**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

**ý****Quarterly Report Pursuant to Section 13or 15(d)**

**of the Securities Exchange Act of 1934**

 

**For thequarterly period ended June 30, 2005**

 

**o****Transition Report Pursuant to Section 13or 15(d)**

**of the Securities Exchange Act of 1934**

 

**For thetransition period from              to              **

 

**CommissionFile Number:  0-24557**

 

**CARDINAL FINANCIAL CORPORATION**

(Exact name of registrant as specifiedin its charter)

 
| **Virginia**                                               | ** ** | **54-1874630**       |
|------------------------------------------------------------|------------|----------------------|
| (State or  other jurisdiction of                           |       | (I.R.S.  Employer    |
| incorporation  or organization)                            |       | Identification  No.) |
|                                                       |       |                 |
| **8270  Greensboro Drive, Suite 500**                      | ** ** | ** **           |
| **McLean,  Virginia**                                      | ** ** | **22102**            |
| (Address of  principal executive offices)                  |       | (Zip Code)           |
|                                                       |       |                 |
| **(703)  584-3400**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes   ý   No   o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule12b-2 of the Exchange Act)

Yes   ý   No   o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate:

 

24,330,673 shares of commonstock, par value $1.00 per share,

outstanding as of July 23,2005

 

 

----

 

**CARDINAL FINANCIAL CORPORATION**

 

**INDEX TO FORM 10-Q**

 
| **PART I – FINANCIAL INFORMATION**                                                             |                                                                        |
|-----------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|
|                                                                                                |                                                                        |
| Item 1. Financial Statements:                                                                       |                                                                        |
|                                                                                                |                                                                        |
|                                                                                                | Consolidated Statements of Condition                                        |   |
|                                                                                                | At June 30, 2005 (unaudited) and December 31,  2004               |   |
|                                                                                                |                                                                        |   |
|                                                                                                | Consolidated Statements of Income                                           |   |
|                                                                                                | For the three and six months ended June 30,  2005 and 2004 (unaudited) |   |
|                                                                                                |                                                                        |   |
|                                                                                                | Consolidated Statements of Comprehensive  Income (Loss)                     |   |
|                                                                                                | For the three and six months ended June 30,  2005 and 2004 (unaudited) |   |
|                                                                                                |                                                                        |   |
|                                                                                                | Consolidated Statements of Changes In  Shareholders’ Equity            |   |
|                                                                                                | For the six months ended June 30, 2005  and 2004 (unaudited)           |   |
|                                                                                                |                                                                        |   |
|                                                                                                | Consolidated Statements of Cash Flows                                       |   |
|                                                                                                | For the six months ended June 30, 2005  and 2004 (unaudited)           |   |
|                                                                                                |                                                                        |   |
|                                                                                                | Notes to Consolidated Financial Statements  (unaudited)                     |   |
|                                                                                                |                                                                        |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |                                                                        |
|                                                                                                |                                                                        |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                 |                                                                        |
|                                                                                                |                                                                        |
| Item 4. Controls and Procedures                                                                     |                                                                        |
|                                                                                                |                                                                        |
| **PART II –  OTHER INFORMATION**                                                               |                                                                        |
|                                                                                                |                                                                        |
| Item 1. Legal Proceedings                                                                           |                                                                        |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                |                                                                        |
| Item 3. Defaults Upon Senior Securities                                                             |                                                                        |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        |                                                                        |
| Item 5. Other Information                                                                           |                                                                        |
| Item 6. Exhibits                                                                                    |                                                                        |
|                                                                                                |                                                                        |
| **SIGNATURES**                                                                                      |                                                                        |

 

2

----

 

**PART I****— FINANCIAL INFORMATION**

 

**Item 1****.  Financial Statements**

 

**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CONDITION

 

June 30, 2005 and December 31, 2004

 

(In thousands, except share data)

 
| ** **                                                                                                                                      | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                      | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **Assets**                                                                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and due  from banks                                                                                                                        |       | $                 | 19,134     |                  | $          | 15,205 |   |
| Federal  funds sold                                                                                                                             |       | 36,997            |       | 8,203                 |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total cash  and cash equivalents                                                                                                                |       | 56,131            |       | 23,408                |       |
| Investment  securities available-for-sale                                                                                                       |       | 151,737           |       | 151,554               |       |
| Investment  securities held-to-maturity (market value of $125,664 and $136,609 at June 30,  2005 and December 31, 2004, respectively) |       | 127,364           |       | 137,953               |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total  investment securities                                                                                                                    |       | 279,101           |       | 289,507               |       |
|                                                                                                                                            |       |              |       |                  |       |
| Other  investments                                                                                                                              |       | 7,598             |       | 8,110                 |       |
| Loans held  for sale, net                                                                                                                       |       | 475,098           |       | 365,454               |       |
|                                                                                                                                            |       |              |       |                  |       |
| Loans  receivable, net of deferred fees and costs                                                                                               |       | 603,257           |       | 489,896               |       |
| Allowance  for loan losses                                                                                                                      |       | (7,210            | )          | (5,878                | )          |
|                                                                                                                                            |       |              |       |                  |       |
| Loans  receivable, net                                                                                                                          |       | 596,047           |       | 484,018               |       |
|                                                                                                                                            |       |              |       |                  |       |
| Premises and  equipment, net                                                                                                                    |       | 17,259            |       | 15,531                |       |
| Deferred tax  asset                                                                                                                             |       | 4,314             |       | 3,238                 |       |
| Goodwill and  intangibles, net                                                                                                                  |       | 20,677            |       | 14,694                |       |
| Accrued  interest receivable and other assets                                                                                                   |       | 11,012            |       | 7,616                 |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total assets                                                                                                                                    |       | $                 | 1,467,237  |                  | $          | 1,211,576 |   |
|                                                                                                                                            |       |              |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                  |       |              |       |                  |       |
|                                                                                                                                            |       |              |       |                  |       |
| Deposits                                                                                                                                        |       | $                 | 1,002,486  |                  | $          | 824,210 |   |
| Other  borrowed funds                                                                                                                           |       | 163,344           |       | 201,085               |       |
| Warehouse  financing                                                                                                                            |       | 38,126            |       | 30,245                |       |
| Mortgage  funding checks                                                                                                                        |       | 93,660            |       | 46,392                |       |
| Escrow  liabilities                                                                                                                             |       | 6,860             |       | 3,020                 |       |
| Accrued  interest payable and other liabilities                                                                                                 |       | 18,859            |       | 11,519                |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total  liabilities                                                                                                                              |       | 1,323,335         |       | 1,116,471             |       |
|                                                                                                                                            |       |              |       |                  |       |
| Common  stock, $1 par value                                                                                                                     |       | 2005              |       | 2004                  |       |   |   |   |   |   |
| Authorized                                                                                                                                      |       | 50,000,000        |       | 50,000,000            |       |   |   |   |   |   |
| Issued and  outstanding                                                                                                                         |       | 24,327,073        |       | 18,462,597            |       |   | 24,327 |   | 18,463 |   |
| Additional  paid-in capital                                                                                                                     |       | 132,191           |       | 92,868                |       |
| Accumulated  deficit                                                                                                                            |       | (11,242           | )          | (15,145               | )          |
| Accumulated  other comprehensive loss                                                                                                           |       | (1,374            | )          | (1,081                | )          |
|                                                                                                                                            |       |              |       |                  |       |
| Total  shareholders’ equity                                                                                                                |       | 143,902           |       | 95,105                |       |
|                                                                                                                                            |       |              |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                 | 1,467,237  |                  | $          | 1,211,576 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OFINCOME

 

Threeand six months ended June 30, 2005 and 2004

(Inthousands, except share and per share data)

(Unaudited)

 
| ** **                                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest  income:                                              |       |                                 |       |                               |       |   |   |   |   |
| Loans receivable                                               |       | $                                    | 8,334      |                               | $          | 4,866 |   | $ | 15,614 |   | $ | 9,592 |   |
| Loans held  for sale                                           |       | 4,657                                |       | 5                                  |       | 8,015 |   | 7 |   |
| Federal  funds sold                                            |       | 77                                   |       | 19                                 |       | 138 |   | 47 |   |
| Investment  securities available-for-sale                      |       | 1,532                                |       | 1,553                              |       | 2,962 |   | 2,824 |   |
| Investment  securities held-to-maturity                        |       | 1,253                                |       | 1,478                              |       | 2,561 |   | 2,828 |   |
| Other  investments                                             |       | 73                                   |       | 46                                 |       | 127 |   | 84 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Total  interest income                                         |       | 15,926                               |       | 7,967                              |       | 29,417 |   | 15,382 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Interest  expense:                                             |       |                                 |       |                               |       |   |   |   |   |
| Deposits                                                       |       | 5,530                                |       | 2,498                              |       | 10,207 |   | 4,780 |   |
| Other  borrowed funds                                          |       | 1,272                                |       | 471                                |       | 2,264 |   | 771 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Total  interest expense                                        |       | 6,802                                |       | 2,969                              |       | 12,471 |   | 5,551 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net interest  income                                           |       | 9,124                                |       | 4,998                              |       | 16,946 |   | 9,831 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Provision  for loan losses                                     |       | 820                                  |       | 314                                |       | 1,369 |   | 388 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net interest  income after provision for loan losses           |       | 8,304                                |       | 4,684                              |       | 15,577 |   | 9,443 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Non-interest  income:                                          |       |                                 |       |                               |       |   |   |   |   |
| Service  charges on deposit accounts                           |       | 330                                  |       | 262                                |       | 610 |   | 502 |   |
| Loan service  charges                                          |       | 618                                  |       | 89                                 |       | 1,244 |   | 285 |   |
| Investment  fee income                                         |       | 291                                  |       | 158                                |       | 450 |   | 336 |   |
| Net gain on  sales of loans                                    |       | 4,035                                |       | 48                                 |       | 7,615 |   | 62 |   |
| Net realized  gain on investment securities available-for-sale |       | 33                                   |       | —                             |       | 33 |   | 241 |   |
| Management  fee income                                         |       | 974                                  |       | —                             |       | 1,498 |   | — |   |
| Other income  (loss)                                           |       | (6                                   | )          | 7                                  |       | 7 |   | 16 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Total  non-interest income                                     |       | 6,275                                |       | 564                                |       | 11,457 |   | 1,442 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Non-interest  expense:                                         |       |                                 |       |                               |       |   |   |   |   |
| Salary and  benefits                                           |       | 5,566                                |       | 1,924                              |       | 10,435 |   | 4,064 |   |
| Occupancy                                                      |       | 1,025                                |       | 465                                |       | 2,071 |   | 961 |   |
| Professional  fees                                             |       | 475                                  |       | 190                                |       | 949 |   | 344 |   |
| Depreciation                                                   |       | 708                                  |       | 322                                |       | 1,389 |   | 632 |   |
| Data  processing                                               |       | 486                                  |       | 197                                |       | 994 |   | 391 |   |
| Telecommunications                                             |       | 277                                  |       | 105                                |       | 610 |   | 208 |   |
| Amortization  of intangibles                                   |       | 72                                   |       | —                             |       | 122 |   | — |   |
| Other  operating expenses                                      |       | 2,512                                |       | 1,095                              |       | 4,646 |   | 2,254 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Total  non-interest expense                                    |       | 11,121                               |       | 4,298                              |       | 21,216 |   | 8,854 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net income  before income taxes                                |       | 3,458                                |       | 950                                |       | 5,818 |   | 2,031 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Provision  for income taxes                                    |       | 1,166                                |       | 316                                |       | 1,915 |   | 678 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                     |       | $                                    | 2,292      |                               | $          | 634 |   | $ | 3,903 |   | $ | 1,353 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  share - basic                                    |       | $                                    | 0.11       |                               | $          | 0.03 |   | $ | 0.20 |   | $ | 0.08 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  share - diluted                                  |       | $                                    | 0.11       |                               | $          | 0.03 |   | $ | 0.19 |   | $ | 0.07 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Weighted-average  shares outstanding - basic                   |       | 21,096,617                           |       | 18,401,199                         |       | 19,817,872 |   | 17,931,094 |   |
|                                                           |       |                                 |       |                               |       |   |   |   |   |
| Weighted-average  shares outstanding - diluted                 |       | 21,321,508                           |       | 18,797,570                         |       | 20,101,026 |   | 18,326,609 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Threeand six months ended June 30, 2005 and 2004

(Dollarsin thousands)

(Unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                           |       | $                                    | 2,292      |                               | $          | 634 |   | $ | 3,903 |   | $ | 1,353 |   |
| Other  comprehensive income (loss):                                  |       |                                 |       |                               |       |   |   |   |   |
| Unrealized  gain (loss) on available-for-sale investment securities: |       |                                 |       |                               |       |   |   |   |   |
| Unrealized  holding gain (loss) arising                              |       |                                 |       |                               |       |   |   |   |   |
| during the  period, net of tax                                       |       | 1,175                                |       | (3,402                             | )          | (271 | ) | (2,528 | ) |
| Less:  reclassification adjustment for                               |       |                                 |       |                               |       |   |   |   |   |
| gains  included in net income, net of tax                            |       | 22                                   |       | —                             |       | 22 |   | 159 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Comprehensive  income (loss)                                         |       | $                                    | 3,445      |                               | $          | (2,768 | ) | $ | 3,610 |   | $ | (1,334 | ) |

 

See accompanying notes toconsolidated financial statements.

