instruments. SFAS No. 161 is effective prospectively for periods beginning on orafter November 15, 2008.  Theadoption provided for enhanced disclosure but otherwise did not have a materialimpact on our consolidated financial

 

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condition or results ofoperations.  Information pertaining toour derivative instruments can be found in Note 8 to the notes to the consolidatedfinancial statements.

 

##### **In April 2009, the FASB issuedFSP FAS 115-2 and FAS 124-2, *Recognition andPresentation of Other-Than-Temporary Impairments*(the “FSP”).  This standard modified the indicator ofother-than-temporary impairment for debt securities.  In addition, it amended the amount of another-than-temporary impairment that is recognized in earnings when there arecredit losses on a debt security for which management does not intend to selland for which it is more likely than not that the entity will not have to sellprior to recovery of the noncredit impairment. In those situations, the portion of the total impairment that isattributable to the credit loss would be recognized in earnings, and the remainingdifference between the debt security’s amortized cost basis and its fair valuewould be included in other comprehensive income.  The FSP is effective for interim and annualperiods ending after June 15, 2009, with early adoption permitted forperiods ending after March 15, 2009. **The adoption of this standard will not have amaterial impact on our consolidated financial condition or results ofoperations.

##### ** **

InApril 2009, the FASB issued FSP FAS 157-4, *DeterminingWhen a Market for an Asset or a Liability is Active or Inactive and DeterminingWhen a Transaction is Distressed.* This standard reaffirmed the exit price objective of fair valuemeasurements and provides guidance on inactive markets and distressedtransactions.  This standard is to beapplied prospectively and is effective for interim and annual periods ending June 15,2009, with early adoption permitted for periods ending after March 15,2009.  The adoption of this standard willnot have a material impact on our consolidated financial condition or resultsof operations.

 

InApril 2009, the FASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments. *This statement amends FASBStatement No. 107, *Disclosures about FairValue of Financial Instruments,*to require disclosures about fairvalue of financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements.  This statement also amends APB Opinion No. 28,*Interim Financial Reporting,* to requirethose disclosures in summarized financial information at interim reportingperiods.  This standard is effective forinterim reporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009.  The adoption of this standard will not have amaterial impact on our consolidated financial condition or results ofoperations.

 

##### **2009 EconomicEnvironment**

##### ** **

Ourcredit quality remains strong despite the challenges we face during the currenteconomic environment.  At March 31,2009, we have non-accrual loans totaling $5.6 million and loans contractuallypast due 90 days or more as to principal or interest of $386,000.  Net charge-offs were 0.15% of our averageloans receivable for the quarter ended March 31, 2009. Our mortgagebanking segment has profited from the recent actions taken by the FederalReserve to reduce interest rates which has spurred an increase in mortgageactivity as homeowners have reacted by applying to refinance their currentmortgages and other consumers have seen an opportunity to purchase housing asit has become more affordable. Net income from our mortgage banking segmentincreased over 140% to $1.3 million for the first quarter of 2009 as comparedto the same period of 2008.

 

Themarket dislocations that have been experienced in the financial markets overthe past year continue to impact our results. Market illiquidity continues toimpact certain portions of our investment securities portfolio, specificallythe ratings of certain monoline insurance providers, which has affected thepricing of certain municipal securities in our portfolio. In addition, we

 

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holdan investment of $8.0 million in par value of pooled trust preferredsecurities, which are significantly below book value as of March 31, 2009due to the lack of liquidity in the market.

 

Therecessionary conditions together with deterioration in the overall economy maycontinue to affect these and other markets in which we do business and couldadversely impact our results in 2009. The degree of the impact is dependentupon the duration and severity of the aforementioned conditions.

 

Whileour loan growth was strong during the first quarter of 2009, continued negativeeconomic conditions are likely to adversely affect our loan portfolio,including causing increases in delinquencies and default rates, which we expectcould impact our charge-offs and provision for loan losses.  Continued deterioration in real estate valuesand household incomes 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.  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, and thesystems by which we set limits and monitor the level or our credit exposure toindividual entities and industries, may not function as we have anticipated.

 

Liquidityis essential to our business.  Theprimary sources of funding for our Bank include customer deposits and wholesalefunding.  Our liquidity could be impairedby an inability to access the capital markets or by unforeseen outflows ofcash, including deposits.  This situationmay arise due to circumstances that we may be unable to control, such asgeneral market disruption, negative views about the financial services industrygenerally, or an 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 by furtherdisruptions 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.

 

On October 14,2008, as a result of Emergency Economic Stabilization Act (“EESA”), the U.S.Treasury and Federal Deposit Insurance Corporation (“FDIC”) announced certainprograms to encourage financial institutions to build capital and to strengthenconfidence and encourage liquidity in the banking system.  Specifically, the U.S. Treasury announced avoluntary Capital Purchase Program (“CPP”), pursuant to which the U.S. Treasurywill purchase up to $250 billion of senior preferred securities from eligibleU.S. financial institutions on standardized terms.  This amount was subsequently increased to$350 billion. On December 12, 2008, we announced that our application for$41.2 million in capital under the CPP had received the U.S. Treasury’spreliminary approval.  Upon preliminaryapproval, our Board of Directors performed careful analysis and decided todecline to participate in the CPP concluding that the significant expense ofthe program and challenge to prudently and profitably deploy the capital wereinconsistent with our long term strategic objectives, and that theparticipation in the CPP would not be in the best interest of our shareholders.

 

Inaddition, the FDIC announced a Temporary Liquidity Guarantee Program pursuantto which the FDIC will guarantee certain newly-issued senior unsecured debtissued by eligible institutions on or before June 30, 2009, as well asfunds in noninterest-bearing transaction deposit accounts held by FDIC-insuredbanks until December 31, 2009.  Weelected to participate in both of these programs.

 

Inaddition to the ESSA, the U.S. government has continued to respond to theongoing financial crisis and economic slowdown by enacting new legislation andexpanding or establishing a number of programs and initiatives.  The recently enacted American Recovery and

 

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Reinvestment Act (“ARRA”)is intended to expand and establish government spending programs and providetax cuts to stimulate the economy. Congress and the U.S. government continue to evaluate and developvarious programs and initiatives designed to stabilize the financial andhousing markets and stimulate the economy, including the U.S. Treasury’srecently announced Financial Stability Plan and the U.S. government’s recentlyannounced foreclosure prevention program. The final form of any such programs or initiatives or relatedlegislation cannot be known at this time. There can be no assurance as to the impact these programs will have onthe financial markets, including the extreme levels of volatility and limitedcredit availability currently being experienced.  The failure of these efforts to stabilize thefinancial markets and a continuation or worsening of current or financial marketconditions could materially and adversely affect our business, financialcondition, results of operations, access to credit, our regulatory capitalposition or the trading price of our common stock.

 

##### **Statements ofIncome**

##### ** **

*General*

 

Forthe three months ended March 31, 2009 and 2008, we reported net income of$2.2 million and $2.0 million, respectively. Net interest income after the provision for loan losses decreased$612,000 to $9.4 million for the three months ended March 31, 2009compared to $10.0 million for the three months ended March 31, 2008.  The decrease in net interest income afterprovision for loan losses is a direct result of an increase in our provisionfor loan losses for the three months ended March 31, 2009 of $896,000 to$1.2 million compared to $320,000 for the same period of 2008.  Net interest income increased $284,000 to$10.6 million for the three months ended March 31, 2009 compared to $10.3million for the three months ended March 31, 2008.  Noninterest income for the three months endedMarch 31, 2009 was $5.8 million, an increase of $1.1 million, or 25%,compared to $4.6 million for the three months ended March 31, 2008.  The increase in noninterest income isprimarily due to an increase in realized and unrealized gains on mortgagebanking activities, which increased $1.0 million to $3.3 million for the threemonths ended March 31, 2009 compared to $2.3 million for the quarter endedMarch 31, 2008.  For the threemonths ended March 31, 2009, noninterest expense increased slightly to$12.0 million, an increase of $214,000 or 2%, from $11.8 million for the threemonths ended March 31, 2008.  Theincrease in noninterest expense for the three months ended March 31, 2009as compared to the same period of 2008 was mostly due to the increase in ourFDIC insurance assessment, which increased $235,000 for the first quarter of2009 as compared to the same quarter of 2008.

 

Forthe three months ended March 31, 2009, basic and diluted income per commonshare were each $0.09.  Basic and dilutedincome per common share for the three months ended March 31, 2008 wereeach $0.08.  Weighted average fullydiluted shares outstanding for the three months ended March 31, 2009 and2008 were 24,805,337 and 24,891,673, respectively.

 

Returnon average assets for the three months ended March 31, 2009 and 2008 wereeach 0.50%. Return on average equity for the three months ended March 31,2009 and 2008 was 5.38% and 5.06%, respectively.

