UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

or

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to                         

Commission File Number:  0-24557

CARDINAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization) 54-1874630
(I.R.S. Employer
Identification No.)

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

(703) 584-3400

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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

32,415,646 shares of common stock, par value $1.00 per share, outstanding as of May 6, 2016

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION	4
Item 1. Financial Statements:	4
Consolidated Statements of Condition At March 31, 2016 and December 31, 2015 (unaudited)	4
Consolidated Statements of Income For the Three Months Ended March 31, 2016 and 2015 (unaudited)	5
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2016 and 2015 (unaudited)	6
Consolidated Statements of Changes in Shareholders’ Equity For the Three Months Ended March 31, 2016 and 2015 (unaudited)	7
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2016 and 2015 (unaudited)	8
Notes to Consolidated Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3. Quantitative and Qualitative Disclosures About Market Risk	68
Item 4. Controls and Procedures	69
PART II — OTHER INFORMATION	70
Item 1. Legal Proceedings	70
Item 1A. Risk Factors	70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3. Defaults Upon Senior Securities	70

2

Item 4. Mine Safety Disclosures	70
Item 5. Other Information	70
Item 6. Exhibits	70
SIGNATURES	71

3

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

March 31, 2016 and December 31, 2015

(In thousands, except share data)

(Unaudited)

			March 31,			December 31,
			2016			2015 *
Assets
Cash and due from banks			$	19,379		$	24,760
Federal funds sold			41,489			14,577
Total cash and cash equivalents			60,868			39,337
Investment securities available-for-sale			407,980			414,077
Investment securities held-to-maturity (fair value of $3,324 and $3,311 at March 31, 2016 and December 31, 2015, respectively)			3,814			3,836
Investment securities - trading			6,221			5,881
Total investment securities			418,015			423,794
Other investments			19,411			20,967
Loans held for sale			365,489			383,768
Loans receivable, net of deferred fees and costs			3,101,978			3,056,310
Allowance for loan losses			(32,407		)	(31,723		)
Loans receivable, net			3,069,571			3,024,587
Premises and equipment, net			24,845			25,163
Deferred tax asset, net			4,895			7,970
Goodwill and intangibles, net			36,415			36,576
Bank-owned life insurance			33,102			32,978
Other real estate owned			—			253
Accrued interest receivable and other assets			41,934			34,528
Total assets			$	4,074,545		$	4,029,921
Liabilities and Shareholders’ Equity
Non-interest bearing deposits			$	687,493		$	657,398
Interest bearing deposits			2,457,534			2,375,373
Total deposits			3,145,027			3,032,771
Other borrowed funds			437,065			537,965
Mortgage funding checks			28,765			12,554
Escrow liabilities			2,777			2,676
Accrued interest payable and other liabilities			34,366			30,808
Total liabilities			3,648,000			3,616,774
Common stock, $1 par value	2016	2015
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	32,414,596	32,373,433	32,415			32,373
Additional paid-in capital			208,456			207,429
Retained earnings			175,485			166,303
Accumulated other comprehensive income, net			10,189			7,042
Total shareholders’ equity			426,545			413,147
Total liabilities and shareholders’ equity			$	4,074,545		$	4,029,921

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

4

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, 2016 and 2015

(In thousands, except per share data)

(Unaudited)

	2016			2015
Interest income:
Loans receivable	$	31,045		$	27,496
Loans held for sale	2,957			2,484
Federal funds sold	65			28
Investment securities available-for-sale	3,159			2,715
Investment securities held-to-maturity	14			21
Other investments	197			156
Total interest income	37,437			32,900
Interest expense:
Deposits	4,472			3,486
Other borrowed funds	2,259			1,975
Total interest expense	6,731			5,461
Net interest income	30,706			27,439
Provision for loan losses	250			130
Net interest income after provision for loan losses	30,456			27,309
Non-interest income:
Service charges on deposit accounts	551			544
Loan fees	309			454
Investment fee income	85			115
Realized and unrealized gains on mortgage banking activities	14,139			16,166
Net realized loss on investment securities-trading	(196		)	—
Net realized gain on investment securities-available for sale	112			202
Increase in cash surrender value of bank-owned life insurance	124			118
Other income	145			5
Total non-interest income	15,269			17,604
Non-interest expense:
Salary and benefits	15,497			12,081
Occupancy	2,592			2,484
Professional fees	1,135			1,589
Depreciation	844			876
Data processing & communications	1,346			1,504
FDIC insurance premiums	516			516
Mortgage loan repurchases and settlements	100			—
Merger and acquisition expenses	—			468
Amortization of intangibles	161			197
Other operating expenses	4,101			4,428
Total non-interest expense	26,292			24,143
Income before income taxes	19,433			20,770
Provision for income taxes	6,366			7,038
Net income	$	13,067		$	13,732
Earnings per common share - basic	$	0.40		$	0.42
Earnings per common share - diluted	$	0.39		$	0.42
Weighted-average common shares outstanding - basic	32,978			32,635
Weighted-average common shares outstanding - diluted	33,436			33,071

See accompanying notes to consolidated financial statements.

5

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended March 31, 2016 and 2015

(In thousands)

(Unaudited)

	2016			2015
Net income	$	13,067		$	13,732
Other comprehensive income:
Unrealized gain on available-for-sale investment securities:
Unrealized holding gain arising during the period, net of tax expense of $2,056 in 2016 and $375 in 2015	3,669			815
Less: reclassification adjustment for net (gains) losses included in net income net of tax expense of $40 in 2016 and $67 in 2015	(72		)	(135		)
Unrealized loss on derivative instruments designated as cash flow hedges, net of tax benefit of $254 in 2016 and $137 in 2015	(450		)	(245		)
Other comprehensive income	3,147			435
Comprehensive income	$	16,214		$	14,167

See accompanying notes to consolidated financial statements.