 

5

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**CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 2005 and 2004

(In thousands)

(Unaudited)

 
| ** **                                                             | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Preferred** | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Shares**    | ** ** | **Stock**     | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance, December 31, 2003                                        |       | 1,364         |       | $             | 1,364      |       | 16,377     |       | $          | 16,377         |       | $               | 86,790     |              | $          | (18,614    | )          | $ | (505 | ) | $ | 85,412 |   |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Stock options exercised                                                |       | —        |       | —        |       | 85         |       | 85         |       | 276            |       | —          |       | —            |       | 361        |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Public offering shares issued                                          |       | —        |       | —        |       | 945        |       | 945        |       | 5,358          |       | —          |       | —            |       | 6,303      |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Preferred stock converted to common stock                              |       | (1,364        | )          | (1,364        | )          | 1,026      |       | 1,026      |       | 338            |       | —          |       | —            |       | —     |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Change in unrealized loss on investment securities  available-for-sale |       | —        |       | —        |       | —     |       | —     |       | —         |       | —          |       | (2,687            | )          | (2,687     | )          |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Net income                                                             |       | —        |       | —        |       | —     |       | —     |       | —         |       | 1,353           |       | —            |       | 1,353      |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Balance, June 30, 2004                                            |       | —        |       | $             | —     |       | 18,433     |       | $          | 18,433         |       | $               | 92,762     |              | $          | (17,261    | )          | $ | (3,192 | ) | $ | 90,742 |   |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Balance, December 31, 2004                                        |       | —        |       | $             | —     |       | 18,463     |       | $          | 18,463         |       | $               | 92,868     |              | $          | (15,145    | )          | $ | (1,081 | ) | $ | 95,105 |   |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Stock options exercised                                                |       | —        |       | —        |       | 78         |       | 78         |       | 435            |       | —          |       | —            |       | 513        |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Public offering shares issued                                          |       | —        |       | —        |       | 5,175      |       | 5,175      |       | 34,615         |       | —          |       | —            |       | 39,790     |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Shares issued in acquisition of Wilson/Bennett                         |       | —        |       | —        |       | 611        |       | 611        |       | 4,273          |       | —          |       | —            |       | 4,884      |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Change in unrealized loss on investment securities  available-for-sale |       | —        |       | —        |       | —     |       | —     |       | —         |       | —          |       | (293              | )          | (293       | )          |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Net income                                                             |       | —        |       | —        |       | —     |       | —     |       | —         |       | 3,903           |       | —            |       | 3,903      |       |
|                                                                   |       |          |       |          |       |       |       |       |       |           |       |            |       |              |       |       |       |
| Balance, June 30, 2005                                            |       | —        |       | $             | —     |       | 24,327     |       | $          | 24,327         |       | $               | 132,191    |              | $          | (11,242    | )          | $ | (1,374 | ) | $ | 143,902 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

6

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**CARDINALFINANCIAL CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 

Six months ended June 30,2005 and 2004

 

(Dollars in thousands)

 

(Unaudited)

 
| ** **                                                                                                                                                                                                                               | ** ** | **2005**   | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Cash flows  from operating activities:                                                                                                                                                                                                   |       |       |       |     |       |
| Net income                                                                                                                                                                                                                               |       | $          | 3,903      |     | $          | 1,353 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities:                                                                                                                                            |       |       |       |     |       |
| Depreciation                                                                                                                                                                                                                             |       | 1,389      |       | 632      |       |
| Amortization  of premiums, discounts and intangibles                                                                                                                                                                                     |       | 881        |       | 1,072    |       |
| Provision  for loan losses                                                                                                                                                                                                               |       | 1,369      |       | 388      |       |
| Loans held  for sale originated and acquired                                                                                                                                                                                             |       | (2,187,040 | )          | (8,034   | )          |
| Proceeds  from the sale of loans held for sale                                                                                                                                                                                           |       | 2,085,011  |       | 7,175    |       |
| Gain on sale  of loans held for sale                                                                                                                                                                                                     |       | (7,615     | )          | (62      | )          |
| Gain on sale  of investment securities available-for-sale                                                                                                                                                                                |       | (33        | )          | (241     | )          |
| Loss on sale  of other assets                                                                                                                                                                                                            |       | 13         |       | —   |       |
| Increase in  accrued interest receivable, other assets, and deferred tax asset                                                                                                                                                           |       | (4,472     | )          | (27      | )          |
| Increase  (decrease) in accrued interest payable, escrow liabilities and other  liabilities                                                                                                                                              |       | 11,180     |       | (1,275   | )          |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Net cash  provided by (used in) operating activities                                                                                                                                                                                     |       | (95,414    | )          | 981      |       |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Cash flows  from investing activities:                                                                                                                                                                                                   |       |       |       |     |       |
| Purchase of  premises and equipment                                                                                                                                                                                                      |       | (3,130     | )          | (4,730   | )          |
| Proceeds  from sale, maturity and call of investment securities available-for-sale                                                                                                                                                       |       | 1,000      |       | 4,000    |       |
| Proceeds  from sale, maturity and call of mortgage-backed securities available-for-sale                                                                                                                                                  |       | 4,896      |       | 9,719    |       |
| Proceeds  from maturity and call of investment securities held-to-maturity                                                                                                                                                               |       | —     |       | 3,490    |       |
| Proceeds  from sale of other investments                                                                                                                                                                                                 |       | 8,119      |       | 261      |       |
| Purchase of  investment securities available-for-sale                                                                                                                                                                                    |       | (12,964    | )          | (6,000   | )          |
| Purchase of  mortgage-backed securities available-for-sale                                                                                                                                                                               |       | (8,432     | )          | (72,959  | )          |
| Purchase of  investment securities held-to-maturity                                                                                                                                                                                      |       | —     |       | (16,472  | )          |
| Purchase of  mortgage-backed securities held-to-maturity                                                                                                                                                                                 |       | —     |       | (14,042  | )          |
| Purchase of  other investments                                                                                                                                                                                                           |       | (7,607     | )          | (2,159   | )          |
| Redemptions  of investment securities available-for-sale                                                                                                                                                                                 |       | 14,511     |       | 14,912   |       |
| Redemptions  of investment securities held-to-maturity                                                                                                                                                                                   |       | 10,199     |       | 14,134   |       |
| Net cash  paid to acquire Wilson/Bennett                                                                                                                                                                                                 |       | (1,379     | )          | —   |       |
| Net increase  in loans receivable, net of deferred fees and costs                                                                                                                                                                        |       | (113,063   | )          | (55,199  | )          |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Net cash  used in investing activities                                                                                                                                                                                                   |       | (107,850   | )          | (125,045 | )          |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Cash flows  from financing activities:                                                                                                                                                                                                   |       |       |       |     |       |
| Net increase  in deposits                                                                                                                                                                                                                |       | 178,276    |       | 123,425  |       |
| Net increase  (decrease) in other borrowed funds                                                                                                                                                                                         |       | (60,491    | )          | 2,544    |       |
| Net increase  in warehouse financing                                                                                                                                                                                                     |       | 7,881      |       | —   |       |
| Net increase  in mortgage funding checks                                                                                                                                                                                                 |       | 47,268     |       | —   |       |
| Proceeds  from FHLB advances - long term                                                                                                                                                                                                 |       | 25,000     |       | 45,000   |       |
| Repayments  of FHLB advances - long term                                                                                                                                                                                                 |       | (2,250     | )          | (1,250   | )          |
| Proceeds  from public offering of common stock                                                                                                                                                                                           |       | 39,790     |       | 6,303    |       |
| Stock options  exercised                                                                                                                                                                                                                 |       | 513        |       | 361      |       |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Net cash  provided by financing activities                                                                                                                                                                                               |       | 235,987    |       | 176,383  |       |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Net increase  in cash and cash equivalents                                                                                                                                                                                               |       | 32,723     |       | 52,319   |       |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Cash and  cash equivalents at beginning of the period                                                                                                                                                                                    |       | 23,408     |       | 13,083   |       |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| Cash and  cash equivalents at end of the period                                                                                                                                                                                          |       | $          | 56,131     |     | $          | 65,402 |   |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| **Supplemental  disclosure of cash flow information:**                                                                                                                                                                                   |       |       |       |     |       |
| Cash paid  during the period for interest                                                                                                                                                                                                |       | $          | 12,003     |     | $          | 5,377 |   |
| Cash paid  for income taxes                                                                                                                                                                                                              |       | 150        |       | 50       |       |
|                                                                                                                                                                                                                                     |       |       |       |     |       |
| **Supplemental  schedule of noncash investing and financing activities:**                                                                                                                                                           |       |       |       |     |       |
| The Company  acquired all of the issued and outstanding common stock of Wilson/Bennett  Capital Management, Inc. In conjunction with the acquisition, the following  noncash changes to the Company’s financial condition occurred: |       |       |       |     |       |
| Fair value  of non-cash assets acquired                                                                                                                                                                                                  |       | $          | 6,296      |     |       |   |
| Fair value  of liabilities assumed                                                                                                                                                                                                       |       | 33         |       |     |       |
| Common  shares issued in acquisition                                                                                                                                                                                                     |       | 4,884      |       |     |       |

 

See accompanying notes to consolidated financialstatements.

 

7

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CARDINAL FINANCIALCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005

(Unaudited)

 

Note 1

 

*Organization*

 

Cardinal Financial Corporation (the ”Company”) was incorporated onNovember 24, 1997 under the laws of the Commonwealth of Virginia as aholding company whose activities consist of investment in its wholly ownedsubsidiaries.  The Company openedCardinal Bank, N.A. (the “Bank”) in 1998 and Cardinal Wealth Services, Inc., an investment services subsidiary, in1999.  In 1999, the Company opened twoadditional banking subsidiaries and, in late 2000, completed an acquisition ofHeritage Bancorp, Inc. and its banking subsidiary, The Heritage Bank.  These banking subsidiaries were consolidatedinto the Bank as of March 1, 2002. On April 15, 2004, the Company received approval from the FederalReserve Bank of Richmond to be a financial holding company.  Effective July 7, 2004, the Bankacquired George Mason Mortgage, LLC (“George Mason”), a mortgage bankingsubsidiary based in Fairfax, Virginia. In December 2004, the Bank converted to a state charteredinstitution and changed its name to Cardinal Bank.  Effective June 9, 2005, the Companyacquired Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”), an assetmanagement firm based in Alexandria, Virginia.

 

*Basis of Presentation*

 

In theopinion of management, the accompanying consolidated financial statements havebeen prepared in accordance with the requirements of Regulation S-X, Article 10.  Accordingly, they do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. However, all adjustments that are, in the opinion of management, necessaryfor a fair presentation have been included. The results of operations for the three and six months ended June 30,2005 are not necessarily indicative of the results to be expected for the fullyear ending December 31, 2005.  Theunaudited interim financial statements should be read in conjunction with theaudited financial statements and notes to financial statements that areincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2004 (the “2004 Form 10-K”).

 

*Stock-Based Compensation*

 

At June 30, 2005, the Company had two stock-based employeecompensation plans, the 1999 Stock Option Plan and the 2002 Equity CompensationPlan.  These plans are described morefully in Footnote 18 of the 2004 Form 10-K.

 

As permitted under Statement of Financial Accounting Standards (“SFAS”)No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure,* which amended SFAS No.123, *Accounting for Stock-BasedCompensation,* the Company has elected to continue to utilize theintrinsic value method in accounting for its stock-based employee compensationarrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees,*and related interpretations including Financial Accounting Standards BoardInterpretation No. 44, *Accounting forCertain Transactions Involving Stock Compensation,*an

 

8

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interpretation of APB No. 25. The following table illustrates the effect on net income and earningsper common share as if the Company had applied the fair value recognitionprovisions of SFAS No. 123, as amended, to stock-based employee compensation.

 

(Dollars in thousands,except per share data)

 
| ** **                                                                                                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(Dollars in thousands)**                                                                                                    | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                                                    |       | $                                    | 2,292      |                               | $          | 634 |   | $ | 3,903 |   | $ | 1,353 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair  value-based method for all awards, net of tax |       | (1,561                               | )          | (79                                | )          | (3,772 | ) | (475 | ) |
| Pro forma  net income                                                                                                         |       | $                                    | 731        |                               | $          | 555 |   | $ | 131 |   | $ | 878 |   |
|                                                                                                                          |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  share:                                                                                                          |       |                                 |       |                               |       |   |   |   |   |
| Basic - as  reported                                                                                                          |       | $                                    | 0.11       |                               | $          | 0.03 |   | $ | 0.20 |   | $ | 0.08 |   |
| Basic - pro  forma                                                                                                            |       | 0.03                                 |       | 0.03                               |       | 0.01 |   | 0.05 |   |
| Diluted - as  reported                                                                                                        |       | 0.11                                 |       | 0.03                               |       | 0.19 |   | 0.07 |   |
| Diluted -  pro forma                                                                                                          |       | 0.03                                 |       | 0.03                               |       | 0.01 |   | 0.05 |   |

 

Theweighted average per share fair values of option grants made for the threemonths ended June 30, 2005 and 2004 were $5.37 and $3.38,respectively.  The weighted average pershare fair values of option grants made for the six months ended June 30,2005 and 2004 were $5.97 and $2.91, respectively.  The fair values of the options granted wereestimated as of the grant date using the Black- Scholes option-pricing modelbased on the following weighted average assumptions:

 
| ** **               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **               | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Estimated  option life   |       | 10 years                             |       | 10 years                           |       | 10 years |   | 10 years |   |
| Risk free  interest rate |       | 4.15                                 | %          | 4.79                               | %          | 4.26 | % | 4.00 | % |
| Expected  volatility     |       | 43.11                                | %          | 11.80                              | %          | 43.11 | % | 11.80 | % |
| Expected  dividend yield |       | 0.00                                 | %          | 0.00                               | %          | 0.00 | % | 0.00 | % |

 

There were options to purchase 425,176 and 919,911 shares of commonstock granted during the three and six months ended June 30, 2005,respectively.  Of those grants, 425,176and 911,911 immediately vested on the grant date for the three and six monthsended June 30, 2005, respectively.

 

9

----

 

Note 2

 

*Acquisition*

 

OnJune 9, 2005, the Company acquired Wilson/Bennett for $1.6 million in cashand 611,111 shares of its common stock. The primary shareholder ofWilson/Bennett at the time of its acquisition by the Company was, and continuesto be, a member of the Company’s Board of Directors.  The Company has entered into an employmentagreement with this person which ends on April 30, 2008, with automaticone-year renewals beginning on that date and each April 30 thereafterunless notice of non-renewal is provided by either party.

 

Thecommon stock utilized to complete this transaction is newly issued by theCompany, is not registered with the Securities and Exchange Commission (the “SEC”),and therefore cannot be sold until so registered or sold pursuant to anexemption from such registration.  Theowners of the shares will be permitted to resell them under Rule 144 under theSecurities Act after holding them for one year. The trading restriction will completely lapse after two years.  Because of this trading restriction, theCompany has valued for purchase accounting purposes the 611,111 restrictedshares at 89% of the fair market value of its unrestricted shares. Totalpurchase consideration paid, which includes direct costs to complete thetransaction, was $6.5 million with the common shares issued being valued at$4.9 million.

 

Theoperating results of Wilson/Bennett are included in the Company’s consolidatedoperating results and its investment services segment information since thedate of acquisition and are not separately material to consolidated operatingresults. The acquisition resulted in the recognition of the followingintangible assets which are being amortized on a straight-line basis over theperiods indicated:

 

Employment/non-competeagreement - $ 698,000 (4 years)

Trade name intangible - $46,000 (3 years)

Purchased customerrelationships - $ 1,858,000 (10 years)

 

Thetransaction also resulted in the recognition of goodwill of $3.5 million. TheCompany used the assistance of an independent valuation consultant to determinethe value assigned to identifiable amortizable intangibles. Goodwill will notbe amortized but will be reviewed, along with the other identified intangibles,for impairment when evidence of impairment exists or, at a minimum, on anannual basis.

 

Dueto the trading restriction described above, the Company has agreed to providecertain demand registration rights with respect to the 611,111 common sharesissued. The owners of these shares have the right to make one written requestto the Company for the registration of one-third of the shares under theSecurities Act of 1933, as amended, to permit the resale of the shares.  In the event that a change of control of theCompany occurs, or the Company’s employment of its current chief executiveofficer terminates, both as described in a registration rights agreement, thenthe registration rights would cover all the shares.  The Company has the option to repurchase anysuch shares following the receipt of a written request for registration fromthe shareholders.  The purchase price hasbeen reduced by the estimated cost to register these shares with the SEC.

 

Note 3

 

*Segment Information*

 

Prior to July 7, 2004, the Company operated and reported twobusiness segments, commercial banking and investment services.  As of July 7, 2004, the Company beganoperating in a third business segment, mortgage banking, with the completion ofits acquisition of George Mason.  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 also provides customers with several choicesof deposit

 

10

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products including demand deposit accounts, savings accounts and certificatesof deposit.  The mortgage banking segmentengages primarilyin the origination and acquisition of residential mortgages for sale into thesecondary market on a best efforts basis. The investment services segment provides advisory services tobusinesses and individuals, including financial planning and retirement/estateplanning.  Wilson/Bennett is included inthe investment services segment since the date of its acquisition, June 9,2005.