 

*General—Business Segments*

 

Net income attributable tothe commercial banking segment for the three months ended March 31, 2009and 2008 was $1.7 million and $2.2 million, respectively.  The 2009 results reported were impacted by anincrease in our provision for loan losses of $870,000 to $1.2

 

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million as compared to$320,000 for the three months ended March 31, 2008.  The increase in provision expense is relatedto current economic and market conditions and modest loan charge-offs for thefirst quarter of 2009.

 

The mortgage banking segmentreported net income of $1.3 million for the three months ended March 31,2009 compared to net income of $542,000 for the three months ended March 31,2008.  The increase in net income for thethree months ended March 31, 2009 was primarily attributable to anincrease in loan origination volume due to the decrease in mortgage interestrates and availability of affordable housing.

 

Thewealth management and trust services segment, which includes CWS,Wilson/Bennett and the trust division of the Bank, recorded net income of$10,000 and $18,000 for the three month periods ended March 31, 2009 and2008, respectively.

 

*NetInterest Income*

 

Netinterest income represents the difference between interest and fees earned oninterest-earning assets and the interest paid on deposits and otherinterest-bearing liabilities. The level of net interest income is impactedprimarily by variations in the volume and mix of these assets and liabilities,as well as changes in interest rates. Net interest income for the three monthsended March 31, 2009 and 2008 was $10.6 million and $10.3 million,respectively, a period-to-period increase of $284,000, or 3%. The yields onboth our assets and liabilities fell during the quarter as interest rates decreased.  During 2008 and 2009, we have primarily beenliability sensitive, which means that we have more liabilities repricing thanassets in the current decreasing interest rate environment, which has allowedus to maintain our net interest margin in this decreasing rate environment.

 

Specifically,interest income on loans receivable decreased $1.3 million for the three monthsended March 31, 2009 compared to the same three month period of 2008.  Interest income on investment securitiesdecreased $727,000 for the three months ended March 31, 2009 as comparedto the three months ended March 31, 2008. The decrease in interest income on loans receivable is directly relatedto the current decreased interest rate environment.  The decrease in interest income on investmentsecurities is directly related to the lower balances of investment securitieswe hold due to the securities sales and calls that have occurred over the pastyear.  Total interest expense hasdecreased $2.9 million for the three months ended March 31, 2009 ascompared to the same period of 2008.  Thedecrease in total interest expense is mostly related to the decreases we havetaken in the interest rates we pay on our interest checking and savings depositaccounts.

 

Wehave certain loans and investment securities for which a portion of the incomerealized is tax-exempt.  Net interestincome on a tax equivalent basis for the three months ended March 31, 2009and 2008 was $10.7 million and $10.4 million, respectively.

 

Ournet interest margin, which equals net interest income divided by averageearning assets, was 2.61% and 2.69% for the three months ended March 31,2009 and 2008, respectively.  Thedecrease in the net interest margin for the three months ended March 31,2009 compared to the same periods of 2008 is a result of a greater decrease inyields earned for average earning assets over the decrease in the cost of ourinterest-bearing liabilities, a direct result of the current interest rateenvironment.  Tables 1 and 2 present ananalysis of average earning assets and interest-bearing liabilities withrelated components of interest income and interest expense on a tax equivalentbasis.

 

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

Three Months EndedMarch 31, 2009, 2008, and 2007

(In thousands)

 
| ** **                                               | ** ** | **2009**    | ** ** | **2008**     | ** ** | **2007**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **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                               |       | $           | 170,513    |         | $          | 2,092       |       | 4.91 | % | $ | 137,047 |   | $ | 2,355 |   | 6.87 | % | $ | 103,408 |   | $ | 1,949 |   | 7.54 | % |
| Real estate -  commercial                                |       | 489,712     |       | 7,651        |       | 6.25        | %          | 415,147 |   | 6,839 |   | 6.59 | % | 324,412 |   | 5,340 |   | 6.58 | % |
| Real estate -  construction                              |       | 179,708     |       | 1,766        |       | 3.93        | %          | 190,882 |   | 3,222 |   | 6.75 | % | 160,346 |   | 3,382 |   | 8.44 | % |
| Real estate -  residential                               |       | 206,975     |       | 2,828        |       | 5.46        | %          | 211,965 |   | 3,002 |   | 5.67 | % | 197,781 |   | 2,676 |   | 5.41 | % |
| Home equity lines                                        |       | 105,867     |       | 976          |       | 3.74        | %          | 85,169 |   | 1,158 |   | 5.45 | % | 63,827 |   | 1,167 |   | 7.31 | % |
| Consumer                                                 |       | 2,513       |       | 36           |       | 5.89        | %          | 2,759 |   | 51 |   | 7.39 | % | 4,880 |   | 94 |   | 7.70 | % |
| Total loans                                              |       | 1,155,288   |       | 15,349       |       | 5.31        | %          | 1,042,969 |   | 16,627 |   | 6.38 | % | 854,654 |   | 14,608 |   | 6.84 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for  sale                                     |       | 171,812     |       | 1,825        |       | 4.25        | %          | 139,336 |   | 2,129 |   | 6.11 | % | 248,962 |   | 4,379 |   | 7.04 | % |
| Investment  securities - trading                         |       | —      |       | —       |       | 0.00        | %          | — |   | — |   | 0.00 | % | 45 |   | 1 |   | 4.56 | % |
| Investment securities  available-for-sale                |       | 232,342     |       | 2,988        |       | 5.14        | %          | 265,248 |   | 3,406 |   | 5.14 | % | 241,383 |   | 2,896 |   | 4.80 | % |
| Investment  securities held-to-maturity                  |       | 49,059      |       | 484          |       | 3.95        | %          | 70,499 |   | 749 |   | 4.25 | % | 96,158 |   | 1,002 |   | 4.17 | % |
| Other investments                                        |       | 15,633      |       | (19          | )          | -0.50       | %          | 14,614 |   | 218 |   | 5.97 | % | 8,727 |   | 127 |   | 5.82 | % |
| Federal funds  sold                                      |       | 23,163      |       | 13           |       | 0.23        | %          | 18,696 |   | 137 |   | 2.93 | % | 79,911 |   | 1,024 |   | 5.13 | % |
| Total  interest-earning assets and interest income (2)   |       | 1,647,297   |       | 20,640       |       | 5.01        | %          | 1,551,362 |   | 23,266 |   | 6.00 | % | 1,529,840 |   | 24,037 |   | 6.28 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning  assets:                             |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                                 |       | $           | 91         |         |       |        |       |   | $ | 8,631 |   |   |   |   |   | $ | 9,390 |   |   |   |   |   |
| Premises and  equipment, net                             |       | 16,307      |       |         |       |        |       | 18,280 |   |   |   |   |   | 20,180 |   |   |   |   |   |
| Goodwill and  other intangibles, net                     |       | 14,153      |       |         |       |        |       | 17,213 |   |   |   |   |   | 17,469 |   |   |   |   |   |
| Accrued interest  and other assets                       |       | 57,258      |       |         |       |        |       | 52,074 |   |   |   |   |   | 46,659 |   |   |   |   |   |
| Allowance for  loan losses                               |       | (14,727     | )          |         |       |        |       | (11,802 | ) |   |   |   |   | (9,744 | ) |   |   |   |   |
| Total assets                                             |       | $           | 1,720,379  |         |       |        |       |   | $ | 1,635,758 |   |   |   |   |   | $ | 1,613,794 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing liabilities:                         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:                            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 119,175     |       | 376          |       | 1.28        | %          | 124,837 |   | 835 |   | 2.68 | % | 129,251 |   | 921 |   | 2.88 | % |
| Money markets                                            |       | 44,307      |       | 147          |       | 1.33        | %          | 42,327 |   | 293 |   | 2.77 | % | 63,739 |   | 379 |   | 2.38 | % |
| Statement savings                                        |       | 261,450     |       | 1,185        |       | 1.84        | %          | 375,022 |   | 3,301 |   | 3.53 | % | 351,121 |   | 4,168 |   | 4.76 | % |
| Certificates of  deposit                                 |       | 606,588     |       | 5,049        |       | 3.33        | %          | 450,488 |   | 4,918 |   | 4.37 | % | 568,904 |   | 6,602 |   | 4.64 | % |
| Total interest -  bearing deposits                       |       | 1,031,520   |       | 6,757        |       | 2.66        | %          | 992,674 |   | 9,347 |   | 3.78 | % | 1,113,015 |   | 12,070 |   | 4.40 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 374,121     |       | 3,142        |       | 3.41        | %          | 339,665 |   | 3,473 |   | 4.10 | % | 199,725 |   | 2,040 |   | 4.14 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,405,641   |       | 9,899        |       | 2.86        | %          | 1,332,339 |   | 12,820 |   | 3.86 | % | 1,312,740 |   | 14,110 |   | 4.36 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 133,775     |       |         |       |        |       | 122,408 |   |   |   |   |   | 123,567 |   |   |   |   |   |
| Other liabilities                                        |       | 19,569      |       |         |       |        |       | 19,654 |   |   |   |   |   | 20,496 |   |   |   |   |   |
| Common shareholders’  equity                        |       | 161,394     |       |         |       |        |       | 161,357 |   |   |   |   |   | 156,991 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $           | 1,720,379  |         |       |        |       |   | $ | 1,635,758 |   |   |   |   |   | $ | 1,613,794 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income and net interest margin (2)         |       |        |       | $            | 10,741     |        | 2.61       | % |   |   | $ | 10,446 |   | 2.69 | % |   |   | $ | 9,927 |   | 2.60 | % |