6

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three months ended March 31, 2016 and 2015

(In thousands)

(Unaudited)

										Accumulated
				Additional						Other
	Common	Common		Paid-in			Retained			Comprehensive
	Shares	Stock		Capital			Earnings			Income		Total
Balance, December 31, 2014	32,078	$	32,078	$	201,948		$	133,129		$	10,166	$	377,321
Stock options exercised	70	70		692			—			—		762
Vesting of restricted stock grants	7	7		(7		)	—			—		—
Stock compensation expense, net of tax benefit	—	—		560			—			—		560
Dividends on common stock of $0.11 per share	—	—		—			(3,534		)	—		(3,534		)
Other comprehensive income	—	—		—			—			435		435
Net income	—	—		—			13,732			—		13,732
Balance, March 31, 2015	32,155	$	32,155	$	203,193		$	143,327		$	10,601	$	389,276
Balance, December 31, 2015	32,373	$	32,373	$	207,429		$	166,303		$	7,042	$	413,147
Stock options exercised	5	5		38			—			—		43
Vesting of restricted stock grants	37	37		(37		)	—			—		—
Stock compensation expense, net of tax benefit	—	—		1,026			—			—		1,026
Dividends on common stock of $0.12 per share	—	—		—			(3,885		)	—		(3,885		)
Other comprehensive income	—	—		—			—			3,147		3,147
Net income	—	—		—			13,067			—		13,067
Balance, March 31, 2016	32,415	$	32,415	$	208,456		$	175,485		$	10,189	$	426,545

See accompanying notes to consolidated financial statements.

7

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31, 2016 and 2015

(In thousands)

(Unaudited)

	2016			2015
Cash flows from operating activities:
Net income	$	13,067		$	13,732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	844			876
Amortization of premiums, discounts and intangibles	548			335
Provision for loan losses	250			130
Loans held for sale originated	(768,801		)	(843,734		)
Proceeds from the sale of loans held for sale	801,219			860,209
Realized and unrealized gains on mortgage banking activities	(14,139		)	(16,166		)
Purchase of investment securities-trading	(1,011		)	(700		)
Loss on investment securities-trading	196			—
Gain on call of investment securities available-for-sale	(112		)	(202		)
Gain on sale of other real estate owned	(40		)	—
Stock compensation expense	1,026			560
Increase in cash surrender value of bank-owned life insurance	(124		)	(118		)
Increase in accrued interest receivable and other assets	(6,796		)	(7,928		)
Increase in accrued interest payable, escrow liabilities and other liabilities	4,134			4,066
Net cash provided by operating activities	30,261			11,060
Cash flows from investing activities:
Net purchases of premises and equipment	(526		)	(762		)
Proceeds from maturity and call of investment securities available-for-sale	8,280			23,315
Proceeds from the sale of other investments	3,187			1,025
Purchase of investment securities available for sale	—			(752		)
Purchase of other investments	(1,631		)	(133		)
Redemptions of investment securities available-for-sale	3,154			3,427
Redemptions of investment securities held-to-maturity	22			5
Proceeds from sale of other real estate owned	293			—
Net increase in loans receivable, net	(45,234		)	(43,837		)
Net cash used in investing activities	(32,455		)	(17,712		)
Cash flows from financing activities:
Net increase in deposits	112,256			109,801
Net decrease in other borrowed funds - short term	(50,900		)	(71,673		)
Net increase in mortgage funding checks	16,211			3,562
Proceeds from FHLB advances	50,000			—
Repayment of FHLB advances	(100,000		)	(10,000		)
Stock options exercised	43			762
Dividends on common stock	(3,885		)	(3,534		)
Net cash provided by financing activities	23,725			28,918
Net increase in cash and cash equivalents	21,531			22,266
Cash and cash equivalents at beginning of the year	39,337			38,189
Cash and cash equivalents at end of the period	$	60,868		$	60,455
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	6,753		$	5,629
Income taxes	2,786			5,319
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on available-for-sale investment securities	5,612			1,055
Change in fair value of derivative instruments designated as cash flow hedges	(704		)	(382		)

See accompanying notes to consolidated financial statements.

8

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Note 1

Organization

Cardinal Financial Corporation (the “Company” or “Cardinal”) is incorporated under the laws of the Commonwealth of Virginia as a financial holding company whose activities consist of investment in its wholly-owned subsidiaries. The principal operating subsidiary of the Company is Cardinal Bank (the “Bank”), a state-chartered institution and its subsidiary, George Mason Mortgage, LLC (“George Mason”), a mortgage banking company based in Fairfax, Virginia. In addition to the Bank, the Company has one nonbank subsidiary, Cardinal Wealth Services, Inc. (“CWS”), an investment services subsidiary.

On January 16, 2014, the Company announced the completion of its acquisition of United Financial Banking Companies, Inc. (“UFBC”), the holding company of The Business Bank (“TBB”), pursuant to a previously announced definitive merger agreement.  The merger of UFBC into Cardinal was effective January 16, 2014.  TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014.

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements have been prepared in accordance with the requirements of Regulation S-X, Article 10. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Note 2

Stock-Based Compensation

At March 31, 2016, the Company had two stock-based employee compensation plans, the 1999 Stock Option Plan (the “Option Plan”) and the 2002 Equity Compensation Plan (the “Equity Plan”).

