Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

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

 

**For the quarterly period endedSeptember 30, 2010**

 

**or**

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

 

**For the transition period from             to             **

** **

**Commission File Number:  0-24557**

 

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Virginia**

(State or other jurisdiction of

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

(I.R.S. Employer

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

 

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

** **

**(703) 584-3400**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

28,761,939 shares of common stock, par value $1.00 per share,outstanding as of November 3, 2010

 

 

 

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**CARDINAL FINANCIAL CORPORATION**

 

**INDEX TO FORM 10-Q**

 
| **PART I  — FINANCIAL INFORMATION**                                                                                            |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                               |   |
| Item 1. Financial  Statements:                                                                                                           |   |
|                                                                                                                                     |   |
| Consolidated  Statements of Condition   At September 30, 2010 (unaudited) and December 31, 2009                                | 3      |
|                                                                                                                                     |   |
| Consolidated  Statements of Income  For the three and nine months ended September 30, 2010 and 2009  (unaudited)                    | 4      |
|                                                                                                                                     |   |
| Consolidated  Statements of Comprehensive Income  For the three and nine months ended September 30, 2010 and 2009  (unaudited)      | 5      |
|                                                                                                                                     |   |
| Consolidated  Statements of Changes in Shareholders’ Equity  For the nine months ended September 30, 2010 and 2009 (unaudited) | 6      |
|                                                                                                                                     |   |
| Consolidated  Statements of Cash Flows  For the nine months ended September 30, 2010 and 2009 (unaudited)                           | 7      |
|                                                                                                                                     |   |
| Notes to  Consolidated Financial Statements (unaudited)                                                                                  | 8      |
|                                                                                                                                     |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations                                       | 33     |
|                                                                                                                                     |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                      | 66     |
|                                                                                                                                     |   |
| Item 4. Controls  and Procedures                                                                                                         | 67     |
|                                                                                                                                     |   |
| **PART II — OTHER  INFORMATION**                                                                                               | 68     |
| ** **                                                                                                                               |   |
| Item 1. Legal  Proceedings                                                                                                               | 68     |
| Item  1A. Risk Factors                                                                                                                   | 68     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                     | 68     |
| Item 3.  Defaults Upon Senior Securities                                                                                                 | 68     |
| Item 4. (Removed and  Reserved)                                                                                                          | 68     |
| Item 5. Other  Information                                                                                                               | 68     |
| Item  6. Exhibits                                                                                                                        | 68     |
|                                                                                                                                     |   |
| **SIGNATURES**                                                                                                                           | 69     |

 

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Table ofContents

 

**PART I — FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCONDITION

September 30, 2010 and December 31, 2009

(In thousands, except share data)

 
| ** **                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                         | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                         |       |                   |       |                  |       |
| Cash and due from banks                                                                                                                            |       | $                      | 10,061     |                  | $          | 19,804 |   |
| Federal funds sold                                                                                                                                 |       | 9,833                  |       | 5,037                 |       |
| Total cash and cash equivalents                                                                                                                    |       | 19,894                 |       | 24,841                |       |
| Investment securities available-for-sale                                                                                                           |       | 296,608                |       | 343,569               |       |
| Investment securities held-to-maturity (market  value of $19,254 and $31,436 at September 30, 2010 and December 31,  2009, respectively) |       | 23,434                 |       | 35,184                |       |
| Investment securities-trading                                                                                                                      |       | 1,843                  |       | 3,724                 |       |
| Total investment securities                                                                                                                        |       | 321,885                |       | 382,477               |       |
| Other investments                                                                                                                                  |       | 16,467                 |       | 16,467                |       |
| Loans held for sale                                                                                                                                |       | 341,413                |       | 179,469               |       |
| Loans receivable, net of deferred fees and costs                                                                                                   |       | 1,351,703              |       | 1,293,432             |       |
| Allowance for loan losses                                                                                                                          |       | (22,444                | )          | (18,636               | )          |
| Loans receivable, net                                                                                                                              |       | 1,329,259              |       | 1,274,796             |       |
| Premises and equipment, net                                                                                                                        |       | 17,040                 |       | 15,743                |       |
| Deferred tax asset, net                                                                                                                            |       | 4,454                  |       | 7,691                 |       |
| Goodwill and intangibles, net                                                                                                                      |       | 13,305                 |       | 13,935                |       |
| Bank-owned life insurance                                                                                                                          |       | 34,211                 |       | 33,712                |       |
| Prepaid FDIC insurance premiums                                                                                                                    |       | 4,717                  |       | 6,683                 |       |
| Other real estate owned                                                                                                                            |       | 2,615                  |       | 4,991                 |       |
| Accrued interest receivable and other assets                                                                                                       |       | 22,051                 |       | 15,380                |       |
| Total assets                                                                                                                                       |       | $                      | 2,127,311  |                  | $          | 1,976,185 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                     |       |                   |       |                  |       |
| Non-interest bearing deposits                                                                                                                      |       | $                      | 211,762    |                  | $          | 166,019 |   |
| Interest bearing deposits                                                                                                                          |       | 1,185,914              |       | 1,130,986             |       |
| Total deposits                                                                                                                                     |       | 1,397,676              |       | 1,297,005             |       |
| Other borrowed funds                                                                                                                               |       | 441,287                |       | 427,579               |       |
| Mortgage funding checks                                                                                                                            |       | 33,058                 |       | 13,918                |       |
| Escrow liabilities                                                                                                                                 |       | 5,278                  |       | 2,079                 |       |
| Accrued interest payable and other liabilities                                                                                                     |       | 25,910                 |       | 31,097                |       |
| Total liabilities                                                                                                                                  |       | 1,903,209              |       | 1,771,678             |       |
|                                                                                                                                               |       |                   |       |                  |       |   |   |   |   |
| ** **                                                                                                                                         | ** ** | **2010**               | ** ** | **2009**              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock, $1 par value                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Shares authorized                                                                                                                                  |       | 50,000,000             |       | 50,000,000            |       |   |   |   |   |
| Shares issued and outstanding                                                                                                                      |       | 28,761,939             |       | 28,717,839            |       | 28,762 |   | 28,718 |   |
| Additional paid-in capital                                                                                                                         |       |                   |       |                  |       | 160,372 |   | 159,798 |   |
| Retained earnings                                                                                                                                  |       |                   |       |                  |       | 25,393 |   | 12,705 |   |
| Accumulated other comprehensive income, net                                                                                                        |       |                   |       |                  |       | 9,575 |   | 3,286 |   |
| Total shareholders’ equity                                                                                                                    |       |                   |       |                  |       | 224,102 |   | 204,507 |   |
| Total liabilities and shareholders’ equity                                                                                                    |       |                   |       |                  |       | $ | 2,127,311 |   | $ | 1,976,185 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFINCOME

Three and Nine months ended September 30, 2010 and 2009

(In thousands, except share data)

(Unaudited)

 
| ** **                                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest income:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Loans receivable                                               |       | $                                                        | 18,701     |                                                    | $          | 16,585 |   | $ | 54,454 |   | $ | 47,969 |   |
| Loans held for sale                                            |       | 2,808                                                    |       | 1,630                                                   |       | 6,070 |   | 5,651 |   |
| Federal funds sold                                             |       | 11                                                       |       | 57                                                      |       | 39 |   | 102 |   |
| Investment securities available-for-sale                       |       | 3,028                                                    |       | 3,264                                                   |       | 10,279 |   | 8,578 |   |
| Investment securities held-to-maturity                         |       | 206                                                      |       | 354                                                     |       | 759 |   | 1,258 |   |
| Other investments                                              |       | 17                                                       |       | 33                                                      |       | 38 |   | 13 |   |
| Total interest income                                          |       | 24,771                                                   |       | 21,923                                                  |       | 71,639 |   | 63,571 |   |
| Interest expense:                                              |       |                                                     |       |                                                    |       |   |   |   |   |
| Deposits                                                       |       | 3,572                                                    |       | 5,710                                                   |       | 12,009 |   | 18,514 |   |
| Other borrowed funds                                           |       | 3,017                                                    |       | 3,121                                                   |       | 9,051 |   | 9,383 |   |
| Total interest expense                                         |       | 6,589                                                    |       | 8,831                                                   |       | 21,060 |   | 27,897 |   |
| Net interest income                                            |       | 18,182                                                   |       | 13,092                                                  |       | 50,579 |   | 35,674 |   |
| Provision for loan losses                                      |       | 3,500                                                    |       | 2,050                                                   |       | 8,625 |   | 4,750 |   |
| Net interest income after provision for loan  losses           |       | 14,682                                                   |       | 11,042                                                  |       | 41,954 |   | 30,924 |   |
| Noninterest income:                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Service charges on deposit accounts                            |       | 463                                                      |       | 514                                                     |       | 1,434 |   | 1,482 |   |
| Loan fees                                                      |       | 678                                                      |       | 503                                                     |       | 1,490 |   | 2,161 |   |
| Investment fee income                                          |       | 1,048                                                    |       | 975                                                     |       | 3,072 |   | 2,665 |   |
| Realized and unrealized gains on mortgage banking  activities  |       | 5,325                                                    |       | 2,833                                                   |       | 11,855 |   | 9,579 |   |
| Net realized gain on investment securities  available-for-sale |       | 193                                                      |       | 73                                                      |       | 726 |   | 625 |   |
| Net realized gain (loss) on investment  securities-trading     |       | 116                                                      |       | 97                                                      |       | 84 |   | (422 | ) |
| Management fee income                                          |       | 1,255                                                    |       | 553                                                     |       | 2,676 |   | 1,267 |   |
| Increase in cash surrender value of bank-owned  life insurance |       | 173                                                      |       | 167                                                     |       | 499 |   | 400 |   |
| Litigation recovery on previously impaired  investment         |       | 71                                                       |       | —                                                  |       | 87 |   | — |   |
| Other income (loss)                                            |       | (16                                                      | )          | (11                                                     | )          | (58 | ) | (45 | ) |
| Total noninterest income                                       |       | 9,306                                                    |       | 5,704                                                   |       | 21,865 |   | 17,712 |   |
| Noninterest expense:                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Salary and benefits                                            |       | 8,923                                                    |       | 5,897                                                   |       | 21,782 |   | 17,546 |   |
| Occupancy                                                      |       | 1,376                                                    |       | 1,321                                                   |       | 4,301 |   | 4,055 |   |
| Professional fees                                              |       | 571                                                      |       | 562                                                     |       | 1,576 |   | 1,566 |   |
| Depreciation                                                   |       | 462                                                      |       | 464                                                     |       | 1,469 |   | 1,515 |   |
| Data communications                                            |       | 1,246                                                    |       | 797                                                     |       | 3,386 |   | 2,377 |   |
| Amortization of intangibles                                    |       | 60                                                       |       | 60                                                      |       | 179 |   | 178 |   |
| Impairment of goodwill                                         |       | —                                                   |       | —                                                  |       | 451 |   | — |   |
| FDIC insurance assessment                                      |       | 524                                                      |       | 463                                                     |       | 1,592 |   | 2,202 |   |
| Mortgage loan repurchases and settlements                      |       | (1,084                                                   | )          | 517                                                     |       | (686 | ) | 1,692 |   |
| Other operating expenses                                       |       | 3,291                                                    |       | 2,897                                                   |       | 8,500 |   | 7,590 |   |
| Total noninterest expense                                      |       | 15,369                                                   |       | 12,978                                                  |       | 42,550 |   | 38,721 |   |
| Income before income taxes                                     |       | 8,619                                                    |       | 3,768                                                   |       | 21,269 |   | 9,915 |   |
| Provision for income taxes                                     |       | 2,716                                                    |       | 1,164                                                   |       | 6,857 |   | 3,000 |   |
| Net income                                                     |       | $                                                        | 5,903      |                                                    | $          | 2,604 |   | $ | 14,412 |   | $ | 6,915 |   |
| Earnings per common share - basic                              |       | $                                                        | 0.20       |                                                    | $          | 0.09 |   | $ | 0.50 |   | $ | 0.26 |   |
| Earnings per common share - diluted                            |       | $                                                        | 0.20       |                                                    | $          | 0.09 |   | $ | 0.49 |   | $ | 0.26 |   |
| Weighted-average common shares outstanding - basic             |       | 29,140,193                                               |       | 28,999,230                                              |       | 29,110,038 |   | 26,559,683 |   |
| Weighted-average common shares outstanding -  diluted          |       | 29,639,114                                               |       | 29,524,878                                              |       | 29,582,342 |   | 27,047,915 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)

Three and nine months ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income                                                                                                                                                                                                                                                                                                                                                                     |       | $                                                        | 5,903      |                                                    | $          | 2,604 |   | $ | 14,412 |   | $ | 6,915 |   |
| Other comprehensive income:                                                                                                                                                                                                                                                                                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized gain on available-for-sale investment  securities:                                                                                                                                                                                                                                                                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized holding gain arising during the period,  net of tax expense of $1.0 million and $3.4 million for the three and nine  months ended September 30, 2010, respectively, and net of tax expense of  $2.1 million and $2.9 million for the three and nine months ended  September 30, 2009, respectively.                                                       |       | 2,122                                                    |       | 4,148                                                   |       | 7,072 |   | 5,908 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Less: reclassification adjustment for net gains  included in net income net of tax expense of $14 thousand and $186 thousand  for the three and nine months ended September 30, 2010, respectively,  and net income net of tax expense of $25 thousand and $212 thousand for the  three and nine months ended September 30, 2009, respectively.                      |       | (131                                                     | )          | (48                                                     | )          | (492 | ) | (412 | ) |
|                                                                                                                                                                                                                                                                                                                                                                           |       | 1,991                                                    |       | 4,100                                                   |       | 6,580 |   | 5,496 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized gain (loss) on derivative instruments  designated as cash flow hedges, net of tax expense of $36 thousand and net of  tax benefit of $99 thousand for the three and nine months ended  September 30, 2010, respectively, and net of tax expense of $153  thousand and $55 thousand for the three and nine months ended  September 30, 2009, respectively. |       | 69                                                       |       | 467                                                     |       | (291 | ) | 168 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Comprehensive income                                                                                                                                                                                                                                                                                                                                                           |       | $                                                        | 7,963      |                                                    | $          | 7,171 |   | $ | 20,701 |   | $ | 12,579 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

Nine months ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

 
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Balance, December 31, 2008                  |       | 24,014     |       | $          | 24,014     |           | $          | 130,709      |       | $                      | 3,437      |       | $          | (154 | ) | $ | 158,006 |   |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Public offering shares issued                    |       | 4,378      |       | 4,378      |       | 27,233         |       | —       |       | —                 |       | 31,611     |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Stock compensation expense, net of tax benefits  |       | —     |       | —     |       | 300            |       | —       |       | —                 |       | 300        |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Stock options exercised                          |       | 11         |       | 11         |       | 47             |       | —       |       | —                 |       | 58         |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Shares issued to employee benefits plan          |       | 287        |       | 287        |       | 1,278          |       | —       |       | —                 |       | 1,565      |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Dividends on common stock of $0.03 per share     |       | —     |       | —     |       | —         |       | (769         | )          | —                 |       | (769       | )          |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Change in accumulated other comprehensive income |       | —     |       | —     |       | —         |       | —       |       | 5,664                  |       | 5,664      |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Net income                                       |       | —     |       | —     |       | —         |       | 6,915        |       | —                 |       | 6,915      |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Balance, September 30, 2009                 |       | 28,690     |       | $          | 28,690     |           | $          | 159,567      |       | $                      | 9,583      |       | $          | 5,510 |   | $ | 203,350 |   |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Balance, December 31, 2009                  |       | 28,718     |       | $          | 28,718     |           | $          | 159,798      |       | $                      | 12,705     |       | $          | 3,286 |   | $ | 204,507 |   |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Stock options exercised                          |       | 44         |       | 44         |       | 122            |       | —       |       | —                 |       | 166        |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Stock compensation expense, net of tax benefit   |       | —     |       | —     |       | 452            |       | —       |       | —                 |       | 452        |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Dividends on common stock of $0.06 per share     |       | —     |       | —     |       | —         |       | (1,724       | )          | —                 |       | (1,724     | )          |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Change in accumulated other comprehensive income |       | —     |       | —     |       | —         |       | —       |       | 6,289                  |       | 6,289      |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Net income                                       |       | —     |       | —     |       | —         |       | 14,412       |       | —                 |       | 14,412     |       |
|                                             |       |       |       |       |       |           |       |         |       |                   |       |       |       |
| Balance, September 30, 2010                 |       | 28,762     |       | $          | 28,762     |           | $          | 160,372      |       | $                      | 25,393     |       | $          | 9,575 |   | $ | 224,102 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCASH FLOWS

Nine Months Ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                                     |       |       |       |       |       |
| Net income                                                                                |       | $          | 14,412     |       | $          | 6,915 |   |
| Adjustments to reconcile net income to net cash (used)  provided by operating activities: |       |       |       |       |       |
| Depreciation                                                                              |       | 1,469      |       | 1,515      |       |
| Amortization of premiums, discounts and  intangibles                                      |       | 579        |       | 304        |       |
| Impairment of goodwill                                                                    |       | 451        |       | —     |       |
| Provision for loan losses                                                                 |       | 8,625      |       | 4,750      |       |
| Loans held for sale originated                                                            |       | (2,123,663 | )          | (2,003,234 | )          |
| Proceeds from the sale of loans held for sale                                             |       | 1,973,574  |       | 2,011,270  |       |
| Realized and unrealized gains on mortgage banking  activities                             |       | (6,829     | )          | (1,696     | )          |
| Proceeds from sale, maturity and call of  investment securities trading                   |       | 181        |       | 1,876      |       |
| Purchase of investment securities trading                                                 |       | (884       | )          | (7,369     | )          |
| Unrealized (gain) loss on investment  securities-trading                                  |       | (84        | )          | 447        |       |
| Gain on sale of investment securities  available-for-sale                                 |       | (735       | )          | (768       | )          |
| Loss on sale of investment securities  available-for-sale                                 |       | 9          |       | 144        |       |
| Gain on sale of other assets                                                              |       | (3         | )          | (16        | )          |
| (Gain) loss on sale of other real estate owned                                            |       | 76         |       | (25        | )          |
| Increase in cash surrender value of bank-owned  life insurance                            |       | (499       | )          | (400       | )          |
| Stock compensation expense, net of tax benefits                                           |       | 452        |       | 300        |       |
| Decrease in accrued interest receivable and other  assets                                 |       | (10,177    | )          | (3,330     | )          |
| Increase in accrued interest payable, escrow  liabilities and other liabilities           |       | 10,679     |       | 2,834      |       |
| Net cash provided by (used in) operating  activities                                      |       | (132,367   | )          | 13,517     |       |
| Cash flows from investing activities:                                                     |       |       |       |       |       |
| Net purchases of premises and equipment                                                   |       | (1,659     | )          | (614       | )          |
| Proceeds from maturity and call of investment  securities available-for-sale              |       | 30,077     |       | 25,963     |       |
| Proceeds from sale of investment securities  available-for-sale                           |       | 10,013     |       | 5,075      |       |
| Proceeds from sale of mortgage-backed securities  available-for-sale                      |       | 24,175     |       | 43,589     |       |
| Proceeds from maturity and call of investment  securities held-to-maturity                |       | 5,857      |       | 2,000      |       |
| Purchase of investment securities  available-for-sale                                     |       | (20,179    | )          | (71,572    | )          |
| Purchase of mortgage-backed securities  available-for-sale                                |       | (37,809    | )          | (96,426    | )          |
| Purchase of other investments                                                             |       | —     |       | (97        | )          |
| Redemptions of investment securities  available-for-sale                                  |       | 40,876     |       | 33,010     |       |
| Redemptions of investment securities  held-to-maturity                                    |       | 6,000      |       | 10,564     |       |
| Proceeds from the sale of other real estate owned                                         |       | 1,196      |       | 846        |       |
| Net increase in loans receivable, net of deferred  fees and costs                         |       | (63,088    | )          | (125,738   | )          |
| Net cash used in investing activities                                                     |       | (4,541     | )          | (173,400   | )          |
| Cash flows from financing activities:                                                     |       |       |       |       |       |
| Net increase in deposits                                                                  |       | 100,671    |       | 96,032     |       |
| Net increase in other borrowed funds                                                      |       | 13,708     |       | 11,447     |       |
| Net increase (decrease) in mortgage funding checks                                        |       | 19,140     |       | (6,011     | )          |
| Proceeds from issuance of stock                                                           |       | —     |       | 31,611     |       |
| Proceeds from FHLB advances                                                               |       | 10,000     |       | —     |       |
| Repayments of FHLB advances                                                               |       | (10,000    | )          | —     |       |
| Stock options exercised                                                                   |       | 166        |       | 58         |       |
| Shares issued to employee benefits plan                                                   |       | —     |       | 1,565      |       |
| Dividends on common stock                                                                 |       | (1,724     | )          | (769       | )          |
| Net cash provided by financing activities                                                 |       | 131,961    |       | 133,933    |       |
| Net decrease in cash and cash equivalents                                                 |       | (4,947     | )          | (25,950    | )          |
| Cash and cash equivalents at beginning of the year                                        |       | 24,841     |       | 45,928     |       |
| Cash and cash equivalents at end of the period                                            |       | $          | 19,894     |       | $          | 19,978 |   |
| **Supplemental disclosure of cash  flow information:**                                    |       |       |       |       |       |
| Cash paid during the period for interest                                                  |       | $          | 23,874     |       | $          | 27,926 |   |
| Cash paid for income taxes                                                                |       | 6,443      |       | 2,488      |       |

 

See accompanying notes to consolidated financial statements.