 

----

| (1) | Non-accrual loans are  included in average balances and do not have a material effect on the average  yield. Interest income on non-accruing loans was not material for the periods  presented.                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Interest income for  loans receivable, investment securities available-for-sale and fed funds sold  (which includes investments in money market preferred stock) is reported on a  fully taxable-equivalent basis at a rate of 34%. |

 

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** **

**Rate and Volume Analysis**

Three Months Ended March 31, 2009, 2008, and 2007

(In thousands)

 
| ** **                               | ** ** | **2009 Compared to 2008** | ** ** | **2008 Compared to 2007** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **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                |       | $                                        | 575        |                                     | $          | (838 | ) | $ | (263 | ) | $ | 634 |   | $ | (228 | ) | $ | 406 |   |
| Real estate - commercial                 |       | 1,228                                    |       | (416                                     | )          | 812 |   | 1,493 |   | 6 |   | 1,499 |   |
| Real estate - construction               |       | (189                                     | )          | (1,267                                   | )          | (1,456 | ) | 644 |   | (804 | ) | (160 | ) |
| Real estate - residential                |       | (66                                      | )          | (108                                     | )          | (174 | ) | 192 |   | 134 |   | 326 |   |
| Home equity lines                        |       | 269                                      |       | (451                                     | )          | (182 | ) | 387 |   | (396 | ) | (9 | ) |
| Consumer                                 |       | (6                                       | )          | (9                                       | )          | (15 | ) | (41 | ) | (2 | ) | (43 | ) |
| Total loans                              |       | 1,811                                    |       | (3,089                                   | )          | (1,278 | ) | 3,309 |   | (1,290 | ) | 2,019 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans held for sale                      |       | 496                                      |       | (800                                     | )          | (304 | ) | (1,928 | ) | (322 | ) | (2,250 | ) |
| Investment securities - trading          |       | —                                   |       | —                                   |       | — |   | (1 | ) | — |   | (1 | ) |
| Investment securities available-for-sale |       | (420                                     | )          | 2                                        |       | (418 | ) | 286 |   | 224 |   | 510 |   |
| Investment securities held-to-maturity   |       | (228                                     | )          | (37                                      | )          | (265 | ) | (267 | ) | 14 |   | (253 | ) |
| Other investments                        |       | 16                                       |       | (253                                     | )          | (237 | ) | 86 |   | 5 |   | 91 |   |
| Federal funds sold                       |       | 32                                       |       | (156                                     | )          | (124 | ) | (785 | ) | (102 | ) | (887 | ) |
| Total interest income (2)                |       | 1,707                                    |       | (4,333                                   | )          | (2,626 | ) | 700 |   | (1,471 | ) | (771 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                    |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:             |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | (45                                      | )          | (414                                     | )          | (459 | ) | (22 | ) | (64 | ) | (86 | ) |
| Money markets                            |       | 13                                       |       | (159                                     | )          | (146 | ) | (127 | ) | 41 |   | (86 | ) |
| Statement savings                        |       | (1,016                                   | )          | (1,100                                   | )          | (2,116 | ) | 281 |   | (1,148 | ) | (867 | ) |
| Certificates of deposit                  |       | 1,700                                    |       | (1,569                                   | )          | 131 |   | (1,375 | ) | (309 | ) | (1,684 | ) |
| Total interest - bearing deposits        |       | 652                                      |       | (3,242                                   | )          | (2,590 | ) | (1,243 | ) | (1,480 | ) | (2,723 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 313                                      |       | (644                                     | )          | (331 | ) | 1,463 |   | (30 | ) | 1,433 |   |
| Total interest expense                   |       | 965                                      |       | (3,886                                   | )          | (2,921 | ) | 220 |   | (1,510 | ) | (1,290 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                                        | 742        |                                     | $          | (447 | ) | $ | 295 |   | $ | 480 |   | $ | 39 |   | $ | 519 |   |

 

----

| (1) | Non-accrual  loans are included in average balances and do not have a material effect on  the average yield. Interest income on non-accruing loans was not material for  the periods presented.                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Interest  income for loans receivable, investment securities available-for-sale and fed  funds sold (which includes investments in money market preferred stock) is  reported on a fully taxable-equivalent basis at a rate of 34%. |
| (3) | Changes  attributable to rate/volume have been allocated to volume.                                                                                                                                                                 |

 

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*Provision for Loan Losses*

 

Theprovision for loan losses for the three months ended March 31, 2009 and2008 was $1.2 million and $320,000, respectively. During the first quarter of2009, we charged off a residential loan held at George Mason totaling $167,000and two residential loans at the Bank totaling $219,000.  In addition, an installment loan at the Banktotaling $49,000 was charged-off during the first quarter of 2009.  In addition to the above mentionedcharge-offs, our provision expense was impacted by an increase in watch listcredits and net new loan growth in addition to our evaluation of the creditquality in our loan portfolio and the qualitative factors we use to determinethe adequacy of our loan loss reserves as described above in “CriticalAccounting Policies—Allowance for Loan Losses.” The allowance for loan lossesat March 31, 2009 and December 31, 2008 were $15.3 million and $14.5million, respectively. Our allowance for loan losses ratio to loans receivable,net were 1.30% and 1.27% at March 31, 2009 and December 31, 2008,respectively.  Nonperforming loans at March 31,2009 and December 31, 2008, were $6.0 million and $5.0 million,respectively.

 

Whileour loan growth was strong during the first quarter of 2009, continued negativeeconomic conditions are likely to adversely affect our loan portfolio,including causing increases in delinquencies and default rates, which we expectcould impact our charge-offs and provision for loan losses.  Continued deterioration in real estate valuesand household incomes 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.  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, and thesystems by which we set limits and monitor the level or our credit exposure toindividual entities and industries, 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 inTables 3, 4 and 5, respectively.

 

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**Allowance for Loan Losses**

Three Months Ended March 31, 2009 and 2008

(In thousands)

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1 |       | $        | 14,518     |     | $          | 11,641 |   |
|                              |       |     |       |     |       |
| Provision for loan losses         |       | 1,216    |       | 320      |       |
|                              |       |     |       |     |       |
| Loans charged off:                |       |     |       |     |       |
| Commercial and industrial         |       | —   |       | (16      | )          |
| Residential                       |       | (386     | )          | —   |       |
| Consumer                          |       | (49      | )          | (87      | )          |
| Total loans charged off           |       | (435     | )          | (103     | )          |
|                              |       |     |       |     |       |
| Recoveries:                       |       |     |       |     |       |
| Commercial and industrial         |       | 4        |       | —   |       |
| Consumer                          |       | —   |       | —   |       |
| Total recoveries                  |       | 4        |       | —   |       |
|                              |       |     |       |     |       |
| Net (charge offs) recoveries      |       | (431     | )          | (103     | )          |
|                              |       |     |       |     |       |
| Ending balance, March 31,    |       | $        | 15,303     |     | $          | 11,858 |   |

 
| ** **                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Loans:**                                                 | ** ** | ** **         | ** ** | ** **            | ** ** |
| Balance at period end                                      |       | $                  | 1,172,681  |                  | $          | 1,139,348 |   |
| Allowance for loan losses to loans receivable  net of fees |       | 1.30               | %          | 1.27                  | %          |
| Annualized net charge-offs to average loans  receivable    |       | 0.15               | %          | 0.24                  | %          |
|                                                            |            |                    |            |                       |            |  |  |

 

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**Allocation of the Allowance for Loan Losses**

At March 31, 2009 and December 31, 2008

(In thousands)

 
| ** **                      | ** ** | **March 31,** | ** ** | **December 31,**     | ** ** |
|---------------------------------|------------|--------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **2009**           | ** ** | **2008**                  | ** ** |
| ** **                      | ** ** | **Allocation**     | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and industrial       |       | $                  | 2,521      |                      | 15.83      | % | $ | 2,129 |   | 14.12 | % |
| Real estate - commercial        |       | 7,356              |       | 44.45                     | %          | 6,110 |   | 41.41 | % |
| Real estate - construction      |       | 2,205              |       | 13.08                     | %          | 3,118 |   | 16.53 | % |
| Real estate - residential       |       | 2,083              |       | 17.21                     | %          | 2,138 |   | 18.57 | % |
| Home equity lines               |       | 1,083              |       | 9.23                      | %          | 965 |   | 9.16 | % |
| Consumer                        |       | 55                 |       | 0.20                      | %          | 58 |   | 0.21 | % |
|                            |       |               |       |                      |       |   |   |   |   |
| Total allowance for loan losses |       | $                  | 15,303     |                      | 100.00     | % | $ | 14,518 |   | 100.00 | % |

 

----

* Percentage of loan type to the total loan portfolio.