In 1998, the Company adopted the Option Plan pursuant to which the Company may grant stock options for up to 625,000 shares of the Company’s common stock to employees and members of the Company’s and its subsidiaries’ boards of directors. As of November 23, 2008, the Option Plan expired, and therefore, there are no shares of common stock available to grant under this plan.

In 2002, the Company adopted the Equity Plan. The Equity Plan was amended in 2011 to increase the number of shares available under the plan and extend the term to 2021.  The Equity Plan authorizes the granting of options, which may be incentive stock options or non-qualified stock options, stock appreciation rights, restricted stock awards, phantom stock awards and performance share awards to directors, eligible officers and key employees of the Company.  There were 90,855 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of March 31, 2016.

9

Stock options are granted with an exercise price equal to the fair value of the Company’s common stock on the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Certain employee stock options have ten year terms and vest and become fully exercisable in 25% annual increments beginning as of the date of grant. In addition, the Company has granted stock options to employees of the Company have ten year terms and vest and become fully exercisable in 20% annual increments beginning after their first year of service.  Other grants have ten year terms and vest and become fully exercisable in one-third annual increments beginning as of the date of grant.

Restricted stock awards are granted at the fair value of the Company’s common stock on the grant date.  Most employee restricted stock awards vest in one-third annual increments on the anniversary date of the grant.  Certain restricted stock awards granted to executive officers vest one-third immediately on the grant date with the remaining unvested options vesting over the next two years.

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

Total expense related to the Company’s share-based compensation plans for the three months ended March 31, 2016 and 2015 was $1.0 million and $560,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $331,000 and $186,000 for the three months ended March 31, 2016 and 2015, respectively.

Options granted for the three months ended March 31, 2016 and 2015 were 17,000 and 109,250, respectively.  The weighted average per share fair value of stock option grants for the three months ended March 31, 2016 and 2015 was $5.59 and $5.93, respectively.  The fair values of the options granted during all periods ended March 31, 2016 and 2015 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

	Three Months Ended
	March 31,
	2016	2015
Estimated option life	6.5 Years	6.5 Years
Risk free interest rate	1.53%	1.73 – 1.83%
Expected volatility	36.50%	36.90%
Expected dividend yield	2.40%	2.46%

Expected volatility is based upon the average annual historical volatility of the Company’s common stock. The estimated option life is derived from specific historical data to estimate the expected term of the option, such as employee option exercise and employee post-vesting departure behavior. The risk free interest rate is based upon the seven-year U.S. Treasury note rate in effect at the time of grant. The expected dividend yield is based upon implied and historical dividend declarations.

Stock option activity during the three months ended March 31, 2016 is summarized as follows:

10

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Years)	Value
Outstanding at December 31, 2015	1,023,550		$	14.97
Granted	17,000		19.18
Exercised	(4,200	)	10.11
Forfeited	(2,250	)	13.64
Outstanding at March 31, 2016	1,034,100		$	15.06	6.67	$	5,471,829
Options exercisable at March 31, 2016	888,504		$	14.64	6.42	$	5,077,236

The intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $38,000 and $560,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the three months ended March 31, 2016 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2015	300,125		$	5.67
Granted	17,000		5.59
Vested	(170,429	)	5.77
Forfeited	(1,100	)	6.12
Balance at March 31, 2016	145,596		$	5.54

A summary of the Company’s restricted stock grant activity during the three months ended March 31, 2016 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2015	65,932		$	21.76
Granted	93,320		19.18
Vested	(36,831	)	19.34
Forfeited	(400	)	22.75
Balance at March 31, 2016	122,021		$	20.51

At March 31, 2016, there was $2.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted average period of 2.4 years. The total fair value of shares from stock options that vested during the three months ended March 31, 2016 and 2015 was $983,000 and $900,000, respectively.  The total fair value of restricted stock grants that vested during the three months ended March 31, 2016 were $714,000 and $134,000, respectively.

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Note 3

Segment Information

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management services.

The commercial banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market. The wealth management services segment provides investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, and investment management.

Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three months ended March 31, 2016 and 2015 is as follows:

At and for the Three Months Ended March 31, 2016 (in thousands):

					Wealth Management
	Commercial		Mortgage		and					Intersegment
	Banking		Banking		Trust Services		Other			Elimination			Consolidated
Net interest income	$	30,545	$	358	$	—	$	(197	)	$	—		$	30,706
Provision for loan losses	250		—		—		—			—			250
Non-interest income	1,216		14,158		85		(190		)	—			15,269
Non-interest expense	16,514		8,963		70		745			—			26,292
Provision for income taxes	4,757		2,000		5		(396		)	—			6,366
Net income (loss)	$	10,240	$	3,553	$	10	$	(736	)	$	—		$	13,067
Total Assets	$	3,998,561	$	406,208	$	513	$	457,080		$	(787,817	)	$	4,074,545
Average Assets	$	3,937,805	$	317,034	$	2,459	$	456,132		$	(717,082	)	$	3,996,348

At and for the Three Months Ended March 31, 2015 (in thousands):

					Wealth Management
	Commercial		Mortgage		and					Intersegment
	Banking		Banking		Trust Services		Other			Elimination			Consolidated
Net interest income	$	27,105	$	511	$	—	$	(177	)	$	—		$	27,439
Provision for loan losses	130		—		—		—			—			130
Non-interest income	1,278		16,216		105		5			—			17,604
Non-interest expense	15,146		7,319		104		1,574			—			24,143
Provision for income taxes	4,215		3,434		—		(611		)	—			7,038
Net income (loss)	$	8,892	$	5,974	$	1	$	(1,135	)	$	—		$	13,732
Total Assets	$	3,371,660	$	358,024	$	2,391	$	415,545		$	(700,850	)	$	3,446,770
Average Assets	$	3,322,472	$	267,313	$	2,409	$	417,547		$	(628,081	)	$	3,381,660

The Company did not have any operating segments other than those reported. Parent company financial information is included in the “Other” category and represents an overhead function rather than an operating segment. The parent company’s most significant assets are its net investments in its subsidiaries. The parent company’s net interest expense is comprised of interest income from short-term investments and interest expense on trust preferred securities.