 

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CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

 

Note1

 

*Organization*

 

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

 

*Basisof Presentation*

 

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

 

Note2

 

*Stock-BasedCompensation*

 

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

 

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

 

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 were404,868 shares of the Company’s common stock available for future grants andawards in the Equity Plan as of September 30, 2010.

 

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Stockoptions are granted with an exercise price equal to the common stock’s fairmarket value at the date of grant. Director stock options have ten year termsand vest and become fully exercisable at the grant date. Certain employee stockoptions have ten year terms and vest and become fully exercisable after threeyears.  Other employee stock options haveten year terms and vest and become fully exercisable in 20% 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 September 30, 2010 and 2009 was $61,000 and $72,000,respectively. Total stock compensation expense for the nine months ended September 30,2010 and 2009 was $452,000 and $300,000, respectively. The total income taxbenefit recognized in the income statement for share-based compensationarrangements was $20,000 and $24,000 for the three months ended September 30,2010 and 2009, respectively.  For thenine months ended September 30, 2010 and 2009, the total income taxbenefit recognized in the income statement for share-based compensation was$146,000 and $102,000, respectively.

 

Optionsgranted during the three and nine months ended September 30, 2010 were4,250 and 66,250, respectively. There were no options granted during the threemonths ended September 30, 2009. For the nine months ended September 30,2009, options granted were 120,650.  Theweighted average per share fair value of stock option grants during the threeand nine months ended September 30, 2010 was $4.16 and $5.04 respectively.The weighted average per share fair value of stock option grants made for thenine months ended September 30, 2009 was $2.80.  The fair values of the options granted duringall periods ended September 30, 2010 and 2009 were estimated as of thegrant date using the Black-Scholes option-pricing model based on the followingweighted average assumptions:

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **              | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                    |       |                                                 |       |                                                |       |   |   |   |   |
| Estimated option life   |       | 6.5 years                                            |       | —                                              |       | 6.5 years |   | 6.5 years |   |
| Risk free interest rate |       | 2.13%                                                |       | —                                              |       | 2.13% - 3.30% |   | 2.10% - 2.56% |   |
| Expected volatility     |       | 45.90%                                               |       | —                                              |       | 45.90% |   | 44.60% |   |
| Expected dividend yield |       | 0.89%                                                |       | —                                              |       | 0.89% |   | 0.67% |   |

 

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

 

Stockoption activity during the nine months ended September 30, 2010 issummarized as follows:

 

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| ** **                                      | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding  at December 31, 2009          |       | 2,139,433                  |       | $                                      | 8.43       |                                                             |       |                                    |       |   |
| Granted                                         |       | 66,250                     |       | 11.05                                  |       |                                                             |       |                                    |       |
| Exercised                                       |       | (44,100                    | )          | 3.78                                   |       |                                                             |       |                                    |       |
| Forfeited                                       |       | (25,810                    | )          | 9.31                                   |       |                                                             |       |                                    |       |
| Expired                                         |       | (6,424                     | )          | 4.39                                   |       |                                                             |       |                                    |       |
| Outstanding  at September 30, 2010         |       | 2,129,349                  |       | $                                      | 8.61       |                                                             | 4.41       |                                    | $          | 2,123,970 |   |
| Options  exercisable at September 30, 2010 |       | 1,994,949                  |       | $                                      | 8.37       |                                                             | 4.45       |                                    | $          | 1,944,519 |   |

 

Theintrinsic value of options exercised during the three and nine months ended September 30,2010 was $36,000 and $261,000, respectively. For the options exercised duringthe nine months ended September 30, 2009, the intrinsic value was $41,000.No options were exercised during the three months ended September 30,2009.

 

Asummary of the status of the Company’s non-vested stock options and changesduring the nine months ended September 30, 2010 is as follows:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Balance  at December 31, 2009  |       | 193,700                    |       | $                                                       | 4.00       |   |
| Granted                             |       | 66,250                     |       | 5.04                                                    |       |
| Vested                              |       | (114,400                   | )          | 5.01                                                    |       |
| Forfeited                           |       | (11,150                    | )          | 3.82                                                    |       |
| Balance  at September 30, 2010 |       | 134,400                    |       | $                                                       | 3.67       |   |

 

AtSeptember 30, 2010, there was $630,000 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 2.10 years. The total fair value of shares that vested during the threemonths ended September 30, 2010 and 2009 was $67,000 and $45,000,respectively. For the nine months ended September 30, 2010 and 2009, thetotal fair value of shares that vested was $573,000 and $290,000, respectively.

 

Note3

 

*Segment Information*

 

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

 

Thecommercial banking segment includes both commercial and consumer lending andprovides customers with such products as commercial loans, real estate loans,business financing and consumer loans. In addition, this segment providescustomers with several choices of deposit products including demand depositaccounts, savings accounts and certificates of deposit. The mortgage bankingsegment engages primarily in the origination and acquisition of residential mortgagesfor 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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Informationabout the reportable segments and reconciliation of this information to theconsolidated financial statements at and for the three and nine months ended September 30,2010 and 2009 is as follows:

 

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

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net  interest income        |       | $                       | 17,745     |                  | $          | 647                                                  |       | $         | —     |                          | $          | (210             | )          | $ | — |   | $ | 18,182 |   |
| Provision  for loan losses  |       | 3,500                   |       | —                |       | —                                               |       | —    |       | —                        |       | 3,500            |       |
| Non-interest  income        |       | 1,025                   |       | 7,147                 |       | 1,052                                                |       | 120       |       | (38                           | )          | 9,306            |       |
| Non-interest  expense       |       | 10,074                  |       | 2,342                 |       | 913                                                  |       | 2,078     |       | (38                           | )          | 15,369           |       |
| Provision  for income taxes |       | 1,507                   |       | 1,894                 |       | 47                                                   |       | (732      | )          | —                        |       | 2,716            |       |
| Net  income (loss)          |       | $                       | 3,689      |                  | $          | 3,558                                                |       | $         | 92         |                          | $          | (1,436           | )          | $ | — |   | $ | 5,903 |   |
|                        |       |                    |       |                  |       |                                                 |       |      |       |                          |       |             |       |
| Total  Assets               |       | $                       | 2,072,959  |                  | $          | 373,167                                              |       | $         | 3,021      |                          | $          | 229,526          |       | $ | (551,362 | ) | $ | 2,127,311 |   |
| Average  Assets             |       | $                       | 2,018,523  |                  | $          | 254,864                                              |       | $         | 2,992      |                          | $          | 230,292          |       | $ | (474,384 | ) | $ | 2,032,287 |   |

 

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

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net  interest income        |       | $                       | 12,649     |                  | $          | 655                                                  |       | $         | —     |                          | $          | (212             | )          | $ | — |   | $ | 13,092 |   |
| Provision  for loan losses  |       | 2,050                   |       | —                |       | —                                               |       | —    |       | —                        |       | 2,050            |       |
| Non-interest  income        |       | 917                     |       | 3,724                 |       | 980                                                  |       | 103       |       | (20                           | )          | 5,704            |       |
| Non-interest  expense       |       | 8,334                   |       | 3,192                 |       | 785                                                  |       | 687       |       | (20                           | )          | 12,978           |       |
| Provision  for income taxes |       | 961                     |       | 408                   |       | 66                                                   |       | (271      | )          | —                        |       | 1,164            |       |
| Net  income (loss)          |       | $                       | 2,221      |                  | $          | 779                                                  |       | $         | 129        |                          | $          | (525             | )          | $ | — |   | $ | 2,604 |   |
|                        |       |                    |       |                  |       |                                                 |       |      |       |                          |       |             |       |
| Total  Assets               |       | $                       | 1,861,401  |                  | $          | 177,183                                              |       | $         | 3,477      |                          | $          | 228,528          |       | $ | (377,186 | ) | $ | 1,893,403 |   |
| Average  Assets             |       | $                       | 1,851,296  |                  | $          | 137,303                                              |       | $         | 3,430      |                          | $          | 223,422          |       | $ | (363,556 | ) | $ | 1,851,895 |   |

 

**At and for the Nine Months Ended September 30, 2010 (inthousands):**

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net  interest income        |       | $                       | 49,467     |                  | $          | 1,727                                                |       | $         | —     |                          | $          | (615             | )          | $ | — |   | $ | 50,579 |   |
| Provision  for loan losses  |       | 8,625                   |       | —                |       | —                                               |       | —    |       | —                        |       | 8,625            |       |
| Non-interest  income        |       | 3,157                   |       | 15,605                |       | 3,086                                                |       | 97        |       | (80                           | )          | 21,865           |       |
| Non-interest  expense       |       | 28,056                  |       | 8,113                 |       | 3,090                                                |       | 3,371     |       | (80                           | )          | 42,550           |       |
| Provision  for income taxes |       | 4,982                   |       | 3,202                 |       | —                                               |       | (1,327    | )          | —                        |       | 6,857            |       |
| Net  income (loss)          |       | $                       | 10,961     |                  | $          | 6,017                                                |       | $         | (4         | )                             | $          | (2,562           | )          | $ | — |   | $ | 14,412 |   |
|                        |       |                    |       |                  |       |                                                 |       |      |       |                          |       |             |       |
| Total  Assets               |       | $                       | 2,072,959  |                  | $          | 373,167                                              |       | $         | 3,021      |                          | $          | 229,526          |       | $ | (551,362 | ) | $ | 2,127,311 |   |
| Average  Assets             |       | $                       | 1,958,395  |                  | $          | 177,033                                              |       | $         | 3,254      |                          | $          | 230,843          |       | $ | (399,975 | ) | $ | 1,969,550 |   |

 

**At and for the Nine Months Ended September 30, 2009 (inthousands):**

 
| ** **                  | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Wealth Management  and  Trust Services** | ** ** | **Other** | ** ** | **Intersegment  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|------------------|------------|
| Net  interest income        |       | $                       | 34,191     |                  | $          | 2,165                                                |       | $         | —     |                          | $          | (682             | )          | $ | — |   | $ | 35,674 |   |
| Provision  for loan losses  |       | 4,656                   |       | 94                    |       | —                                               |       | —    |       | —                        |       | 4,750            |       |
| Non-interest  income        |       | 3,077                   |       | 12,419                |       | 2,686                                                |       | (406      | )          | (64                           | )          | 17,712           |       |
| Non-interest  expense       |       | 25,504                  |       | 9,154                 |       | 2,376                                                |       | 1,751     |       | (64                           | )          | 38,721           |       |
| Provision  for income taxes |       | 2,025                   |       | 1,835                 |       | 105                                                  |       | (965      | )          | —                        |       | 3,000            |       |
| Net  income (loss)          |       | $                       | 5,083      |                  | $          | 3,501                                                |       | $         | 205        |                          | $          | (1,874           | )          | $ | — |   | $ | 6,915 |   |
|                        |       |                    |       |                  |       |                                                 |       |      |       |                          |       |             |       |
| Total  Assets               |       | $                       | 1,861,401  |                  | $          | 177,183                                              |       | $         | 3,477      |                          | $          | 228,528          |       | $ | (377,186 | ) | $ | 1,893,403 |   |
| Average  Assets             |       | $                       | 1,777,923  |                  | $          | 170,349                                              |       | $         | 3,447      |                          | $          | 201,099          |       | $ | (369,438 | ) | $ | 1,783,380 |   |

 

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 parentcompany’s most significant assets are its net investments in its subsidiaries.The parent company’s net interest expense is comprised of interest 

 

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incomefrom short-term investments and interest expense on trust preferred securities.The parent company’s non-interest expense is primarily non-allocable executivesalaries and professional services related to the Company’s regulatoryrequirements.

 

TheCompany is in the process of negotiating the service agreement with one of itslargest Trust clients.  If the Company is unsuccessful in retaining thisclient, this would decrease revenues and cash flows derived from a reportingunit within the wealth management and trust services business segment, andresult in the potential impairment of the goodwill and intangible assetsrecorded in the reporting unit.  The Company expects that the negotiationswill be concluded in the next 30-60 days.

 

Note4

 

*Earnings Per Share*

 

Thefollowing is the calculation of basic and diluted earnings per share for thethree and nine months ended September 30, 2010 and 2009.  Antidilutive outstanding stock optionsexcluded from weighted average shares outstanding for the diluted earnings pershare calculation were 81,211 and 245,990 for three months ended September 30,2010 and 2009, respectively. For the nine months ended September 30, 2010and 2009, antidilutive stock options excluded from weighted average sharesoutstanding for the diluted earnings per share calculation were 59,448 and392,951, respectively.  These stockoptions have exercise prices that were greater than the average market price ofthe Company’s common stock for the periods presented.

 

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(In thousands,**                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **except per share data)**    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income available to common shareholders |       | $                                | 5,903      |                            | $          | 2,604 |   | $ | 14,412 |   | $ | 6,915 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Weighted  average common shares - basic      |       | 29,140                           |       | 28,999                          |       | 29,110 |   | 26,560 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Weighted  average common shares - diluted    |       | 29,639                           |       | 29,525                          |       | 29,582 |   | 27,048 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Earnings  per common share - basic           |       | $                                | 0.20       |                            | $          | 0.09 |   | $ | 0.50 |   | $ | 0.26 |   |
|                                         |       |                             |       |                            |       |   |   |   |   |
| Earnings  per common share - diluted         |       | $                                | 0.20       |                            | $          | 0.09 |   | $ | 0.49 |   | $ | 0.26 |   |

 

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

 

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

 
| ** **                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                  | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted  average common shares outstanding                              |       | 28,760                                               |       | 28,690                                              |       | 28,740 |   | 26,269 |   |
| Weighted  average shares attributable to the deferred compensation plans |       | 380                                                  |       | 309                                                 |       | 370 |   | 291 |   |
| Total  weighted average shares - basic                                   |       | 29,140                                               |       | 28,999                                              |       | 29,110 |   | 26,560 |   |

 

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

 
| ** **                                                                       | ** ** | **Three Months Ended ** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **September 30,**                 | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                                          | ** ** | **2010**                               | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                             |       |                                   |       |                            |       |   |   |   |   |
| Weighted  average shares outstanding - basic (from above)                        |       | 29,140                                 |       | 28,999                          |       | 29,110 |   | 26,560 |   |
| Incremental  weighted average shares attributable to deferred compensation plans |       | 289                                    |       | 374                             |       | 245 |   | 361 |   |
| Weighted  average shares attributable to vested stock options                    |       | 210                                    |       | 152                             |       | 227 |   | 127 |   |
| Incremental  shares attributable to unvested stock options                       |       | —                                 |       | —                          |       | — |   | — |   |
| Total  weighted average shares - diluted                                         |       | 29,639                                 |       | 29,525                          |       | 29,582 |   | 27,048 |   |

 

Note5

 

*InvestmentSecurities*

 

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

 
| ** **                                 | ** ** | **September 30, 2010** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                    | ** ** | **Gross  Amortized  cost**       | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  value** | ** ** |
| *Investment Securities Available-for-Sale* | ** ** | ** **                       |       |   |   |   | ** ** | ** ** | ** ** |
| U.S.  government-sponsored agencies        |       | $                                | 20,932     |   | $ | 2,197 |   | $ | — |   | $ | 23,129 |   |
| Mortgage-backed  securities                |       | 190,788                          |       | 9,297 |   | (77 | ) | 200,008 |   |
| Municipal  securities                      |       | 64,793                           |       | 3,510 |   | (17 | ) | 68,286 |   |
| U.S.  treasury securities                  |       | 4,917                            |       | 268 |   | — |   | 5,185 |   |
| Total                                      |       | $                                | 281,430    |   | $ | 15,272 |   | $ | (94 | ) | $ | 296,608 |   |
|                                       |       |                             |       |   |   |   |   |   |   |
| *Investment Securities Held-to-Maturity*   | ** ** | ** **                       |       |   |   |   | ** ** | ** ** | ** ** |
| Mortgage-backed  securities                |       | 15,430                           |       | 752 |   | — |   | 16,182 |   |
| Corporate  bonds                           |       | 8,004                            |       | — |   | (4,932 | ) | 3,072 |   |
| Total                                      |       | $                                | 23,434     |   | $ | 752 |   | $ | (4,932 | ) | $ | 19,254 |   |

 

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

 

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

 
| ** **                         | ** ** | **September 30, 2010** | ** **    |
|------------------------------------|------------|----------------------------------|---------------|
| ** **                         | ** ** | **Available-for-Sale**           | ** **    | **Held-to-Maturity** | ** ** |
| **(In thousands)**            | ** ** | **Amortized  cost**              | ** **    | **Fair  Value** | ** ** | **Amortized  cost** | ** ** | **Fair  Value** | ** ** |
| After  1 year but within 5 years   |       | $                                |  4,917   |   | $ |  5,185 |   | $ | — |   | $ | — |   |
| After  5 years but within 10 years |       | 31,312                           |          | 33,997 |   | — |   | — |   |
| After  10 years                    |       | 54,413                           |          | 57,418 |   | 8,004 |   | 3,072 |   |
| Mortgage-backed  securities        |       | 190,788                          |          | 200,008 |   | 15,430 |   | 16,182 |   |
| Total                              |       | $                                |  281,430 |   | $ |  296,608 |   | $ |  23,434 |   | $ |  19,254 |   |

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

 

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

 

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**September 30, 2010**

 
| **Investment Securities Available-for-Sale** | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**           | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| **(In thousands)**                                | ** ** | **Fair Value**                    | ** ** | **Unrealized loss**             | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| U.S.  treasury securities                              |       | $                                      | —     |                                 | $          | —              |       | $ | — |   | $ | — |   | — |   | — |   |
| U.S.  government - sponsored agencies                  |       | —                                 |       | —                               |       | —              |       | — |   | — |   | — |   |
| Mortgage-backed  securities                            |       | —                                 |       | —                               |       | 838                 |       | (77 | ) | 838 |   | (77 | ) |
| Municipal  securities                                  |       | —                                 |       | —                               |       | 2,917               |       | (17 | ) | 2,917 |   | (17 | ) |
| Total  temporarily impaired securities                 |       | $                                      | —     |                                 | $          | —              |       | $ | 3,755 |   | $ | (94 | ) | $ | 3,755 |   | $ | (94 | ) |
|                                                        |            |                                        |            |                                      |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Investment Securities Held-to-Maturity** | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**           | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| **(In thousands)**                              | ** ** | **Fair Value**                    | ** ** | **Unrealized loss**             | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** | **Fair Value** | ** ** | **Unrealized loss** | ** ** |
| Mortgage-backed  securities                          |       | $                                      | —     |                                 | $          | —              |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Corporate  bonds                                     |       | —                                 |       | —                               |       | 3,072               |       | (4,932 | ) | 3,072 |   | (4,932 | ) |
| Total  temporarily impaired securities               |       | $                                      | —     |                                 | $          | —              |       | $ | 3,072 |   | $ | (4,932 | ) | $ | 3,072 |   | $ | (4,932 | ) |

 

**December 31, 2009**

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

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

 

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

 

TheCompany has $7.9 million in non-government non-agency mortgage-relatedsecurities.  These securities are ratedfrom AAA to AA.  The various protectiveelements on the non agency securities may change in the future if marketconditions or the financial stability of credit insurers changes, which couldimpact the ratings of these securities.