 

Information about the reportable segments and reconciliation of thisinformation to the consolidated financial statements at and for the three andsix months ended June 30, 2005 and 2004, are as follows:

 

11

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**(Dollars in thousands)**

 

**Cardinal Financial Corporation and Subsidiaries**

**SegmentReporting at and for the Three and Six Months Ended June 30, 2005 and 2004**

**(Dollars in thousands)**

**(Unaudited)**

 

**At and forthe Three Months Ended June 30, 2005:**

 
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 7,697      |         | $          | 1,632          |       | $                | —     |       | $          | —           |       | $ | (205 | ) | $ | 9,124 |   |
| Provision  for loan losses  |       | 820            |       | —       |       | —         |       | —           |       | —     |       | 820              |       |
| Non-interest  income        |       | 470            |       | 5,505        |       | 291            |       | —           |       | 9          |       | 6,275            |       |
| Non-interest  expense       |       | 5,872          |       | 4,426        |       | 324            |       | —           |       | 499        |       | 11,121           |       |
| Provision  for income taxes |       | 453            |       | 960          |       | (17            | )          | —           |       | (230       | )          | 1,166            |       |
| Net income  (loss)          |       | $              | 1,022      |         | $          | 1,751          |       | $                | (16        | )          | $          | —           |       | $ | (465 | ) | $ | 2,292 |   |
|                        |       |           |       |         |       |           |       |             |       |       |       |             |       |
| Total Assets                |       | $              | 1,310,707  |         | $          | 495,017        |       | $                | 7,228      |       | $          | (511,046         | )          | $ | 165,331 |   | $ | 1,467,237 |   |

 

**At and forthe Three Months Ended June 30, 2004:**

 
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 4,976      |         | $          | —         |       | $                | —     |       | $          | —           |       | $ | 22 |   | $ | 4,998 |   |
| Provision  for loan losses  |       | 314            |       | —       |       | —         |       | —           |       | —     |       | 314              |       |
| Non-interest  income        |       | 406            |       | —       |       | 158            |       | —           |       | —     |       | 564              |       |
| Non-interest  expense       |       | 3,728          |       | —       |       | 185            |       | —           |       | 385        |       | 4,298            |       |
| Provision  for income taxes |       | 448            |       | —       |       | (8             | )          | —           |       | (124       | )          | 316              |       |
| Net income  (loss)          |       | $              | 892        |         | $          | —         |       | $                | (19        | )          | $          | —           |       | $ | (239 | ) | $ | 634 |   |
|                        |       |           |       |         |       |           |       |             |       |       |       |             |       |
| Total Assets                |       | $              | 804,041    |         | $          | —         |       | $                | 701        |       | $          | (85,553          | )          | $ | 90,833 |   | $ | 810,022 |   |

 

**At and forthe Six Months Ended June 30, 2005:**

 
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 14,437     |         | $          | 2,943          |       | $                | —     |       | $          | —           |       | $ | (434 | ) | $ | 16,946 |   |
| Provision  for loan losses  |       | 1,369          |       | —       |       | —         |       | —           |       | —     |       | 1,369            |       |
| Non-interest  income        |       | 845            |       | 10,145       |       | 450            |       | —           |       | 17         |       | 11,457           |       |
| Non-interest  expense       |       | 11,465         |       | 8,376        |       | 545            |       | —           |       | 830        |       | 21,216           |       |
| Provision  for income taxes |       | 831            |       | 1,539        |       | (38            | )          | —           |       | (417       | )          | 1,915            |       |
| Net income  (loss)          |       | $              | 1,617      |         | $          | 3,173          |       | $                | (57        | )          | $          | —           |       | $ | (830 | ) | $ | 3,903 |   |
|                        |       |           |       |         |       |           |       |             |       |       |       |             |       |
| Total Assets                |       | $              | 1,310,707  |         | $          | 495,017        |       | $                | 7,228      |       | $          | (511,046         | )          | $ | 165,331 |   | $ | 1,467,237 |   |

 

**At and forthe Six Months Ended June 30, 2004:**

 
| ** **                  | ** ** | **Commercial** | ** ** | **Mortgage** | ** ** | **Investment** | ** ** | **Intersegment** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | **Banking**    | ** ** | **Banking**  | ** ** | **Services**   | ** ** | **Elimination**  | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
| Net interest  income        |       | $              | 9,777      |         | $          | —         |       | $                | —     |       | $          | —           |       | $ | 54 |   | $ | 9,831 |   |
| Provision  for loan losses  |       | 388            |       | —       |       | —         |       | —           |       | —     |       | 388              |       |
| Non-interest  income        |       | 1,106          |       | —       |       | 336            |       | —           |       | —     |       | 1,442            |       |
| Non-interest  expense       |       | 7,779          |       | —       |       | 424            |       | —           |       | 651        |       | 8,854            |       |
| Provision  for income taxes |       | 910            |       | —       |       | (30            | )          | —           |       | (202       | )          | 678              |       |
| Net income  (loss)          |       | $              | 1,806      |         | $          | —         |       | $                | (58        | )          | $          | —           |       | $ | (395 | ) | $ | 1,353 |   |
|                        |       |           |       |         |       |           |       |             |       |       |       |             |       |
| Total Assets                |       | $              | 804,041    |         | $          | —         |       | $                | 701        |       | $          | (85,553          | )          | $ | 90,833 |   | $ | 810,022 |   |

 

12

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At June 30, 2005, the Company did not have any operating segmentsother than those reported.  Parentcompany financial information is included in the “Other” category andrepresents an overhead function rather than an operating segment.  The parent company’s most significant assetsare its net investments in its subsidiaries. The parent company’s net interest income is comprised of interest incomefrom short-term investments and interest expense on trust preferredsecurities.  The parent company’snon-interest expense is mostly non-allocable executive salaries andprofessional services related to the Company’s regulatory requirements.

 

Note 4

 

*Earnings Per Share*

 

The following is the calculation of basic and diluted earnings pershare for the three and six months ended June 30, 2005 and 2004. Stockoptions outstanding at June 30, 2005 and 2004 were 2,076,413 and1,048,545, respectively.  Stock optionsissued that were not included in the calculation of diluted earnings per sharebecause the exercise prices were greater than the average market price were224,891 and 10,000 for the three months ended June 30, 2005 and 2004,respectively.  Stock options issued thatwere not included in the calculation of diluted earnings per share because theexercise prices were greater than the average market price were 283,154 and10,000 for the six months ended June 30, 2005 and 2004, respectively.

 
| **(Dollars in thousands,**                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **except share and per share data)**         | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  available to common shareholders |       | $                                    | 2,292      |                               | $          | 634 |   | $ | 3,903 |   | $ | 1,353 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Weighted  average common shares - basic      |       | 21,096,617                           |       | 18,401,199                         |       | 19,817,872 |   | 17,931,094 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Weighted  average common shares - diluted    |       | 21,321,508                           |       | 18,797,570                         |       | 20,101,026 |   | 18,326,609 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  common share - basic           |       | $                                    | 0.11       |                               | $          | 0.03 |   | $ | 0.20 |   | $ | 0.08 |   |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Earnings per  common share - diluted         |       | $                                    | 0.11       |                               | $          | 0.03 |   | $ | 0.19 |   | $ | 0.07 |   |

 

Note 5

 

*Derivatives*

 

TheCompany accounts for derivatives and hedging activities in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and Hedging Activity*,as amended by SFAS No. 138, *Accounting for CertainDerivative Instruments and Certain Hedging Activities,*and SFAS No.149*, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.*

 

13

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TheCompany utilizes forward sales commitments to economically hedge the interestrate risk inherent when entering into interest rate lock loan commitments andoriginating fixed-rate loans for sale. At June 30, 2005, the fair value of interest rate lock commitmentswith a notional value of $234.1 million was $(331,000), and the fair value offorward sale commitments with a notional value of $626.6 million was$357,000.  These derivatives are recordedin other assets and other liabilities on the consolidated statements ofcondition at their fair values.  Inaddition to these market value adjustments for open interest rate lock loancommitments and forward sale commitments at June 30, 2005, a basisadjustment of $(26,000) has been recorded related to the loans held for sale asof that date and is included in loans held for sale, net in the consolidatedstatements of condition.

 

Note 6

 

*Secondary Common Stock Offering*

 

TheCompany completed a secondary public offering of 5,175,000 shares of its commonstock during the quarter ended June 30, 2005. Of this amount, 4,500,000shares were sold on May 17, 2005 and an additional 675,000 shares were sold on June 6,2005 under the over-allotment option that the Company had granted to theunderwriters. Proceeds from these sales, less the underwriting discount andother issuance costs, totaled $39.8 million. The Company will utilize the netproceeds to support future growth and expansion and for general corporatepurposes. All of the shares sold in the offering were newly issued.

 

Note 7

 

*Goodwill and Other Intangibles*

 

Asnoted above, effective June 9, 2005, the Company completed its acquisitionof Wilson/Bennett in a cash and common stock transaction valued at $6.5million.  This transaction was accountedfor as a purchase and Wilson/Bennett’s assets and liabilities were recorded atfair value as of the purchase date.  Thistransaction resulted in the recognition of $3.5 million of goodwill andamortizable other intangible assets of $2.6 million.

 

Informationconcerning changes in other intangible assets and the related accumulatedamortization is as follows:

 
| ** **                         | ** ** | **Mortgage Banking**        | ** ** | **Investment Services**       | ** ** | **Total**                   | ** ** |
|------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| **(Dollars in thousands)**         | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Balance at December 31,  2004 |       | $                           | 1,781      |                          | $          | 49                          |       | $ | — |   | $ | — |   | $ | 1,781 |   | $ | 49 |   |
| Customer  relationship intangibles |       | —                      |       | 99                            |       | 1,858                       |       | 12 |   | 1,858 |   | 111 |   |
| Employment/non-compete  agreement  |       | —                      |       | —                        |       | 698                         |       | 10 |   | 698 |   | 10 |   |
| Trade name                         |       | —                      |       | —                        |       | 46                          |       | 1 |   | 46 |   | 1 |   |
| Balance at June 30,  2005     |       | $                           | 1,781      |                          | $          | 148                         |       | $ | 2,602 |   | $ | 23 |   | $ | 4,383 |   | $ | 171 |   |

 

14

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Theaggregate amortization expense for the three and six months ended June 30,2005 was $73,000 and $122,000, respectively. There was no amortization expense for the comparable periods of 2004.

 

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

 
| ** **              | ** ** | **(Dollars in thousands)** | ** ** |
|-------------------------|------------|----------------------------|------------|
| 2005 (last  six months) |       | $                          | 287        |   |
| 2006                    |       | 574                        |       |
| 2007                    |       | 574                        |       |
| 2008                    |       | 565                        |       |
| 2009                    |       | 460                        |       |
| 2010                    |       | 384                        |       |
|                         |            |                            |            |  |

 

Thechanges in the carrying amount of goodwill for year to date June 30, 2005are as follows:

 
| ** **                                           | ** ** | **Commercial  Banking** | ** ** | **Mortgage  Banking** | ** ** | **Investment  Services** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|--------------------------|------------|-----------|------------|
| Balance at December 31,  2004                   |       | $                       | 22         |                  | $          | 12,941                   |       | $         | —     |   | $ | 12,963 |   |
| Goodwill  attributable to Wilson/Bennett acquisition |       | —                  |       | —                |       | 3,502                    |       | 3,502     |       |
| Balance at June 30,  2005                       |       | $                       | 22         |                  | $          | 12,941                   |       | $         | 3,502      |   | $ | 16,465 |   |

 

15

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**Item 2****.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

The following presents management’s discussionand analysis of our consolidated financial condition at June 30, 2005 and December 31,2004 and the unaudited results of our operations for the three and six months periodsended June 30, 2005 and 2004.  Thisdiscussion should be read in conjunction with our unaudited consolidatedfinancial statements and the notes thereto appearing elsewhere in this reportand the audited financial statements and the notes to financial statements includedin our Annual Report on Form 10-K for the year ended December 31, 2004.

 

**Overview**

 

**Cardinal Financial Corporation, a locally managed financialholding company headquartered in Tysons Corner, Virginia, is committed toproviding superior customer service, a diversified mix of financial productsand services, and convenient banking to our retail and business consumers.  We own Cardinal Bank (the “Bank”), a Virginiastate-chartered community bank, Cardinal Wealth Services, Inc., an investmentservices subsidiary, and Wilson/Bennett Capital Management, Inc. (“Wilson/Bennett”),an Alexandria, Virginia based asset management firm acquired in June 2005.  Through these three subsidiaries and GeorgeMason Mortgage, LLC (“George Mason”), a mortgage banking subsidiary of CardinalBank, we offer a wide range of traditional banking products and services toboth our commercial and retail customers. Our commercial relationship managers focus on attracting small andmedium-sized businesses as well as government contractors, commercial real estatedevelopers and builders and professionals such as physicians, accountants andattorneys.  We have twenty retail bank officelocations and provide competitive retail products and services.  We complement our core banking operations byoffering a full range of investment products and services to our customersthrough our third-party brokerage relationship with Raymond James FinancialServices, Inc. and asset management services through Wilson/Bennett.**

 

On July 7,2004, we acquired George Mason from United Bank – Virginia, a wholly ownedsubsidiary of United Bankshares, Inc. in a cash transaction for $17.0million.  This transaction resulted inthe recognition of $12.9 million of goodwill and $1.7 million of amortizableintangibles.  This transaction was accountedfor as a purchase, and George Mason’s assets and liabilities were recorded at theirfair values as of the purchase date.  GeorgeMason’s operating results are included in our consolidated results since theacquisition date.  George Mason, based inFairfax, Virginia, engages primarily in the origination and acquisition ofresidential mortgages for sale into the secondary market on a best effortsbasis through eight branches located throughout the metropolitan Washingtonregion.  George Mason has approximately200 employees and does business in eight states, including Virginia, Marylandand the District of Columbia.  GeorgeMason is one of the largest residential mortgage originators in the greaterWashington metropolitan area, reporting originations of over $3.5 billion in2004 and $4.5 billion in 2003.  GeorgeMason’s originations for the first six months of 2005 were $2.0 billion.  George Mason’s primary sourcesof revenue include net interest income earned on loans

 

16

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held for sale, gain on the sale of loans held for sale and contractualmanagement fees earned relating to services provided to other mortgagecompanies owned by local home builders. Loans are made pursuant to purchase commitments and are sold servicingreleased.

 

In July 2004, we formed a wholly-ownedsubsidiary, Cardinal Statutory Trust I, for the purpose of issuing $20.0million of floating rate junior subordinated deferrable interest debentures (“trustpreferred securities”).  These trustpreferred securities are due in 2034 and pay interest at a rate equal to LIBOR(London Interbank Offered Rate) plus 2.40%, which adjusts quarterly.  These securities are redeemable at a premiumthrough March 2008 and at par thereafter. We have guaranteed payment of these securities.  The $20.6 million payable by us to CardinalStatutory Trust I is included in other borrowed funds in the consolidated statementsof condition since Cardinal Statutory Trust I is an unconsolidated subsidiaryas we are not the primary beneficiary of this entity.  We utilized the proceeds from the issuance ofthe trust preferred securities to make a capital contribution into the Bank.