12

Note 4

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three months ended March 31, 2016 and 2015.  There were 670 and 167 antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation for the three months ended March 31, 2016 and 2015, respectively.  There were 4,998 antidilutive outstanding restricted stock awards excluded from the weighted average shares outstanding for the diluted earnings per share calculation for the three months ended March 31, 2016.   There were no antidilutive outstanding restricted stock awards excluded from the weighted average shares outstanding for the diluted earnings per share calculation for the three months ended March 31, 2015.

(In thousands,	Three Months Ended
except per share data)	2016		2015
Net income available to common shareholders	$	13,067	$	13,732
Weighted average common shares - basic	32,978		32,635
Weighted average common shares - diluted	33,436		33,071
Earnings per common share - basic	$	0.40	$	0.42
Earnings per common share - diluted	$	0.39	$	0.42

Weighted average shares for the basic earnings per share calculation is increased by the number of shares required to be issued under the Company’s various deferred compensation plans.  These plans provide for a Company match, and such match must be in the common stock of the Company.  Employees who participate in the Company’s deferred compensation plans can allocate, at their discretion, their contributions to various investment options, including an option to invest in Company Common Stock.  The incremental weighted average shares attributable to the deferred compensation plans included in diluted outstanding shares assumes the participants opt to invest all of their contributions into the Company’s Common Stock investment option.

The following shows the composition of basic outstanding shares for the three months ended March 31, 2016 and 2015:

(in thousands)	2016	2015
Weighted average common shares outstanding	32,391	32,123
Weighted average shares attributable to the deferred compensation plans	587	512
Total weighted average shares - basic	32,978	32,635

The following shows the composition of diluted outstanding shares for the three months ended March 31, 2016 and 2015:

13

	Three Months Ended
	March 31,
(in thousands)	2016	2015
Weighted average shares outstanding - basic (from above)	32,978	32,635
Incremental weighted average shares attributable to deferred compensation plans	312	259
Weighted average shares attributable to vested stock options	146	177
Incremental shares from stock option plan	—	—
Incremental shares from restricted stock grants	—	—
Total weighted average shares - diluted	33,436	33,071

Note 5

Investment Securities

The approximate fair value and amortized cost of investment securities at March 31, 2016 and December 31, 2015 are shown in the tables below.

	March 31, 2016
	Gross			Gross			Gross
	Amortized			Unrealized			Unrealized				Fair
(In thousands)	Cost			Gains			Losses				Value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	65,192		$	2,710		$	—			$	67,902
Mortgage-backed securities	155,806			7,265			(22			)	163,049
Municipal securities	169,424			7,627			(22			)	177,029
Total	$	390,422		$	17,602		$	(44		)	$	407,980
Investment Securities Held-to-Maturity
Mortgage-backed securities	$		1	$		—	$		—		$		1
Pooled trust preferred securities	3,813			—			(490			)	3,323
Total	$	3,814		$	—		$	(490		)	$	3,324

	December 31, 2015
	Gross			Gross			Gross
	Amortized			Unrealized			Unrealized				Fair
(In thousands)	Cost			Gains			Losses				Value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	70,617		$	2,318		$	(30		)	$	72,905
Mortgage-backed securities	158,959			3,982			(217			)	162,724
Municipal securities	172,556			6,154			(262			)	178,448
Total	$	402,132		$	12,454		$	(509		)	$	414,077
Investment Securities Held-to-Maturity
Mortgage-backed securities	$		3	$		—	$		—		$		3
Pooled trust preferred securities	3,833			—			(525			)	3,308
Total	$	3,836		$	—		$	(525		)	$	3,311

The fair value and amortized cost of investment securities by contractual maturity at March 31, 2016 and December 31, 2015 are shown below.  Expected maturities may differ from contractual

14

maturities because many issuers have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2016
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Within One Year	$	7,511	$	7,613	$	—	$	—
After 1 year but within 5 years	64,979		69,075		—		—
After 5 years but within 10 years	31,690		33,372		—		—
After 10 years	130,436		134,871		3,813		3,323
Mortgage-backed securities	155,806		163,049		1		1
Total	$	390,422	$	407,980	$	3,814	$	3,324

	December 31, 2015
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	cost		Value		cost		Value
Within One Year	$	9,225	$	9,382	$	—	$	—
After 1 year but within 5 years	52,510		55,120		—		—
After 5 years but within 10 years	38,095		40,243		—		—
After 10 years	143,343		146,608		3,833		3,308
Mortgage-backed securities	158,959		162,724		3		3
Total	$	402,132	$	414,077	$	3,836	$	3,311

The following table shows the Company’s investment securities’ gross unrealized losses and their fair value, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015.