 

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AtSeptember 30, 2010, certain of the Company’s investment grade securities werein an unrealized loss position. Investment securities with unrealized losses are a result of pricingchanges due to recent and negative conditions in the current market environmentand not as a result of permanent credit impairment.  Contractual cash flows for the agencymortgage-backed securities are guaranteed and/or funded by the U.S.government.  Other mortgage-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 does notintend to sell nor does the Company believe it is probable to sell any of thetemporarily impaired securities prior to the recovery of the amortized cost.

 

Theheld-to-maturity portfolio includes investments in four pooled trust preferredsecurities, totaling $8.0 million of par value at September 30, 2010 (eachsecurity has a par value of $2.0 million). These securities are presented as corporate bonds in the abovetable.  The collateral underlying thesestructured securities are instruments issued by financial institutions orinsurers.  The Company owns the A-3tranches in each issuance.  Each of thebonds is rated by more than one rating agency. Two of the securities have a composite rating of AA, one of thesecurities has a composite rating of BB- and the other security has a compositerating of B-.  There is minimalobservable trading activity for these types of securities.  The Company has estimated the fair value ofthe securities through the use of internal calculations and through informationprovided by external pricing services. Given the level of subordination below the A-3 tranches, and the actualand expected performance of the underlying collateral, the Company expects toreceive all contractual interest and principal payments recovering theamortized cost basis of each of the four securities, and concluded that thesesecurities are not other-than-temporarily impaired.  The Company continuously monitors thefinancial condition of the underlying issues and the level of subordination belowthe A-3 tranche.  The Company alsoutilizes a multi-scenario model which assumes varying levels of additionaldefaults and deferrals and the effects of such adverse developments on thecontractual cash flows for the A-3 tranches.  In each of the ten adversescenarios, there was no indication of a break to the A-3 contractual cashflows.  Significant judgement is involvedin the evaluation of other than temporary impairment.  The Company does not intend to sell nor doesthe Company believe it is probable that it will be required to sell thesecorporate bonds prior to the recovery of its investment.

 

Inone of the pooled trust preferred securities issues, 40% of the principalbalance is subordinate to our class of ownership, and it is estimated that abreak in contractual cash flow would occur if $157 million of the remaining$323 million, or 49% of the performing collateral defaulted or deferredpayment.  In another of the pooled trustpreferred securities issues, 41% of the principal balance is subordinate to ourclass of ownership, and it is estimated that a break in contractual cash flowwould occur if $88.5 million of the remaining $258 million, or 35% of theperforming collateral defaulted or deferred payment.  In the third of the pooled trust preferredsecurities issues, 66% of the principal balance is subordinate to our class ofownership, and it is estimated that a break in contractual cash flow wouldoccur if $149 million of the remaining $176 million, or 85% of the performingcollateral defaulted or deferred payment. In the fourth of the pooled trust preferred securities issues, 50% ofthe principal balance is subordinate to our class of ownership, and it isestimated that a break in contractual cash flow would occur if $278 million ofthe remaining $378 million, or 74% of the performing collateral defaulted todeferred payment.

 

Noother-than-temporary impairment has been recognized on the securities in theCompany’s investment portfolio for the three and nine months ended September30, 2010, and the Company does not continue to hold any investment securitiesfor which the Company previously recognized other than temporary impairment.

 

Note6

 

*Allowance for Loan Losses*

 

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

 

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| ** **                                         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(In thousands)**                            | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Allowance for loan losses, beginning of the period |       | $                                                        | 21,058     |                                                    | $          | 16,150 |   | $ | 18,636 |   | $ | 14,518 |   |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Provision for loan losses                          |       | 3,500                                                    |       | 2,050                                                   |       | 8,625 |   | 4,750 |   |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Loans charged off:                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Commercial and industrial                          |       | (1,750                                                   | )          | (25                                                     | )          | (3,112 | ) | (40 | ) |
| Residential                                        |       | (425                                                     | )          | (701                                                    | )          | (1,732 | ) | (1,756 | ) |
| Consumer                                           |       | (2                                                       | )          | (1                                                      | )          | (50 | ) | (4 | ) |
| Total loans charged off                            |       | (2,177                                                   | )          | (727                                                    | )          | (4,894 | ) | (1,800 | ) |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Recoveries:                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Commercial and industrial                          |       | —                                                   |       | —                                                  |       | 3 |   | 5 |   |
| Residential                                        |       | 52                                                       |       | —                                                  |       | 62 |   | — |   |
| Consumer                                           |       | 11                                                       |       | —                                                  |       | 12 |   | — |   |
| Total recoveries                                   |       | 63                                                       |       | —                                                  |       | 77 |   | 5 |   |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net (charge offs) recoveries                       |       | (2,114                                                   | )          | (727                                                    | )          | (4,817 | ) | (1,795 | ) |
|                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Ending balance, September 30,                      |       | $                                                        | 22,444     |                                                    | $          | 17,473 |   | $ | 22,444 |   | $ | 17,473 |   |

 

Theallowance for loan losses at September 30, 2010 and December 31, 2009 was $22.4million and $18.6 million, respectively. Allowance for loan losses ratio toloans receivable, net was 1.66% and 1.44% at September 30, 2010 and December31, 2009, respectively.  Nonperforming loans at September 30, 2010 andDecember 31, 2009, were $9.6 million and $847,000, respectively. The increasein nonperforming loans was primarily the result of two commercial relationshipswhich were previously impaired that deteriorated further during 2010.

 

Forthe nine months ending September 30, 2010, the Company charged off commercialloans totaling $3.1 million including three loans associated with one borrowerand residential loans totaling $1.7 million.  In addition, consumer loanstotaling $50,000 have been charged-off during 2010. Recoveries totaling$77,000 have been recorded during 2010.

 

Forthe nine months ending September 30, 2009, the Company charged off threeresidential mortgage loans totaling $1.7 million.  In addition,installment loans totaling $4,000 were charged off during 2009.  The Bankrecorded partial charge offs of two commercial loans totaling $40,000 during2009.

 

Note7

 

*Derivative Instruments and Hedging Activities*

 

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

 

AtSeptember 30, 2010, accumulated other comprehensive income included anunrealized loss, net of tax, of $35,000 related to forward loan sales contractsdesignated as the hedging instrument in the cash flow hedge. Loans held forsale are generally sold within sixty days of closing and, therefore,substantially all of the amount recorded in accumulated other comprehensiveincome at

 

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September30, 2010 that is related to the Company’s cash flow hedges will be recognizedin earnings during the fourth quarter of 2010.

 

AtSeptember 30, 2010, the Company had $214.6 million in residential mortgage ratelock commitments and associated forward sales and $308.4****millionin forward loan sales associated with $341.4 million of loans that had closedand presented as held for sale.

 

TheCompany has interest rate swaps to mitigate its exposure to interest raterisk.  These interest rate swaps have anaggregate notional amount of $10.0 million to hedge against changes in cashflows caused by movement in interest rates related to the Company’s issuance of$20.0 million in trust preferred securities. In addition, the Company has an interest rate swap to mitigate thevariability in the fair value for one loan receivable.  At September 30, 2010, accumulated othercomprehensive income included an after-tax unrealized loss of $262,000 relatedto these interest rate swaps.

 

*Note 8*

 

*Fair Value of DerivativeInstruments and Hedging Activities*

 

Thefollowing tables disclose the derivative instruments’ location on the Company’sstatement of condition and the fair value of those instruments at September 30,2010 and December 31, 2009.  In addition,the gains and losses related to these derivative instruments is provided forthe nine months ended September 30, 2010 and 2009.

 

**Derivative Instruments and Hedging Activities**

**At September 30, 2010**

**(in thousands)**

 
| ** **                                                   | ** ** | **Asset Derivatives**                    | ** ** | **Liability Derivatives** | ** **   |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------|--------------|
| ** **                                                   | ** ** | **Balance Sheet  Location**              | ** ** | **Fair Value**            | ** **   | **Balance Sheet  Location** | ** ** | **Fair Value** | ** ** |
| **Derivatives Designated as Hedging  Instruments**           |       |                                          |       |                           |         |   |   |   |   |
| Interest Rate Swaps                                          |       | Accrued  Interest Receivable and Other Assets |       | $                              |  — |   | Accrued  Interest Payable and Other Liabilities |   | $ |  2,152 |   |
| Forward Loan Sales Commitments                               |       | Accrued  Interest Receivable and Other Assets |       | 1,754                          |         | Accrued  Interest Payable and Other Liabilities |   | 1,485 |   |
| **Total Derivatives Designated as Hedging  Instruments**     |       |                                          |       | 1,754                          |         |   |   | 3,637 |   |
|                                                         |       |                                          |       |                           |         |   |   |   |   |
| **Derivatives Not Designated as Hedging  Instruments**       |       |                                          |       |                           |         |   |   |   |   |
| Forward Loan Sales Commitments                               |       | Accrued  Interest Receivable and Other Assets |       | 6,830                          |         | Accrued  Interest Payable and Other Liabilities |   | 21 |   |
| Rate Lock Commitments                                        |       | Accrued  Interest Receivable and Other Assets |       | 21                             |         | Accrued  Interest Payable and Other Liabilities |   | 292 |   |
| **Total Derivatives Not Designated as  Hedging Instruments** |       |                                          |       | 6,851                          |         |   |   | 313 |   |
|                                                         |       |                                          |       |                           |         |   |   |   |   |
| **Total Derivatives**                                        |       |                                          |       | $                              |  8,605  |   |   |   | $ |  3,950 |   |

 

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**Derivative Instruments and Hedging Activities**

**At December 31, 2009**

**(in thousands)**

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

 

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**Impact of Derivative Instruments on the Statement ofIncome**

**For the Three Months Ended September 30, 2010**

**(in thousands)**

 
| **Derivatives in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |    |   |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------|------------|---------|--------|
|                                                                     |       |                                                                                        |       |                                                                                         |       |                                                                                             |         |                                                                                           |       |    |   |
| Interest  Rate Swaps                                                     |       | Other Income                                                                                |       | $                                                                                            | 99         |                                                                                             | Other Income |                                                                                           | $          | (99     | )      |   |   |
| **Total**                                                                |       |                                                                                        | ** ** | **$**                                                                                        | **99**     |                                                                                             |         | ** **                                                                                     | **$**      | **(99** | **)**  |   |   |

 
| **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                                                    |       | $                                                                                                                                        | (77        | )                                                                                                                                                                 | Other Income |                                                                                                                                                        | $          | —                                                                                                                                                                              |       | Other Income                                                                                                                                                                      |       | $ | — |   |
|                                                                    |       |                                                                                                                                     |       |                                                                                                                                                              |         |                                                                                                                                                        |       |                                                                                                                                                                                |       |                                                                                                                                                                              |       |
| Forward  Loan Sales Commitments                                         |       | 146                                                                                                                                      |       | Other Income                                                                                                                                                      |         | (1,058                                                                                                                                                      | )          | Other Income                                                                                                                                                                        |       | 1                                                                                                                                                                                 |       |
| **Total**                                                               | ** ** | **$**                                                                                                                                    | **69**     |                                                                                                                                                              |         | ** **                                                                                                                                                  | **$**      | **(1,058**                                                                                                                                                                          | **)**      |                                                                                                                                                                              | ** ** | **$** | **1** | ** ** |

 
| **Derivatives  Not Designated as  Hedging Instruments** | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** **      | **Location of Gain  (Loss) Recognized in  Income on Derivative** |                                                          |   |   |   |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------|-----------------|------------------------------------------------------------------------------------------------|---------------------------------------------------------------|--------|--------|--------|
| ** **                                              |       |                                                                                     |            |                                                                                           |                                                          |   |   |   |   |   |   |
| Forward Loan Sales  Commitments                         |       | $                                                                                        |  6,538     |                                                                                           | Realized and unrealized  gains on mortgage banking activities |   |   |   |   |
| Forward Loan Sales  Commitments                         |       | 271                                                                                      |            | Other Income                                                                                   |                                                          |   |   |   |   |   |   |
| Rate Lock Commitments                                   |       | (271                                                                                     | )               | Other Income                                                                                   |                                                          |   |   |   |   |   |   |
| **Total**                                               | ** ** | **$**                                                                                    | ** 6,538** |                                                                                           |                                                          |   |   |   |   |   |   |   |

 

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**Impact of Derivative Instruments on the Statement ofIncome**

**For the Nine Months Ended September 30, 2010**

**(in thousands)**

 
| **Derivatives in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |     |   |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------|------------|----------|--------|
|                                                                     |       |                                                                                        |       |                                                                                         |       |                                                                                             |         |                                                                                           |       |     |   |
| Interest  Rate Swaps                                                     |       | Other Income                                                                                |       | $                                                                                            | 319        |                                                                                             | Other Income |                                                                                           | $          | (319     | )      |   |   |
| **Total**                                                                |       |                                                                                        | ** ** | **$**                                                                                        | **319**    |                                                                                             |         | ** **                                                                                     | **$**      | **(319** | **)**  |   |   |

 
| **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                                                          |       | $                                                                                                                                        | (262       | )                                                                                                                                                                 | Other Income |                                                                                                                                                        | $          | —                                                                                                                                                                              |       | Other Income                                                                                                                                                                      |       | $ | — |   |
|                                                                          |       |                                                                                                                                     |       |                                                                                                                                                              |         |                                                                                                                                                        |       |                                                                                                                                                                                |       |                                                                                                                                                                              |       |
| Forward  Loan Sales Commitments                                               |       | (29                                                                                                                                      | )          | Other Income                                                                                                                                                      |         | (119                                                                                                                                                        | )          | Other Income                                                                                                                                                                        |       | 1                                                                                                                                                                                 |       |
| **Total**                                                                     | ** ** | **$**                                                                                                                                    | **(291**   | **)**                                                                                                                                                             |         | ** **                                                                                                                                                  | **$**      | **(119**                                                                                                                                                                            | **)**      |                                                                                                                                                                              | ** ** | **$** | **1** | ** ** |

 
| **Derivatives  Not Designated as  Hedging Instruments** | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** |                                                          |   |   |   |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|---------------------------------------------------------------|--------|--------|--------|
| ** **                                              | ** ** | ** **                                                                               | ** ** | ** **                                                                                     | ** **                                                    |   |   |   |   |   |   |
| Forward  Loan Sales Commitments                         |       | $                                                                                        | 13,939     |                                                                                           | Realized and unrealized  gains on mortgage banking activities |   |   |   |   |
| Forward  Loan Sales Commitments                         |       | 780                                                                                      |       | Other Income                                                                                   |                                                          |   |   |   |   |   |   |
| Rate  Lock Commitments                                  |       | (780                                                                                     | )          | Other Income                                                                                   |                                                          |   |   |   |   |   |   |
| **Total**                                               | ** ** | **$**                                                                                    | **13,939** |                                                                                           |                                                          |   |   |   |   |   |   |   |

 

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**Impact of Derivative Instruments on the Statement ofIncome**

**For the Three Months Ended September 30, 2009**

**(in thousands)**

 
| **Derivatives in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** |    |   |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------|------------|---------|--------|
|                                                                     |       |                                                                                        |       |                                                                                         |       |                                                                                             |         |                                                                                           |       |    |   |
| Interest  Rate Swaps                                                     |       | Other Income                                                                                |       | $                                                                                            | 86         |                                                                                             | Other Income |                                                                                           | $          | (86     | )      |   |   |
| **Total**                                                                |       |                                                                                        | ** ** | **$**                                                                                        | **86**     |                                                                                             |         | ** **                                                                                     | **$**      | **(86** | **)**  |   |   |

 
| **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                                                    |       | $                                                                                                                                        | 98         |                                                                                                                                                              | Other Income |                                                                                                                                                        | $          | —                                                                                                                                                                              |       | Other Income                                                                                                                                                                      |       | $ | — |   |
|                                                                    |       |                                                                                                                                     |       |                                                                                                                                                              |         |                                                                                                                                                        |       |                                                                                                                                                                                |       |                                                                                                                                                                              |       |
| Forward  Loan Sales Commitments                                         |       | 369                                                                                                                                      |       | Other Income                                                                                                                                                      |         | 1,557                                                                                                                                                       |       | Other Income                                                                                                                                                                        |       | 1                                                                                                                                                                                 |       |
| **Total**                                                               | ** ** | **$**                                                                                                                                    | **467**    |                                                                                                                                                              |         | ** **                                                                                                                                                  | **$**      | **1,557**                                                                                                                                                                           |       |                                                                                                                                                                              | ** ** | **$** | **1** | ** ** |

 
| **Derivatives  Not Designated as  Hedging Instruments** | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** |                                                          |   |   |   |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|---------------------------------------------------------------|--------|--------|--------|
| ** **                                              |       |                                                                                     |       |                                                                                           |                                                          |   |   |   |   |   |   |
| Forward  Loan Sales Commitments                         |       | $                                                                                        | 1,693      |                                                                                           | Realized and unrealized  gains on mortgage banking activities |   |   |   |   |
| Forward  Loan Sales Commitments                         |       | (173                                                                                     | )          | Other Income                                                                                   |                                                          |   |   |   |   |   |   |
| Rate  Lock Commitments                                  |       | 173                                                                                      |       | Other Income                                                                                   |                                                          |   |   |   |   |   |   |
| **Total**                                               | ** ** | **$**                                                                                    | **1,693**  |                                                                                           |                                                          |   |   |   |   |   |   |   |