 

On June 9, 2005, we acquired Wilson/Bennett.  We acquired Wilson/Bennett for total considerationof $6.5 million, which consisted of a payment of $1.6 million in cash and theissuance of 611,111 shares of our common stock valued at $4.9 million.  We believe that the Wilson/Bennettacquisition furthers our strategy of enhancing fee income and diversifying ourrevenue stream and the services we deliver to our customers.  Wilson/Bennett had approximately 460institutional and personal clients and approximately $210 million of assetsunder management at June 30, 2005. Wilson/Bennett utilizes a value-orientedinvestment approach that focuses on large capitalization stocks. Wilson/Bennett’s2004 unaudited revenues were approximately $1.4 million.  We anticipate that the acquisition ofWilson/Bennett will not have a material impact on our 2005 earnings.

 

Net interest income is ourprimary source of revenue.  We definerevenue as net interest income plus non-interest income.  As discussed further in our interest ratesensitivity section, we manage our balance sheet and interest rate risk to maximize,and concurrently stabilize, net interest income.  We do this by monitoring the spread betweenthe interest rates earned on interest-earnings assets and the interest ratespaid on interest-bearing liabilities.  Weattempt to minimize our exposure to interest rate risk, but are unable toeliminate it entirely.  In addition tomanagement of interest rate risk, we analyze our loan portfolio for exposure tocredit risk.  Loan defaults andforeclosures are unavoidable in the banking industry and we try to limit our exposureto this risk by carefully underwriting and monitoring our extensions ofcredit.  In addition to net interestincome, non-interest income is an increasingly important source of revenue forus and includes service charges on deposits and loans, investment fee incomeand gains on sales on investment securities available-for-sale, gains on salesof loans held for sale, and management fee income.  Our acquisition of George Mason in July 2004has resulted in non-interest income becoming a larger component of our totalrevenues, and we anticipate that the acquisition of Wilson/Bennett will furthercontribute to this trend.

 

**Our business strategy is to grow through geographicexpansion while maintaining strong asset quality and achieving sustainedprofitability.  We completed a secondarycommon stock offering that raised $39.8 million in capital during the secondquarter of 2005.  This capital is beingused to support the continuing expansion of our branch office network andbalance sheet growth.  As a result ofthis increased capital and retained earnings, our legal lending limit increasedto $17.6 million as of June 30, 2005, which allows us to more quickly expandour commercial and real estate lending loan portfolios.  In addition, we expect to increase ourloan-to-deposit ratio and shift the mix of our earning assets to higheryielding loans.**

 

17

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**Critical Accounting Policies**

 

*General*

 

U. S. generallyaccepted accounting principles are complex and require management to applysignificant judgment to various accounting, reporting, and disclosurematters.  Management must use assumptionsand estimates when applying these principles where precise measurements are notpossible or practical.  These policiesare critical because they are highly dependent upon subjective or complexjudgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have asignificant impact on the consolidated financial statements.  Actual results could differ from initialestimates.

 

The accountingpolicies we view as critical are those relating to judgments, assumptions and estimatesregarding the determination of the allowance for loan losses, accounting foreconomic hedging activities, and the valuation of deferred tax assets.

 

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

 

**We maintain the allowance for loan losses ata level that represents management’s best estimate of known and inherent lossesin our loan portfolio.  Both the amountof the provision expense and the level of the allowance for loan losses areimpacted by many factors, including general economic conditions, actual andexpected credit losses, historical trends and specific conditions of individualborrowers.  As a part of our analysis, weuse comparative peer group data and qualitative factors such as levels of andtrends in delinquencies and nonaccrual loans, national and local economictrends and conditions and concentrations of loans exhibiting similar riskprofiles to support our estimates.**

 

**Credit losses are an inherent part of ourbusiness and, although we believe the methodologies for determining theallowance for loan losses and the current level of the allowance are adequate,it is possible that there may be unidentified losses in the portfolio at June 30,2005 that may become evident at a future date pursuant to additional analysisor regulatory comment.  Additionalprovisions for such losses, if necessary, would be recorded in the commercialbanking or mortgage banking segment, as appropriate, and would negativelyimpact earnings.**

 

For purposes of our analysis, we categorizeour loans into one of five categories: commercial and industrial, commercial real estate (includingconstruction), home equity lines of credit, residential mortgages, andconsumer.  In the absence of historicalloss factors, peer group loss factors are applied to all categories and areadjusted by the qualitative factors mentioned above.  The indicated loss factors resulting fromthis analysis are applied to each of the loan categories to determine anallowance level for each of the five categories of loans.  In addition, we individually assign lossfactors to all loans that have been identified as having loss attributes, asindicated by deterioration in the financial condition of the borrower or adecline in underlying collateral value if the loan is collateral dependent.  Since we have limited historical data onwhich to base loss factors for classified loans, we apply, in accordance withregulatory guidelines, a 5% loss factor to all loans classified as specialmention, a 15% loss factor to all loans classified as substandard and a 50%loss factor to all loans classified as doubtful.  Loans classified as loss loans are fullyreserved or charged off.

 

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*Hedging*

 

We account for our derivatives and hedgingactivities in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 133, *Accounting for Derivative Instruments and HedgingActivity*, as amended by SFAS No. 138, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities,*andSFAS No. 149*, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.*

 

In the normal course of our mortgage bankingoperations at George Mason, we enter into contractual commitments, includingloan commitments and rate lock commitments to extend credit to financeresidential properties.  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 on these commitments and subsequently closedloans if interest rates change between the time of the interest rate lock andthe delivery of the loan to the investor. Loan commitments related to mortgage loans that are intended to be soldare considered derivatives in accordance with the guidance of SEC StaffAccounting Bulletin No. 105, *Application of AccountingPrinciples to Loan Commitments*. Accordingly, the fair value of these derivatives as of the end of thereporting period has been determined through an analysis of changes in marketinterest rates from the interest rate lock date and loan closing date andexpectations of pipeline fallout.

 

To mitigate the effect of the interest rate riskinherent in providing rate lock commitments, we economically hedge eachindividual commitment by entering into best efforts delivery forward loan salecontracts.  These forward contracts aremarked to market through earnings and are not designated as accounting hedgesunder SFAS No. 133.  The fair values ofthe loan commitments and the forward sales contracts generally move in oppositedirections and, accordingly, the impact of changes in these valuations on netincome during the loan commitment period is generally inconsequential.

 

Although the forward loan sale contracts serve as aneconomic hedge of interest rate risk from holding fixed-rate loans held forsale, these forward contracts have not been designated as accounting hedgesunder SFAS No. 133 and, accordingly, loans held for sale are accounted for atthe lower of cost or market in accordance with SFAS No. 65, *Accounting for Certain Mortgage Banking Activities.*

 

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

#### ** **

We record a provision for income tax expense based on theamounts of current taxes payable or refundable and the change in net deferredtax assets or liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effectsof differing carrying values of assets and liabilities for tax and financialstatement purposes that will reverse in future periods.  When substantial uncertainty existsconcerning the recoverability of a deferred tax asset, the carrying value ofthe asset is reduced by a valuation allowance. The amount of any valuation allowance established is based upon anestimate of the deferred tax asset that is probable of recovery.  Increases or decreases in the valuationallowance result in corresponding increases or decreases to the provision forincome taxes.

 

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

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, *Share-BasedPayment:  An Amendment of FASB Statements123 and 95*(“FAS 123R”)*.*  This statement requires that companiesrecognize in the income statement the grant-date

 

19

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fairvalue of stock options and other equity-based compensation.  It is required to be applied by us beginning January 1,2006.  This statement requires that stockawards be classified as either an equity award or a liability award.  Equity classified awards are valued as of thegrant date using either an observable market price or a valuation methodology.  Liability classified awards are valued atfair value as of each reporting date.  Weintend to adopt FAS 123R using the modified prospective application methodwhich requires, among other things, that we recognize compensation cost for allawards outstanding at January 1, 2006 for which the requisite service hasnot been rendered.  We estimate that thisnew standard will result in an increase in pretax expense of approximately$72,000 quarterly and $288,000 annually in 2006 based on the current stockoptions outstanding.  Additional expensewould be recorded for any future stock option grants.

 

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

 

Netincome for the three months ended June 30, 2005 and 2004 was $2.3 millionand $634,000, respectively, an increase of $1.7 million, or 262%.  Net income for the six months ended June 30,2005 and 2004 was $3.9 million and $1.4 million, respectively, an increase of$2.6 million, or 188%.  The increase innet income for the three months ended June 30, 2005 compared to sameperiod of 2004 was primarily a result of increased net interest income of $4.1million and non-interest income of $5.7 million, offset by increases innon-interest expense of $6.8 million.  Theincrease in net income for the six months ended June 30, 2005 compared tothe same period of 2004 was also primarily a result of increased net interestincome of $7.1 million and non-interest income of $10.0 million, offset byincrease in non-interest expense of $12.4 million.  In addition, the 2005 results included theresults of operations of George Mason, which were not included in the three andsix months ended June 30, 2004 results since George Mason was acquired on July 7,2004.  Net income attributable to GeorgeMason for the three and six months ended June 30, 2005 was $1.8 millionand $3.2 million, respectively.

 

Basic and diluted earnings per share were both$0.11 for the three months ended June 30, 2005.  For the three months ended June 30, 2004,basic and diluted earnings per share were $0.03.  Weighted average fully diluted sharesoutstanding for the three months ended June 30, 2005 were 21,321,508compared to 18,797,570 for the three months ended June 30, 2004.  Basic and diluted earnings per share were$0.20 and $0.19, respectively, for the six months ended June 30,2005.  Basic and diluted earnings pershare were $0.08 and $0.07, respectively, for the six months ended June 30,2004.  Weighted average fully dilutedshares outstanding for the six months ended June 30, 2005 were 20,101,026compared to 18,326,609 for the six months ended June 30, 2004.

 

Return on average assets for the three monthsended June 30, 2005 and 2004 was 0.70% and 0.35%, respectively.  Return on average assets for the six monthsended June 30, 2005 and 2004 was 0.64% and 0.39%, respectively.  Return on average equity for the three monthsended June 30, 2005 and 2004 was 7.61% and 2.76%, respectively.  Return on average equity for the six monthsended June 30, 2005 and 2004 was 7.16% and 2.95%, respectively.

 

Net interest income represents the differencebetween interest and fees earned on interest earning assets and the interestpaid on deposits and other interest bearing liabilities.  The level of net interest income is impactedprimarily by variations in the volume and mix of these assets and liabilities,as well as changes in interest rates. Net interest income for the three months ended June 30, 2005 and2004 was $9.1 million and $5.0 million, respectively, a period-to-periodincrease of $4.1 million, or 82.6%.  Netinterest income for the six months ended June 30, 2005 and 2004 was $16.9million and $9.8 million, respectively, an increase of $7.1 million, or 72.4%.

 

20

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The increase in net interestincome was primarily the result of the increase in the average volume of loansreceivable and loans held for sale compared with the same periods of 2004.  These increases were funded through theincreases in total deposits and other borrowed funds.

 

Our netinterest margin for the three months ended June 30, 2005 and 2004 was 2.91% and2.82%, respectively.  Our net interestmargin for the six months ended June 30, 2005 and 2004 was 2.88% and 2.90%,respectively.  This compared to a netinterest margin of 2.72% for the year ended December 31, 2004.  The increase in the net interest margin forthe three months ended June 30, 2005 compared to the same period in 2004, was aresult of a higher volume of loans receivable and loans held for sale at anincreased rate of interest earned compared with the interest rate paid on theincreased volume of deposits and other borrowed funds primarily due to theoperations of George Mason in 2005. We remain asset sensitive and thereforeanticipate that net interest margin will improve in a rising rateenvironment.  Tables 1 through 4 presentan analysis of average earning assets, interest bearing liabilities and demanddeposits with related components of interest income and interest expense.

 

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

ThreeMonths Ended June 30, 2005, 2004 and 2003

(Dollarsin thousands)

 
| ** **                                               | ** ** | **2005**             | ** ** | **2004**                       | ** ** | **2003** |       |
|----------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** |   |
| **Assets**                                               |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $                    | 66,766     |                           | $          | 954      |       | 5.72 | % | $ | 57,385 |   | $ | 755 |   | 5.26 | % | $ | 50,683 |   | $ | 817 |   | 6.45 | % |
| Real estate -  commercial                                |       | 246,548              |       | 3,891                          |       | 6.31     | %          | 151,236 |   | 2,340 |   | 6.19 | % | 114,892 |   | 2,032 |   | 7.07 | % |
| Real estate -  construction                              |       | 68,402               |       | 1,145                          |       | 6.70     | %          | 45,947 |   | 638 |   | 5.55 | % | 14,800 |   | 214 |   | 5.78 | % |
| Real estate -  residential                               |       | 108,400              |       | 1,451                          |       | 5.35     | %          | 42,028 |   | 581 |   | 5.53 | % | 37,211 |   | 604 |   | 6.49 | % |
| Home equity lines                                        |       | 64,678               |       | 806                            |       | 4.98     | %          | 51,027 |   | 407 |   | 3.20 | % | 31,890 |   | 263 |   | 3.31 | % |
| Consumer                                                 |       | 4,931                |       | 87                             |       | 7.06     | %          | 9,336 |   | 145 |   | 6.21 | % | 9,099 |   | 170 |   | 7.49 | % |
| Total loans                                              |       | 559,725              |       | 8,334                          |       | 5.96     | %          | 356,959 |   | 4,866 |   | 5.45 | % | 258,575 |   | 4,100 |   | 6.34 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                                |       | 387,890              |       | 4,657                          |       | 4.80     | %          | 468 |   | 5 |   | 4.27 | % | — |   | — |   | 0.00 | % |
| Investment  securities available-for-sale                |       | 160,006              |       | 1,532                          |       | 3.83     | %          | 181,147 |   | 1,553 |   | 3.43 | % | 199,129 |   | 1,614 |   | 3.24 | % |
| Investment  securities held-to-maturity                  |       | 130,982              |       | 1,253                          |       | 3.83     | %          | 157,827 |   | 1,478 |   | 3.75 | % | — |   | — |   | 0.00 | % |
| Other investments                                        |       | 6,515                |       | 73                             |       | 4.48     | %          | 4,566 |   | 46 |   | 4.03 | % | 2,576 |   | 31 |   | 4.81 | % |
| Federal funds  sold                                      |       | 10,279               |       | 77                             |       | 3.00     | %          | 8,586 |   | 19 |   | 0.90 | % | 14,458 |   | 42 |   | 1.16 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income       |       | 1,255,397            |       | 15,926                         |       | 5.07     | %          | 709,553 |   | 7,967 |   | 4.49 | % | 474,738 |   | 5,787 |   | 4.88 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earning assets:                            |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                                 |       | 10,110               |       |                           |       |     |       | 10,958 |   |   |   |   |   | 8,097 |   |   |   |   |   |
| Premises and  equipment, net                             |       | 17,333               |       |                           |       |     |       | 8,065 |   |   |   |   |   | 5,219 |   |   |   |   |   |
| Goodwill and  other intangibles, net                     |       | 17,622               |       |                           |       |     |       | 22 |   |   |   |   |   | 646 |   |   |   |   |   |
| Accrued interest  and other assets                       |       | 11,713               |       |                           |       |     |       | 5,335 |   |   |   |   |   | 4,070 |   |   |   |   |   |
| Allowance for  loan losses                               |       | (6,545               | )          |                           |       |     |       | (4,417 | ) |   |   |   |   | (3,483 | ) |   |   |   |   |
| Total assets                                             |       | $                    | 1,305,630  |                           |       |     |       |   | $ | 729,516 |   |   |   |   |   | $ | 489,287 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing liabilities:                         |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:                            |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 121,307              |       | 362                            |       | 1.19     | %          | 150,689 |   | 506 |   | 1.35 | % | 146,086 |   | 665 |   | 1.83 | % |
| Money markets                                            |       | 164,349              |       | 1,112                          |       | 2.71     | %          | 26,703 |   | 39 |   | 0.58 | % | 24,838 |   | 56 |   | 0.90 | % |
| Statement savings                                        |       | 9,157                |       | 25                             |       | 1.09     | %          | 7,583 |   | 12 |   | 0.63 | % | 5,382 |   | 10 |   | 0.73 | % |
| Certificates of  deposit                                 |       | 523,279              |       | 4,031                          |       | 3.08     | %          | 275,287 |   | 1,941 |   | 2.82 | % | 174,336 |   | 1,495 |   | 3.44 | % |
| Total interest -  bearing deposits                       |       | 818,092              |       | 5,530                          |       | 2.70     | %          | 460,262 |   | 2,498 |   | 2.18 | % | 350,642 |   | 2,226 |   | 2.55 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 202,803              |       | 1,272                          |       | 2.51     | %          | 94,650 |   | 471 |   | 2.00 | % | 28,563 |   | 117 |   | 1.64 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 1,020,895            |       | 6,802                          |       | 2.67     | %          | 554,912 |   | 2,969 |   | 2.15 | % | 379,205 |   | 2,343 |   | 2.48 | % |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 112,239              |       |                           |       |     |       | 80,991 |   |   |   |   |   | 67,737 |   |   |   |   |   |
| Other liabilities                                        |       | 51,955               |       |                           |       |     |       | 1,574 |   |   |   |   |   | 2,315 |   |   |   |   |   |
| Preferred  shareholders’ equity                     |       | —               |       |                           |       |     |       | — |   |   |   |   |   | 6,824 |   |   |   |   |   |
| Common  shareholders’ equity                        |       | 120,541              |       |                           |       |     |       | 92,039 |   |   |   |   |   | 33,206 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $                    | 1,305,630  |                           |       |     |       |   | $ | 729,516 |   |   |   |   |   | $ | 489,287 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income and net interest margin (2)         |       |                 |       | $                              | 9,124      |     | 2.91       | % |   |   | $ | 4,998 |   | 2.82 | % |   |   | $ | 3,444 |   | 2.90 | % |
|                                                          |            |                      |            |                                |            |          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Non-accrual loans are included in average balances and do not have amaterial effect on the average yield. Interest income on non-accruing loans was not material for the quarterspresented.