At March 31, 2016

Investment Securities Available-for-Sale	Less than 12 months					12 months or more					Total
(In thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Mortgage-backed securities	$	358	$	(2	)	$	627	$	(20	)	$	985	$	(22	)
Municipal securities	5,480		(21		)	258		(1		)	5,738		(22		)
Total temporarily impaired securities	$	5,838	$	(23	)	$	885	$	(21	)	$	6,723	$	(44	)

Investment Securities Held-to-Maturity	Less than 12 months				12 months or more					Total
(In thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Pooled trust preferred securities	$	—	$	—	$	3,323	$	(490	)	$	3,323	$	(490	)
Total temporarily impaired securities	$	—	$	—	$	3,323	$	(490	)	$	3,323	$	(490	)

At December 31, 2015

Investment Securities Available-for-Sale	Less than 12 months					12 months or more					Total
(In thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government sponsored agencies	$	9,970	$	(30	)	$	—	$	—		$	9,970	$	(30	)
Mortgage-backed securities	46,772		(202		)	677		(15		)	47,449		(217		)
Municipal securities	30,313		(261		)	259		(1		)	30,572		(262		)
Total temporarily impaired securities	$	87,055	$	(493	)	$	936	$	(16	)	$	87,991	$	(509	)

Investment Securities Held-to-Maturity	Less than 12 months				12 months or more					Total
(In thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Pooled trust preferred securities	$	—	$	—	$	3,308	$	(525	)	$	3,308	$	(525	)
Total temporarily impaired securities	$	—	$	—	$	3,308	$	(525	)	$	3,308	$	(525	)

15

The Company estimates the fair value of its pooled trust preferred securities portfolio by using third party projected cash flows for each of the issuances in the portfolio, and a discount rate that is commensurate with the risk inherent in the expected cash flows is applied to arrive at the estimated fair value.

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2016, the majority of the investment securities portfolio consisted of securities rated AAA by a leading rating agency.  Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.  At March 31, 2016, 99% of the Company’s mortgage-related securities are guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA).

The Company has $911,000 in non-government non-agency mortgage-related securities in its available-for-sale portfolio.  The various protective elements on the non-agency securities may change in the future if market conditions or the financial stability of credit insurers changes, which could impact the ratings of these securities.

At March 31, 2016, certain of the Company’s investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment.  Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due.  The Company does not intend to sell nor does the Company believe it will be required to sell any of the temporarily impaired securities prior to the recovery of the amortized cost.

No other-than-temporary impairment has been recognized for the securities in the Company’s investment portfolio for the three months ended March 31, 2016.

The Company has investment assets designated as trading to economically hedge against fair value changes in the Company’s nonqualified deferred compensation plan liability.  Those investments are designated as trading securities, and as such, the changes in fair value are reflected in earnings.  Trading securities at March 31, 2016 and December 31, 2015 are as follows:

(in thousands)	March 31, 2016		December 31, 2015
Cash equivalents	$	690	$	702
Mutual funds	5,531		5,179
	$	6,221	$	5,881

Note 6

Loans Receivable and Allowance for Loan Losses

The loan portfolio at March 31, 2016 and December 31, 2015 consist of the following:

	March 31, 2016
(In thousands)	Originated			Acquired			Total
Commercial and industrial	$	352,327		$	11,361		$	363,688
Real estate - commercial	1,483,699			76,025			1,559,724
Real estate - construction	561,722			1,222			562,944
Real estate - residential	447,021			6,287			453,308
Home equity lines	159,304			2,176			161,480
Consumer	4,323			510			4,833
	3,008,396			97,581			3,105,977
Net deferred fees and costs	(3,999		)	—			(3,999		)
Loans receivable, net of fees	3,004,397			97,581			3,101,978
Allowance for loan losses	(32,250		)	(157		)	(32,407		)
Loans receivable, net	$	2,972,147		$	97,424		$	3,069,571

16

	December 31, 2015
(In thousands)	Originated			Acquired			Total
Commercial and industrial	$	366,549		$	13,138		$	379,687
Real estate - commercial	1,421,976			78,329			1,500,305
Real estate - construction	572,260			1,341			573,601
Real estate - residential	439,346			6,420			445,766
Home equity lines	153,762			2,869			156,631
Consumer	4,278			568			4,846
	2,958,171			102,665			3,060,836
Net deferred fees and costs	(4,526		)	—			(4,526		)
Loans receivable, net of fees	2,953,645			102,665			3,056,310
Allowance for loan losses	(31,564		)	(159		)	(31,723		)
Loans receivable, net	$	2,922,081		$	102,506		$	3,024,587

The loan portfolio is segregated into two components:  loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).

The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification (“ASC”) Topic 310-30 or ASC 310-20.  The outstanding principal balance and related carrying amount of acquired loans included in the consolidated statements of condition at March 31, 2016 and December 31, 2015 are as follows:

(in thousands)	March 31, 2016
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	9,084
Carrying amount	5,898
Other acquired loans
Outstanding principal balance	93,106
Carrying amount	91,683
Total acquired loans
Outstanding principal balance	102,190
Carrying amount	97,581

17

(in thousands)	December 31, 2015
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	10,886
Carrying amount	7,723
Other acquired loans
Outstanding principal balance	96,392
Carrying amount	94,942
Total acquired loans
Outstanding principal balance	107,278
Carrying amount	102,665

The following table presents changes in the accretable discount, which includes income recognized from contractual interest cash flows.

(in thousands)
Balance at December 31, 2015	$	(4,613	)
Charge-offs	—
Recoveries	(61		)
Accretion	65
Balance at March 31, 2016	$	(4,609	)

(in thousands)
Balance at December 31, 2014	$	(5,053	)
Charge-offs	504
Recoveries	(55		)
Accretion	(9		)
Balance at December 31, 2015	$	(4,613	)

The Company’s allowance for loan losses is based first on a segmentation of its loan portfolio by general loan type, or portfolio segments, as presented in the preceding table.  For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on class segments, which are largely based on the type of collateral underlying each loan.  The Company also maintains an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

Activity in the Company’s allowance for loan losses for the three months ended March 31, 2016 and 2015 is shown below.