 

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

**For the Nine Months Ended September 30, 2009**

**(in thousands)**

 
| **Derivatives in Fair Value Hedging  Relationships** | ** ** | **Locations of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Amount of Gain  (Loss) Recognized in  Income on Derivative** | ** ** | **Location of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** **   | **Amount of Gain  (Loss) Recognized  in Income on  Hedged Item** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                     |       |                                                                                        |       |                                                                                         |       |                                                                                             |         |                                                                                           |       |       |       |
| Interest  Rate Swaps                                                     |       | Other Income                                                                                |       | $                                                                                            | (377       | )                                                                                                | Other Income |                                                                                           | $          | (377       | )          |   |   |
| **Total**                                                                |       |                                                                                        | ** ** | **$**                                                                                        | **(377**   | **)**                                                                                            |         | ** **                                                                                     | **$**      | **(377**   | **)**      | ** ** | ** ** |

 
| **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                                                    |       | $                                                                                                                                        | 64         |                                                                                                                                                              | Other Income |                                                                                                                                                        | $          | —                                                                                                                                                                              |       | Other Income                                                                                                                                                                      |       | $ | — |   |
|                                                                    |       |                                                                                                                                     |       |                                                                                                                                                              |         |                                                                                                                                                        |       |                                                                                                                                                                                |       |                                                                                                                                                                              |       |
| Forward  Loan Sales Commitments                                         |       | 103                                                                                                                                      |       | Other Income                                                                                                                                                      |         | 487                                                                                                                                                         |       | Other Income                                                                                                                                                                        |       | 1                                                                                                                                                                                 |       |
| **Total**                                                               | ** ** | **$**                                                                                                                                    | **167**    |                                                                                                                                                              |         | ** **                                                                                                                                                  | **$**      | **487**                                                                                                                                                                             |       |                                                                                                                                                                              | ** ** | **$** | **1** | ** ** |

 
| **Derivatives Not Designated as  Hedging Instruments** | ** ** | **Amount of Gain  (Loss) Recognized  in Income on  Derivative** | ** ** | **Location of Gain  (Loss) Recognized in  Income on Derivative** | ** **                                                    | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|---------------------------------------------------------------|------------|------------|
| Forward  Loan Sales Commitments                                            |       | $                                                                                        | 5,321      |                                                                                           | Realized and unrealized  gains on mortgage banking activities |       |       |   |
| Forward  Loan Sales Commitments                                            |       | 130                                                                                      |       | Other Income                                                                                   |                                                          |       |       |
| Rate  Lock Commitments                                                     |       | (130                                                                                     | )          | Other Income                                                                                   |                                                          |       |       |
| **Total**                                                                  |       | **$**                                                                                    | **5,321**  |                                                                                           |                                                          |       |       |   |

 

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Note9

 

*Goodwill and Other Intangibles*

 

Informationconcerning total amortizable other intangible assets at September 30, 2010is as follows:

 
| ** **                         | ** ** | **Mortgage Banking**   | ** ** | **Wealth Management  and Trust Services** | ** ** | **Total**                   | ** ** |
|------------------------------------|------------|-----------------------------|------------|----------------------------------------------------------|------------|-----------------------------|------------|
| **(In thousands)**            | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**                            | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at December 31, 2009  |       | $                           | 1,781      |                                                     | $          | 1,039                       |       | $ | 795 |   | $ | 576 |   | $ | 2,576 |   | $ | 1,615 |   |
| 2010 activity:                     |       |                        |       |                                                     |       |                        |       |   |   |   |   |   |   |
| Customer relationship intangibles  |       | —                      |       | 149                                                      |       | —                      |       | 30 |   | — |   | 179 |   |
| Balance at September 30, 2010 |       | $                           | 1,781      |                                                     | $          | 1,188                       |       | $ | 795 |   | $ | 606 |   | $ | 2,576 |   | $ | 1,794 |   |

 

Theaggregate amortization expense was $60,000 for each of the three months ended September 30,2010 and 2009. For the nine months ended September 30, 2010 and 2009, theaggregate amortization expense was $179,000 and $178,000, respectively.

 

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

 
| **(In thousands)**             | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2010 (October – December) |       | $          | 60         |   |
| 2011                                |       | 238        |       |
| 2012                                |       | 238        |       |
| 2013                                |       | 189        |       |
| 2014                                |       | 41         |       |
| 2015 and thereafter                 |       | 16         |       |
|                                     |            |            |            |  |

 

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

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

 

Goodwillof each of the Company’s business segments is tested for impairment on anannual basis or more frequently if events or circumstances warrant. During theperiod ended September 30, 2010, the Company performed an evaluation of thegoodwill associated with its acquisition of George Mason, which is included inthe mortgage banking segment. Based on the results of the analysis, the fairvalue of George Mason exceeded its carrying value. As a result, no impairmentwas indicated.

 

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Aspreviously reported for the period ended June 30, 2010, the Companyperformed its annual review of goodwill at Wilson/Bennett, a reporting unitwithin its Wealth Management and Trust Services segment, and it recognized animpairment charge of $451,000.  The analysisincluded the use of the expected present value technique.  This technique uses the probability-weightedaverage of expected certainty equivalent cash flows.   The cash flow assumptions have beendetermined based upon recent experience in growth or declines of assets undermanagement, recent expense trends and recent valuations of other assetmanagement firms and the costs associated with executing our business plan.

 

Historically,Wilson/Bennett and Cardinal Trust and Investments have been separate reportingunits within the Wealth Management and Trust Services business segment.    Both of these units manage financial assetsfor institutional clients and for upper middle class to wealthyindividuals.  The Company now uses asingle “wealth management” sales team to present financial products toprospects and also to service our existing clients.  The “back office” for each of thesecomponents is performed by the same administrative staff, and there is a singleperson that oversees the combined sales effort and manages the operations.   Prospectively and beginning in the thirdquarter of 2010, the Wilson/Bennett and Cardinal Trust and Investmentsreporting units have been combined into a single reporting unit and evaluationsof the recoverability of goodwill and other intangible assets are now based onthe combined cash flows of these businesses.

 

Note10

 

*Commitmentsand Contingencies*

 

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

 

Standbyletters of credit are conditional commitments issued by the Company to guaranteethe performance of the contractual obligations by a customer to a thirdparty.  The majority of these guaranteesextend until satisfactory completion of the customer’s contractualobligations.  All standby letters ofcredit outstanding at September 30, 2010 are collateralized.

 

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

 

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Commitmentsto extend credit of $215.7 million as of September 30, 2010 are related toGeorge Mason’s mortgage loan funding commitments and are of a short termnature.  Commitments to extend credit totaling $445.4 million primarily havefloating rates as of September 30, 2010.  At September 30, 2010,standby letters of credit were $20.1 million.

 

Theseoff-balance sheet financial instruments may involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated statements of financial 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 exposure to credit loss under standbyletters of credit and commitments to extend credit is represented by thecontractual amounts of those instruments. It is uncertain as to the amountsthat we will be required to fund on these commitments as many such arrangementsexpire with no amounts drawn.

 

GeorgeMason provides for its estimated exposure to repurchase loans previously soldto investors for which borrowers failed to provide full and accurateinformation on their loan application or for which appraisals have not beenacceptable or where the loan was not underwritten in accordance with the loanprogram specified by the loan investor, and for other exposure to its investorsrelated to loan sales activities. 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. During thepast two years, the Company has taken steps to limit its exposure to such loanrepurchases through agreements entered into with various investors.  During 2010, the Company experiencedfavorable results in resolving various investor claims and has reduced itsreserve related to such claims by $1.1 million. As of September 30, 2010,the Company had no outstanding loan repurchases or settlements.

 

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

 

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Note11

 

*FairValue Measurements*

 

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

 

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

 

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

 

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

 

*RecurringFair Value Measurements*

 

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

 

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

 

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

 

TheCompany records its interest rate lock commitments and forward loan salescommitments at fair value determined as the amount that would be required tosettle each of these derivative financial instruments at the balance sheet date.  In the normal course of business, GeorgeMason and Cardinal First (collectively, the “mortgage companies”) enter intocontractual interest rate lock commitments to extend credit to borrowers withfixed expiration dates.  The commitments become effective when theborrowers “lock-in” a specified interest rate within the time framesestablished by the mortgage companies.  All borrowers are evaluated forcredit worthiness prior to the extension of the commitment.  Market riskarises if interest rates move adversely between the time of the interest ratelock by the borrower and the sale date of the loan to an investor.  To

 

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mitigatethe effect of the interest rate risk inherent in providing rate lockcommitments to borrowers, the mortgage companies enter into best effortsforward sales contracts to sell loans to investors.  The forward salescontracts lock in an interest rate and price for the sale of loans similar tothe specific rate lock commitments.  Both the rate lock commitments to theborrowers and the forward sales contracts to investors through to the date theloan closes are undesignated derivatives and accordingly, are marked to fairvalue through earnings.  These valuationsfall into a Level 2 category.

 

Therewere no significant transfers into and out of Level 1, Level 2 and Level 3measurements in the fair value hierarchy during the three and nine months endedSeptember 30, 2010.  Transfers betweenlevels are recognized at the end of each reporting period.  The valuation technique used for fair valuemeasurements using significant other observable inputs (Level 2) is the marketapproach for each class of assets and liabilities.

 

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

 

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

 
| ** **                                                  | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                                    | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Description**                                             | ** ** | **Balance** | ** ** | **Quoted Prices in  Active markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Investment securities available-for-sale:                   |       |        |       |                                                                                                |       |   |   |   |   |
| U.S. treasury securities                                    |       | $           | 5,185      |                                                                                                | $          | 5,185 |   | $ | — |   | $ | — |   |
| U.S. government- sponsored agencies                         |       | 23,129      |       | —                                                                                              |       | 23,129 |   | — |   |
| Mortgage-backed securities                                  |       | 200,008     |       | —                                                                                              |       | 200,008 |   | — |   |
| Municipal securities                                        |       | 68,286      |       | —                                                                                              |       | 68,286 |   | — |   |
| Total investment securities available-for-sale              |       | 296,608     |       | 5,185                                                                                               |       | 291,423 |   | — |   |
| Investment securities - trading                             |       | 1,843       |       | —                                                                                              |       | 1,843 |   | — |   |
| Loans receivable                                            |       | 13,303      |       | —                                                                                              |       | 13,303 |   | — |   |
| Bank-owned life insurance                                   |       | 34,211      |       | —                                                                                              |       | 34,211 |   | — |   |
| Derivative liability - interest rate swaps                  |       | 2,152       |       | —                                                                                              |       | 2,152 |   | — |   |
| Derivative asset - forward loan sales commitments           |       | 8,584       |       | —                                                                                              |       | 8,584 |   | — |   |
| Derivative asset — interest rate lock commitments      |       | 21          |       | —                                                                                              |       | 21 |   | — |   |
| Derivative liability - forward loan sales  commitments      |       | 1,506       |       | —                                                                                              |       | 1,506 |   | — |   |
| Derivative liability — interest rate lock  commitments |       | 292         |       | —                                                                                              |       | 292 |   | — |   |
|                                                             |            |             |            |                                                                                                     |            |  |  |  |  |  |  |  |  |

 

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

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

 

*Nonrecurring Fair ValueMeasurements*

 

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

 

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

 
| ** **                         | ** ** | ** **  | ** ** | **Fair Value Measurements Using**                                                | ** ** |
|------------------------------------|------------|-------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **Description**                    | ** ** | **Balance** | ** ** | **Quoted Prices  in Active  markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| George Mason — Reporting Unit |       | $           | 24,010     |                                                                                            | $          | — |   | $ | — |   | $ | 24,010 |   |
| Corporate bonds                    |       | 3,072       |       | —                                                                                          |       | — |   | 3,072 |   |
| Nonaccrual loans                   |       | 9,581       |       | —                                                                                          |       |   | 9,581 |   | — |   |
| Other real estate owned            |       | 2,615       |       | —                                                                                          |       | 2,615 |   | — |   |
|                                    |            |             |            |                                                                                                 |            |  |  |  |  |  |  |  |  |

 

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

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

 

SeeNote 5 for information on the valuation of the Company’s corporate bondportfolio.

 

TheCompany’s nonaccrual loans are measured at the present value of its expectedfuture cash flows discounted at the loan’s coupon rate, or at the loan’sobservable market price or fair value of the collateral if the loan iscollateral dependent.  The Company measures the collateral value onimpaired loans by obtaining an updated appraisal of the underlying collateraland may discount further the appraised value, if necessary, to an amount equalto the expected cash proceeds in the event the loan is foreclosed upon and thecollateral is sold.  In addition, an estimate of costs to sell thecollateral is assumed.  The Company values other real estate owned byobtaining an updated appraisal of the property foreclosed upon, and discountsfurther the appraised value to an amount equal to the expected cash proceedsupon the sale of the property.  Both nonaccrual loans and other realestate owned are valued using adjusted market quotes and therefore fall intothe Level 2 category.

 

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

 

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**Fair Value of Financial Instruments**

 

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

 

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

 

*Cashand Cash Equivalents*

 

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

 

*InvestmentSecurities Held-to-Maturity and Other Investments*

 

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

 

*LoansHeld for Sale*

 

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

 

*LoansReceivable, Net*

 

Inorder to determine the fair market value for loans receivable, the loanportfolio was segmented based on loan type, credit quality and maturities.  For certain variable rate loans with nosignificant credit concerns and frequent repricings, estimated fair values arebased on current carrying amounts.  Thefair values of other loans are estimated using discounted cash flow analyses,at interest rates currently being offered for loans with similar terms toborrowers of similar credit quality. This method of estimating fair value does not incorporate the exit-priceconcept of fair value which is acceptable for this disclosure.

 

*Deposits*

 

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

 

*OtherBorrowed Funds*

 

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

 

*AccruedInterest Receivable*

 

Thecarrying amount of accrued interest receivable approximates its fair value.

 

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

 
| ** **                                                    | ** ** | **September 30, 2010** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **Carrying**                     | ** ** | **Estimated** | ** ** |
| **(In thousands)**                                            | ** ** | **Amount**                       | ** ** | **Fair Value** | ** ** |
| Financial assets:                                             |       |                             |       |   |   |
| Cash and cash equivalents                                     |       | $                                | 19,894     |   | $ | 19,894 |   |
| Investment securities held-to-maturity and other  investments |       | 39,901                           |       | 35,721 |   |
| Loans held for sale                                           |       | 341,413                          |       | 341,413 |   |
| Loans receivable, net                                         |       | 1,328,819                        |       | 1,354,144 |   |
| Accrued interest receivable                                   |       | 6,627                            |       | 6,627 |   |
|                                                          |       |                             |       |   |   |
| Financial liabilities:                                        |       |                             |       |   |   |
| Demand deposits                                               |       | $                                | 211,762    |   | $ | 211,762 |   |
| Interest checking                                             |       | 128,252                          |       | 128,252 |   |
| Money market and statement savings                            |       | 382,550                          |       | 382,550 |   |
| Certificates of deposit                                       |       | 675,112                          |       | 687,956 |   |
| Other borrowed funds                                          |       | 441,287                          |       | 470,701 |   |
| Accrued interest payable                                      |       | 1,476                            |       | 1,476 |   |

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

 

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

 

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

 

**CautionAbout Forward-Looking Statements**

 

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

 

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

 

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

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

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

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

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

·                  changes in operations of our wealthmanagement and trust services segment, its customer base and assets undermanagement and any associated impact on the fair value of goodwill in thefuture;

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

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

 

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

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

·                  governmental monetary and fiscal policies;

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

·                  changes in accounting policies, rules andpractices;

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

·                  maintaining capital levels adequate tosupport our growth;

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

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

·                  risks and uncertainties related to futuretrust operations;

·                  demand, development and acceptance of newproducts and services;

·                  problems with technology utilized by us;

·                  changing trends in customer profiles andbehavior; and

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

 

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

 

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

 

**Overview**

 

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

 

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

 

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

 

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

 

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

 

**CriticalAccounting Policies**

 

*General*

 

U. S. generally accepted accounting principles arecomplex and require management to apply significant judgment to variousaccounting, reporting, and disclosure matters. Management must use assumptions, judgments and estimates when applyingthese principles where precise measurements are not possible or practical.  These policies are critical because they arehighly dependent upon subjective or complex judgments, assumptions andestimates.  Changes in such judgments,assumptions and estimates may have a significant impact on the consolidatedfinancial statements.  Actual results, infact, could differ from initial estimates.

 

The accounting policies we view as critical arethose relating to judgments, assumptions and estimates regarding thedetermination of the allowance for loan losses, the fair value measurements ofcertain assets and liabilities, accounting for economic hedging activities,accounting for impairment testing of goodwill, accounting for the impairment ofamortizing intangible assets and other long-lived assets, and the valuation ofdeferred tax assets.

 

*Allowance for Loan Losses*

 

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

 

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

 

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

 

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

 

*FairValue Measurements*

 

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

 

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

 

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*Accountingfor Economic Hedging Activities*

 

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

 

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

 

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

 

Tomitigate the effect of the interest rate risk inherent in providing rate lockcommitments, we economically hedge our commitments by entering into bestefforts delivery forward loan sales contracts. During the rate lock commitmentperiod, these forward loan sales contracts are marked to market throughearnings and are not designated as accounting hedges. The fair values of loancommitments and the fair values of forward loan sales contracts generally movein opposite directions, and the net impact of changes in these valuations onnet income during the loan commitment period is generally inconsequential. Atthe closing of the loan, the loan commitment derivative expires and we record aloan held for sale and continue to be obligated under the same forward loansales contract.   The forward salescontract is then designated as a hedge against the variability in cash to bereceived from the loan sale.  Loans heldfor sale are accounted for at the lower of cost or fair value*.*

 

*Accounting for Impairment Testing of Goodwill*

 

Totest goodwill for impairment, we perform an analysis to compare the fair valueof the reporting unit to which the goodwill is assigned to the carrying valueof the reporting unit. We make estimates of the discounted cash flows from theexpected future operations of the reporting unit. This discounted cash flowanalysis involves the use of unobservable inputs including:  estimated future cash flows from operations;an estimate of a terminal value; a discount rate; and 

 

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otherinputs.  Our estimated future cash flowsare largely based on our historical actual cash flows.  If the analysis indicates that the fair valueof the reporting unit is less than its carrying value, we do an analysis tocompare the implied fair value of the reporting unit’s goodwill with thecarrying amount of that goodwill. The implied fair value of the goodwill isdetermined by allocating the fair value of the reporting unit to all its assetsand liabilities. If the implied fair value of the goodwill is less than thecarrying value, an impairment loss is recognized.

 

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

 

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

 

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

 

*Valuation of Deferred TaxAssets*

 

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

 

**New Financial Accounting Standards**

 

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

 

In January 2010, weadopted ASU 2009-17, *Consolidations (Topic810): Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities.*  This ASUamends the guidance on variable interest entities (“VIE”) in ASC Topic 810 relatedto the consolidation of variable interest entities.  It requires reporting entities to evaluateformer QSPEs for consolidation, changes the approach to determining a VIE’sprimary beneficiary from a quantitative assessment to a qualitative assessmentdesigned to identify a controlling financial interest, and increases thefrequency of required reassessments to determine whether a company 

 

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is the primary beneficiaryof a VIE.  It also clarifies, but doesnot significantly change, the characteristics that identify a VIE.  This statement requires additional year-end andinterim disclosures for public companies. The adoption of this standard did not have a material impact on ourconsolidated financial condition or results of operations.