 

**Nonperforming Loans**

At March 31, 2009 and December 31, 2008

(In thousands)

 
| ** **                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Nonaccruing loans                             |       | $                  | 5,638      |                  | $          | 4,671 |   |
|                                          |       |               |       |                  |       |
| Loans contractually past-due 90 days or  more |       | 386                |       | 379                   |       |
|                                          |       |               |       |                  |       |
| Total nonperforming loans                     |       | $                  | 6,024      |                  | $          | 5,050 |   |

 

*NoninterestIncome*

 

Noninterestincome includes service charges on deposits and loans, realized and unrealizedgains on mortgage banking activities, investment fee income, and management feeincome, and continues to be an important factor in our operating results.Noninterest income for the three months ended March 31, 2009 and 2008 were$5.8 million and $4.6 million, respectively, an increase of $1.1 million, or25%.   Realized and unrealized gains onmortgage banking activities by our mortgage banking segment for the threemonths ended March 31, 2009 and 2008 were $3.3 million and $2.3 million,respectively, an increase of $1.0 million, or 44%.  Included in realized and unrealized gains onmortgage banking activities are any origination, underwriting, and discountpoints and other funding fees received and deferred at loan origination. Costsinclude direct costs associated with the loan origination, such as commissionsand salaries that are deferred at the time of origination.  Income from loan services charges increased$523,000 to $833,000 for the three months ended March 31, 2009, comparedto

 

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$310,000for the same period of 2008.  Managementfee income for the three months ended March 31, 2009 and 2008 was $331,000and $84,000, respectively, an increase of $247,000. Management fee incomerepresents the income earned for services George Mason provides to othermortgage companies owned by local home builders and generally fluctuates basedon the volume of loan sales. The increases in realized and unrealized gains onmortgage banking activities, loan service charges and management fee income isdirectly related to the increase in loan origination activity and sales volumeoccurring in the mortgage banking segments as a result of the decreases inmortgage rates and the availability of affordable homes during the firstquarter of 2009.

 

Servicecharges on deposit accounts decreased $55,000 to $472,000 for the three monthsended March 31, 2009 compared to $527,000 for the same period of 2008.

 

Investmentfee income decreased $90,000 to $810,000 for the three months ended March 31,2009 compared to $900,000 for the same period of 2008. The decrease ininvestment fee income is attributable to the decrease in net commissions earnedat CWS as a result of employee turnover in that subsidiary and decreased feeincome at our trust division due to the loss of low margin custodyrelationships with two clients.

 

Forthe three month period ended March 31, 2009, we recorded net gains onsales of investment securities available-for-sale of $552,000.  Included in these net gains, were net losseson sales of investment securities available-for-sale of $217,000 which resultedfrom the sale of all of our shares of Fannie Mae perpetual preferredstock.  Additionally, we had tradinglosses of $631,000 as a result of our purchase of investments to economicallyhedge against fair value changes of the Company’s nonqualified deferredcompensation plan liability.  Theseinvestments are included in Other Assets on the statement of condition at March31, 2009. The trading losses were primarily the result of lower stock pricesand were partially offset by a reduction in the period’s compensation expenseassociated with this benefit plan.

 

Noninterestincome represented 35% and 31% of our total revenues for the three months endedMarch 31, 2009 and 2008, respectively.

 

*NoninterestExpense*

 

Noninterestexpense includes salaries and benefits, occupancy costs, professional fees,depreciation, data processing, telecommunications and miscellaneous expenses.Noninterest expense for the three months ended March 31, 2009 was $12.0million, compared to $11.8 million for the same period of 2008, an increase of$214,000, or 2%.  The increase innoninterest expense for the three months ended March 31, 2009 as comparedto the same period of 2008 was a result an increase in our FDIC insuranceassessment during the first quarter of 2009. Our FDIC insurance assessmentincreased $235,000 for the first quarter of 2009 as compared to the same periodof 2008 as a result of the changes made by the FDIC over the past severalmonths to replenish the levels of the Bank Institution Fund as a result ofrecent bank failures.  In addition,additions made to George Mason’s repurchase reserves increased $580,000 for thethree months ended March 31, 2009 as compared to the same period of2008.  Salary and benefits expensedecreased $517,000 for the three months ended March 31, 2009 compared tothe same period of 2008 due to the decrease in the level of staffing at thecommercial banking and wealth management business segments.

 

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* *

*IncomeTaxes*

 

Forthe three months ended March 31, 2009, we recorded a provision for incometaxes of $953,000, compared to $761,000 for the same period of 2008.  Our effective tax rate for the three monthsended March 31, 2009 and 2008 was 30.5% and 27.2%, respectively.  The increase in our effective tax rate isprimarily a result of a decrease in income from our tax-exempt investmentsduring the first quarter of 2009 as compared to the same period of 2008.  In addition, our tax exempt income is asmaller percentage of our overall net income for the three months ended March 31,2009 compared to March 31, 2008. See also “Critical Accounting Policies — Valuation of Deferred TaxAssets.”

 

**Statementsof Condition**

 

Totalassets were $1.79 billion and $1.74 billion at March 31, 2009 and December 31,2008, respectively.  The increase in ourtotal assets was primarily driven by the increase in total deposits.  Total deposits increased $30.2 million to$1.21 billion at March 31, 2009 compared to $1.18 billion at December 31,2008.

 

*InvestmentSecurities*

 

Investmentsecurities were $241.0 million at March 31, 2009, compared to $315.5million at December 31, 2008, a decrease of $74.5 million. The decrease ininvestment securities is primarily due to sales, calls and maturities ofcertain of our U.S. government sponsored agency and mortgage-backed securities,which was primarily reinvested funds received from these transactions in ourloan portfolio.  The investment portfolioconsists of investment securities available-for-sale and investment securitiesheld-to-maturity. Investment securities available-for-sale are those securitiesthat we intend to hold for an indefinite period of time, but not necessarilyuntil maturity. These securities are carried at fair value and may be sold aspart of an asset/liability strategy, liquidity management or regulatory capitalmanagement.  Investment securitiesheld-to-maturity are those securities that we have the intent and ability tohold to maturity and are carried at amortized cost. At March 31, 2009,investment securities available-for-sale were $194.2 million and investmentsecurities held-to-maturity were $46.8 million. At December 31, 2008,investment securities available-for-sale were $265.4 million and investmentsecurities held-to-maturity were $50.2 million. See Table 6 for additional information on our investment securitiesportfolio.

 

Wecomplete reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2009, 82% of the parvalue of our investment securities portfolio consisted of securities rated AAAby a leading rating agency.  Investmentsecurities which carry a AAA rating are judged to be of the best quality andcarry the smallest degree of investment risk. At March 31, 2009, 93% of our mortgage-backed investment securitiesportfolio are guaranteed by the Federal National Mortgage Association (FNMA),the Federal Home Loan Mortgage Corporation (FHLMC) and the Government NationalMortgage Association (GNMA).  During thethird quarter of 2008, FNMA and FHLMC were placed into conservatorship byfederal regulators.  We expect to receivefull payment of interest and principal on the securities in the investmentportfolio.

 

Wehave $12.4 million in non-government non-agency mortgage-backedsecurities.  These securities are ratedAAA.  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.

 

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AtMarch 31, 2009 certain of our investment grade securities were in anunrealized loss position.  Investmentsecurities with unrealized losses have interest rates that are less thancurrent market interest rates and, therefore, the indicated decrease in valuesare not a result of permanent credit impairment. Municipal securities, with anamortized cost of $33.3 million at March 31, 2009, are the primarycomponent of the unrealized losses in the available-for-sale investmentsecurities portfolio at March 31, 2009. The majority of our municipal securities have been downgraded to AA orsingle A status due to the downgrades of the monoline insurance companies thatinsured those bonds.  The downgradedbonds remain general obligations of the municipalities and while prices forthese municipal securities are generally below book value, we expect to receivepayment of all principal amounts due to us. There is no other-than-temporary impairment on these municipalsecurities or any other securities in our investment portfolio.