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	2016			2015
Beginning balance, January 1	$	31,723		$	28,275
Provision for loan losses	250			130
Loans charged off:
Commercial and industrial	(39		)	(3		)
Residential	(51		)	—
Consumer	—			(16		)
Total loans charged off	(90		)	(19		)
Recoveries:
Commercial and industrial	512			485
Residential	12			10
Consumer	—			3
Total recoveries	524			498
Net recoveries	434			479
Ending balance, March 31,	$	32,407		$	28,884

As of March 31, 2016 and 2015, the allowance for loan losses for the acquired loan portfolio was $157,000 and $0, respectively.  There were no impairments recorded in the purchased credit impaired portfolio as of March 31, 2016 and 2015.

An analysis of the allowance for loan losses based on loan type, or segment, and the Company’s loan portfolio, which identifies certain loans that are evaluated for individual or collective impairment, as of March 31, 2016 and 2015, are below:

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Allowance for Loan Losses

At and for the Three Months Ended March 31, 2016

(In thousands)

	Commercial and Industrial			Real Estate - Commercial		Real Estate - Construction			Real Estate - Residential		Home Equity Lines			Consumer		Total
Allowance for loan losses:
Beginning Balance, January 1	$	1,623		$	20,356	$	7,877		$	1,462	$	377		$	28	$	31,723
Charge-offs	(39		)	—		—			—		(51		)	—		(90		)
Recoveries	11			50		451			12		—			—		524
Provision for loan losses	(44		)	691		(614		)	145		70			2		250
Ending Balance, March 31, 2016	$	1,551		$	21,097	$	7,714		$	1,619	$	396		$	30	$	32,407
Ending Balance, March 31, 2016
Individually evaluated for impairment	$	—		$	—	$	—		$	—	$	—		$	—	$	—
Collectively evaluated for impairment	1,551			21,097		7,714			1,619		396			30		32,407

Loans Receivable

At March 31, 2016

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Loans Receivable:
Ending Balance, March 31, 2016	$	363,688	$	1,559,724	$	562,944	$	453,308	$	161,480	$	4,833	$	3,105,977
Ending Balance, March 31, 2016
Individually evaluated for impairment	$	750	$	2,039	$	—	$	—	$	42	$	—	$	2,831
Purchased Credit Impaired Loans	79		3,861		1,222		261		475		—		5,898
Collectively evaluated for impairment	362,859		1,553,824		561,722		453,047		160,963		4,833		3,097,248

20

Allowance for Loan Losses

For the Year Ended December 31, 2015

(In thousands)

	Commercial and  Industrial			Real Estate - Commercial		Real Estate - Construction		Real Estate -  Residential			Home Equity  Lines			Consumer			Total
Allowance for loan losses:
Beginning Balance, January 1	$	2,061		$	17,820	$	6,105	$	1,954		$	301		$	34		$	28,275
Charge-offs	(144		)	—		—		(28		)	(48		)	(71		)	(291		)
Recoveries	485			1,802		22		42			—			—			2,351
Provision for loan losses	(779		)	734		1,750		(506		)	124			65			1,388
Ending Balance, December 31, 2015	$	1,623		$	20,356	$	7,877	$	1,462		$	377		$	28		$	31,723
Ending Balance, December 31, 2015
Individually evaluated for impairment	$	—		$	—	$	—	$	—		$	—		$	—		$	—
Collectively evaluated for impairment	1,623			20,356		7,877		1,462			377			28			31,723

Loans Receivable

At December 31, 2015

(In thousands)

	Commercial and  Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate -  Residential		Home Equity  Lines		Consumer		Total
Loans Receivable:
Ending Balance, December 31, 2015	$	379,687	$	1,500,305	$	573,601	$	445,766	$	156,631	$	4,846	$	3,060,836
Ending Balance, December 31, 2015
Individually evaluated for impairment	$	893	$	5,616	$	—	$	587	$	51	$	—	$	7,147
Purchased Credit Impaired Loans	863		4,669		1,341		338		512		—		7,723
Collectively evaluated for impairment	377,931		1,490,020		572,260		444,841		156,068		4,846		3,045,966

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2015

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction		Real Estate - Residential			Home Equity Lines		Consumer			Total
Allowance for loan losses:
Beginning Balance, January 1	$	2,061		$	17,820		$	6,105	$	1,954		$	301	$	34		$	28,275
Charge-offs	(3		)	—			—		—			—		(16		)	(19		)
Recoveries	187			293			5		10			3		—			498
Provision for loan losses	(120		)	(398		)	613		(3		)	22		16			130
Ending Balance, March 31, 2015	$	2,125		$	17,715		$	6,723	$	1,961		$	326	$	34		$	28,884
Ending Balance, March 31, 2015
Individually evaluated for impairment	$	—		$	—		$	—	$	—		$	—	$	—		$	—
Collectively evaluated for impairment	2,125			17,715			6,723		1,961			326		34			28,884

Loans Receivable

At March 31, 2015

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction		Real Estate - Residential		Home Equity Lines		Consumer		Total
Loans Receivable:
Ending Balance, March 31, 2015	$	323,890	$	1,268,667	$	490,785	$	406,367	$	135,276	$	4,769	$	2,629,754
Ending Balance, March 31, 2015
Individually evaluated for impairment	$	1,171	$	273	$	250	$	—	$	51	$	—	$	1,745
Purchased Credit Impaired Loans	2,878		6,736		1,641		326		496		3		12,080
Collectively evaluated for impairment	319,841		1,261,658		488,894		406,041		134,729		4,766		2,615,929

The accounting policy related to the allowance for loan losses is considered a critical accounting policy given the level of estimation, judgment and uncertainty in evaluating the levels of the allowance required for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment and uncertainty can have on the consolidated financial results.