(2)          We do not have investments that have tax benefit attributes; therefore,there are no tax equivalent adjustments to our net interest income.

 

21

----

 

**Rate and Volume Analysis**

ThreeMonths Ended June 30, 2005, 2004 and 2003

(Dollarsin thousands)

 
| ** **                               | ** ** | **Three Months Ended June 30,  2005 Compared to 2004** | ** ** | **Three Months Ended June 30,  2004 Compared to 2003** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                               | ** ** | **Average  Volume**                                    | ** ** | **Average  Rate**                                      | ** ** | **Increase  (Decrease)** | ** ** | **Average  Volume** | ** ** | **Average  Rate** | ** ** | **Increase  (Decrease)** | ** ** |
| **Interest  income:**                    | ** ** | ** **                                             | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Loans (1):                               |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                |       | $                                                      | 123        |                                                   | $          | 76 |   | $ | 199 |   | $ | 108 |   | $ | (170 | ) | $ | (62 | ) |
| Real estate - commercial                 |       | 1,475                                                  |       | 76                                                     |       | 1,551 |   | 643 |   | (335 | ) | 308 |   |
| Real estate - construction               |       | 312                                                    |       | 195                                                    |       | 507 |   | 450 |   | (26 | ) | 424 |   |
| Real estate - residential                |       | 918                                                    |       | (48                                                    | )          | 870 |   | 78 |   | (101 | ) | (23 | ) |
| Home equity lines                        |       | 108                                                    |       | 291                                                    |       | 399 |   | 158 |   | (14 | ) | 144 |   |
| Consumer                                 |       | (68                                                    | )          | 10                                                     |       | (58 | ) | 5 |   | (30 | ) | (25 | ) |
| Total loans                              |       | 2,868                                                  |       | 600                                                    |       | 3,468 |   | 1,442 |   | (676 | ) | 766 |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Loans held for sale, net                 |       | 4,139                                                  |       | 513                                                    |       | 4,652 |   | 5 |   | — |   | 5 |   |
| Investment securities available-for-sale |       | (181                                                   | )          | 160                                                    |       | (21 | ) | (146 | ) | 85 |   | (61 | ) |
| Investment securities held-to-maturity   |       | (251                                                   | )          | 26                                                     |       | (225 | ) | 1,478 |   | — |   | 1,478 |   |
| Other investments                        |       | 20                                                     |       | 7                                                      |       | 27 |   | 24 |   | (9 | ) | 15 |   |
| Federal funds sold                       |       | 4                                                      |       | 54                                                     |       | 58 |   | (17 | ) | (6 | ) | (23 | ) |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Total interest income                    |       | 6,599                                                  |       | 1,360                                                  |       | 7,959 |   | 2,786 |   | (606 | ) | 2,180 |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                    |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:             |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | (99                                                    | )          | (45                                                    | )          | (144 | ) | 20 |   | (179 | ) | (159 | ) |
| Money markets                            |       | 200                                                    |       | 873                                                    |       | 1,073 |   | 4 |   | (21 | ) | (17 | ) |
| Statement savings                        |       | 2                                                      |       | 11                                                     |       | 13 |   | 4 |   | (2 | ) | 2 |   |
| Certificates of deposit                  |       | 1,744                                                  |       | 346                                                    |       | 2,090 |   | 871 |   | (425 | ) | 446 |   |
| Total interest - bearing deposits        |       | 1,847                                                  |       | 1,185                                                  |       | 3,032 |   | 899 |   | (627 | ) | 272 |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 539                                                    |       | 262                                                    |       | 801 |   | 269 |   | 85 |   | 354 |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Total interest expense                   |       | 2,386                                                  |       | 1,447                                                  |       | 3,833 |   | 1,168 |   | (542 | ) | 626 |   |
|                                     |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                                                      | 4,213      |                                                   | $          | (87 | ) | $ | 4,126 |   | $ | 1,618 |   | $ | (64 | ) | $ | 1,554 |   |

 

----

(1)          Non-accrual loans are included in average balances and do not have amaterial effect on the average yield. Interest income on non-accruing loans wasnot material for the quarters presented.

(2)          We do not have investments that have tax benefit attributes; therefore,there are no tax equivalent adjustments to our net interest income.

 

22

----

 

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

SixMonths Ended June 30, 2005, 2004 and 2003

(Dollarsin thousands)

 
| ** **                                               | ** ** | **2005**             | ** ** | **2004**                       | ** ** | **2003**   | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate**   | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                               | ** ** | ** **           | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets:                                |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans (1):                                               |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial                               |       | $                    | 63,836     |                           | $          | 1,809      |       | 5.67 | % | $ | 58,356 |   | $ | 1,551 |   | 5.32 | % | $ | 51,866 |   | $ | 1,650 |   | 6.36 | % |
| Real estate -  commercial                                |       | 235,276              |       | 7,272                          |       | 6.18       | %          | 144,506 |   | 4,563 |   | 6.32 | % | 115,287 |   | 4,097 |   | 7.11 | % |
| Real estate -  construction                              |       | 68,683               |       | 2,262                          |       | 6.59       | %          | 43,778 |   | 1,204 |   | 5.50 | % | 11,894 |   | 351 |   | 5.90 | % |
| Real estate -  residential                               |       | 96,746               |       | 2,594                          |       | 5.36       | %          | 42,382 |   | 1,196 |   | 5.64 | % | 35,755 |   | 1,181 |   | 6.61 | % |
| Home equity lines                                        |       | 62,983               |       | 1,490                          |       | 4.77       | %          | 47,928 |   | 770 |   | 3.22 | % | 30,131 |   | 503 |   | 3.37 | % |
| Consumer                                                 |       | 5,417                |       | 187                            |       | 6.90       | %          | 9,855 |   | 308 |   | 6.25 | % | 9,367 |   | 351 |   | 7.56 | % |
| Total loans                                              |       | 532,941              |       | 15,614                         |       | 5.86       | %          | 346,805 |   | 9,592 |   | 5.53 | % | 254,300 |   | 8,133 |   | 6.40 | % |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for  sale, net                                |       | 338,730              |       | 8,015                          |       | 4.73       | %          | 301 |   | 7 |   | 4.65 | % | — |   | — |   | 0.00 | % |
| Investment  securities available-for-sale                |       | 156,974              |       | 2,962                          |       | 3.77       | %          | 161,637 |   | 2,824 |   | 3.50 | % | 189,640 |   | 3,292 |   | 3.47 | % |
| Investment  securities held-to-maturity                  |       | 133,450              |       | 2,561                          |       | 3.84       | %          | 153,922 |   | 2,828 |   | 3.67 | % | — |   | — |   | 0.00 | % |
| Other investments                                        |       | 5,847                |       | 127                            |       | 4.35       | %          | 4,100 |   | 84 |   | 4.10 | % | 2,216 |   | 55 |   | 4.96 | % |
| Federal funds  sold                                      |       | 10,718               |       | 138                            |       | 2.60       | %          | 10,366 |   | 47 |   | 0.90 | % | 13,983 |   | 80 |   | 1.14 | % |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets and interest income       |       | 1,178,660            |       | 29,417                         |       | 4.99       | %          | 677,131 |   | 15,382 |   | 4.54 | % | 460,139 |   | 11,560 |   | 5.02 | % |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earning assets:                            |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                                 |       | 6,336                |       |                           |       |       |       | 10,607 |   |   |   |   |   | 11,390 |   |   |   |   |   |
| Premises and  equipment, net                             |       | 17,167               |       |                           |       |       |       | 7,449 |   |   |   |   |   | 5,114 |   |   |   |   |   |
| Goodwill and  other intangibles, net                     |       | 16,070               |       |                           |       |       |       | 22 |   |   |   |   |   | 646 |   |   |   |   |   |
| Accrued interest  and other assets                       |       | 9,769                |       |                           |       |       |       | 6,274 |   |   |   |   |   | 4,266 |   |   |   |   |   |
| Allowance for  loan losses                               |       | (6,268               | )          |                           |       |       |       | (4,413 | ) |   |   |   |   | (3,440 | ) |   |   |   |   |
| Total assets                                             |       | $                    | 1,221,734  |                           |       |       |       |   | $ | 697,070 |   |   |   |   |   | $ | 478,115 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**           |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing liabilities:                         |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -  bearing deposits:                            |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest checking                                        |       | 130,184              |       | 790                            |       | 1.22       | %          | 153,106 |   | 1,034 |   | 1.35 | % | 142,602 |   | 1,303 |   | 1.84 | % |
| Money markets                                            |       | 104,021              |       | 1,282                          |       | 2.46       | %          | 25,586 |   | 75 |   | 0.59 | % | 25,481 |   | 125 |   | 0.99 | % |
| Statement savings                                        |       | 8,924                |       | 47                             |       | 1.05       | %          | 7,387 |   | 21 |   | 0.58 | % | 4,940 |   | 19 |   | 0.78 | % |
| Certificates of  deposit                                 |       | 538,096              |       | 8,088                          |       | 3.01       | %          | 256,425 |   | 3,650 |   | 2.85 | % | 173,796 |   | 3,019 |   | 3.50 | % |
| Total interest -  bearing deposits                       |       | 781,225              |       | 10,207                         |       | 2.63       | %          | 442,504 |   | 4,780 |   | 2.17 | % | 346,819 |   | 4,466 |   | 2.60 | % |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other borrowed  funds                                    |       | 178,328              |       | 2,264                          |       | 2.56       | %          | 84,098 |   | 771 |   | 1.84 | % | 21,798 |   | 190 |   | 1.76 | % |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities and interest expense |       | 959,553              |       | 12,471                         |       | 2.62       | %          | 526,602 |   | 5,551 |   | 2.11 | % | 368,617 |   | 4,656 |   | 2.55 | % |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                        |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                          |       | 108,084              |       |                           |       |       |       | 76,695 |   |   |   |   |   | 67,191 |   |   |   |   |   |
| Other liabilities                                        |       | 45,006               |       |                           |       |       |       | 1,889 |   |   |   |   |   | 1,953 |   |   |   |   |   |
| Preferred  shareholders’ equity                     |       | —               |       |                           |       |       |       | — |   |   |   |   |   | 6,824 |   |   |   |   |   |
| Common  shareholders’ equity                        |       | 109,091              |       |                           |       |       |       | 91,884 |   |   |   |   |   | 33,530 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity         |       | $                    | 1,221,734  |                           |       |       |       |   | $ | 697,070 |   |   |   |   |   | $ | 478,115 |   |   |   |   |   |
|                                                     |       |                 |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income and net interest margin (2)         |       |                 |       | $                              | 16,946     |       | 2.88       | % |   |   | $ | 9,831 |   | 2.90 | % |   |   | $ | 6,904 |   | 3.00 | % |

 

----

(1)          Non-accrual loans are included in average balances and do not have amaterial effect on the average yield. Interest income on non-accruing loans was not material for the periodspresented.

(2)          We do not have investments that have tax benefit attributes; therefore,there are no tax equivalent adjustments to our net interest income.