 

Inaddition, our held-to-maturity portfolio includes investments in four pooledtrust preferred securities, totaling $8.0 million of par value at March 31,2009.  The collateral underlying thesestructured securities are instruments issued by financial institutions orinsurers.  We own the A-3 tranches ineach issuance.  Each of the bonds arerated by more than one rating agency. Two of the securities have composite ratings of AA.  One of the securities has a composite ratingof BBB+, and one has a composite rating of BBB-.  These ratings are consistent with the gradesfrom the other rating agencies.  There isminimal observable trading activity for these types of securities.  We have estimated the fair value of thesecurities through the use of internal calculations and through informationprovided by external pricing services. Given the level of subordination below our A-3 tranches, and the actualand expected performance of the underlying collateral, we expect to receive allcontractual interest and principal payments and concluded that these securitiesare not other-than-temporarily impaired.

 

AtSeptember 30, 2008, we recorded an other-than-temporary impairment of $4.4million related to our investment in Fannie Mae perpetual preferred stock.  This impairment was due to the shares beingtraded well below their par value following the placement of Fannie Mae intoconservatorship by federal regulators in September 2008.  During the first quarter of 2009, we sold allof our Fannie Mae perpetual preferred stock for a net loss of $217,000.

 

Wehold $15.7 million in FHLB stock at March 31, 2009.  In September 2008, the FHLB 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.  It was announced that the fourth quarterdividend would be declared and paid at the end of January 2009.  On March 31, 2009, the Board ofDirectors announced that no dividend would be declared for the fourth quarterof 2008.

 

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**InvestmentSecurities **

At March 31,2009 and December 31, 2008

(In thousands)

 
| ** **                                     | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
|------------------------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                     | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Available-for-sale at March 31, 2009**  | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| U.S. government-sponsored agencies             |       |          |       |       |       |        |       |
| Five to ten years                              |       | $             | 5,738      |       | $          | 5,742       |       | 5.13 | % |
| Total U.S. government-sponsored agencies       |       | 5,738         |       | 5,742      |       | 5.13        | %          |
|                                           |       |          |       |       |       |        |       |
| Mortgage-backed securities (1)                 |       |          |       |       |       |        |       |
| One to five years                              |       | 178           |       | 178        |       | 4.38        | %          |
| Five to ten years                              |       | 16,366        |       | 16,991     |       | 5.02        | %          |
| After ten years                                |       | 135,428       |       | 138,748    |       | 5.39        | %          |
| Total mortgage-backed securities               |       | 151,972       |       | 155,917    |       | 5.35        | %          |
|                                           |       |          |       |       |       |        |       |
| Municipal securities (2)                       |       |          |       |       |       |        |       |
| After ten years                                |       | 33,266        |       | 31,951     |       | 4.09        | %          |
| Total municipal securities                     |       | 33,266        |       | 31,951     |       | 4.09        | %          |
|                                           |       |          |       |       |       |        |       |
| U. S. treasury securities                      |       |          |       |       |       |        |       |
| One to five years                              |       | 600           |       | 600        |       | 1.02        | %          |
| Total U.S. treasury securities                 |       | 600           |       | 600        |       | 1.02        | %          |
| Total investment securities available-for-sale |       | $             | 191,576    |       | $          | 194,210     |       | 5.11 | % |

 
| ** **                                   | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
|----------------------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                   | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Held-to-maturity at March 31, 2009**  | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| U.S. government-sponsored agencies           |       |          |       |       |       |        |       |
| One to five years                            |       | $             | 2,001      |       | $          | 2,015       |       | 4.30 | % |
| Total U.S. government-sponsored agencies     |       | 2,001         |       | 2,015      |       | 4.30        | %          |
|                                         |       |          |       |       |       |        |       |
| Mortgage-backed securities (1)               |       |          |       |       |       |        |       |
| One to five years                            |       | 1,678         |       | 1,709      |       | 4.29        | %          |
| Five to ten years                            |       | 8,737         |       | 8,987      |       | 4.46        | %          |
| After ten years                              |       | 26,415        |       | 26,755     |       | 4.41        | %          |
| Total mortgage-backed securities             |       | 36,830        |       | 37,451     |       | 4.42        | %          |
|                                         |       |          |       |       |       |        |       |
| Corporate bonds                              |       |          |       |       |       |        |       |
| After ten years                              |       | 8,004         |       | 3,718      |       | 2.62        | %          |
| Total corporate bonds                        |       | 8,004         |       | 3,718      |       | 2.62        | %          |
| Total investment securities held-to-maturity |       | 46,835        |       | 43,184     |       | 4.11        | %          |
|                                         |       |          |       |       |       |        |       |
| Total investment securities                  |       | $             | 238,411    |       | $          | 237,394     |       | 4.91 | % |

 

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| ** **                                       | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
|--------------------------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| ** **                                       | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Available-for-sale at December 31, 2008** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| U.S. government-sponsored agencies               |       |          |       |       |       |        |       |
| One to five years                                |       | $             | 24,917     |       | $          | 24,962      |       | 5.28 | % |
| Five to ten years                                |       | 436           |       | 166        |       | 8.25        | %          |
| Total U.S. government-sponsored agencies         |       | 25,353        |       | 25,128     |       | 5.33        | %          |
|                                             |       |          |       |       |       |        |       |
| Mortgage-backed securities (1)                   |       |          |       |       |       |        |       |
| One to five years                                |       | 4,263         |       | 4,277      |       | 4.19        | %          |
| Five to ten years                                |       | 42,503        |       | 43,626     |       | 4.45        | %          |
| After ten years                                  |       | 158,969       |       | 160,301    |       | 5.27        | %          |
| Total mortgage-backed securities                 |       | 205,735       |       | 208,204    |       | 5.08        | %          |
|                                             |       |          |       |       |       |        |       |
| Municipal securities (2)                         |       |          |       |       |       |        |       |
| After ten years                                  |       | 33,265        |       | 31,424     |       | 4.09        | %          |
| Total U.S. treasury securities                   |       | 33,265        |       | 31,424     |       | 4.09        | %          |
|                                             |       |          |       |       |       |        |       |
| U. S. treasury securities                        |       |          |       |       |       |        |       |
| One to five years                                |       | 598           |       | 600        |       | 1.02        | %          |
| Total U.S. treasury securities                   |       | 598           |       | 600        |       | 1.02        | %          |
| Total investment securities available-for-sale   |       | $             | 264,951    |       | $          | 265,356     |       | 4.97 | % |
|                                             |       |          |       |       |       |        |       |   |   |
| ** **                                       | ** ** | **Amortized** | ** ** | **Fair**   | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Cost**      | ** ** | **Value**  | ** ** | **Yield**   | ** ** |
| **Held-to-maturity at December 31, 2008**   | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** |
| U.S. government-sponsored agencies               |       |          |       |       |       |        |       |
| One to five years                                |       | $             | 2,001      |       | $          | 2,025       |       | 4.30 | % |
| Total U.S. government-sponsored agencies         |       | 2,001         |       | 2,025      |       | 4.30        | %          |
|                                             |       |          |       |       |       |        |       |
| Mortgage-backed securities (1)                   |       |          |       |       |       |        |       |
| One to five years                                |       | 1,836         |       | 1,867      |       | 4.26        | %          |
| Five to ten years                                |       | 9,267         |       | 9,463      |       | 4.45        | %          |
| After ten years                                  |       | 29,075        |       | 29,142     |       | 4.39        | %          |
| Total mortgage-backed securities                 |       | 40,178        |       | 40,472     |       | 4.40        | %          |
|                                             |       |          |       |       |       |        |       |
| Corporate bonds                                  |       |          |       |       |       |        |       |
| After ten years                                  |       | 8,004         |       | 3,262      |       | 4.09        | %          |
| Total corporate bonds                            |       | 8,004         |       | 3,262      |       | 4.09        | %          |
| Total investment securities held-to-maturity     |       | 50,183        |       | 45,759     |       | 4.34        | %          |
|                                             |       |          |       |       |       |        |       |
| Total investment securities                      |       | $             | 315,134    |       | $          | 311,115     |       | 4.87 | % |

 

----

(1)  Based on contractual maturities.

(2) Yields for tax-exempt municipal securities are not reported ona tax-equivalent basis.

 

*LoansReceivable*

 

Loansreceivable, net of deferred fees and costs, were $1.17 billion at March 31,2009 and $1.14 billion at December 31, 2008, an increase of $33.3million.  See Table 7 for details on theloans receivable portfolio. During the quarter ended March 31, 2009, themix of our loan portfolio changed slightly, with increases in commercial andindustrial loans and commercial real estate loans, and decreases in real estateconstruction and real estate residential loans. Loans held for sale at March 31, 2009 was $212.1 million comparedto $157.0 million at December 31, 2008, an increase of $55.1 million.  Loans held for sale are valued at the lowerof cost or market value.

 

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Theincrease in loans held for sale at March 31, 2009 compared to December 31,2008 is due to the decreased mortgage interest rate environment and consumerstaking advantage of the affordable housing market.