The Company’s ongoing credit quality management process relies on a system of activities to assess and evaluate various factors that impact the estimation of the allowance for loan losses.  These factors include, but are not limited to; current economic conditions; loan concentrations, collateral adequacy and value: past loss experience for particular types of loans, size, composition and nature of loans; migration of loans through our loan rating methodology; trends in charge-offs and recoveries.  This process also contemplates a disciplined approach to managing and monitoring credit exposures to ensure that the structure and pricing of credit remains consistent with the Company’s assessment of risk.  The loan officer has frequent contact with the borrower and is a key player in the credit management process and

21

must develop and diligently practice sound credit management skills and habits to ensure effectiveness.  Under the direction of the Company’s loan committee and the chief credit officer, the credit risk management function works with the loan officers and other groups within the Company to monitor the loan portfolio, maintain the watch list, and compile the analysis necessary to determine the allowance for loan losses.

Loans are added to the watch list when circumstances appear to warrant the inclusion of the relationship.  As a general rule, loans are added to the watch list when they are deemed to be problem assets.  Problem assets are defined as those that have been risk rated substandard or lower.   Successful problem asset management requires early recognition of deteriorating credits and timely corrective or risk management actions.  Generally, risk ratings are either approved or amended by the loan committee accordingly.  Problem loans are maintained on the watch list until the loan is either paid off or circumstances around the borrower’s situation improve to the point that the risk rating on the loan is adjusted upward.

In addition to internal activities, the Company also engages an external consultant on a quarterly basis to review the Company’s loan portfolio.  This external loan review function helps to ensure the soundness of the loan portfolio through a third party review of existing exposures in the portfolio, supporting the commercial loan officers in the execution of its credit management responsibilities, and monitoring the adherence to the Company’s credit risk management standards.

The following tables report the Company’s nonaccrual and past due loans at March 31, 2016 and December 31, 2015.  In addition, the credit quality of the loan portfolio is provided as of March 31, 2016 and December 31, 2015.

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At March 31, 2016

(In thousands)

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due (includes nonaccrual)		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	—	$	—	$	—	$	—	$	352,327	352,327		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		362,628		362,628		—		—
Non-owner occupied	—		—		—		—		1,121,071		1,121,071		—		—
Real estate - construction
Residential	—		—		—		—		252,242		252,242		—		—
Commercial	—		—		—		—		309,480		309,480		—		—
Real estate - residential
Single family	—		—		—		—		263,043		263,043		—		—
Multi-family	—		—		—		—		183,978		183,978		—		—
Home equity lines	116		42		—		158		159,146		159,304		—		—
Consumer
Installment	5		—		—		5		3,860		3,865		—		—
Credit cards	—		—		—		—		458		458		—		—
	$	121	$	42	$	—	$	163	$	3,008,233	$	3,008,396	$	—	$	—

22

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At March 31, 2016

(In thousands)

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due (includes nonaccrual)		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	—	$	—	$	—	$	—	$	11,361	11,361		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		35,937		35,937		—		—
Non-owner occupied	—		—		—		—		40,088		40,088		—		—
Real estate - construction
Residential	—		—		—		—		740		740		—		—
Commercial	—		—		—		—		482		482		—		—
Real estate - residential
Single family	—		—				—		6,287		6,287		—		—
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		2,176		2,176		—		—
Consumer
Installment	—		—		—		—		510		510		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	—	$	—	$	—	$	—	$	97,581	$	97,581	$	—	$	—

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At December 31, 2015

(In thousands)

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due (includes nonaccrual)		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	—	$	—	$	58	$	58	$	366,491	366,549		$	—	$	58
Real estate - commercial
Owner occupied	—		—		—		—		360,287		360,287		—		—
Non-owner occupied	—		—		—		—		1,061,689		1,061,689		—		—
Real estate - construction
Residential	—		—		—		—		257,679		257,679		—		—
Commercial	—		—		—		—		314,581		314,581		—		—
Real estate - residential
Single family	351		587		—		938		250,063		251,001		—		—
Multi-family	—		—		—		—		188,345		188,345		—		—
Home equity lines	—		—		51		51		153,711		153,762		—		51
Consumer
Installment	—		—		—		—		3,830		3,830		—		—
Credit cards	—		—		—		—		448		448		—		—
	$	351	$	587	$	109	$	1,047	$	2,957,124	$	2,958,171	$	—	$	109

23

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At December 31, 2015

(In thousands)

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due (includes nonaccrual)		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	—	$	—	$	342	$	342	$	12,796	13,138		$	—	$	342
Real estate - commercial
Owner occupied	—		—		—		—		37,450		37,450		—		—
Non-owner occupied	—		—		—		—		40,879		40,879		—		—
Real estate - construction
Residential	—		—		—		—		811		811		—		—
Commercial	—		—		—		—		530		530		—		—
Real estate - residential
Single family	—		—				—		6,420		6,420		—		—
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		2,869		2,869		—		—
Consumer
Installment	—		—		—		—		568		568		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	—	$	—	$	342	$	342	$	102,323	$	102,665	$	—	$	342

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of March 31, 2016 and December 31, 2015, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

24

Impaired Loans  - Originated Loan Portfolio

At March 31, 2016

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	750	$	750	$	—	$	1
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	2,039		2,460		—		2
Real estate - construction
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	42		42		—		—
Consumer	—		—		—		—
With related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	750	$	750	$	—	$	1
Real estate - commercial	2,039		2,460		—		2
Real estate - construction	—		—		—		—
Real estate - residential	—		—		—		—
Home equity lines	42		42		—		—
Consumer	—		—		—		—
Total	$	2,831	$	3,252	$	—	$	3