 

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

 

In January 2010, the FinancialAccounting Standards Board (“FASB”) issued ASU No. 2010-09, *Subsequent Events (Topic 855): Amendments to Certain Recognition andDisclosure Requirements,*so that SEC filers, as defined in the ASU,no longer are required to disclose the date through which subsequent eventshave been evaluated in originally issued and revised financial statements.

 

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

 

**2010 Economic Environment**

 

Our credit quality remains strongdespite the challenging economic environment. Through the third quarter of 2010, the U.S. economy has continued itsslow recovery with slight increases in consumer spending and while theunemployment rate has receded from its peak, it remains elevated.  Despite encouraging signs of improvement, thelevels of business and consumer demand and production remain low.  Businesses are reluctant to hire and certainreal estate markets remain stressed.  At September 30,2010, we have non-accrual loans totaling $9.6 million and loans contractuallypast due 90 days or more as to principal or interest of $266,000.  Annualized net charge-offs were 0.49% of ouraverage loans receivable for the nine months ended September 30, 2010. Dueto historically low mortgage loan rates, originations from our mortgage bankingsegment for the first nine months of 2010 have surpassed originations for thesame period of 2009.  Originations duringthe third quarter of 2010 alone almost matched mortgage loan originations forthe first six months of 2010.  As aresult, net income from our mortgage banking segment increased to $3.6 millionfor the three months ended September 30, 2010 compared to net income of$779,000 for the same period of 2009.

 

Marketilliquidity continues to impact certain portions of our investment securitiesportfolio, specifically the ratings of certain corporate bonds in ourportfolio. We hold investments of $8.0 million in par value of pooled trustpreferred securities, which are significantly below 

 

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bookvalue as of September 30, 2010 due to the lack of liquidity in the marketand investor apprehension for investing in these types of investments.

 

We expect very challenging economicand operating conditions to continue for the foreseeable future.  These conditions could continue to affect themarkets in which we do business and could adversely impact our results for theremainder of 2010. The degree of the impact is dependent upon the duration andseverity of the aforementioned conditions.

 

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

 

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

 

The U.S. government continues toenact legislation and develop various programs and initiatives designed tostabilize the housing markets and stimulate the economy.  In July 2010, the Dodd-Frank Wall StreetReform and Consumer Protection Act (the “Act”) was signed into law.  We are unsure of the impact this Act willhave on our business, operations or our financial condition.

 

**Statements of Income**

 

*General*

 

Forthe three months ended September 30, 2010 and 2009, we reported net incomeof $5.9 million and $2.6 million, respectively, an increase of $3.3 million, or127%.  Net interest income after theprovision for loan losses increased $3.6 million to $14.7 million for the threemonths ended September 30, 2010 compared to $11.0 million for the threemonths ended September 30, 2009. Provision for loan losses for the three months ended September 30,2010 was $3.5 million, an increase of $1.5 million, compared to $2.1 millionfor the same period of 2009.  Despite theincrease in our provision for loan losses, the increase in net interest incomeafter provision for loan losses was due to an increase in our net interestincome of $5.1 million to $18.2 million for the three months ended September 30,2010.  Noninterest income for the threemonths ended September 30, 2010 and 2009 was $9.3 million and $5.7million, respectively, an increase of $3.6 million.  Realized and unrealized gains on mortgagebanking activities increased $2.5 million for the three months ended September 30,2010 as compared to the three months ended September 30, 2009.  In addition, income from managed companiesincreased $702,000 to 

 

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$1.3million for the three months ended September 30, 2010 compared to $553,000for the same three month period of 2009. For the three months ended September 30, 2010, noninterest expenseincreased to $15.4 million, compared to $13.0 million for the same period of2009.  The increase in noninterestexpense is attributable to increases in salary and benefits expense as we haveadded business development officers in our commercial banking, wealthmanagement and mortgage banking operations.

 

Forthe three months ended September 30, 2010, basic and diluted income percommon share were each $0.20.  Basic anddiluted earnings per common share for the three months ended September 30,2009 were each $0.09.  Weighted averagefully diluted shares outstanding for the three months ended September 30,2010 and 2009 were 29,639,114 and 29,524,878, respectively.

 

Returnon average assets for the three months ended September 30, 2010 and 2009was 1.16% and 0.56%, respectively. Return on average equity for the threemonths ended September 30, 2010 and 2009 was 10.56% and 5.20%,respectively.

 

Netincome for the nine months ended September 30, 2010 and 2009 was $14.4million and $6.9 million, respectively, an increase of $7.5 million, or108%.  Net interest income afterprovision for loan losses for the nine months ended September 30, 2010increased $11.0 million to $42.0 million, compared to $30.9 million for thesame nine month period of 2009.  Theincrease in net interest income after provision for loan losses is directlyrelated to our increase in net interest income for the periods presented,despite an increase in provision for loan losses.  Net interest income increased to $50.6million for the nine months ended September 30, 2010, compared to $35.7million for the nine months ended September 30, 2009.  Provision for loan losses for the nine monthsended September 30, 2010 and 2009 was $8.6 million and $4.8 million,respectively, an increase of $3.8 million. Noninterest income increased $4.2 million to $21.9 million for the ninemonths ended September 30, 2010, compared to $17.7 million for the sameperiod of 2009.  The increase innoninterest income is primarily related to an increase in realized andunrealized gains on mortgage banking activities and associated management feeincome due to increased loan origination activity from this business line.  Noninterest expense was $42.6 million for thenine months ended September 30, 2010, an increase of $3.8 million comparedto $38.7 million for the nine months ended September 30, 2009.

 

Forthe nine months ended September 30, 2010, basic and diluted income percommon share were $0.50 and $0.49, respectively.  Basic and diluted earnings per common sharefor the nine months ended September 30, 2009 were each $0.26.  Weighted average fully diluted sharesoutstanding for the nine months ended September 30, 2010 and 2009 were29,582,342 and 27,047,915, respectively.

 

Returnon average assets for the nine months ended September 30, 2010 and 2009was 0.98% and 0.52%, respectively. Return on average equity for the nine monthsended September 30, 2010 and 2009 was 8.95% and 5.12%, respectively.

 

*General—Business Segments*

 

We operate in three businesssegments: commercial banking, mortgage banking, and wealth management and trustservices.  Net income attributable to thecommercial banking segment for the three months ended September 30, 2010was $3.7 million compared to net income of $2.2 million for the three monthsended September 30, 2009.  Netinterest income increased $5.1 million to $17.7 million for the three monthsended September 30, 2010, compared to $12.6 million for the same period of2009.  Provision for loan lossesincreased $1.5 million to 

 

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$3.5 million for the threemonths ended September 30, 2010 compared to $2.1 million for the sameperiod of 2009.  The increase inprovision expense is related to current economic and market conditions and anincrease in loan charge-offs and nonperforming loans during 2010.  Noninterest income increased to $1.0 millionfor the three months ended September 30, 2010 compared to $917,000 for thethree months ended September 30, 2009. During the third quarter of 2010, gains of $193,000 were recorded onsales of investment securities available-for-sale, compared to $73,000 for thethree months ended September 30, 2009. Noninterest expense was $10.1 million for the three months ended September 30,2010, compared to $8.3 million for the same period of 2009.  The increase in noninterest expense for thethird quarter of 2010 as compared to the same period of 2009 is primarily dueto expenses related to our core system conversion, branch expansion andadditions to our business development staff at the Bank.

 

For the nine months ended September 30,2010, net income attributable to the commercial banking segment was $11.0million, and an increase of $5.9 million, from $5.1 million for the same ninemonth period of 2009.  The increase innet income is attributable to the increase in our net interest income for theperiods presented.  Net interest incomeincreased $15.3 million to $49.5 million for the nine months ended September 30,2010, compared to $34.2 million for the nine months ended September 30,2009.  Provision for loan lossesincreased $4.0 million to $8.6 million for the nine months ended September 30,2010, again as a result of the current economic and market conditions and theseimpacts on our borrowers.  Noninterestincome for the nine months ended September 30, 2010 and 2009 was $3.2million and $3.1 million, respectively. Noninterest expense increased to $28.1 million from $25.5 million forthe nine months ended September 30, 2010 compared to the same period of2009.

 

Themortgage banking segment reported net income of $3.6 million for the threemonths ended September 30, 2010 compared to a net income of $779,000 forthe three months ended September 30, 2009. The increase in net income for the three months ended September 30,2010 was primarily attributable to the increase in loan origination activityduring 2010 as compared to 2009.  For thenine months ended September 30, 2010, net income was $6.0 million, anincrease of $2.5 million, compared to $3.5 million for the nine months ended September 30,2009.

 

Thewealth management and trust services segment, which includes CWS,Wilson/Bennett and the trust division of the Bank, recorded net income of$92,000 for the three months ended September 30, 2010, compared to netincome of $129,000 for the three months ended September 30, 2009.  For the nine months ended September 30,2010, this business segment recorded a net loss of $4,000 compared to netincome of $205,000 for the same period of 2009. The decrease in net income during 2010 is primarily attributable to ourrecording an impairment charge of $451,000 as a result of our annual impairmentassessment related to the Wilson/Bennett goodwill.

 

*NetInterest Income*

 

Netinterest income is our primary source of revenue, representing the differencebetween interest and fees earned on interest-earning assets and the interestpaid on deposits and other interest-bearing liabilities. The level of netinterest income is impacted primarily by variations in the volume and mix ofthese assets and liabilities, as well as changes in interest rates. Netinterest income for the three months ended September 30, 2010 and 2009 was$18.2 million and $13.1 million, respectively, a period-to-period increase of$5.1 million, or 39%. For the nine months ended September 30, 2010, ournet interest income was $50.6 million, compared to $35.7 million for the sameperiod of 2009, an increase of $14.9 million, or 42%.  The net yields on our assets 

 

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increasedas a result of our moderately increasing interest-earning assets while loweringthe interest rates on our deposit liabilities.

 

Specifically,interest income on loans receivable, increased $2.1 million for the threemonths ended September 30, 2010 compared to the same three month period of2009.  For the nine months ended September 30,2010, interest income on loans receivable increased $6.5 million as compared tothe nine months ended September 30, 2009. The increase in interest income on loans receivable is primarily aresult of an increase in the volume of our loans receivable portfolio.  Interest income on loans held for saleincreased $1.2 million to $2.8 million for the three months ended September 30,2010, a direct result of a period-to-period increase in mortgage loanoriginations in our held for sale portfolio. For the nine months ended September 30, 2010, interest income fromloans held for sale increased $419,000 to $6.1 million compared to $5.7 millionfor the nine months ended September 30, 2009.

 

Interestincome on investment securities, decreased $384,000 for the three months ended September 30,2010 as compared to the three months ended September 30, 2009.  The decrease in interest income on investmentsecurities is due to the decreased yield of the portfolio for the three monthsended September 30, 2010 compared to the same period of 2009.  For the nine months ended September 30,2010, interest income on investment securities increased $1.2 million.  The increase in interest income on investmentsecurities is related to an increase in purchases of investment securities overthe past year.

 

Totalinterest expense has decreased $2.2 million for the three months ended September 30,2010 as compared to the same period of 2009. For the nine months ended September 30, 2010, total interestexpense decreased $6.8 million as compared to the same nine month period of2009.  The decrease in total interestexpense is mostly related to reductions in the interest rates we pay on our interestchecking and savings deposit accounts given the current low interest rateenvironment.  In addition, ourcertificates of deposit are repricing at lower interest rates.

 

Ournet interest margin, on a tax-equivalent basis, which equals net interest incomedivided by average interest earning assets, was 3.82% and 2.97% for the threemonths ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30,2010 and 2009, net interest margin was 3.65% and 2.81%, respectively.  The increases in our net interest margin areagain attributable to our balance sheet management and strategically decreasingthe interest rates we pay on our deposit liabilities.  The following tables present an analysis ofaverage earning assets and interest-bearing liabilities with related componentsof interest income and interest expense on a tax equivalent basis.

 

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**Average Balance Sheets and Interest Rates onInterest-Earning Assets and Interest-Bearing Liabilities**

Three Months Ended September 30, 2010, 2009 and 2008

(In thousands)

 
| ** **                                               | ** ** | **2010**    | ** ** | **2009**     | ** ** | **2008**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | **Yield/**  | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  (1):                                              |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  and industrial                               |       | $           | 162,810    |         | $          | 1,904       |       | 4.67 | % | $ | 148,446 |   | $ | 1,781 |   | 4.80 | % | $ | 119,891 |   | $ | 1,843 |   | 6.15 | % |
| Real  estate - commercial                                |       | 609,800     |       | 9,812        |       | 6.40        | %          | 567,150 |   | 8,893 |   | 6.27 | % | 454,513 |   | 7,447 |   | 6.55 | % |
| Real  estate - construction                              |       | 203,948     |       | 2,959        |       | 5.80        | %          | 178,585 |   | 2,251 |   | 5.04 | % | 189,041 |   | 2,703 |   | 5.72 | % |
| Real  estate - residential                               |       | 230,707     |       | 2,935        |       | 5.09        | %          | 201,500 |   | 2,596 |   | 5.15 | % | 213,360 |   | 2,984 |   | 5.60 | % |
| Home  equity lines                                       |       | 120,709     |       | 1,065        |       | 3.50        | %          | 114,414 |   | 1,033 |   | 3.58 | % | 96,196 |   | 1,131 |   | 4.66 | % |
| Consumer                                                 |       | 2,611       |       | 39           |       | 5.93        | %          | 2,815 |   | 42 |   | 5.92 | % | 2,608 |   | 40 |   | 6.08 | % |
| Total  loans                                             |       | 1,330,585   |       | 18,714       |       | 5.63        | %          | 1,212,910 |   | 16,596 |   | 5.47 | % | 1,075,609 |   | 16,148 |   | 6.01 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  held for sale                                     |       | 243,064     |       | 2,808        |       | 4.62        | %          | 131,417 |   | 1,630 |   | 4.96 | % | 118,009 |   | 1,709 |   | 5.79 | % |
| Investment  securities available-for-sale                |       | 290,903     |       | 3,206        |       | 4.41        | %          | 286,835 |   | 3,384 |   | 4.72 | % | 258,807 |   | 3,421 |   | 5.29 | % |
| Investment  securities held-to-maturity                  |       | 25,495      |       | 206          |       | 3.23        | %          | 39,347 |   | 354 |   | 3.60 | % | 54,373 |   | 586 |   | 4.30 | % |
| Other  investments                                       |       | 15,728      |       | 17           |       | 0.44        | %          | 15,728 |   | 33 |   | 0.84 | % | 15,726 |   | 113 |   | 2.91 | % |
| Federal  funds sold                                      |       | 19,810      |       | 11           |       | 0.22        | %          | 91,776 |   | 57 |   | 0.25 | % | 19,068 |   | 118 |   | 2.45 | % |
| Total  interest-earning assets and interest income (2)   |       | 1,925,585   |       | 24,962       |       | 5.19        | %          | 1,778,013 |   | 22,054 |   | 4.96 | % | 1,541,592 |   | 22,095 |   | 5.73 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest  earning assets:                             |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                 |       | 12,348      |       |         |       |        |       | 1,213 |   |   |   |   |   | 7,241 |   |   |   |   |   |
| Premises  and equipment, net                             |       | 17,079      |       |         |       |        |       | 15,723 |   |   |   |   |   | 17,276 |   |   |   |   |   |
| Goodwill  and other intangibles, net                     |       | 13,343      |       |         |       |        |       | 14,025 |   |   |   |   |   | 17,060 |   |   |   |   |   |
| Accrued  interest and other assets                       |       | 86,113      |       |         |       |        |       | 59,613 |   |   |   |   |   | 50,487 |   |   |   |   |   |
| Allowance  for loan losses                               |       | (22,181     | )          |         |       |        |       | (16,692 | ) |   |   |   |   | (12,763 | ) |   |   |   |   |
| Total  assets                                            |       | $           | 2,032,287  |         |       |        |       |   | $ | 1,851,895 |   |   |   |   |   | $ | 1,620,893 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing liabilities:                         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing deposits:                            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  checking                                       |       | 131,355     |       | 85           |       | 0.26        | %          | 120,990 |   | 282 |   | 0.92 | % | 114,362 |   | 605 |   | 2.10 | % |
| Money  markets                                           |       | 113,375     |       | 145          |       | 0.51        | %          | 54,539 |   | 113 |   | 0.82 | % | 40,434 |   | 230 |   | 2.26 | % |
| Statement  savings                                       |       | 268,665     |       | 276          |       | 0.41        | %          | 314,226 |   | 967 |   | 1.22 | % | 345,687 |   | 2,379 |   | 2.73 | % |
| Certificates  of deposit                                 |       | 671,236     |       | 3,066        |       | 1.81        | %          | 631,746 |   | 4,348 |   | 2.73 | % | 446,411 |   | 4,030 |   | 3.58 | % |
| Total  interest - bearing deposits                       |       | 1,184,631   |       | 3,572        |       | 1.20        | %          | 1,121,501 |   | 5,710 |   | 2.02 | % | 946,894 |   | 7,244 |   | 3.04 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  borrowed funds                                    |       | 389,969     |       | 3,017        |       | 3.07        | %          | 362,391 |   | 3,121 |   | 3.42 | % | 359,976 |   | 3,427 |   | 3.78 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,574,600   |       | 6,589        |       | 1.66        | %          | 1,483,892 |   | 8,831 |   | 2.36 | % | 1,306,870 |   | 10,671 |   | 3.24 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                         |       | 208,391     |       |         |       |        |       | 150,336 |   |   |   |   |   | 136,575 |   |   |   |   |   |
| Other  liabilities                                       |       | 25,698      |       |         |       |        |       | 17,280 |   |   |   |   |   | 17,477 |   |   |   |   |   |
| Common  shareholders’ equity                        |       | 223,598     |       |         |       |        |       | 200,387 |   |   |   |   |   | 159,971 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity         |       | $           | 2,032,287  |         |       |        |       |   | $ | 1,851,895 |   |   |   |   |   | $ | 1,620,893 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income and net interest margin (2)         |       |        |       | $            | 18,373     |        | 3.82       | % |   |   | $ | 13,223 |   | 2.97 | % |   |   | $ | 11,424 |   | 2.96 | % |

 

----

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

(2) Interest income for loans receivable and investment securitiesavailable-for-sale is reported on a fully taxable-equivalent basis at a rate of32%.