 

**Loans Receivable**

AtMarch 31, 2009 and December 31, 2008

(Inthousands)

 
| ** **                      | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                            |       |                         |       |                            |       |   |   |   |   |
| Commercial and industrial       |       | $                            | 185,703    |                            | 15.83      | % | $ | 160,989 |   | 14.12 | % |
| Real estate - commercial        |       | 521,504                      |       | 44.45                           | %          | 472,131 |   | 41.41 | % |
| Real estate - construction      |       | 153,435                      |       | 13.08                           | %          | 188,484 |   | 16.53 | % |
| Real estate - residential       |       | 201,986                      |       | 17.21                           | %          | 211,651 |   | 18.57 | % |
| Home equity lines               |       | 108,311                      |       | 9.23                            | %          | 104,370 |   | 9.16 | % |
| Consumer                        |       | 2,388                        |       | 0.20                            | %          | 2,393 |   | 0.21 | % |
|                            |       |                         |       |                            |       |   |   |   |   |
| Gross loans                     |       | $                            | 1,173,327  |                            | 100.00     | % | $ | 1,140,018 |   | 100.00 | % |
|                            |       |                         |       |                            |       |   |   |   |   |
| Net deferred (fees) costs       |       | (646                         | )          |                            |       | (670 | ) |   |   |
| Less: allowance for loan losses |       | (15,303                      | )          |                            |       | (14,518 | ) |   |   |
|                            |       |                         |       |                            |       |   |   |   |   |
| Loans receivable, net           |       | $                            | 1,157,378  |                            |       |   | $ | 1,124,830 |   |   |   |

 

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*Deposits*

 

Totaldeposits were $1.21 billion at March 31, 2009 compared to $1.18billion at December 31, 2008. We had increases in our noninterest bearingchecking products, interest bearing and money market checking accounts, savingsaccounts and certificates of deposit. Overall, deposit balances increased ascustomers are seeking smaller financial institutions to deposit their moneywith as result of the current economic turmoil and are increasing the balancesheld with financial institutions as a result of the increased protection oftheir money by the FDIC.  See Table 8 fordetails on certificates of deposit with balances of $100,000 or more. During2008, we joined 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 that principaland interest are eligible for FDIC insurance protection.  At March 31, 2009 and December 31,2008, we had $64.1 million and $53.5 million, respectively, in CDARS deposits,which are considered to be brokered deposits. Brokered certificates of deposit not in the CDARS network were $28.2million and $35.7 million at March 31, 2009 and December 31, 2008,respectively.

 

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

At March 31, 2009

(In thousands)

 
| **Maturities:**                       | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| Three months or less                  |       | $                   | 29,982     |            | $          | 52,729    |       | $ | 82,711 |   |
| Over three months through six months  |       | 19,360              |       | 25,304          |       | 44,664    |       |
| Over six months through twelve months |       | 51,495              |       | 3,307           |       | 54,802    |       |
| Over twelve months                    |       | 64,409              |       | 1,944           |       | 66,353    |       |
|                                  |       | $                   | 165,246    |            | $          | 83,284    |       | $ | 248,530 |   |

 

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

 

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*Borrowings*

 

Otherborrowed funds increased $1.4 million to $368.6 million at March 31, 2009,compared to $367.2 million at December 31, 2008.  Treasury, Tax & Loan Note optionborrowings increased $933,000 to $1.6 million at March 31, 2009 comparedto $692,000 at December 31, 2008. FHLB advances remained at $280.0 million at March 31, 2009 comparedto December 31, 2008. Customer repurchase agreements increased $490,000 to$66.4 million at March 31, 2009 compared to $65.9 million at December 31,2008.  We had no federal funds purchasedat each of March 31, 2009 and December 31, 2008.  Table 9 provides information on ourborrowings.

 

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

At March 31, 2009

(In thousands)

 
| ** **                                                     | ** ** | ** ** | ** ** | **Amount** | ** **  |
|----------------------------------------------------------------|------------|------------|------------|------------|-------------|
| **Short-term borrowed funds:**                       | ** ** | ** ** | ** ** | ** ** | ** **  |
| TT&L note option                                           |       | 0.34       | %          | $          | 1,625       |   |
| Customer repurchase agreements                                 |       | 0.64       | %          | 66,377     |        |
| **Total short-term borrowed funds and  weighted average rate** | ** ** | **0.63**   | **%**      | **$**      | **68,002**  | ** ** |
| **Other borrowed funds:**                                      |       |       |       |       |        |
| Trust preferred                                                |       | 4.69       | %          | $          | 20,619      |   |
| FHLB advances - long term                                      |       | 3.98       | %          | 280,000    |        |
| **Other borrowed funds and weighted average  rate**            | ** ** | **4.03**   | **%**      | **$**      | **300,619** | ** ** |
|                                                           |       |       |       |       |        |
| **Total other borrowed funds and weighted  average rate**      | ** ** | **3.40**   | **%**      | **$**      | **368,621** | ** ** |

 

*Shareholders’Equity*

 

Shareholders’equity at March 31, 2009 was $162.8 million compared to $158.0 million at December 31,2008, an increase of $4.8 million, or 3%. During the three months ended March 31,2009, we issued 287,000 shares of our common stock to employee benefit plansfor a total addition of $1.6 million to shareholder’s equity.  In addition, our accumulated other comprehensiveincome increased $1.2 million for the year to date March 31, 2009, whichwas primarily related to the change in the market value of ouravailable-for-sale investment securities. Net income for the quarter of $2.2 million also contributed to our increasein shareholders’ equity.  Book value pershare at March 31, 2009 was $6.70 compared to $6.58 at December 31,2008. Tangible book value per share (which is book value per share adjusted forchanges in other

 

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comprehensiveincome, less goodwill and other intangible assets) at March 31, 2009 was$6.07 compared to $6.00 at December 31, 2008.

 

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

 

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

 

*Commercial Banking*

 

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

 

Forthe three months ended March 31, 2009, the commercial banking segmentrecorded net income of $1.7 million compared to net income of $2.2 million forthe same period of 2008. The decrease in net income is primarily related to anincrease in the provision for loan losses of $870,000 to $1.2 million duringthe first quarter of 2009 as compared to $320,000 for the same period of 2008.  Operating results for this business segmentwere supplemented by an increase in net interest income and noninterest incomefor the three months ended March 31, 2009 as compared to the same periodsof 2008.  Net interest income increased$175,000 to $10.1 million for the three months ended March 31, 2009,compared to $10.0 million for the three months ended March 31, 2008.  Noninterest income increased $273,000 to $1.3million for the three months ended March 31, 2009 compared to $1.1 millionfor the three months ended March 31, 2008. The increase in noninterest income for the three months ended March 31,2009 compared to the same period of 2008 was primarily related to gainsrecorded on sales of investment securities held-for-sale.  Noninterest expense increased $232,000 to$7.9 million for the three months ended March 31, 2009 compared to $7.7million for the same period of 2008.  Theincrease in noninterest expense for the first quarter of 2009 compared to thesame period of 2008 was primarily related to the increase in our FDIC insuranceassessment for the first quarter of 2009. At March 31, 2009, total assets for this segment were $1.75billion, loans receivable, net of deferred fees and costs, were $1.17 billionand total deposits were $1.21 billion. At March 31, 2008, total assetswere $1.67 billion, loans receivable, net of deferred fees and costs, were$1.04 billion and total deposits were $1.14 billion.

 

*MortgageBanking*

 

Theoperations of the mortgage banking segment are conducted through George Mason,and, as of the first quarter of 2009, Cardinal First. The Bank opened CardinalFirst to originate mortgage loans for new homes and refinancing in Virginia,Maryland and Washington, D.C., principally for existing Cardinal Bankcustomers. Both George Mason and Cardinal First engage primarily in theorigination and acquisition of residential mortgages for sale into thesecondary market on a best efforts basis.

 

Forthe three months ended March 31, 2009 and 2008, the mortgage bankingsegment recorded net income of $1.3 million and $542,000, respectively. Theincrease in net income is primarily attributable to the decrease in mortgageinterest rates and the availability of affordable housing for consumers in ourmarket.  Noninterest income increased$1.6 million to $4.2 million for the three months ended March 31, 2009compared to $2.6 million for the same three month 

 

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periodof 2008, the increase being related to the increase in our loan origination andsales volumes.  Noninterest expenseincreased $401,000 to $3.0 million for the three months ended March 31,2009 compared to $2.6 million for the same three month period of 2008.  The increase in noninterest expense isrelated to the increase in repurchase reserves at George Mason for the firstquarter of 2009.  At March 31, 2009,total assets for this segment were $224.6 million; loans held for sale were$212.1 million and mortgage funding checks were $27.1 million. At March 31,2008, total assets were $169.1 million; loans held for sale were $153.3 millionand mortgage funding checks were $6.3 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 March 31, 2009 and 2008, the wealth management andtrust services segment recorded net income of $10,000 and $18,000,respectively. For the three months ended March 31, 2009 and 2008,noninterest income was $821,000 and $900,000, respectively.  Noninterest expense for the three monthsended March 31, 2009 and 2008 was $806,000 and $873,000,respectively.  At March 31, 2009,total assets were $3.5 million and managed and custodial assets were $2.6billion. At March 31, 2008, total assets for this segment were $3.7million and managed and custodial assets were $3.4 billion. The decrease inmanaged and custodial assets and the related noninterest income is primarilyattributable to a decrease in managed assets at our trust division due to theloss of low margin custody relationships with two clients and the departure ofcertain personnel at CWS.