 

23

----

 

**Rate and Volume Analysis**

SixMonths Ended June 30, 2005, 2004 and 2003

(Dollarsin thousands)

 
| ** **                               | ** ** | **Six Months Ended June 30,  2005 Compared to 2004** | ** ** | **Six Months Ended June 30,  2004 Compared to 2003** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **Average  Volume**                                  | ** ** | **Average  Rate**                                    | ** ** | **Increase  (Decrease)** | ** ** | **Average  Volume** | ** ** | **Average  Rate** | ** ** | **Increase  (Decrease)** | ** ** |
| **Interest  income:**                    | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Loans (1):                               |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Commercial and industrial                |       | $                                                    | 146        |                                                 | $          | 112 |   | $ | 258 |   | $ | 206 |   | $ | (305 | ) | $ | (99 | ) |
| Real estate - commercial                 |       | 2,866                                                |       | (157                                                 | )          | 2,709 |   | 1,038 |   | (572 | ) | 466 |   |
| Real estate - construction               |       | 685                                                  |       | 373                                                  |       | 1,058 |   | 941 |   | (88 | ) | 853 |   |
| Real estate - residential                |       | 1,534                                                |       | (136                                                 | )          | 1,398 |   | 220 |   | (205 | ) | 15 |   |
| Home equity lines                        |       | 239                                                  |       | 481                                                  |       | 720 |   | 302 |   | (35 | ) | 267 |   |
| Consumer                                 |       | (138                                                 | )          | 17                                                   |       | (121 | ) | 22 |   | (65 | ) | (43 | ) |
| Total loans                              |       | 5,332                                                |       | 690                                                  |       | 6,022 |   | 2,729 |   | (1,270 | ) | 1,459 |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Loans held for sale, net                 |       | 7,870                                                |       | 138                                                  |       | 8,008 |   | 7 |   | — |   | 7 |   |
| Investment securities available-for-sale |       | (82                                                  | )          | 220                                                  |       | 138 |   | (490 | ) | 22 |   | (468 | ) |
| Investment securities held-to-maturity   |       | (376                                                 | )          | 109                                                  |       | (267 | ) | 2,828 |   | — |   | 2,828 |   |
| Other investments                        |       | 36                                                   |       | 7                                                    |       | 43 |   | 47 |   | (18 | ) | 29 |   |
| Federal funds sold                       |       | 2                                                    |       | 89                                                   |       | 91 |   | (20 | ) | (13 | ) | (33 | ) |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total interest income                    |       | 12,782                                               |       | 1,253                                                |       | 14,035 |   | 5,101 |   | (1,279 | ) | 3,822 |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                    |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest - bearing deposits:             |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest checking                        |       | (158                                                 | )          | (86                                                  | )          | (244 | ) | 102 |   | (371 | ) | (269 | ) |
| Money markets                            |       | 233                                                  |       | 974                                                  |       | 1,207 |   | 1 |   | (51 | ) | (50 | ) |
| Statement savings                        |       | 5                                                    |       | 21                                                   |       | 26 |   | 9 |   | (7 | ) | 2 |   |
| Certificates of deposit                  |       | 3,994                                                |       | 444                                                  |       | 4,438 |   | 1,457 |   | (826 | ) | 631 |   |
| Total interest - bearing deposits        |       | 4,074                                                |       | 1,353                                                |       | 5,427 |   | 1,569 |   | (1,255 | ) | 314 |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Other borrowed funds                     |       | 861                                                  |       | 632                                                  |       | 1,493 |   | 545 |   | 36 |   | 581 |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total interest expense                   |       | 4,935                                                |       | 1,985                                                |       | 6,920 |   | 2,114 |   | (1,219 | ) | 895 |   |
|                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net interest income (2)                  |       | $                                                    | 7,847      |                                                 | $          | (732 | ) | $ | 7,115 |   | $ | 2,987 |   | $ | (60 | ) | $ | 2,927 |   |

 

----

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

(2)          We do not have investments that have tax benefit attributes; therefore,there are no tax equivalent adjustments to our net interest income.

 

24

----

 

The provisionfor loan losses for the three months ended June 30, 2005 and 2004 was $820,000and $314,000, respectively.  For the sixmonths ended June 30, 2005 and 2004, the provision for loan losses was $1.4million and $388,000, respectively.  Theincreases in provision expense were a result of the net increase of $113.4million in the loan portfolio during the first six months of 2005.  The allowance for loan losses at June 30,2005 and December 31, 2004 was $7.2 million and $5.9 million,respectively.    Our allowance for loanloss ratio was 1.20% at each of June 30, 2005 and December 31, 2004.  We continued to experience strong loanquality with annualized net charged-off loans equal to 0.01% to total loans forthe six months ended June 30, 2005, compared to 0.06% for the same period of2004.  Non-performing loans were equal to0.04% and 0.11% of total loans at June 30, 2005 and December 31, 2004,respectively.  Additional information onthe allowance for loan losses, its allocation to the total loans receivableportfolio and information on nonperforming loans can be found in Tables 5, 6and 7.

 

**Allowance for Loan Losses**

SixMonths Ended June 30, 2005 and 2004

(Dollarsin thousands)

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Beginning balance, January 1 |       | $        | 5,878      |     | $          | 4,344 |   |
|                         |       |     |       |     |       |
| Provision for loan losses    |       | 1,369    |       | 388      |       |
|                         |       |     |       |     |       |
| Loans charged off:           |       |     |       |     |       |
| Commercial and industrial    |       | (120     | )          | (100     | )          |
| Consumer                     |       | (1       | )          | (4       | )          |
| Total loans charged off      |       | (121     | )          | (104     | )          |
|                         |       |     |       |     |       |
| Recoveries:                  |       |     |       |     |       |
| Commercial and industrial    |       | 76       |       | 3        |       |
| Consumer                     |       | 8        |       | 2        |       |
| Total recoveries             |       | 84       |       | 5        |       |
|                         |       |     |       |     |       |
| Net (charge offs) recoveries |       | (37      | )          | (99      | )          |
|                         |       |     |       |     |       |
| Ending balance, June 30      |       | $        | 7,210      |     | $          | 4,633 |   |

 
| ** **                                                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Loans:                                                      | ** ** | ** **         | ** ** | ** **             | ** ** |
| Balance at period end                                       |       | $                  | 603,257    |                   | $          | 489,896 |   |
| Allowance for loan losses to loans  receivable, net of fees |       | 1.20               | %          | 1.20                   | %          |
| Annualized net charge-offs to average loans  receivable     |       | 0.01               | %          | 0.02                   | %          |
|                                                             |            |                    |            |                        |            |  |  |

 

25

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**Allocation of the Allowance for Loan Losses**

AtJune 30, 2005 and December 31, 2004

(Dollarsin thousands)

 
| ** **                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Allocation**     | ** ** | **% of Total***        | ** ** | **Allocation** | ** ** | **% of Total*** | ** ** |
| Commercial and industrial       |       | $                  | 1,110      |                   | 10.92      | % | $ | 963 |   | 11.53 | % |
| Real estate - commercial        |       | 3,279              |       | 44.52                  | %          | 2,732 |   | 44.88 | % |
| Real estate - construction      |       | 699                |       | 10.59                  | %          | 768 |   | 14.18 | % |
| Real estate - residential       |       | 1,287              |       | 21.87                  | %          | 692 |   | 15.69 | % |
| Home equity lines               |       | 722                |       | 11.26                  | %          | 612 |   | 12.32 | % |
| Consumer                        |       | 113                |       | 0.84                   | %          | 111 |   | 1.40 | % |
|                            |       |               |       |                   |       |   |   |   |   |
| Total allowance for loan losses |       | $                  | 7,210      |                   | 100.00     | % | $ | 5,878 |   | 100.00 | % |

 

----

*Percentage of loan type to the total loan portfolio.

 

**Nonperforming Loans Receivable**

AtJune 30, 2005 and December 31, 2004

(Dollarsin thousands)

 
| ** **                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Nonaccruing loans                             |       | $                  | 234        |                   | $          | 547 |   |
|                                          |       |               |       |                   |       |
| Loans contractually past-due 90 days or  more |       | 36                 |       | —                 |       |
|                                          |       |               |       |                   |       |
| Troubled debt restructurings                  |       | —             |       | —                 |       |
| Total nonperforming loans receivable          |       | $                  | 270        |                   | $          | 547 |   |

 

26

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Non-interestincome includes, among other things, service charges on deposits and loans,gains on the sale of loans held for sale, investment fee income, and managementfee income, and continues to be an increasingly important factor in ouroperating results.  Non-interest incomefor the three months ended June 30, 2005 and 2004 was $6.3 million and$564,000, respectively, a period-to-period increase of $5.7 million.  Non-interest income for the six months endedJune 30, 2005 and 2004 was $11.5 million and $1.4 million, respectively, aperiod-to-period increase of $10.1 million. The increase in non-interest income was primarily attributable to theincreases in net gains on sales of loans by George Mason of $4.0 million and$7.6 million for the three and six months ended June 30, 2005, respectively,and increases in management fee income of $974,000 and $1.5 million for thethree and six months ended June 30, 2005, respectively. Management fee incomerepresents the income earned for services provided by George Mason to othermortgage banking companies owned by local home builders.  Gains on sales of loans include the grossgains on the sale of mortgage loans, net of origination costs.  Included in the gross gains on sale ofmortgage loans are any origination, underwriting, and discount points and otherfunding fees received and deferred at origination.  Costs when the loan closes include directcosts associated with origination, such as commissions and salaries for fundedloans and are deferred and subsequently recognized when the loan is sold.

 

27

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Service charges on depositaccounts increased $68,000 to $330,000 for the three months ended June 30,2005 compared to the same period of 2004. For the six months ended June 30, 2005, service charges on depositaccounts increased $108,000, to $610,000 compared to the same period of2004.  Loan service charge incomeincreased $529,000 to $618,000 for the three months ended June 30, 2005,compared to $89,000 for the same period of 2004.  These increases were primarily related to theoperations of George Mason in 2005.  Forthe six months ended June 30, 2005, loan service charges increased$959,000 to $1.2 million, compared to $285,000 for the same period of2004.  Investment fee income increased to$291,000 for the three months ended June 30, 2005 compared to $158,000 forthe same three month period of 2004.  Forthe six months ended June 30, 2005, investment fee income increased$114,000, to $450,000, compared to $336,000 for the same six month period of2004.

 

Non-interest expense includes salaries andbenefits, occupancy, professional fees, depreciation, data processing,telecommunications and miscellaneous expenses. Non-interest expense for the three months ended June 30, 2005 was$11.1 million, compared to $4.3 million for the same period of 2004, anincrease of $6.8 million.  For the sixmonths ended June 30, 2005, non-interest expense increased $12.4 millionto $21.2 million, compared to $8.9 million for the same six month period of2004.  The increases were attributable tothe acquisition of George Mason in July 2004 and our branch officeexpansion during the past twelve months. During the twelve months ended June 30, 2005, we opened sevenbranch banking facilities, including our twentieth branch, which is located inWoodbridge, Virginia, in June 2005.  Expenses related to the branch expansion are primarily represented inthe increases in our salaries and benefits expense, occupancy expense anddepreciation expense.  We expect non-interestexpense to continue to increase as we continue our branch expansion in2005.  We currently plan to open twoadditional branches during the remainder of 2005.  The acquisition of Wilson/Bennett in June 2005will also result in increased non-interest expense.

 

The effective tax rate for thesecond quarter of 2005 was 33.7%, compared to 33.3% for the same period of2004.  For the six months ended June 30,2005, the effective tax rate was 32.9% compared to 33.4% for the same period of2004.  The 2005 effective rate is basedon the estimated annual effective tax rate. We recorded a provision for income tax expense of $1.2 million and$316,000 for the three months ended June 30, 2005 and 2004,respectively.  For the six months ended June 30,2005 and 2004, provision for income tax expense was $1.9 million and $678,000,respectively.  For more information, see “CriticalAccounting Policies” above in this discussion.

 

**Statements of Condition**

 

Total assets were $1.47 billion at June 30,2005, compared to $1.21 billion at December 31, 2004, an increase of$255.7 million or 21.1%.  This growth wasdriven primarily by increases in loans held for sale and loans receivable, fundsreceived from deposits and the completion of our secondary offering during thesecond quarter of 2005.

 

Investmentsecurities were $279.1 million at June 30, 2005, compared to $289.5million at December 31, 2004, a decrease of $10.4 million.  The decrease was primarily attributable tosales and redemptions of bonds in the investment portfolio during the secondquarter of 2005.  The investmentportfolio consists of investment securities available-for-sale and investmentsecurities held-to-maturity.  Investmentsecurities held-to-maturity are those securities that we have the intent andability to hold to maturity and are carried at amortized cost.  Investment securities available-for-sale arethose securities that we intend to hold for an indefinite period of time, butnot necessarily until maturity.  Thesesecurities are carried at fair value and may be sold

 

28

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as part of an asset/liabilitystrategy, liquidity management, regulatory capital management or similarfactors.  At June 30, 2005,investment securities available-for-sale were $151.7 million and investmentsecurities held-to-maturity were $127.4 million.  See Table 8 for additional information on ourinvestment securities portfolio.  We haveallowed our securities portfolios to decrease from December 31, 2004 to June 30,2005 to help fund our loan demand.

 

**Investment Securities**

At June 30, 2005 and December 31,2004

(Dollarsin thousands)

 
| **Available-for-sale at  June 30, 2005**                      | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Average  Yield** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|--------------------|------------|
| Obligations of U.S. government-sponsored  agencies and enterprises |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 15,967     |            | $          | 15,910             |       | 4.32 | % |
| Five to ten years                                                  |       | 2,000               |       | 1,994           |       | 3.96               | %          |
| Total U.S. government-sponsored agencies                           |       | $                   | 17,967     |            | $          | 17,904             |       | 4.28 | % |
|                                                               |       |                |       |            |       |               |       |
| Mortgage-backed securities*                                        |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 6,420      |            | $          | 6,338              |       | 3.96 | % |
| Five to ten years                                                  |       | 8,682               |       | 8,556           |       | 3.93               | %          |
| After ten years                                                    |       | 118,843             |       | 116,941         |       | 4.06               | %          |
| Total mortgage-backed securities                                   |       | $                   | 133,945    |            | $          | 131,835            |       | 4.05 | % |
|                                                               |       |                |       |            |       |               |       |
| Treasury bonds                                                     |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 2,023      |            | $          | 1,998              |       | 2.63 | % |
| Total treasury bonds                                               |       | $                   | 2,023      |            | $          | 1,998              |       | 2.63 | % |
| Total investment securities  available-for-sale                    |       | $                   | 153,935    |            | $          | 151,737            |       | 4.05 | % |

 
| **Held-to-maturity at  June 30, 2005**                        | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Average  Yield** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|--------------------|------------|
| Obligations of U.S. government-sponsored  agencies and enterprises |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 9,500      |            | $          | 9,329              |       | 3.52 | % |
| Five to ten years                                                  |       | 13,019              |       | 12,942          |       | 4.37               | %          |
| After ten years                                                    |       | 2,999               |       | 2,982           |       | 4.22               | %          |
| Total U.S. government-sponsored agencies                           |       | $                   | 25,518     |            | $          | 25,253             |       | 4.04 | % |
|                                                               |       |                |       |            |       |               |       |
| Mortgage-backed securities*                                        |       |                |       |            |       |               |       |
| Five to ten years                                                  |       | $                   | 9,417      |            | $          | 9,351              |       | 4.05 | % |
| After ten years                                                    |       | 84,424              |       | 83,170          |       | 4.14               | %          |
| Total mortgage-backed securities                                   |       | $                   | 93,841     |            | $          | 92,521             |       | 4.13 | % |
|                                                               |       |                |       |            |       |               |       |
| Corporate bonds                                                    |       |                |       |            |       |               |       |
| After ten years                                                    |       | $                   | 8,005      |            | $          | 7,890              |       | 4.21 | % |
| Total corporate bonds                                              |       | $                   | 8,005      |            | $          | 7,890              |       | 4.21 | % |
| Total investment securities  held-to-maturity                      |       | $                   | 127,364    |            | $          | 125,664            |       | 4.12 | % |
|                                                               |       |                |       |            |       |               |       |
| Total investment securities                                        |       | $                   | 281,299    |            | $          | 277,401            |       | 4.08 | % |

 

----

* Based on contractual maturities.