 

44

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**Rate and Volume Analysis**

Three Months Ended September 30, 2010, 2009 and 2008

(In thousands)

 
| ** **                               | ** ** | **2010 Compared to 2009** | ** ** | **2009 Compared to 2008** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **Change Due to**              | ** ** | ** **                               | ** ** | **Change Due to** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Average**                              | ** ** | **Average**                              | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                               | ** ** | **Volume (3)**                      | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume (3)** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest income:**                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans (1):                               |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                |       | $                                        | 205        |                                     | $          | (82 | ) | $ | 123 |   | $ | 439 |   | $ | (501 | ) | $ | (62 | ) |
| Real estate - commercial                 |       | 669                                      |       | 250                                      |       | 919 |   | 1,846 |   | (400 | ) | 1,446 |   |
| Real estate - construction               |       | 320                                      |       | 388                                      |       | 708 |   | (150 | ) | (302 | ) | (452 | ) |
| Real estate - residential                |       | 376                                      |       | (37                                      | )          | 339 |   | (164 | ) | (224 | ) | (388 | ) |
| Home equity lines                        |       | 57                                       |       | (25                                      | )          | 32 |   | 210 |   | (308 | ) | (98 | ) |
| Consumer                                 |       | (3                                       | )          | 0                                        |       | (3 | ) | 3 |   | (1 | ) | 2 |   |
| Total loans                              |       | 1,624                                    |       | 494                                      |       | 2,118 |   | 2,184 |   | (1,736 | ) | 448 |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans held for sale                      |       | 1,385                                    |       | (207                                     | )          | 1,178 |   | 194 |   | (273 | ) | (79 | ) |
| Investment securities available-for-sale |       | 48                                       |       | (226                                     | )          | (178 | ) | 370 |   | (407 | ) | (37 | ) |
| Investment securities held-to-maturity   |       | (125                                     | )          | (23                                      | )          | (148 | ) | (163 | ) | (69 | ) | (232 | ) |
| Other investments                        |       | —                                   |       | (16                                      | )          | (16 | ) | 2 |   | (82 | ) | (80 | ) |
| Federal funds sold                       |       | (45                                      | )          | (1                                       | )          | (46 | ) | 442 |   | (503 | ) | (61 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total interest income (2)                |       | 2,887                                    |       | 21                                       |       | 2,908 |   | 3,029 |   | (3,070 | ) | (41 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                    |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:             |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | 24                                       |       | (221                                     | )          | (197 | ) | 35 |   | (358 | ) | (323 | ) |
| Money markets                            |       | 122                                      |       | (90                                      | )          | 32 |   | 80 |   | (197 | ) | (117 | ) |
| Statement savings                        |       | (140                                     | )          | (551                                     | )          | (691 | ) | (217 | ) | (1,195 | ) | (1,412 | ) |
| Certificates of deposit                  |       | 272                                      |       | (1,554                                   | )          | (1,282 | ) | 1,673 |   | (1,355 | ) | 318 |   |
| Total interest - bearing deposits        |       | 278                                      |       | (2,416                                   | )          | (2,138 | ) | 1,571 |   | (3,105 | ) | (1,534 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 238                                      |       | (342                                     | )          | (104 | ) | 23 |   | (329 | ) | (306 | ) |
| Total interest expense                   |       | 516                                      |       | (2,758                                   | )          | (2,242 | ) | 1,594 |   | (3,434 | ) | (1,840 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                                        | 2,371      |                                     | $          | 2,779 |   | $ | 5,150 |   | $ | 1,435 |   | $ | 364 |   | $ | 1,799 |   |

 

----

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

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

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

 

45

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**Average Balance Sheets and Interest Rates onInterest-Earning Assets and Interest-Bearing Liabilities**

Nine Months Ended September 30, 2010, 2009 and 2008

(In thousands)

 
| ** **                                               | ** ** | **2010**    | ** ** | **2009**     | ** ** | **2008**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                               | ** ** | **Average** | ** ** | **Income/**  | ** ** | **Yield/**  | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income/** | ** ** | **Yield/** | ** ** |
| ** **                                               | ** ** | **Balance** | ** ** | **Expense**  | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  (1):                                              |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  and industrial                               |       | $           | 160,116    |         | $          | 5,580       |       | 4.65 | % | $ | 158,966 |   | $ | 5,721 |   | 4.80 | % | $ | 127,572 |   | $ | 6,080 |   | 6.35 | % |
| Real  estate - commercial                                |       | 606,537     |       | 28,428       |       | 6.21        | %          | 531,923 |   | 24,984 |   | 6.26 | % | 432,948 |   | 21,304 |   | 6.56 | % |
| Real  estate - construction                              |       | 197,108     |       | 8,315        |       | 5.62        | %          | 177,728 |   | 6,095 |   | 4.57 | % | 190,428 |   | 8,723 |   | 6.11 | % |
| Real  estate - residential                               |       | 227,272     |       | 8,819        |       | 5.17        | %          | 202,133 |   | 8,094 |   | 5.34 | % | 213,018 |   | 8,970 |   | 5.61 | % |
| Home  equity lines                                       |       | 119,248     |       | 3,233        |       | 3.62        | %          | 109,935 |   | 3,003 |   | 3.65 | % | 90,593 |   | 3,338 |   | 4.92 | % |
| Consumer                                                 |       | 2,634       |       | 114          |       | 5.79        | %          | 2,586 |   | 118 |   | 6.05 | % | 2,680 |   | 130 |   | 6.48 | % |
| Total  loans                                             |       | 1,312,915   |       | 54,489       |       | 5.53        | %          | 1,183,271 |   | 48,015 |   | 5.41 | % | 1,057,239 |   | 48,545 |   | 6.12 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  held for sale                                     |       | 167,947     |       | 6,070        |       | 4.82        | %          | 168,428 |   | 5,651 |   | 4.47 | % | 132,921 |   | 5,792 |   | 5.81 | % |
| Investment  securities available-for-sale                |       | 317,195     |       | 10,797       |       | 4.54        | %          | 239,301 |   | 8,905 |   | 4.96 | % | 264,376 |   | 10,400 |   | 5.25 | % |
| Investment  securities held-to-maturity                  |       | 30,400      |       | 759          |       | 3.33        | %          | 44,351 |   | 1,258 |   | 3.78 | % | 61,475 |   | 1,963 |   | 4.25 | % |
| Other  investments                                       |       | 15,728      |       | 38           |       | 0.32        | %          | 15,697 |   | 13 |   | 0.11 | % | 15,138 |   | 548 |   | 4.82 | % |
| Federal  funds sold                                      |       | 22,304      |       | 39           |       | 0.23        | %          | 57,563 |   | 102 |   | 0.24 | % | 23,023 |   | 433 |   | 2.52 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income (2)   |       | 1,866,489   |       | 72,192       |       | 5.16        | %          | 1,708,611 |   | 63,944 |   | 4.99 | % | 1,554,172 |   | 67,681 |   | 5.81 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest  earning assets:                             |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                 |       | 12,719      |       |         |       |        |       | 1,026 |   |   |   |   |   | 7,526 |   |   |   |   |   |
| Premises  and equipment, net                             |       | 16,256      |       |         |       |        |       | 15,977 |   |   |   |   |   | 17,765 |   |   |   |   |   |
| Goodwill  and other intangibles, net                     |       | 13,699      |       |         |       |        |       | 14,090 |   |   |   |   |   | 17,140 |   |   |   |   |   |
| Accrued  interest and other assets                       |       | 80,676      |       |         |       |        |       | 59,401 |   |   |   |   |   | 52,042 |   |   |   |   |   |
| Allowance  for loan losses                               |       | (20,289     | )          |         |       |        |       | (15,725 | ) |   |   |   |   | (12,192 | ) |   |   |   |   |
| Total  assets                                            |       | $           | 1,969,550  |         |       |        |       |   | $ | 1,783,380 |   |   |   |   |   | $ | 1,636,453 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing liabilities:                         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  - bearing deposits:                            |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  checking                                       |       | 133,166     |       | 403          |       | 0.40        | %          | 121,062 |   | 960 |   | 1.06 | % | 121,338 |   | 2,101 |   | 2.31 | % |
| Money  markets                                           |       | 98,749      |       | 444          |       | 0.60        | %          | 49,504 |   | 397 |   | 1.07 | % | 40,860 |   | 764 |   | 2.50 | % |
| Statement  savings                                       |       | 277,845     |       | 1,191        |       | 0.57        | %          | 286,180 |   | 3,255 |   | 1.52 | % | 366,209 |   | 8,312 |   | 3.03 | % |
| Certificates  of deposit                                 |       | 656,142     |       | 9,971        |       | 2.03        | %          | 619,158 |   | 13,902 |   | 3.00 | % | 450,650 |   | 13,274 |   | 3.93 | % |
| Total  interest - bearing deposits                       |       | 1,165,902   |       | 12,009       |       | 1.38        | %          | 1,075,904 |   | 18,514 |   | 2.30 | % | 979,057 |   | 24,451 |   | 3.34 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  borrowed funds                                    |       | 376,443     |       | 9,051        |       | 3.21        | %          | 363,422 |   | 9,383 |   | 3.45 | % | 349,178 |   | 10,172 |   | 3.89 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,542,345   |       | 21,060       |       | 1.83        | %          | 1,439,326 |   | 27,897 |   | 2.59 | % | 1,328,235 |   | 34,623 |   | 3.48 | % |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  deposits                                         |       | 189,865     |       |         |       |        |       | 144,233 |   |   |   |   |   | 127,945 |   |   |   |   |   |
| Other  liabilities                                       |       | 22,730      |       |         |       |        |       | 19,780 |   |   |   |   |   | 18,706 |   |   |   |   |   |
| Common  shareholders’ equity                        |       | 214,610     |       |         |       |        |       | 180,041 |   |   |   |   |   | 161,567 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity         |       | $           | 1,969,550  |         |       |        |       |   | $ | 1,783,380 |   |   |   |   |   | $ | 1,636,453 |   |   |   |   |   |
|                                                     |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income and net interest margin (2)         |       |        |       | $            | 51,132     |        | 3.65       | % |   |   | $ | 36,047 |   | 2.81 | % |   |   | $ | 33,058 |   | 2.84 | % |

 

----

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

(2) Interest income for loans receivable and investment securitiesavailable-for-sale is reported on a fully taxable-equivalent basis at a rate of32%.

 

46

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**Rate and Volume Analysis**

Nine Months Ended September 30, 2010, 2009 and 2008

(In thousands)

 
| ** **                               | ** ** | **2010 Compared to 2009** | ** ** | **2009 Compared to 2008** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                               | ** ** | **Change Due to**              | ** ** | ** **                               | ** ** | **Change Due to** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Average**                              | ** ** | **Average**                              | ** ** | **Increase** | ** ** | **Average** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                               | ** ** | **Volume (3)**                      | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume (3)** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest income:**                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans (1):                               |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                |       | $                                        | 161        |                                     | $          | (302 | ) | $ | (141 | ) | $ | 1,496 |   | $ | (1,855 | ) | $ | (359 | ) |
| Real estate - commercial                 |       | 3,505                                    |       | (61                                      | )          | 3,444 |   | 4,870 |   | (1,190 | ) | 3,680 |   |
| Real estate - construction               |       | 665                                      |       | 1,555                                    |       | 2,220 |   | (582 | ) | (2,046 | ) | (2,628 | ) |
| Real estate - residential                |       | 1,007                                    |       | (282                                     | )          | 725 |   | (458 | ) | (418 | ) | (876 | ) |
| Home equity lines                        |       | 254                                      |       | (24                                      | )          | 230 |   | 713 |   | (1,048 | ) | (335 | ) |
| Consumer                                 |       | 1                                        |       | (5                                       | )          | (4 | ) | (4 | ) | (8 | ) | (12 | ) |
| Total loans                              |       | 5,593                                    |       | 881                                      |       | 6,474 |   | 6,035 |   | (6,565 | ) | (530 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans held for sale                      |       | (16                                      | )          | 435                                      |       | 419 |   | 1,547 |   | (1,688 | ) | (141 | ) |
| Investment securities available-for-sale |       | 2,899                                    |       | (1,007                                   | )          | 1,892 |   | (986 | ) | (509 | ) | (1,495 | ) |
| Investment securities held-to-maturity   |       | (396                                     | )          | (103                                     | )          | (499 | ) | (550 | ) | (155 | ) | (705 | ) |
| Other investments                        |       | 0                                        |       | 25                                       |       | 25 |   | 19 |   | (554 | ) | (535 | ) |
| Federal funds sold                       |       | (62                                      | )          | (1                                       | )          | (63 | ) | 656 |   | (987 | ) | (331 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total interest income (2)                |       | 8,018                                    |       | 230                                      |       | 8,248 |   | 6,721 |   | (10,458 | ) | (3,737 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                    |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:             |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | 96                                       |       | (653                                     | )          | (557 | ) | (7 | ) | (1,134 | ) | (1,141 | ) |
| Money markets                            |       | 395                                      |       | (348                                     | )          | 47 |   | 161 |   | (528 | ) | (367 | ) |
| Statement savings                        |       | (95                                      | )          | (1,969                                   | )          | (2,064 | ) | (1,822 | ) | (3,235 | ) | (5,057 | ) |
| Certificates of deposit                  |       | 829                                      |       | (4,760                                   | )          | (3,931 | ) | 4,946 |   | (4,318 | ) | 628 |   |
| Total interest - bearing deposits        |       | 1,225                                    |       | (7,730                                   | )          | (6,505 | ) | 3,278 |   | (9,215 | ) | (5,937 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 336                                      |       | (668                                     | )          | (332 | ) | 405 |   | (1,194 | ) | (789 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Total interest expense                   |       | 1,561                                    |       | (8,398                                   | )          | (6,837 | ) | 3,683 |   | (10,409 | ) | (6,726 | ) |
|                                     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                                        | 6,457      |                                     | $          | 8,628 |   | $ | 15,085 |   | $ | 3,038 |   | $ | (49 | ) | $ | 2,989 |   |

 

----

(1) Non-accrual loansare included in average balances and do not have a material effect on the averageyield.  Interest income on non-accruingloans was not material for the periods presented.

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

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

 

47

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*Provisionfor Loan Losses*

 

Theprovision for loan losses for the three months ended September 30, 2010and 2009 was $3.5 million and $2.1 million, respectively. For the nine monthsended September 30, 2010 and 2009, our provision for loan losses was $8.6million and $4.8 million, respectively. The increase in our provision expense during 2010 compared to 2009 is adirect result of increases in non-performing loans and the adverse migration ofcertain loans through our allowance for loan losses calculation model becauseof ongoing adverse economic conditions. While we continue to report strong credit quality in our loan portfolio,we have experienced increases in our watch list credits and netcharge-offs.  Our provision expense wasalso impacted by net new loan growth in addition to our evaluation of thecredit quality in our loan portfolio and the qualitative factors we use todetermine the adequacy of our loan loss reserves as described above in “CriticalAccounting Policies—Allowance for Loan Losses.”

 

Duringthe first nine months of 2010, we charged off residential loans totaling $1.7million and consumer loans totaling $50,000. We recorded charge-offs on four previously impaired commercial loanstotaling $3.1 million through September 30, 2010.

 

Theallowance for loan losses at September 30, 2010 and December 31, 2009was $22.4 million and $18.6 million, respectively. Our allowance for loanlosses ratio to loans receivable, net was 1.66% and 1.44% at September 30,2010 and December 31, 2009, respectively. Nonperforming loans at September 30, 2010 and December 31,2009, were $9.6 million and $847,000, respectively. The increase in nonperformingloans was a result of two commercial relationships, which were previously impaired,having deteriorated further in 2010.

 

Continued challenging economicconditions could adversely affect our home equity loans of credit, credit cardand other loan portfolios, including causing increases in delinquencies anddefault rates, which we expect could impact our charge-offs and provision forloan losses.  Continued deterioration incommercial and residential real estate values, employment data and householdincomes could result in higher credit losses for us.  Also, in the ordinary course of business, wemay be subject to a concentration of credit risk to a particular industry,counterparty, borrower or issuer.  At September 30,2010, our commercial real estate portfolio was 46% of our total loanportfolio.  A deterioration in thefinancial condition or prospects of a particular industry or a failure ordowngrade of, or default by, any particular entity or group of entities couldnegatively impact our businesses, perhaps materially, and the systems by whichwe set limits and monitor the level of our credit exposure to individualentities 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 in thefollowing tables.

 

48

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**Allowance for Loan Losses**

Three amd Nine Months Ended September 30, 2010 and 2009

(In thousands)

 
| ** **                         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance, beginning of the period   |       | $                                                        | 21,058     |                                                    | $          | 16,150 |   | $ | 18,636 |   | $ | 14,518 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Provision for loan losses          |       | 3,500                                                    |       | 2,050                                                   |       | 8,625 |   | 4,750 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Loans charged off:                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Commercial and industrial          |       | (1,750                                                   | )          | (25                                                     | )          | (3,112 | ) | (40 | ) |
| Residential                        |       | (425                                                     | )          | (701                                                    | )          | (1,732 | ) | (1,756 | ) |
| Consumer                           |       | (2                                                       | )          | (1                                                      | )          | (50 | ) | (4 | ) |
| Total loans charged off            |       | (2,177                                                   | )          | (727                                                    | )          | (4,894 | ) | (1,800 | ) |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Recoveries:                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Commercial and industrial          |       | —                                                   |       | —                                                  |       | 3 |   | 5 |   |
| Residential                        |       | 52                                                       |       | —                                                  |       | 62 |   | — |   |
| Consumer                           |       | 11                                                       |       | —                                                  |       | 12 |   | — |   |
| Total recoveries                   |       | 63                                                       |       | —                                                  |       | 77 |   | 5 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net (charge offs) recoveries       |       | (2,114                                                   | )          | (727                                                    | )          | (4,817 | ) | (1,795 | ) |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Ending balance, September 30, |       | $                                                        | 22,444     |                                                    | $          | 17,473 |   | $ | 22,444 |   | $ | 17,473 |   |

 
| ** **                                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |      |   |   |   |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-----------|--------|--------|--------|
| ** **                                                  | ** ** | **2010**               | ** ** | **2009**               | ** ** |      |   |   |   |
| **Loans:**                                                  | ** ** | ** **             | ** ** | ** **             | ** ** |      |   |   |   |
| Balance at period end                                       |       | $                      | 1,351,703  |                   | $          | 1,263,291 |   |   |   |   |   |
| Allowance for loan losses to loans receivable, net  of fees |       | 1.66                   | %          | 1.38                   | %          |      |   |   |   |
| Annualized net charge-offs to average loans receivable      |       | 0.49                   | %          | 0.20                   | %          |      |   |   |   |
|                                                             |            |                        |            |                        |            |           |        |        |        |  |  |

 

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**Allocation of the Allowance for Loan Losses**

At September 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,**     | ** ** |
|---------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **2010**               | ** ** | **2009**                  | ** ** |
| ** **                      | ** ** | **Allocation**         | ** ** | **% of Total*** | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and industrial       |       | $                      | 2,405      |                      | 12.01      | % | $ | 2,797 |   | 12.45 | % |
| Real estate - commercial        |       | 11,027                 |       | 45.54                     | %          | 9,666 |   | 45.80 | % |
| Real estate - construction      |       | 5,046                  |       | 15.83                     | %          | 2,829 |   | 14.80 | % |
| Real estate - residential       |       | 2,592                  |       | 17.46                     | %          | 2,096 |   | 17.67 | % |
| Home equity lines               |       | 1,307                  |       | 8.95                      | %          | 1,182 |   | 9.07 | % |
| Consumer                        |       | 67                     |       | 0.21                      | %          | 66 |   | 0.21 | % |
|                            |       |                   |       |                      |       |   |   |   |   |
| Total allowance for loan losses |       | $                      | 22,444     |                      | 100.00     | % | $ | 18,636 |   | 100.00 | % |

 

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* Percentage of loan type to the total loan portfolio.