 

Informationpertaining to our business segments can be found in Note 3 to the notes toconsolidated financial statements.

 

## **Capital Resources**

 

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

 

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

 

AtMarch 31, 2009, our Tier 1 and total (Tier 1 and Tier 2) risk-basedcapital ratios were 11.53% and 12.60%, respectively. Our regulatory capitallevels for the Bank and bank holding company meet those established forwell-capitalized institutions.

 

AtDecember 31, 2008, our Tier 1 and total risk-based capital ratios were11.67% and 12.72%, respectively.  Table10 provides additional information pertaining to our capital ratios.

 

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**Capital Components**

At March 31, 2009 and December 31,2008

(In thousands)

 
| ** **                                                        | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                        | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                        | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                        | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **Cardinal Financial Corporation (Consolidated):** | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
|                                                              |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At March 31, 2009**                                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based capital/Total capital to  risk-weighted assets   |       | $          | 183,113    |                       | 12.60      | %                          | $          | 116,266                    | >  | 8.00                       | %          | $ | 145,333 | >  | 10.00 | % |
| Tier I capital/Tier I capital to  risk-weighted assets            |       | 167,614    |       | 11.53                      | %          | 58,133                     | >  | 4.00                       | %          | 87,200                     | >  | 6.00 | % |
| Tier I capital/Total capital to average  assets                   |       | 167,614    |       | 9.82                       | %          | 68,249                     | >  | 4.00                       | %          | 85,311                     | >  | 5.00 | % |
|                                                              |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At December 31, 2008**                                     |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based capital/Total capital to  risk-weighted assets   |       | $          | 178,420    |                       | 12.72      | %                          | $          | 112,207                    | >  | 8.00                       | %          | $ | 140,259 | >  | 10.00 | % |
| Tier I capital/Tier I capital to  risk-weighted assets            |       | 163,716    |       | 11.67                      | %          | 56,104                     | >  | 4.00                       | %          | 84,156                     | >  | 6.00 | % |
| Tier I capital/Total capital to average  assets                   |       | 163,716    |       | 9.90                       | %          | 66,168                     | >  | 4.00                       | %          | 82,711                     | >  | 5.00 | % |

 
| ** **                                                      | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                      | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                      | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **Cardinal Bank:**                                         | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
|                                                            |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At March 31, 2009**                                      |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based capital/Total capital to  risk-weighted assets |       | $          | 172,749    |                       | 11.95      | %                          | $          | 115,695                    | >  | 8.00                       | %          | $ | 144,619 | >  | 10.00 | % |
| Tier I capital/Tier I capital to  risk-weighted assets          |       | 157,250    |       | 10.87                      | %          | 57,847                     | >  | 4.00                       | %          | 86,771                     | >  | 6.00 | % |
| Tier I capital/Total capital to average  assets                 |       | 157,250    |       | 9.25                       | %          | 68,031                     | >  | 4.00                       | %          | 85,038                     | >  | 5.00 | % |
|                                                            |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **At December 31, 2008**                                   |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total risk-based capital/Total capital to  risk-weighted assets |       | $          | 168,513    |                       | 12.04      | %                          | $          | 111,957                    | >  | 8.00                       | %          | $ | 139,946 | >  | 10.00 | % |
| Tier I capital/Tier I capital to  risk-weighted assets          |       | 153,810    |       | 10.99                      | %          | 55,978                     | >  | 4.00                       | %          | 83,968                     | >  | 6.00 | % |
| Tier I capital/Total capital to average  assets                 |       | 153,810    |       | 9.32                       | %          | 66,018                     | >  | 4.00                       | %          | 82,523                     | >  | 5.00 | % |

 

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**ContractualObligations**

 

We have entered into anumber of long-term contractual obligations to support our ongoing businessactivities. These contractual obligations will be funded through operatingrevenues and liquidity sources held or available to us and exclude contractualinterest costs, where applicable. The required payments under such obligationsare detailed in Table 11.

 

**ContractualObligations**

At March 31,2009

(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                             |       | $                                         | 526,001    |   | $ | 378,525 |   | $ | 76,712 |   | $ | 70,404 |   | $ | 360 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Brokered certificates of deposit                    |       | 92,285                                    |       | 90,349 |   | 1,936 |   | — |   | — |   |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Advances from the Federal Home Loan Bank of Atlanta |       | 280,000                                   |       | — |   | 10,000 |   | 115,000 |   | 155,000 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Trust preferred securities                          |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                         |       | 16,304                                    |       | 4,827 |   | 2,628 |   | 5,503 |   | 3,346 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                               |       | $                                         | 935,209    |   | $ | 473,701 |   | $ | 91,276 |   | $ | 190,907 |   | $ | 179,325 |   |

 

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

 

We are a party to financialinstruments with off-balance sheet risk to meet the financing needs of our customers.These financial instruments include commitments to extend credit and standbyletters of credit. Those instruments involve, to varying degrees, elements ofcredit risk 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.

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the agreement. Commitments generallyhave expiration dates or other termination clauses and may require payment of afee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future funding requirements.We evaluate each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained is based onmanagement’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 the contractual obligations by a customer to a third party.Those guarantees are primarily issued to support public and private borrowingarrangements, including commercial paper, bond financing, and similartransactions. The credit risk involved in issuing standby letters of credit isessentially the same as that involved in extending loan facilities tocustomers. We hold certificates of deposit, deposit accounts, real estate orother appropriate forms of collateral supporting those commitments for whichcollateral is deemed necessary.

 

AtMarch 31, 2009, commitments to extend credit were $485.7 million andstandby letters of credit were $13.0 million. The liability associated withstandby letters of credit at March 31, 2009 was $15,000.  Commitments to extend credit of $147.0million as of March 31, 2009 are related to the mortgage banking segment’spipeline and are of a short term nature.

 

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

 

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exhibit strong financial performance tomitigate this risk.  We do not expect anythird-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.

 

George Mason estimates a reserve(early pay-off reserve) for mortgage loans sold that are repaid by the borrowerwithin a certain number of days following the loan sale, thereby requiring thatGeorge Mason refund part of the service release premium and/or premium pricingreceived from the investor pursuant to the loan sale agreement.  The reserve at March 31, 2009 was$9,000.

 

GeorgeMason has a reserve for its estimated exposure to repurchase loans previouslysold to investors for which borrowers failed to provide full and accurateinformation on their loan application or for which appraisals have not been acceptableor when the loan was not underwritten in accordance with the loan programspecified by the loan investor. At March 31, 2009, this reserve had abalance of $1.9 million.  We evaluate themerits of each claim and estimate the reserve based on actual and expectedclaims received and consider 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 managed companies at the time oforigination.  These loans are then soldby George Mason to investors.  GeorgeMason has agreements with its managed companies requiring that, for any loansthat 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, the managed company be responsiblefor buying back the loan.  In the eventthat the managed company’s financial condition deteriorates and it is unable tofund the repurchase of such loans, George Mason may have to provide the fundsto repurchase these loans from investors. In this instance, George Mason would establish an allowance on thereceivable from the managed company. There is no such allowance recorded at March 31, 2009 as managementexpects to fully recover amounts owed by managed companies as of March 31,2009.

 

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 $2.8million payment to the correspondent. The terms of this agreement require that we may be obligated to makeadditional payments to the correspondent in future periods

 

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based on certain conditions.  Webelieve the additional exposure under this agreement is not material.  The amount of the exposure declines with thepassage of time.

 

## **Liquidity**

 

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

 

Inaddition to deposits, we have access to various wholesale funding markets.These markets include the brokered CD market, the repurchase agreement marketand the federal funds market. During 2008, we joined the Certificates ofDeposit Account 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 depositthrough CDARS, we place their funds into certificates of deposit with otherbanks in the CDARS network in increments of less than $250,000 so thatprincipal and interest 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 $272.1 million at March 31,2009 or 15% of total assets. We held investments that are classified asheld-to-maturity in the amount of $46.8 million at March 31, 2009. 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 March 31, 2009 was $19 million. Borrowing capacitywith the Federal Reserve Bank of Richmond was $451 million at March 31,2009. We anticipate maintaining liquidity at a level sufficient to protectdepositors, provide for reasonable growth and fully comply with all regulatoryrequirements.