 
| **Available-for-sale at  December 31, 2004**                  | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Average  Yield** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|--------------------|------------|
| Obligations of U.S. government-sponsored  agencies and enterprises |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 3,000      |            | $          | 2,947              |       | 3.33 | % |
| Five to ten years                                                  |       | 3,000               |       | 3,009           |       | 4.46               | %          |
| Total U.S. government-sponsored agencies                           |       | $                   | 6,000      |            | $          | 5,956              |       | 3.89 | % |
|                                                               |       |                |       |            |       |               |       |
| Mortgage-backed securities*                                        |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 2,161      |            | $          | 2,131              |       | 3.59 | % |
| Five to ten years                                                  |       | 14,662              |       | 14,603          |       | 3.96               | %          |
| After ten years                                                    |       | 128,477             |       | 126,846         |       | 3.97               | %          |
| Total mortgage-backed securities                                   |       | $                   | 145,300    |            | $          | 143,580            |       | 3.96 | % |
|                                                               |       |                |       |            |       |               |       |
| Treasury bonds                                                     |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 2,031      |            | $          | 2,018              |       | 2.63 | % |
| Total treasury bonds                                               |       | $                   | 2,031      |            | $          | 2,018              |       | 2.63 | % |
| Total investment securities  available-for-sale                    |       | $                   | 153,331    |            | $          | 151,554            |       | 3.94 | % |

 
| **Held-to-maturity at  December 31, 2004**                    | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Average  Yield** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|--------------------|------------|
| Obligations of U.S. government-sponsored  agencies and enterprises |       |                |       |            |       |               |       |
| One to five years                                                  |       | $                   | 6,500      |            | $          | 6,427              |       | 3.36 | % |
| Five to ten years                                                  |       | 16,018              |       | 15,901          |       | 4.28               | %          |
| After ten years                                                    |       | 2,999               |       | 2,962           |       | 4.22               | %          |
| Total U.S. government-sponsored agencies                           |       | $                   | 25,517     |            | $          | 25,290             |       | 4.03 | % |
|                                                               |       |                |       |            |       |               |       |
| Mortgage-backed securities*                                        |       |                |       |            |       |               |       |
| Five to ten years                                                  |       | $                   | 10,392     |            | $          | 10,406             |       | 3.83 | % |
| After ten years                                                    |       | 94,039              |       | 92,990          |       | 4.04               | %          |
| Total mortgage-backed securities                                   |       | $                   | 104,431    |            | $          | 103,396            |       | 4.02 | % |
|                                                               |       |                |       |            |       |               |       |
| Corporate bonds                                                    |       |                |       |            |       |               |       |
| After ten years                                                    |       | $                   | 8,005      |            | $          | 7,923              |       | 4.21 | % |
| Total corporate bonds                                              |       | $                   | 8,005      |            | $          | 7,923              |       | 4.21 | % |
| Total investment securities held-to-maturity                       |       | $                   | 137,953    |            | $          | 136,609            |       | 4.03 | % |
|                                                               |       |                |       |            |       |               |       |
| Total investment securities                                        |       | $                   | 291,284    |            | $          | 288,163            |       | 3.98 | % |

 

----

* Based on contractual maturities.

 

29

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Loans receivable, net of deferred fees and costs,increased by $113.4 million, or 23.1%, to $603.3 million at June 30, 2005from $489.9 million at December 31, 2004 (see Table 9 for details on theloans receivable portfolio). We experienced growth in our commercial andindustrial, commercial real estate, residential real estate and home equityloan portfolios.  We expect continuedgrowth within these loan categories over the next two quarters of 2005 due toour increased legal lending limit of $17.6 million and the volume of loans wehave scheduled for funding.  Real estate– construction loans decreased by $5.6 million or 8.1% and consumer loansdecreased by $1.8 or 25.8% from December 31, 2004 to June 30, 2005.  In addition, we had $475.1 million in loansheld for sale, net at June 30, 2005, compared to $365.5 million at December 31,2004, an increase of $109.6 million. Loans that are held for sale, net are valued at the lower of cost ormarket value.

 

**Loans Receivable**

AtJune 30, 2005 and December 31, 2004

(Dollarsin thousands)

 
| ** **                      | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------------|------------|
|                            |       |                   |       |                       |       |   |   |   |   |
| Commercial and industrial       |       | $                      | 65,934     |                       | 10.92      | % | $ | 56,512 |   | 11.53 | % |
| Real estate - commercial        |       | 268,735                |       | 44.52                      | %          | 220,012 |   | 44.88 | % |
| Real estate - construction      |       | 63,885                 |       | 10.59                      | %          | 69,535 |   | 14.18 | % |
| Real estate - residential       |       | 132,029                |       | 21.87                      | %          | 76,932 |   | 15.69 | % |
| Home equity lines               |       | 67,974                 |       | 11.26                      | %          | 60,408 |   | 12.32 | % |
| Consumer                        |       | 5,055                  |       | 0.84                       | %          | 6,816 |   | 1.40 | % |
|                            |       |                   |       |                       |       |   |   |   |   |
| Gross loans                     |       | $                      | 603,612    |                       | 100.00     | % | $ | 490,215 |   | 100.00 | % |
|                            |       |                   |       |                       |       |   |   |   |   |
| Add: net deferred (fees) costs  |       | (355                   | )          |                       |       | (319 | ) |   |   |
| Less: allowance for loan losses |       | (7,210                 | )          |                       |       | (5,878 | ) |   |   |
|                            |       |                   |       |                       |       |   |   |   |   |
| Loans receivable, net           |       | $                      | 596,047    |                       |       |   | $ | 484,018 |   |   |   |

 

30

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Total deposits increased $178.3 million, or21.6%, to $1.00 billion at June 30, 2005, compared to $824.2 million at December 31,2004 (see Table 10 for details on certificates of deposit with balances of$100,000 or more).  We experiencedincreases in non-interest bearing demand deposits, money market and savingsdeposits and certificates of deposit. The increase in deposits is a result of new customers from our branchexpansion, competitive deposit pricing of our Monster Money Market account andincreased advertising efforts.  OurMonster Money Market promotion, which began earlier this year, is arelationship account that offers an adjustable interest rate, currently 3.14%,for balances over $25,000.  Deposits inour Monster Money Market product at June 30, 2005 totaled $197.0million.  Brokered certificates ofdeposit decreased $19.7 million to $47.0 million at June 30, 2005 comparedto $86.7 million at December 31, 2004. Additional information on brokered certificates of deposit can be foundin “Liquidity” below.

 

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

AtJune 30, 2005

(Dollars in thousands)

 
| **Maturities:**                       |   |    |    |
|---------------------------------------|--------|---------|---------|
| Three months or less                  |   | $       | 32,621  |   |
| Over three months through six months  |   | 29,307  |    |
| Over six months through twelve months |   | 22,102  |    |
| Over twelve months                    |   | 136,824 |    |
|                                  |   | $       | 220,854 |   |

 

31

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Other borrowed funds decreased$37.7 million to $163.3 million at June 30, 2005, compared to $201.1million at December 31, 2004.  Wehad Federal Home Loan Bank advances that matured during the first six months of2005 and were able to replace this funding source with other short term fundingand as a result of our deposit growth. Table 11 provides information on our short-term borrowings.

 

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

AtJune 30, 2005

(Dollarsin thousands)

 
| ** **                                                   | ** ** | ** **          | ** ** | **Date Amount** | ** ** | ** **        | ** ** | ** **      | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|
| **Advance Date**                                             | ** ** | **Term of Advance** | ** ** | **Due**         | ** ** | **Interest Rate** | ** ** | **Outstanding** | ** ** |
| Jan-04                                                       |       | 18 months           |       | Jul-05          |       | 1.83              | %          | $               | 5,000      |   |
| Mar-03                                                       |       | 3 years             |       | Mar-06          |       | 2.33              | %          | 1,000           |       |
| Apr-04                                                       |       | 2 years             |       | May-06          |       | 2.58              | %          | 2,000           |       |
| **Total short-term FHLB advances and weighted average rate** | ** ** | ** **          | ** ** | ** **      |       | **2.08**          | **%**      | **$**           | **8,000**  | ** ** |

 
| **Other borrowed funds:**      |       |       |       |       |   |     |   |   |        |
|--------------------------------|------------|------------|------------|------------|--------|----------|--------|--------|-------------|
| TT&L Note option           |       |       |       |       |   | 2.53     | %      | $      | 5,013       |   |
| Trust preferred                |       |       |       |       |   | 5.81     | %      | 20,619 |        |
| Customer repurchase agreements |       |       |       |       |   | 1.07     | %      | 38,004 |        |
| FHLB advances - long term      |       |       |       |       |   | 3.47     | %      | 91,708 |        |
| **Total other borrowed funds** | ** ** | ** ** | ** ** | ** ** |   | **2.56** | **%**  | **$**  | **163,344** |   |

 

32

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At June 30,2005, mortgage funding checks increased by $47.3 million to $93.7 million,compared to $46.4 million at December 31, 2004.  Warehouse financing increased $7.9 million to$38.1 at June 30, 2005 compared to $30.2 million at December 31,2004.  These liabilities are related toGeorge Mason and are used to fund the loans in process of being sold.  George Mason has credit facilities with theBank and also has a third party facility of $250 million.  There were $38.1 million in borrowingsoutstanding under this third party facility at June 30, 2005.  George Mason had a $60.0 million line ofcredit with an unaffiliated third party which, due to our limited use of thiscredit facility, we did not renew when it matured on March 1, 2005.

 

Shareholders’ equity at June 30,2005 was $143.9 million, an increase of $48.8 million, or 51.3%, compared to$95.1 million at December 31, 2004. During the second quarter of 2005, wecompleted a secondary common stock offering of 5,175,000 shares which nettedproceeds of $39.8 million.  In addition,we acquired Wilson/Bennett for $1.6 million in cash and 611,111 shares ofcommon stock, which were valued at $4.9 million.  The remaining portion of the increase fromthe prior year end was primarily net income of $3.9 million for the six monthsended June 30, 2005 partially offset by an unfavorable market valueadjustment of $293,000 on investment securities available-for-sale as of June 30,2005.  Book value per share at June 30,2005 was $5.92, compared to $5.15 at December 31, 2004.  Tangible book value per share at June 30,2005 was $5.07 compared to $4.36 at December 31, 2004.

 

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

##### ** **

**We provide banking and non-banking financialservices and products through our subsidiaries. Prior to July 7, 2004, management operated and reported on theresults of our operations through two business segments, commercial banking andinvestment services.  With the completionof our acquisition of George Mason during the third quarter of 2004, we nowoperate in a third business segment, mortgage banking.**

** **

#### ***Commercial Banking***

#### ** **

The commercial banking segmentprovides a wide range of banking services to small businesses and individualsthrough multiple delivery channels. Services offered include commercial and consumer lending, depositproducts and banking via the Internet or telephone.

 

For the three months ended June 30,2005, the commercial banking segment recorded net income of $1.0 millioncompared to $892,000 for the three months ended June 30, 2004, an increaseof $130,000.  The increase in secondquarter net income for 2005 was primarily related to the increased volume andinterest rates in the Bank’s loans held for sale, net and loans receivable, netof deferred fees and costs portfolios. For the six months ended June 30, 2005, net income for thecommercial banking segment was $1.6 million compared to $1.8 million for thesame six month period of 2004.  Thedecrease in year-to-date earnings was a result of the support needed for ourbranch expansion.  At June 30, 2005,total assets were $1.31 billion, loans receivable, net of deferred fees andcosts were $603.3 million and total deposits were $1.00 billion.  At June 30, 2004, total assets were$804.0 million, loans receivable, net of deferred fees and costs were $392.9million and total deposits were $597.6 million.

 

*Mortgage Banking*

 

The operations of the mortgage bankingsegment are conducted through George Mason. George Mason engages primarily in the origination and acquisition ofresidential mortgages for sale into the secondary market on a best effortsbasis.  George Mason is included in thisoperating segment since the date of its acquisition, July 7, 2004.

 

For the three months ended June 30,2005, the mortgage banking segment recorded net income of $1.8 million.  For the six months ended June 30, 2005,the mortgage banking segment

 

33

----

 

recorded net income of $3.2 million.  At June 30, 2005, total assets were$495.0 million, loans held for sale, net were $475.1 million and mortgagefunding checks were $93.7 million.

 

#### ***Investment Services***

 

The investment services segment providesinvestment and financial services through an affiliation with a third partybroker-dealer.  Wilson/Bennett isincluded in this operating segment since the date of its acquisition, June 9,2005.

 

For the three months ended June 30,2005, the investment services segment recorded a net loss of $16,000, comparedto a net loss of $19,000 for the same period of 2004, an improvement of$3,000.  For the six months ended June 30,2005, the investment services segment recorded a net loss of $57,000, comparedto a net loss of $58,000 for the same period of 2004.  At June 30, 2005, total assets were $7.2million and total assets under management were $344.7 million.  At June 30, 2004, total assets were$701,000 and total assets under management were $186.3 million.

 

Information pertaining to our business segments can be found in Note 3to the Notes to Consolidated Financial Statements.

 

## **CapitalResources**

 

Capital adequacy is an important measure offinancial stability and performance.  Ourobjectives are to maintain a level of capitalization that is sufficient to sustainasset growth and promote depositor and investor confidence.

 

Regulatory agencies measure capital adequacyutilizing a formula that takes into account the individual risk profile of afinancial institution.  The guidelinesdefine capital as both Tier 1 (primarily common shareholders’ equity, definedto include certain debt obligations) and Tier 2 (to include certain other debtobligations, a portion of the allowance for loan losses, and 45% of anyunrealized gains in equity securities).

 

At June 30, 2005, our Tier 1 and total(Tier 1 and Tier 2) risk-based capital ratios were 14.75% and 15.49%,respectively.  At December 31, 2004,our Tier 1 and total risk-based capital ratios were 12.7% and 13.4%,respectively.  The increase in ourregulatory capital ratios was a result of the proceeds from our common stockoffering during the second quarter of 2005. Our regulatory capital levels for the Bank and bank holding company meetthose established for well-capitalized institutions. Table 12 providesadditional information pertaining to our capital ratios.

 

**Capital Components**

At June 30, 2005 and December 31, 2004

(Dollars in thousands)

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **To Be Well  Capitalized Under  Prompt Corrective** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio**                                            | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                                             |       |       |       |                  |       |                  |       |                                                 |       |   |   |   |   |
| **At June 30, 2005**                                        |       |       |       |                  |       |                  |       |                                                 |       |   |   |   |   |
| Total risk based capital/ Total capital to  risk-weighted assets |       | $          | 151,967    |                  | 15.49      | %                     | $          | 78,465                                               | >       | 8.00 | % | $ | 98,082 | > | 10.00 | % |
| Tier I capital/ Tier I capital to risk-weighted  assets          |       | 144,645    |       | 14.75                 | %          | 39,233                | >       | 4.00                                                 | %          | 58,849 | > | 6.00 | % |
| Tier I capital/ Total capital to average  assets                 |       | 144,645    |       | 11.23                 | %          | 51,520                | >       | 4.00                                                 | %          | 64,400 | > | 5.00 | % |
|                                                             |       |       |       |                  |       |                  |       |                                                 |       |   |   |   |   |
| **At December 31, 2004**                                    |       |       |       |                  |       |                  |       |                                                 |       |   |   |   |   |
| Total risk based capital/ Total capital to  risk-weighted assets |       | $          | 107,660    |                  | 13.40      | %                     | $          | 64,294                                               | >       | 8.00 | % | $ | 80,368 | > | 10.00 | % |
| Tier I capital/ Tier I capital to  risk-weighted assets          |       | 101,670    |       | 12.65                 | %          | 32,147                | >       | 4.00                                                 | %          | 48,221 | > | 6.00 | % |
| Tier I capital/ Total capital to average  assets                 |       | 101,670    |       | 8.83                  | %          | 46,075                | >       | 4.00                                                 | %          | 57,594 | > | 5.00 | % |

 

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**Contractual Obligations**

 

We have entered into a number of long-termcontractual obligations to support our ongoing business activities.  We anticipate that these contractualobligations will be funded through operating revenues and liquidity sourcesheld or available to us.  The requiredpayments under such obligations are detailed in Table 13.