 

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**Nonperforming Loans Receivable**

At September 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Nonaccruing loans                                                |       | $                      | 9,315      |                  | $          | 696 |   |
|                                                             |       |                   |       |                  |       |
| Loans contractually past-due 90 days or more and  still accruing |       | 266                    |       | 151                   |       |
|                                                             |       |                   |       |                  |       |
| Total nonperforming loans receivable                             |       | $                      | 9,581      |                  | $          | 847 |   |

 

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*NoninterestIncome*

 

Noninterestincome includes service charges on deposits and loans, realized and unrealizedgains on mortgage banking activities, investment fee income, management feeincome, and gains on sales of investment securities available-for-sale, andcontinues to be an important factor in our operating results. Noninterestincome for the three months ended September 30, 2010 and 2009 was $9.3million and $5.7 million, respectively.  Noninterestincome for the nine months ended September 30, 2010 and 2009 was $21.9million and $17.7 million, respectively. Realized and unrealized gains on mortgage banking activities by ourmortgage banking segment for the three months ended September 30, 2010 and2009 were $5.3 million and $2.8 million, respectively, an increase of $2.5million, or 88%.  During the thirdquarter of 2010, our mortgage loan origination volume significantly increasedas a result of historically low mortgage rates. In addition, the margin we earn on loan sales has significantlyincreased contributing to the increase in our gains.  Included in realized and unrealized gains onmortgage banking activities are any origination, underwriting, and discountpoints and other funding fees and gains associated with our sales of loans tothird party investors.  Costs includedirect costs associated with the loan origination, such as commissions andsalaries that are deferred at the time of origination.  For the nine months ended September 30,2010 and 2009, realized and unrealized gains on mortgage banking activitieswere $11.9 million and $9.6 million, respectively.  This increase is attributable to theaforementioned increase in loan origination and sales volume for the year todate 2010 compared to 2009, in addition to the increase in the margin we earnon our loan sales over the past year.

 

Managementfee income, which represents the income earned for services George Masonprovides to other mortgage companies owned by local home builders and generallyfluctuates based on the volume of loan sales, increased $702,000 to $1.3million for the three months ended September 30, 2010 as compared to$553,000 for the three months ended September 30, 2009.  For the nine months ended September 30,2010 and 2009, management fee income was $2.7 million and $1.3 million,respectively.  This component of ourmortgage banking business has seen increases in loan origination and salesvolume, which has contributed to the increase in our management fee income.

 

Loanfees increased $175,000 to $678,000 for the three months ended September 30,2010 as compared to the same period of 2009. For the nine months ended September 30, 2010 and 2009, loan feeswere $1.5 million and $2.2 million, respectively, a decrease of $671,000.  The decrease is primarily related to adecrease in fee income from our mortgage banking segment, specifically, atGeorge Mason’s title company.

 

Investmentfee income increased $73,000 to $1.0 million for the three months ended September 30,2010 compared to $975,000 for the same period of 2009. For the nine monthsended September 30, 2010 and 2009, investment fee income was $3.1 millionand $2.7 million, respectively.  Theincrease in investment fee income is attributable to increases in the marketvalues of managed and custodial assets and an increase in the number of customerrelationships in our trust division.

 

Theincrease in the cash surrender value of our bank-owned life insurance for thethree and nine months ended September 30, 2010 and 2009 was $173,000 and$499,000, respectively.  For the samethree and nine month periods of 2009, income from our bank-owned life insurancewas $167,000 and $400,000, respectively. The increase is directly related to increases in the underlying value ofthe investments.

 

Forthe three months ended September 30, 2010 and 2009, we recorded net gainson sales of investment securities available-for-sale of $193,000 and $73,000,respectively.  For the year-to-date September 30,2010 and 2009, net gains on sales of investment securities were $726,000 and$625,000, respectively.  For the threemonths ended September 30, 2010 and 2009, net gains on investmentsecurities held for trading purposes was $116,000 and $97,000,respectively.  For the nine months ended September 30,2010 we recorded net gains of $84,000 on investment securities held for tradingpurposes compared to a net loss of $422,000 for the same period of 2009.  The loss recorded during 2009 was a result ofour purchase of investments to economically hedge against fair value changes ofour nonqualified deferred compensation plan liability.  These investments are designated as tradingsecurities, and as such, the changes in fair value are reflected in earnings.  These trading losses were primarily theresult of lower stock prices and were partially offset by a reduction in theperiod’s compensation expense associated with this benefit plan.

 

Noninterestincome represented 34% and 30% of our total revenues for the three months endedSeptember 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, noninterestincome as a percentage of our total revenues was 30% and 33%, respectively.

 

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* *

*NoninterestExpense*

 

Noninterestexpense includes, among other things, salaries and benefits, occupancy costs,professional fees, depreciation, data processing, telecommunications andmiscellaneous expenses. Noninterest expense for the three months ended September 30,2010 was $15.4 million, compared to $13.0 million for the same period of 2009,an increase of $2.4 million, or 18%.  Forthe nine months ended September 30, 2010 and 2009, noninterest expense was$42.6 million and $38.7 million, respectively, an increase of $3.8 million, or10%.

 

Forthe quarter ended September 30, 2010, salaries and benefits expenseincreased to $8.9 million up from $5.9 million for the quarter ended September 30,2009.  The increase in salaries andbenefits expense is mostly related to increases in our business developmentpersonnel at our commercial banking, wealth management and mortgage bankingsegments.  Also, we recorded anadditional $801,000 during the third quarter of 2010 related to our CEO’s newemployment agreement, which includes the immediate vesting of his supplementalexecutive retirement plan.  In addition,accruals for incentive pay for 2010 have increased compared to 2009 as a resultof better than expected financial results for the quarter and year-to-date2010.  Data communications expenseincreased $449,000 to $1.2 million for the three months ended September 30,2010 as compared to $797,000 for the same period of 2009, for core IT systemconversion costs.  Offsetting theseincreases is a reversal of accruals related to mortgage loan repurchases andputbacks of $1.1 million during the third quarter of 2010.  During the past two years, we have takensteps to limit our exposure to loan repurchases through agreements entered intowith various investors.  During 2010, weexperienced favorable results in resolving various investor claims and reducedour reserve by $1.1 million.  AtSeptember 30, 2010, there were no outstanding loan repurchases or settlements.  Additional increases in noninterest expenseare related to branch expansion as we added a banking office and a mortgagebanking office during the 2010 quarter.

 

Forthe year to date September 30, 2010, salaries and benefits expenseincreased to $21.8 million up from $17.5 million for the nine months ended September 30,2009.  Data communications expenseincreased $1.0 million to $3.4 million for the nine months ended September 30,2010 as compared to $2.4 million for the same period of 2009.  These increases were attributable to theaforementioned increases in personnel, benefits and our core system conversion.  Additional increases in noninterest expenseare related to branch expansion as we added a banking office and a mortgagebanking office during 2010.  FDICinsurance premiums decreased $610,000 to $1.6 million for the nine months endedSeptember 30, 2010 compared to $2.2 million for the same period of2009.  The decrease in the assessment isdue to the FDIC’s special assessment which occurred during the second quarterof 2009.  Mortgage loan repurchases andsettlements decreased $2.4 million during the nine months ended September 30,2010 as compared to the same period of 2009, again due to our taking steps toreduce our exposure to loan repurchases and putbacks in our mortgage bankingsegment. Also contributing to the increase in our noninterest expense for 2010was an impairment charge of $451,000 related to our annual impairment analysisof the goodwill associated with our acquisition of Wilson/Bennett.

 

*IncomeTaxes*

 

Forthe three months ended September 30, 2010, we recorded a provision forincome taxes of $2.7 million, compared to $1.2 million for the same period of2009.  Our effective tax rate for thethree months ended September 30, 2010 and 2009 was 32% and 31%,respectively.  For the nine months ended September 30,2010, we recorded a provision for income taxes of $6.9 million, compared to$3.0 million for the same period of 2009. Our effective tax rate for the nine months ended September 30, 2010and 2009 was 32% and 30%, respectively. Our effective rate as of September 30, 2010 increased compared to September 30,2009 because the income we 

 

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realizeon our tax-exempt investments has been a smaller portion of our overall netincome during the first nine months of 2010. Our effective tax rate is less than the statutory rate because of incomewe receive on tax-exempt investments. See also “Critical Accounting Policies — Valuation of Deferred TaxAssets.”

 

**Statementsof Condition**

 

Totalassets were $2.13 billion and $1.98 billion at September 30, 2010 andDecember 31, 2009, respectively.

 

*InvestmentSecurities*

 

Ourinvestment securities portfolio is used as a source of income andliquidity.  Investment securities were$321.9 million at September 30, 2010, compared to $382.5 million atDecember 31, 2009, a decrease of $60.6 million.  The decrease in investment securities during2010 as compared to 2009 is a result of paydowns and sales of investmentsecurities during 2010. We have not replaced these securities with newpurchases because this funding has been reallocated to support the increase inour loans held for sale. The investment securities portfolio consists ofinvestment securities available-for-sale, investment securitiesheld-to-maturity and trading securities. Investment securitiesavailable-for-sale are those securities that we intend to hold for anindefinite period of time, but not necessarily until maturity. These securitiesare carried at fair value and may be sold as part of an asset/liabilitystrategy, liquidity management or regulatory capital management.  Investment securities held-to-maturity arethose securities that we have the intent and ability to hold to maturity andare carried at amortized cost. Investment securities-trading are securities wepurchase to economically hedge against fair value changes in our nonqualifieddeferred compensation plan liability. These securities include cash equivalents, equities and mutual funds.  At September 30, 2010, investmentsecurities available-for-sale were $296.6 million, investment securitiesheld-to-maturity were $23.4 million and investment securities-trading were $1.8million. At December 31, 2009, investment securities available-for-salewere $343.6 million, investment securities held-to-maturity were $35.2 million,and investment securities-trading were $3.7 million.  See the following table for additionalinformation on our investment securities portfolio.

 

Wecomplete reviews for other-than-temporary impairment at least quarterly.  As of September 30, 2010, the majorityof our investment securities portfolio consisted of securities rated AAA by aleading rating agency.  Investmentsecurities which carry a AAA rating are judged to be of the best quality andcarry the smallest degree of investment risk. At September 30, 2010, 96% of our mortgage-related investmentsecurities portfolio is guaranteed by the Federal National Mortgage Association(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the GovernmentNational Mortgage Association (GNMA).

 

Wehave $7.9 million in non-government non-agency mortgage-relatedsecurities.  These securities are ratedfrom AAA to AA.  The various protectiveelements on the non-agency securities may change in the future if marketconditions or the financial stability of credit insurers changes, which couldimpact the ratings of these securities.

 

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

 

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

 

Noother-than-temporary impairment has been recognized on the securities in ourinvestment portfolio during 2010.  We donot intend to sell nor do we believe it is probable that we will be required tosell any of our temporarily impaired securities prior to the recovery of theamortized cost.

 

SeeNote 5 to our notes to the consolidated financial statements for additionalinformation on our investment securities portfolio. 

 

FHLBstock at each of September 30, 2010 and December 31, 2009 was $15.7million, and is included in other investments on the consolidated statements ofcondition.  During 2008, the FHLB ofAtlanta announced a change in their dividend declaration and payment schedulebeginning during the fourth quarter of 2008. The change was initiated so that the dividend can be declared and paidto member banks after the FHLB has calculated their net income for thepreceding quarter.  During 2009, the FHLBannounced changes to its capital stock requirements.  Specifically, the Board of Directorsincreased the dollar cap on its stock purchases from $25 million to $26 millionand repurchases of member excess stock will be evaluated on a quarterly basisinstead of a daily basis.  We do notexpect the above changes to materially impact our liquidity position.

 

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**Investment Securities**

At September 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                                                       | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Available-for-sale at September 30, 2010** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S. government-sponsored agencies                               |       |          |       |      |       |        |       |
| Five to ten years                                                |       | $             | 20,932     |      | $          | 23,129      |       | 4.14 | % |
| Total U.S. government-sponsored agencies                         |       | 20,932        |       | 23,129    |       | 4.14        | %          |
|                                                             |       |          |       |      |       |        |       |
| Mortgage-backed securities (1)                                   |       |          |       |      |       |        |       |
| One to five years                                                |       | 7             |       | 7         |       | 9.01        | %          |
| Five to ten years                                                |       | 24,325        |       | 25,550    |       | 4.20        | %          |
| After ten years                                                  |       | 166,456       |       | 174,451   |       | 4.54        | %          |
| Total mortgage-backed securities                                 |       | 190,788       |       | 200,008   |       | 4.49        | %          |
|                                                             |       |          |       |      |       |        |       |
| Tax exempt municipal securities (2)                              |       |          |       |      |       |        |       |
| Five to ten years                                                |       | 7,566         |       | 7,972     |       | 3.42        | %          |
| After ten years                                                  |       | 52,910        |       | 55,806    |       | 3.98        | %          |
| Taxable municipal securities                                     |       |          |       |      |       |        |       |
| Five to ten years                                                |       | 2,814         |       | 2,896     |       | 5.04        | %          |
| After ten years                                                  |       | 1,503         |       | 1,612     |       | 4.90        | %          |
| Total municipal securities                                       |       | 64,793        |       | 68,286    |       | 3.98        | %          |
|                                                             |       |          |       |      |       |        |       |
| U. S. treasury securities                                        |       |          |       |      |       |        |       |
| One to five years                                                |       | 4,917         |       | 5,185     |       | 2.36        | %          |
| Total U.S. treasury securities                                   |       | 4,917         |       | 5,185     |       | 2.36        | %          |
| Total investment securities available-for-sale                   |       | $             | 281,430    |      | $          | 296,608     |       | 4.31 | % |

 
| ** **                                                     | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|----------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Held-to-maturity at September 30, 2010** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| Mortgage-backed securities (1)                                 |       |          |       |      |       |        |       |
| One to five years                                              |       | 406           |       | 426       |       | 4.16        | %          |
| Five to ten years                                              |       | 4,350         |       | 4,587     |       | 4.61        | %          |
| After ten years                                                |       | 10,674        |       | 11,169    |       | 4.12        | %          |
| Total mortgage-backed securities                               |       | 15,430        |       | 16,182    |       | 4.26        | %          |
|                                                           |       |          |       |      |       |        |       |
| Corporate bonds                                                |       |          |       |      |       |        |       |
| After ten years                                                |       | 8,004         |       | 3,072     |       | 1.49        | %          |
| Total corporate bonds                                          |       | 8,004         |       | 3,072     |       | 1.49        | %          |
| Total investment securities held-to-maturity                   |       | 23,434        |       | 19,254    |       | 3.31        | %          |
|                                                           |       |          |       |      |       |        |       |
| Total investment securities                                    |       | $             | 304,864    |      | $          | 315,862     |       | 4.23 | % |
|                                                                |            |               |            |           |            |             |            |  |  |

 

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| ** **                                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Available-for-sale at December 31, 2009** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| U.S. government-sponsored agencies                              |       |          |       |      |       |        |       |
| Five to ten years                                               |       | $             | 26,074     |      | $          | 26,030      |       | 4.15 | % |
| After ten years                                                 |       | 29,974        |       | 29,629    |       | 5.01        | %          |
| Total U.S. government-sponsored agencies                        |       | 56,048        |       | 55,659    |       | 4.61        | %          |
|                                                            |       |          |       |      |       |        |       |
| Mortgage-backed securities (1)                                  |       |          |       |      |       |        |       |
| One to five years                                               |       | 9             |       | 9         |       | 8.97        | %          |
| Five to ten years                                               |       | 33,079        |       | 33,964    |       | 4.21        | %          |
| After ten years                                                 |       | 184,635       |       | 189,432   |       | 4.84        | %          |
| Total mortgage-backed securities                                |       | 217,723       |       | 223,405   |       | 4.74        | %          |
|                                                            |       |          |       |      |       |        |       |
| Tax exempt municipal securities (2)                             |       |          |       |      |       |        |       |
| Five to ten years                                               |       | 6,090         |       | 6,156     |       | 3.34        | %          |
| After ten years                                                 |       | 50,270        |       | 50,227    |       | 4.01        | %          |
| Taxable municipal securities                                    |       |          |       |      |       |        |       |
| After ten years                                                 |       | 3,331         |       | 3,225     |       | 4.96        | %          |
| Total municipal securities                                      |       | 59,691        |       | 59,608    |       | 3.99        | %          |
|                                                            |       |          |       |      |       |        |       |
| U. S. treasury securities                                       |       |          |       |      |       |        |       |
| One to five years                                               |       | 4,901         |       | 4,897     |       | 2.36        | %          |
| Total U.S. treasury securities                                  |       | 4,901         |       | 4,897     |       | 2.36        | %          |
| Total investment securities available-for-sale                  |       | $             | 338,363    |      | $          | 343,569     |       | 4.55 | % |

 
| ** **                                                    | ** ** | **Amortized** | ** ** | **Fair**  | ** ** | **Average** | ** ** |
|---------------------------------------------------------------|------------|---------------|------------|-----------|------------|-------------|------------|
| **Held-to-maturity at December 31, 2009** | ** ** | **Cost**      | ** ** | **Value** | ** ** | **Yield**   | ** ** |
| Mortgage-backed securities (1)                                |       |          |       |      |       |        |       |
| One to five years                                             |       | $             | 1,833      |      | $          | 1,884       |       | 4.43 | % |
| Five to ten years                                             |       | 6,244         |       | 6,478     |       | 4.59        | %          |
| After ten years                                               |       | 19,103        |       | 19,731    |       | 4.26        | %          |
| Total mortgage-backed securities                              |       | 27,180        |       | 28,093    |       | 4.35        | %          |
|                                                          |       |          |       |      |       |        |       |
| Corporate bonds                                               |       |          |       |      |       |        |       |
| After ten years                                               |       | 8,004         |       | 3,343     |       | 1.33        | %          |
| Total corporate bonds                                         |       | 8,004         |       | 3,343     |       | 1.33        | %          |
| Total investment securities held-to-maturity                  |       | 35,184        |       | 31,436    |       | 3.66        | %          |
|                                                          |       |          |       |      |       |        |       |
| Total investment securities                                   |       | $             | 373,547    |      | $          | 375,005     |       | 4.47 | % |

 

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(1)  Based on contractual maturities.

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

 

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*LoansReceivable*

 

Totalloans receivable, net of deferred fees and costs, were $1.35 billion at September 30,2010 and $1.29 billion at December 31, 2009, an increase of $58.3 million.  This increase is a result of additions to oursales and lending staff over the past year. See the following table for details on the loans receivable portfolio. Loansheld for sale at September 30, 2010 were $341.4 million compared to $179.5million at December 31, 2009.  Loansheld for sale are valued at the lower of cost or fair value.