 

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##### **Interest RateSensitivity**

 

We are exposed to variousbusiness risks including interest rate risk. Our goal is to maximize netinterest income without incurring excessive interest rate risk. Management ofnet interest income and interest rate risk must be consistent with the level ofcapital and liquidity that we maintain. We manage interest rate risk through anasset and liability committee (“ALCO”). ALCO is responsible for managing theinterest rate risk in conjunction with liquidity and capital management.

 

Weemploy an independent consulting firm to model our interest ratesensitivity.  We use a net interestincome simulation model as our primary tool to measure interest ratesensitivity. Many assumptions are developed based on expected activity in thebalance sheet. For maturing assets, assumptions are created for theredeployment of these assets. For maturing liabilities, assumptions aredeveloped for the replacement of these funding sources. Assumptions are alsodeveloped for assets and liabilities that could reprice during the modeled timeperiod. These assumptions also cover how we expect rates to change onnon-maturity deposits such as 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 currentbalance sheet, the current level of interest rates and the developedassumptions, the model then produces an expected level of net interest incomeassuming that market rates remain unchanged. This is considered the base case.Next, the model determines what net interest income would be based on specificchanges 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 moved up 200 basis pointsin the first year and then rates remain flat in the second year. In both the upand down scenarios, the model assumes a parallel shift in the yield curve. Theresults of these simulations are then compared to the base case.

 

AtMarch 31, 2009, we were asset sensitive for the entire two year simulationperiod.   Asset sensitive means thatyields on the Bank’s interest-earning assets will rise faster thaninterest-bearing liability costs in a rising rate environment.  For a declining rate environment, assetyields will fall faster than interest-bearing liability costs.  Being asset sensitive our net interest incomeshould increase in a rising rate scenario. In the up 200 basis point scenario, our net interest income wouldimprove by not more than 4.5% for the one year period and by not more than 7.7%over the two year time horizon.  In thedown 100 basis point scenario the interest rate risk model indicates that ournet interest income will be nearly unchanged from the base case over the oneyear period and the two year time horizon.

 

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

 

Our Asset/LiabilityCommittee is responsible for reviewing our liquidity requirements andmaximizing our net interest income consistent with capital requirements,liquidity, interest rate and economic outlooks, competitive factors andcustomer needs. Interest rate risk arises because the assets of the Bank andthe liabilities of the Bank have different maturities and characteristics. Inorder to measure this interest rate risk, we use a simulation process thatmeasures the impact of changing interest rates on net interest income. Thismodel is run for the Bank by an independent consulting firm. The simulationsincorporate assumptions related to expected activity in the balance sheet. Formaturing assets, assumptions are developed for the redeployment of theseassets. For maturing liabilities, assumptions are developed for the replacementof these funding sources. Assumptions are also developed for assets andliabilities that reprice during the modeled time period. These assumptions alsocover how we expect rates to change on non-maturity deposits such as interestchecking, money market checking, savings accounts as well as certificates ofdeposit. With the funding markets still lacking liquidity, forecasts fordeposit rate movements carry greater uncertainty than when this market isfunctioning normally.  Based on inputsthat include the most recent period end balance sheet, the current level ofinterest rates and the developed assumptions, the model then produces anexpected level of net interest income assuming that interest rates remainunchanged. This becomes the base case. Next, the model determines the impact onnet interest income given specified changes in interest rates. The ratesimulations are performed for a two year period and include ramped rate changesof down 100 basis points and up 200 basis points. The down 200 basis pointscenario was discontinued given the current level of interest rates.  In the ramped down rate change, the modelmoves rates gradually down 100 basis points over the first year and then ratesremain flat in the second year.

 

For the up 200 basis pointscenario, rates are gradually increased by 200 basis points in the first yearand remain flat in the second year. In both the up and down scenarios, themodel assumes a parallel shift in the yield curve. The results of thesesimulations are then compared to the base case.

 

AtMarch 31, 2009, we were asset sensitive for the entire two year simulationperiod.   Asset sensitive means thatyields on the Bank’s interest-earning assets will rise faster thaninterest-bearing liability costs in a rising rate environment.  For a declining rate environment, assetyields will fall faster than interest-bearing liability costs.  Being asset sensitive our net interest incomeshould increase in a rising rate environment. In the up 200 basis point scenario, our net interest income wouldimprove by not more than 4.5% for the one year period and by not more than 7.7%over the two year time horizon.  In thedown 100 basis point scenario the interest rate risk model indicates that ournet interest income will be nearly unchanged from the base case over the oneyear period and the two year time horizon.

 

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

 

We have counter-party riskthat may arise from the possible inability of George Mason’s third partyinvestors to meet the terms of their forward sales contracts.  George Mason works with third-party investorsthat are generally well-capitalized, are investment grade and exhibit strongfinancial performance to mitigate this risk. We do not expect any third-party investor to fail to meet itsobligation.  In addition, we havederivative counterparty risk relating to certain interest rate swaps we havewith a third party.  This risk may arisefrom 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**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that theinformation required to be disclosed by it in the reports that it files orsubmits under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods required by theSecurities and Exchange Commission, including, without limitation, thosecontrols and procedures designed to ensure that such information is accumulatedand communicated to the Company’s management to allow timely decisionsregarding required disclosures.

 

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

 

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

 

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**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

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.  The risk factors that are applicable to usare outlined in our Annual Report on Form 10-K for the year ended December 31,2008.  These risk factors have notchanged as of the date of this report.

 

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

 

(a)  None.

(b)  Not applicable.

(c)  For the three monthsended March 31, 2009, we did not purchase shares of our common stock.

 

**Item 3.  Defaults Upon Senior Securities**

 

(a)  None.

(b)  None.

 

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

 

(a)  None.

(b)  Not applicable.

(c)  None.

(d)  None.

 

**Item 5.  Other Information**

 

(a) None.

(b)  None.

 

**Item 6.  Exhibits**

 
| 3.1  |   | Bylaws of Cardinal Financial Corporation  (restated in electronic format as of April 24, 2009)        |
|------|--------|------------------------------------------------------------------------------------------------------------|
| 10.1 |   | Cardinal Financial Corporation Executive  Deferred Income Plan, as amended and restated, February 25, 2009 |
| 10.2 |   | Cardinal Financial Corporation Directors  Deferred Income Plan, as amended and restated, February 25, 2009 |
| 10.3 |   | George Mason Mortgage, LLC Executive Deferred  Income Plan, as amended and restated, February 25, 2009     |
| 10.4 |   | Amendment to Executive Employment Agreement of  Kendal E. Carson                                           |
| 31.1 |   | Rule 13a-14(a) Certification  of Chief Executive Officer                                         |

 

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

 

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**SIGNATURES**

** **

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

** **
| ** **                  | ** ** | **CARDINAL  FINANCIAL CORPORATION**                                                      |
|-----------------------------|------------|------------------------------------------------------------------------------------------|
| ** **                  | ** ** | **(Registrant)**                                                                         |
| ** **                  | ** ** | ** **                                                                               |
| ** **                  | ** ** | ** **                                                                               |
| **Date:  May 8, 2009** | ** ** | **/**s/ Bernard H. Clineburg                                                             |
| ** **                  | ** ** | **Bernard  H. Clineburg**                                                                |
| ** **                  | ** ** | **Chairman  and Chief Executive Officer**                                                |
| ** **                  | ** ** | **(Principal  Executive Officer)**                                                       |
| ** **                  | ** ** | ** **                                                                               |
| ** **                  | ** ** | ** **                                                                               |
| **Date:  May 8, 2009** | ** ** | **/**s/ Mark A. Wendel                                                                   |
| ** **                  | ** ** | **Mark A.  Wendel**                                                                      |
| ** **                  | ** ** | **Executive  Vice President and Chief Financial Officer  (Principal Financial Officer)** |
| ** **                  | ** ** | ** **                                                                               |
| ** **                  | ** ** | ** **                                                                               |
| **Date:  May 8, 2009** | ** ** | **/**s/ Jennifer L. Deacon                                                               |
| ** **                  | ** ** | **Jennifer  L. Deacon**                                                                  |
| ** **                  | ** ** | **Senior  Vice President and Controller**                                                |
| ** **                  | ** ** | **(Principal  Accounting Officer)**                                                      |

** **

**58**

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                            |
|----------------------|------------|------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Bylaws of Cardinal Financial Corporation  (restated in electronic format as of April 24, 2009)        |
| 10.1                 |       | Cardinal Financial Corporation Executive  Deferred Income Plan, as amended and restated, February 25, 2009 |
| 10.2                 |       | Cardinal Financial Corporation Directors  Deferred Income Plan, as amended and restated, February 25, 2009 |
| 10.3                 |       | George Mason Mortgage, LLC Executive Deferred  Income Plan, as amended and restated, February 25, 2009     |
| 10.4                 |       | Amendment to Executive Employment Agreement of  Kendal E. Carson                                           |
| 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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