 

**Contractual Obligations**

AtJune 30, 2005

(Dollarsin thousands)

 
| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **Total**                  | ** ** | **Less than 1  Year** | ** ** | **1 - 2 Years** | ** ** | **3 - 5 Years** | ** ** | **More than 5  Years** | ** ** |
| Certificates of deposit of $100,000 or more          |       | $                          | 220,854    |   | $ | 84,030 |   | $ | 34,936 |   | $ | 99,961 |   | $ | 1,927 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Brokered certificates of deposit                     |       | 47,200                     |       | 47,200 |   | — |   | — |   | — |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Advances from the Federal Home Loan Bank of  Atlanta |       | 99,708                     |       | 8,000 |   | 15,250 |   | 56,458 |   | 20,000 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Trust preferred securities                           |       | 20,000                     |       | — |   | — |   | — |   | 20,000 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                          |       | 14,325                     |       | 3,915 |   | 3,790 |   | 5,441 |   | 1,179 |   |
|                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                                |       | $                          | 402,087    |   | $ | 143,145 |   | $ | 53,976 |   | $ | 161,860 |   | $ | 43,106 |   |

 

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**Financial Instruments with Off-Balance SheetRisk and Credit Risk**

 

In the normal course of business, we are aparty to financial instruments with off-balance sheet risk to meet thefinancing needs of our customers.  Thesefinancial instruments include commitments to extend credit and standby lettersof credit.  These instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized onthe balance sheet.

 

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

 

At June 30, 2005, commitments to extendcredit were $236.9 million and standby letters of credit were $6.3 million.

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts do notnecessarily represent future funding requirements.  We evaluate each customer’s credit worthinesson a case-by-case basis.  The amount ofcollateral obtained is based on management’s credit evaluation of thecounterparty.  Collateral held varies butmay include accounts receivable, inventory, property and equipment, andincome-producing commercial properties.

 

Unfunded commitments under lines of creditare commitments for possible future extensions of credit to existingcustomers.  Those lines of credit may ormay not be drawn upon to the total extent of funding to which we havecommitted.

 

**Standby letters of credit are conditionalcommitments we issued to guarantee the performance of a customer to a thirdparty.  Those guarantees are primarilyissued to support public and private borrowing arrangements, includingcommercial paper, bond financing, and similar transactions.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers.  We hold certificates ofdeposit, deposit accounts, and real estate as collateral supporting thosecommitments for which collateral is deemed necessary.**

** **

## **Liquidity**

## ** **

Liquidity in the banking industry is defined as the abilityto meet the demand for funds of both depositors and borrowers.  We must be able to meet these needs with cashon hand by obtaining funding from depositors or other lenders or by convertingnon-cash items to cash.  The objective ofour liquidity management program is to ensure that we always have sufficientliquid resources to meet the demands of our depositors and borrowers.  Stable core deposits and a strong capitalposition provide the base for our liquidity position.  We have demonstrated our ability to attractretail deposits because of our convenient branch locations, personal serviceand deposit pricing.

 

In addition to retail deposits, we have access to variouswholesale funding markets.  These marketsinclude the brokered CD market, the repurchase agreement market and the federal

 

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fundsmarket.  We also maintain secured linesof credit with the Federal Reserve Bank of Richmond and the Federal Home LoanBank of Atlanta.  Having diverse fundingalternatives reduces our reliance on any one source for funding.

 

Cash flow from amortizing assets or maturing assets can alsoprovide funding to meet the needs of depositors and borrowers.

 

We have established a formal liquidity contingency plan whichestablishes a liquidity management team and provides guidelines for liquiditymanagement.  For our liquidity managementprogram, we first determine our current liquidity position.  Liquidity is then forecasted based onforecasted changes in the balance sheet. The Bank expects to maintain a certain liquidity cushion throughout theforecast period.  In addition to theforecast, we also stress test our liquidity position under several differentstress scenarios.  Guidelines for theforecasted liquidity cushion and for liquidity cushions for each stressscenario have been established.  Inaddition, one stress test combines all other stress tests to see how liquiditywould react to several negative scenarios occurring at the same time.  We believe that we currently have sufficientresources to meet our anticipated liquidity needs.

 

In September 2004, George Mason and the Bank enteredinto a one year $150 million floating rate revolving credit and securityagreement with a third party.  Thepurpose of this credit facility is to fund residential mortgage loans at GeorgeMason prior to their sale into the secondary market.  The credit facility requires, among otherthings, that George Mason and the Bank have positive quarterly net income andmaintain specified minimum tangible and regulatory net worth levels.  The Company has guaranteed repayment of thisdebt.  The interest rate on this creditfacility is LIBOR plus between 1.50% and 1.875%.  At June 30, 2005, $38.1 of this line wasutilized.

 

In addition to this facility, this same lender has alsoprovided a $100 million facility that is utilized by George Mason to warehouseresidential mortgage loans held for sale to this lender.  The terms of this facility are substantiallythe same as the above-referenced revolving credit and security agreement and thecost of this facility is netted against interest earned on the loans pendingsettlement with the lender.  At June 30,2005, none of this line was utilized.

 

Liquid assets, which include cash and due from banks, federalfunds sold and investment securities available for sale totaled $207.9 millionat June 30, 2005 or 14.2% of total assets. We held investments that are classified as held-to-maturity in theamount of $127.4 million at June 30, 2005. To maintain ready access to the bank’s secured lines of credit, the Bankhas pledged the majority of its securities to the Federal Home Loan Bank ofAtlanta with additional securities pledged to the Federal Reserve Bank ofRichmond.  Additional borrowing capacityat the Federal Home Loan Bank of Atlanta at June 30, 2005 wasapproximately $192.4 million.  Borrowingcapacity with the Federal Reserve Bank of Richmond was approximately $22.8million at June 30, 2005.  As notedabove, George Mason has $250 million of lines of credit available to it.  We are committed to maintaining liquidity ata level sufficient to protect depositors, provide for reasonable growth andfully comply with all regulatory requirements.

 

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

##### ** **

We are exposed to various business risks includinginterest rate risk.  Our goal is tomaximize net interest income without incurring excessive interest raterisk.  Management of net interest incomeand interest rate risk must be consistent with the level of capital andliquidity that we maintain.  We manageinterest rate risk through an asset and liability committee (“ALCO”).

 

37

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ALCOis responsible for managing the interest rate risk for the company inconjunction with liquidity and capital management.

 

Through the middle of 2004, ALCO used gap analysisto measure interest rate sensitivity. Beginning with the interest rate sensitivity analysis for the thirdquarter of 2004, we hired an independent consulting firm to model the interestrate sensitivity of the company.  Insteadof gap analysis, we began using a net interest income simulation model as ourprimary tool to measure interest rate sensitivity.  Many assumptions are developed based onexpected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment ofthese assets.  For maturing liabilities,assumptions are developed for the replacement of these funding sources.  Assumptions are also developed for assets andliabilities that could reprice during the modeled time period.  These assumptions also cover how we expectrates to change on non-maturity deposits such as NOW, Money Market and savingsaccounts.  Based on inputs that includethe current balance sheet, the current level of interest rates and thedeveloped assumptions, the model then produces an expected level of net interestincome assuming that market rates remain unchanged.  This is considered the base case.  Next, the model determines what net interestincome would be given changes in interest rates.  The rate simulations performed include aramped rate change of down 200 basis points and up 200 basis points over a twoyear time period.  In the ramped downrate change, the model moves rates gradually down 200 basis points over thefirst year and then rates remain flat in the second year.  For the up 200 basis point scenario, ratesare gradually moved up 200 basis points in the first year and then rates remainflat in the second year.  In both the upand down scenarios, the model assumes a parallel shift in the yield curve.  The results of these simulations are thencompared to the base case.

 

At June 30, 2005, we were asset sensitive.  Asset sensitive means that we had more assetsmaturing and repricing than liabilities. We have a significant portion of our assets as floating rate assets andwe have taken a significant amount of term funding through fixed rate, fixedterm, certificates of deposit.  In arising rate environment, net interest income should grow for an asset sensitivebank.  In the up 200 basis point scenariofor one year, net interest income improves by not more than 10% compared to thebase case and by not more than 14% over the two year time horizon.  Being asset sensitive, net interest incomedeclines compared to the base case in the down 200 basis point scenario.  At June 30, 2005, net interest income hada negative variance to the base case of less than 8% for the one year periodand a negative variance of less than 14% over the cumulative two year period.

 

**Caution About Forward-Looking Statements**

 

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

 

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

 

•                  the ability tosuccessfully manage our growth or implement our growth strategies if we areunable to identify attractive markets, locations or opportunities to expand inthe future;

•                  changes ininterest rates and the successful management of interest rate risk;

 

38

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•                  risks inherentin making loans such as repayment risks and fluctuating collateral values;

•                  maintaining costcontrols and asset quality as we open or acquire new branches;

•                  maintainingcapital levels adequate to support our growth;

•                  reliance on ourmanagement team, including the ability to attract and retain key personnel;

•                  competition withother banks and financial institutions, and companies outside of the bankingindustry, including those companies that have substantially greater access tocapital and other resources;

•                  changes ingeneral economic and business conditions in our market area;

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

•                  problems withtechnology utilized by us;

•                  changing trendsin customer profiles and behavior; and

•                  changes inbanking and other laws and regulations applicable to us.

 

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

 

39

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Our asset and liability committee is responsible forreviewing our liquidity requirements and maximizing our net interest incomeconsistent with capital requirements, liquidity, interest rate and economicoutlooks, competitive factors and customer needs.  Interest rate risk arises because the assetsof the bank and the liabilities of the bank have different maturities andcharacteristics.  In order to measurethis interest rate risk, we use a simulation process that measures the impactof changing interest rates on net interest income.  This model is run for the bank by anindependent consulting firm that was hired by the bank in the fourth quarter of2004.  The simulations incorporateassumptions related to expected activity in the balance sheet.  For maturing assets, assumptions aredeveloped for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacementof these funding sources.  Assumptionsare also developed for assets and liabilities that reprice during the modeledtime period.  These assumptions alsocover how we expect rates to change on non-maturity deposits such as NOW, MoneyMarket and savings accounts.  Based oninputs that include the most recent period end balance sheet, the current levelof interest rates and the developed assumptions, the model then produces anexpected level of net interest income assuming that interest rates remainunchanged.  This becomes the basecase.  Next, the model determines theimpact on net interest income given certain interest rate changes.  The rate changes include a ramped rate changeof down 200 basis points and up 200 basis points over a two year timeperiod.  In the ramped down rate change,the model moves rates gradually down 200 basis points over the first year andthen rates remain flat in the second year. For the up 200 basis point scenario, rates are gradually increased by200 basis points in the first year and remain flat in the second year.  In both the up and down scenarios, the modelassumes a parallel shift in the yield curve. The results for net interest income are then compared to the base case witha variance to the base case determined.

 

At June 30, 2005, we were asset sensitive.  Asset sensitive means that we had more assetsmaturing or repricing than liabilities. We have a significant portion of our assets as floating rate assets andwe have also taken a significant amount of term funding through fixed rate,fixed term, certificates of deposit.  Ina rising rate environment, net interest income should grow for an assetsensitive bank.  In the up 200 basispoint scenario for one year, net interest income improves by not more than 10%compared to the base case and by not more than 14% over the two year cumulativetime horizon.

 

Being an asset sensitive bank, net interest incomedeclines compared to the base case in the down 200 basis point simulation byless than 8% for one year and by 14% over the cumulative two year period.

 

40

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**Item 4.  Controls and Procedures**

 

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

 

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

 

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

 

41

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**PART II – OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

In the ordinary course of our operations, wemay become party to legal proceedings. Currently, we are not party to any material legal proceedings and nosuch proceedings are, to management’s knowledge, threatened against us.

 

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

** **

(a)  None.

(b)  Not applicable.

(c)  None.

 

**Item 3.  Defaults Upon SeniorSecurities**

 

(a)  None.

(b)  None.

 

**Item 4.  Submission of Matters toa Vote of Security Holders**

 

(a)  The Company’s Annual Meeting ofShareholders was held on April 22, 2005.

(b)  Not applicable.

(c)  At the Annual Meeting ofShareholders, the following persons were elected as directors for termsexpiring in 2008:

 
| ** **                     | ** ** | **Votes**  | ** ** |
|--------------------------------|------------|------------|------------|
| **Director**                   | ** ** | **For**    | ** ** | **Withheld** | ** ** |
| William G. Buck                |       | 16,415,124 |       | 503,074 |   |
| Sidney O. Dewberry, P.E., L.S. |       | 16,405,907 |       | 512,291 |   |
| John W. Fisher                 |       | 16,412,615 |       | 505,583 |   |
| William E. Peterson            |       | 16,201,899 |       | 716,299 |   |

 

In addition, the shareholders voted on andapproved an amendment to the Company’s 2002 Equity Compensation Plan by a voteof 6,501,045 for and 3,592,071 against, with 91,561 abstentions and 6,733,521broker non-votes.

 

Finally, the shareholders voted on andratified the appointment of KPMG LLP, as the Company’s independent auditors for2005 by a vote of 16,826,030 for and 39,871 against, with 52,297 abstentionsand 0 broker non-votes.

 

(d)  None.

 

**Item 5.  Other Information**

 

(a)  None.

(b)  None.

 

42

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**Item 6.  Exhibits**

 

31.1         Rule 13a-14(a) Certification of Chief ExecutiveOfficer

31.2         Rule 13a-14(a) Certification of Chief FinancialOfficer

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

 

43

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**SIGNATURES**

** **

**Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this Report to be signedon its behalf by the undersigned thereunto duly authorized.**

 
| ** **                     | ** ** | **CARDINAL  FINANCIAL CORPORATION**                       |
|--------------------------------|------------|-----------------------------------------------------------|
| ** **                     | ** ** | **(Registrant)**                                          |
| ** **                     | ** ** | ** **                                                |
| ** **                     | ** ** | ** **                                                |
| **Date:  August 9, 2005** | ** ** | **  /s/  Bernard H. Clineburg**                 | ** ** |
| ** **                     | ** ** | **Bernard H.  Clineburg**                                 |
| ** **                     | ** ** | **Chairman,  President and Chief Executive Officer**      |
| ** **                     | ** ** | **(Principal  Executive Officer)**                        |
| ** **                     | ** ** | ** **                                                |
| ** **                     | ** ** | ** **                                                |
| **Date:  August 9, 2005** | ** ** | **  /s/  Robert A. Cern**                       | ** ** |
| ** **                     | ** ** | **Robert A. Cern**                                        |
| ** **                     | ** ** | **Executive Vice  President and Chief Financial Officer** |
| ** **                     | ** ** | **(Principal  Financial Officer)**                        |
| ** **                     | ** ** | ** **                                                |
| ** **                     | ** ** | ** **                                                |
| **Date:  August 9, 2005** | ** ** | **  /s/  Jennifer L. Deacon**                   | ** ** |
| ** **                     | ** ** | **Jennifer L.  Deacon**                                   |
| ** **                     | ** ** | **Senior Vice  President and Controller**                 |
| ** **                     | ** ** | **(Principal  Accounting Officer)**                       |

 

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