 

**Loans Receivable**

At September 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                      | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                            |       |                             |       |                            |       |   |   |   |   |
| Commercial and industrial       |       | $                                | 162,505    |                            | 12.01      | % | $ | 161,156 |   | 12.45 | % |
| Real estate - commercial        |       | 616,280                          |       | 45.54                           | %          | 592,780 |   | 45.80 | % |
| Real estate - construction      |       | 214,157                          |       | 15.83                           | %          | 191,523 |   | 14.80 | % |
| Real estate - residential       |       | 236,314                          |       | 17.46                           | %          | 228,693 |   | 17.67 | % |
| Home equity lines               |       | 121,088                          |       | 8.95                            | %          | 117,392 |   | 9.07 | % |
| Consumer                        |       | 2,832                            |       | 0.21                            | %          | 2,859 |   | 0.21 | % |
|                            |       |                             |       |                            |       |   |   |   |   |
| Gross loans                     |       | $                                | 1,353,176  |                            | 100.00     | % | 1,294,403 |   | 100.00 | % |
|                            |       |                             |       |                            |       |   |   |   |   |
| Net deferred (fees) costs       |       | (1,473                           | )          |                            |       | (971 | ) |   |   |
| Less: allowance for loan losses |       | (22,444                          | )          |                            |       | (18,636 | ) |   |   |
|                            |       |                             |       |                            |       |   |   |   |   |
| Loans receivable, net           |       | $                                | 1,329,259  |                            |       |   | $ | 1,274,796 |   |   |   |

 

*Deposits*

 

Totaldeposits were $1.40 billion at September 30, 2010 compared to $1.30billion at December 31, 2009. During 2010, we have had increases in ournoninterest bearing checking products, money market checking, savings andcertificates of deposit. We have had success in attracting deposit balancesfrom customers seeking to deposit their money with smaller, local banks anddepositors are increasing balances held with financial institutions as a resultof the increased protection of their money by the FDIC.  See the following table for details oncertificates of deposit with balances of $100,000 or more. We are a member ofthe Certificates of Deposit

 

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AccountRegistry Service (“CDARS”).   CDARSallows our customers to access FDIC insurance protection on multi-milliondollar 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.  At September 30, 2010 and December 31,2009, we had $110.4 million and $59.4 million, respectively, in CDARS deposits,which are considered to be brokered deposits. Brokered certificates of deposit not in the CDARS network were $10.0million and $28.2 million at September 30, 2010 and December 31,2009, respectively.

 

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

At September 30, 2010

(In thousands)

 
| ** **                            | ** ** | **Fixed Term** | ** ** | **No-Penalty*** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------|------------|-----------------|------------|-----------|------------|
| **Maturities:**                       |       |                |       |            |       |      |       |
| Three months or less                  |       | $                   | 129,022    |            | $          | 18,393    |       | $ | 147,415 |   |
| Over three months through six months  |       | 49,013              |       | 4,335           |       | 53,348    |       |
| Over six months through twelve months |       | 57,670              |       | 8,156           |       | 65,826    |       |
| Over twelve months                    |       | 100,355             |       | 25,628          |       | 125,983   |       |
|                                  |       | $                   | 336,060    |            | $          | 56,512    |       | $ | 392,572 |   |

 

----

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

 

*Borrowings*

 

Otherborrowed funds increased $13.7 million to $441.3 million at September 30,2010, compared to $427.6 million at December 31, 2009.  Treasury, Tax & Loan Note optionborrowings decreased $987,000 to $999,000 at September 30, 2010 comparedto $2.0 million at December 31, 2009. FHLB advances remained at $280.0 million at September 30, 2010compared to December 31, 2009. Customer repurchase agreements increased$1.7 million to $81.7 million at September 30, 2010 compared to $80.0million at December 31, 2009.  Wehad federal funds purchased of $58.0 million at September 30, 2010compared to $45.0 million at December 31, 2009.  The following table provides information onour borrowings.

** **

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

At September 30, 2010

(In thousands)

** **
| ** **                                                     | ** ** | **Yield** | ** ** | **Amount** | ** **  |
|----------------------------------------------------------------|------------|-----------|------------|------------|-------------|
| **Short-term borrowed funds:**                       |       |      |       |       |        |
| TT&L note option                                           |       | 0.00      | %          | $          | 999         |   |
| Customer repurchase agreements                                 |       | 0.25      | %          | 81,669     |        |
| Federal Funds Purchased                                        |       | 0.29      | %          | 58,000     |        |
| **Total short-term borrowed funds  and weighted average rate** | ** ** | **0.26**  | **%**      | **$**      | **140,668** | ** ** |
| **Other borrowed funds:**                                      |       |      |       |       |        |
| Trust preferred                                                |       | 3.99      | %          | $          | 20,619      |   |
| FHLB advances - long term                                      |       | 3.90      | %          | 280,000    |        |
| **Other borrowed funds and weighted  average rate**            | ** ** | **3.91**  | **%**      | **$**      | **300,619** | ** ** |
|                                                           |       |      |       |       |        |
| **Total other borrowed funds and  weighted average rate**      | ** ** | **2.75**  | **%**      | **$**      | **441,287** | ** ** |

 

*Shareholders’Equity*

 

Shareholders’equity at September 30, 2010 was $224.1 million compared to $204.5 millionat December 31, 2009, an increase of $19.6 million, or 10%. The increasein shareholders’ equity at September 30, 2010 compared to December 31,2009 is primarily attributable to net income of $14.4 million for the ninemonths ended September 30, 2010.  Inaddition, accumulated other comprehensive income increased $6.3 million for thenine months ended September 30, 2010. Book value per share at September 30, 2010 was $7.79 compared to$7.12 at December 31, 2009. Tangible book value per share (which is bookvalue per share adjusted for changes in other comprehensive income, lessgoodwill and other intangible assets) at September 30, 2010 was $7.00compared to $6.52 at December 31, 2009.

 

**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 September 30, 2010, the commercial banking segmentrecorded net income of $3.7 million compared to $2.2 million for the sameperiod of 2009. For 

 

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thenine months ended September 30, 2010, the commercial banking segmentrecorded net income of $11.0 million compared to $5.1 million for the ninemonths ended September 30, 2009. See “**Statements of Income** — *General—Business**Segments*” abovefor additional information regarding the operating results for the commercialbanking segment for the periods presented. At September 30, 2010, total assets for this segment were $2.07billion, loans receivable, net of deferred fees and costs, were $1.35 billionand total deposits were $1.40 billion. At September 30, 2009, total assetswere $1.86 billion, loans receivable, net of deferred fees and costs, were$1.26 billion and total deposits were $1.28 billion.

 

*MortgageBanking*

 

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

 

Forthe three months ended September 30, 2010 and 2009, the mortgage bankingsegment recorded net income of $3.6 million and $779,000, respectively. For thenine months ended September 30, 2010 and 2009, the mortgage banking segmentrecorded net income of $6.0 million and $3.5 million, respectively.  See “**Statements of Income**— *General—Business**Segments*”above for additional information regarding the operating results for themortgage banking segment for the periods presented.  At September 30, 2010, total assets forthis segment were $373.2 million; loans held for sale were $341.4 million andmortgage funding checks were $33.1 million. At September 30, 2009, totalassets were $177.2 million; loans held for sale were $151.8 million andmortgage funding checks were $13.2 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 September 30, 2010 and 2009, the wealth managementand trust services segment recorded net income of $92,000 and $129,000,respectively. For the nine months ended September 30, 2009, the wealthmanagement and trust services segment recorded a net loss of $4,000 and netincome of $205,000, respectively.  Werecorded an impairment charge of $451,000 in this business segment during thesecond quarter of 2010 related to the goodwill associated with the acquisitionof Wilson/Bennett.  See “**Statements of Income** — *General—Business**Segments*” above for additionalinformation regarding the operating results for this business segment for theperiods presented.  We are in the processof negotiating our service agreement with one of our largest Trustclients.  If we are unsuccessful inretaining this client, this would decrease revenues and cash flows derived froma reporting unit within our wealth management and trust services businesssegment, and result in the potential impairment of the goodwill and intangibleassets recorded in the reporting unit.  Weexpect that the negotiations will be concluded in the next 30-60 days.  At September 30, 2010, total assets were$3.0 million and managed and custodial assets were $3.1 billion. At September 30,2009, total assets for this segment were $3.5 million and managed and custodialassets were $3.1 billion.

 

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

 

**Capital Resources**

 

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

 

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

 

AtSeptember 30, 2010, our Tier 1 and total (Tier 1 and Tier 2) risk-basedcapital ratios were 12.28% and 13.57%, respectively. At December 31, 2009,our Tier 1 and total risk-based capital ratios were 12.97% and 14.15%,respectively.  Our regulatory capitallevels for the Bank and bank holding company meet those established forwell-capitalized institutions.  Thedecrease in our risk-based capital ratios was primarily a result of theincrease in assets on our balance sheet and changes in the risk weightings ofcertain assets during 2010, offset by an increase in shareholders’ equity at September 30,2010 compared to December 31, 2009.

 

Thefollowing table provides additional information pertaining to our capitalratios.

** **

**Capital Components**

At September 30, 2010 and December 31, 2009

(In thousands)

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |
| **Cardinal Financial Corporation (Consolidated):**          |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| ** **                                                       |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| **At September 30, 2010**                                   |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| Total risk-based capital/Total capital to  risk-weighted assets  |       | $          | 239,939    |                       | 13.57      | %                          | $          | 141,455                    |       | >                  |  8.00 | % | $ | 176,819 |   | >  |  10.00 | % |
| Tier I capital/Tier I capital to risk-weighted  assets           |       | 217,222    |       | 12.28                      | %          | 70,728                     |       | >                  |  4.00 | %                          | 106,091    |   | >  |  6.00 | % |
| Tier I capital/Total capital to average assets                   |       | 217,222    |       | 10.76                      | %          | 80,758                     |       | >                  |  4.00 | %                          | 100,947    |   | >  |  5.00 | % |
|                                                             |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| **At December 31, 2009**                                    |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $          | 226,137    |                       | 14.15      | %                          | $          | 127,869                    |       | >                  |  8.00 | % | $ | 159,837 |   | >  |  10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets          |       | 207,286    |       | 12.97                      | %          | 63,935                     |       | >                  |  4.00 | %                          | 95,902     |   | >  |  6.00 | % |
| Tier I capital/ Total capital to average assets                  |       | 207,286    |       | 11.03                      | %          | 75,185                     |       | >                  |  4.00 | %                          | 93,981     |   | >  |  5.00 | % |

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **To Be Well**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Cardinal Bank:**                                          |       |       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| ** **                                                       |       |       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **At September 30, 2010**                                   |       |       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total risk-based capital/Total capital to  risk-weighted assets  |       | $          | 224,218    |                       | 12.74      | %                          | $          | 140,765 |   | >  | 8.00 | % | $ | 175,956 |   | >  | 10.00 | % |
| Tier I capital/Tier I capital to risk-weighted  assets           |       | 201,501    |       | 11.45                      | %          | 70,383                     |       | > |  4.00 | % | 105,574 |   | >  |  6.00 | % |
| Tier I capital/Total capital to average assets                   |       | 201,501    |       | 10.02                      | %          | 80,407                     |       | > |  4.00 | % | 100,509 |   | >  |  5.00 | % |
|                                                             |       |       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
|                                                             |       |       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| **At December 31, 2009**                                    |       |       |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Total risk-based capital/ Total capital to  risk-weighted assets |       | $          | 206,413    |                       | 12.98      | %                          | $          | 127,257 |   | > |  8.00 | % | $ | 159,071 |   | >  | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets          |       | 187,562    |       | 11.79                      | %          | 63,629                     | ** ** | > |  4.00 | % | 95,443 |   | >  |  6.00 | % |
| Tier I capital/ Total capital to average assets                  |       | 187,562    |       | 10.02                      | %          | 74,884                     |       | > |  4.00 | % | 93,605 |   | >  |  5.00 | % |

 

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**ContractualObligations**

 

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

** **

**Contractual Obligations**

At September 30, 2010

(In thousands)

 
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 - 2 Years** | ** ** | **3 - 5 Years** | ** ** | **More than 5   Years** | ** ** |
| Long-Term Debt Obligations:                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Certificates of deposit                              |       | $                                         | 555,215    |   | $ | 300,275 |   | $ | 105,417 |   | $ | 135,845 |   | $ | 13,678 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Brokered certificates of deposit                     |       | 120,440                                   |       | 112,992 |   | 7,448 |   | — |   | — |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Advances from the Federal Home Loan Bank of  Atlanta |       | 280,000                                   |       | — |   | 75,000 |   | 50,000 |   | 155,000 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Trust preferred securities                           |       | 20,619                                    |       | — |   | — |   | — |   | 20,619 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                          |       | 29,551                                    |       | 4,656 |   | 3,379 |   | 8,928 |   | 12,588 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                                         | 1,005,825  |   | $ | 417,923 |   | $ | 191,244 |   | $ | 194,773 |   | $ | 201,885 |   |

 

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

 

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

 

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

 

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

 

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GeorgeMason provides for its estimated exposure to repurchase loans previously soldto investors for which borrowers failed to provide full and accurateinformation on their loan application or for which appraisals have not beenacceptable or when the loan was not underwritten in accordance with the loanprogram specified by the loan investor, and for other exposures to itsinvestors related to loan sales activities. We evaluate the merits of eachclaim and estimate the reserve based on actual and expected claims received andconsider the historical amounts paid to settle such claims.  During the past two years, we have taken steps tolimit our exposure to loan repurchases through agreements entered into withvarious investors.  During 2010, weexperienced favorable results in resolving various investor claims and had nooutstanding loan repurchases or settlement as of September 30, 2010 andtherefore reduced our reserves by $1.1 million.

 

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

 

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

 

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

 

AtSeptember 30, 2010, commitments to extend credit were $445.4 million andstandby letters of credit were $20.1 million. Commitments to extend credit of$215.7 million as of September 30, 2010 are related to the mortgagebanking segment’s mortgage loan funding commitments and are of a short termnature.

 

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**Liquidity**

 

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

 

Inaddition to deposits, we have access to different wholesale funding markets.These markets include the brokered CD market, the repurchase agreement marketand the federal funds market. We are a member of the Certificates of DepositAccount Registry Service (“CDARS”). CDARS allows our customers to access FDIC insurance protection onmulti-million dollar certificates of deposit through our Bank.  When a customer places a large 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.

 

Cashflows from amortizing assets or maturing assets and our investment securitiesavailable-for-sale portfolio can also provide funding to meet the needs ofdepositors 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 $316.5 million at September 30,2010 or 15% of total assets. We held investments that are classified asheld-to-maturity in the amount of $23.4 million at September 30, 2010. Tomaintain ready access to the Bank’s secured lines of credit, the Bank haspledged roughly half of its investment securities and a portion of itsresidential real estate and commercial real estate loan portfolios to the FederalHome Loan Bank of Atlanta with additional investment securities and certainloans in its commercial & industrial portfolios pledged to the FederalReserve Bank of Richmond. Additional borrowing capacity at the Federal HomeLoan Bank of Atlanta at September 30, 2010 was $153.7 million. Borrowingcapacity with the Federal Reserve Bank of Richmond was $100 million at September 30,2010. These facilities are subject to the FHLB and the Federal Reserveapproving disbursement to us.  Inaddition, we have unsecured federal funds purchased lines of $315 millionavailable to us.  We anticipatemaintaining liquidity at a level sufficient to protect depositors, provide forreasonable growth and fully comply with all regulatory requirements.

 

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**Interest Rate Sensitivity**

 

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

 

Weemploy an independent consulting firm to model our interest 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.

 

AtSeptember 30, 2010, our asset/liability position was neutral based on ourinterest rate sensitivity model. Currently, our net interest income would decrease by less than 1.2% in adown 100 basis point scenario and would be neutral in an up 200 basis pointscenario over a one-year time frame.  Inthe two-year time horizon, our net interest income would decrease by less than 2.6%in a down 100 basis point scenario and would be neutral in an up 200 basispoint scenario.

 

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

 

OurAsset/Liability Committee is responsible for reviewing our liquidityrequirements and maximizing our net interest income consistent with capitalrequirements, liquidity, interest rate and economic outlooks, competitivefactors and customer needs. Interest rate risk arises because the assets of theBank and the liabilities of the Bank have different maturities andcharacteristics. In order to measure this interest rate risk, we use asimulation process that measures the impact of changing interest rates on netinterest income. This model is run for the Bank by an independent consultingfirm. The simulations incorporate assumptions related to expected activity inthe balance sheet. For maturing assets, assumptions are developed for theredeployment of these assets. For maturing liabilities, assumptions aredeveloped for the replacement of these funding sources. Assumptions are alsodeveloped for assets and liabilities that reprice during the modeled timeperiod. These assumptions also cover how we expect rates to change on non-maturitydeposits such as interest checking, money market checking, savings accounts aswell as certificates of deposit. With the funding markets still lackingliquidity, forecasts for deposit rate movements carry greater uncertainty thanwhen this market is functioning normally. Based on inputs that include the most recent period end balance sheet,the current level of interest rates and the developed assumptions, the modelthen produces an expected level of net interest income assuming that interestrates remain unchanged. This becomes the base case. Next, the model determinesthe impact on net interest income given specified changes in interest rates.The rate simulations are performed for a two year period and include rampedrate changes of down 100 basis points and up 200 basis points. The down 200basis point scenario was discontinued given the current level of interestrates.  In the ramped down rate change,the model moves rates gradually down 100 basis points over the first year andthen rates remain flat in the second year.

 

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

 

AtSeptember 30, 2010, our asset/liability position was neutral based on ourinterest rate sensitivity model. Currently, our net interest income would decrease by less than 1.2% in adown 100 basis point scenario and would be neutral in an up 200 basis pointscenario over a one-year time frame.  Inthe two-year time horizon, our net interest income would decrease by less than 2.6%in a down 100 basis point scenario and would be neutral in an up 200 basispoint scenario.

 

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

 

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

 

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**Item 4. Controls and Procedures**

 

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

 

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

 

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

 

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**PART II — OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

**Item 1A.  Risk Factors**

 

Our operations are subjectto many risks that could adversely affect our future financial condition andperformance and, therefore, the market value of our securities, including therisk factors that are outlined in our Annual Report on Form 10-K for theyear ended December 31, 2009.  Therehave been no material changes in our risk factors from those disclosed.

 

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

 

(a)  None.

(b)  Not applicable.

(c)  For the three monthsended September 30, 2010, we did not purchase shares of our common stock.

 

**Item 3.  Defaults Upon Senior Securities**

 

(a)  None.

(b)  None.

 

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

 

**Item 5.  Other Information**

 

(a)  None.

(b)  None.

 

**Item 6.  Exhibits**

 

31.1         Rule 13a-14(a) Certificationof Chief Executive Officer

31.2         Rule 13a-14(a) Certificationof Chief Financial Officer

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

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

 

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**SIGNATURES**

 

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

 
|                         |   | CARDINAL  FINANCIAL CORPORATION                                                     |
|------------------------------|--------|-------------------------------------------------------------------------------------|
|                         |   | (Registrant)                                                                        |
|                         |   |                                                                                |
| Date:  November 5, 2010 |   | /s/  Bernard H. Clineburg                                                           |
|                         |   | Bernard  H. Clineburg                                                               |
|                         |   | Chairman  and Chief Executive Officer                                               |
|                         |   | (Principal  Executive Officer)                                                      |
|                         |   |                                                                                |
|                         |   |                                                                                |
| Date:  November 5, 2010 |   | /s/  Mark A. Wendel                                                                 |
|                         |   | Mark  A. Wendel                                                                     |
|                         |   | Executive  Vice President and Chief Financial Officer (Principal Financial Officer) |
|                         |   |                                                                                |
|                         |   |                                                                                |
| Date:  November 5, 2010 |   | /s/  Jennifer L. Deacon                                                             |
|                         |   | Jennifer  L. Deacon                                                                 |
|                         |   | Senior  Vice President and Chief Accounting Officer                                 |
|                         |   | (Principal  Accounting Officer)                                                     |

 

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** **

**EXHIBIT INDEX**

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

 

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