25

Impaired Loans  - Acquired Loan Portfolio

At March 31, 2016

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction
Residential	740		895		—		5
Commercial	482		621		—		4
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
With related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial	740		—		—		5
Real estate - construction	482		1,516		—		4
Real estate - residential	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
Total	$	1,222	$	1,516	$	—	$	9

26

Impaired Loans  - Originated Loan Portfolio

At December 31, 2015

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	893	$	916	$	—	$	1
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	5,616		6,461		—		30
Real estate - construction
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential
Single family	587		587		—		8
Multi-family	—		—		—		—
Home equity lines	51		51		—		—
Consumer	—		—		—		—
With related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	893	$	916	$	—	$	1
Real estate - commercial	5,616		6,461		—		30
Real estate - construction	—		—		—		—
Real estate - residential	587		587		—		8
Home equity lines	51		51		—		—
Consumer	—		—		—		—
Total	$	7,147	$	8,015	$	—	$	39

27

Impaired Loans  - Acquired Loan Portfolio

At December 31, 2015

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	342	$	470	$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	190		225		—		1
Real estate - construction
Residential	—		—		—		—
Commercial	530		627		—		4
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
With related allowance:
Commercial and industrial	$	—	$	—	$	—	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	342	$	470	$	—	$	—
Real estate - commercial	190		225		—		1
Real estate - construction	530		627		—		4
Real estate - residential	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
Total	$	1,062	$	1,322	$	—	$	5

In order to maximize the collection of certain loans, the Company will attempt to work with borrowers when necessary to extend or modify loan terms to better align with the borrower’s ability to repay.  Extensions and modifications to loans are made in accordance with the Company’s policy and conform to regulatory guidance.  Each occurrence is unique to the borrower and is evaluated separately.  The Company considers regulatory guidelines when restructuring a loan to ensure that prudent lending practices are followed.  As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan.

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Company has granted a concession to the borrower.  The Company determines that a borrower may be experiencing financial difficulty if the borrower is currently in default on any of its debt, or if the Company is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future.

28

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reductions in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.  For the periods ended March 31, 2016 and 2015, there were no loans modified in a troubled debt restructuring.

At March 31, 2016 and December 31, 2015, the Company had two TDRs totaling $362,000 and $365,000, respectively (both of which are related to one borrower).  Loans reported as TDRs as of March 31, 2016 and December 31, 2015 are not on nonaccrual.  While the borrower is having financial difficulty, the borrower has not missed a scheduled payment under the terms of the loan agreement.  The Company did not place these TDRs on nonaccrual as the only concession granted to the borrower was an extension of the maturity date to provide the borrower additional time needed to sell the collateral associated with these two loans.

29

At March 31, 2016, these loans are performing as expected post-modification. There are no acquired loans classified as TDRs.  For restructured loans in the portfolio, the Company had no loan loss reserves at March 31, 2016 and December 31, 2015, respectively.  There were no outstanding commitments to advance additional funds to customer relationships whose loans had been restructured as of March 31, 2016 and December 31, 2015.

Loans modified as TDRs within the previous 12 months and for which there was a payment default during the period are calculated by first identifying TDRs that defaulted during the period and then determining whether they were modified within the 12 months prior to the default.  For each of the periods ended March 31, 2016 and 2015, there were no loans modified during the previous 12 months that defaulted during the period.

One of the most significant factors in assessing the credit quality of the Company’s loan portfolio is the risk rating.  The Company uses the following risk ratings to manage the credit quality of its loan portfolio: pass, other loans especially mentioned (OLEM), substandard, doubtful and loss.  OLEM are those loans in which the borrower exhibits potential weakness that may, if not corrected or reversed, weaken the Bank’s credit position at some future date.  These loans may not show problems as yet due to the borrower’s apparent ability to service the debt, but special circumstances surround the loans of which the Bank’s management should be aware.  Substandard risk rated loans are those loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management.  Loans that have a risk rating of doubtful have all the weakness inherent in one graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable.  A loss loan is one that is considered uncollectible and will be charged-off immediately.  All other loans not rated OLEM, substandard, doubtful or loss are considered to have a pass risk rating.  Substandard and doubtful risk rated loans are evaluated for impairment.  The following table presents a summary of the risk ratings by portfolio segment and class segment at March 31, 2016 and December 31, 2015.

30

Internal Risk Rating Grades - Originated Loan Portfolio

At March 31, 2016

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	350,614	$	963	$	750	$	—	$	—
Real estate - commercial
Owner occupied	362,628		—		—		—		—
Non-owner occupied	1,115,583		3,449		2,039		—		—
Real estate - construction
Residential	252,242		—		—		—		—
Commercial	305,121		4,359		—		—		—
Real estate - residential
Single family	263,043		—		—		—		—
Multi-family	183,978		—		—		—		—
Home equity lines	159,146		116		42		—		—
Consumer
Installment	3,860		5		—		—		—
Credit cards	458		—		—		—		—
Total Loans Receivable	$	2,996,673	$	8,892	$	2,831	$	—	$	—

31

Internal Risk Rating Grades - Acquired Loan Portfolio

At March 31, 2016

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	11,317	$	44	$	—	$	—	$	—
Real estate - commercial
Owner occupied	35,937		—		—		—		—
Non-owner occupied	36,998		3,090		—		—		—
Real estate - construction
Residential	740		—		—		—		—
Commercial	482		—		—		—		—
Real estate - residential
Single family	6,287		—		—		—		—
Multi-family	—		—		—		—		—
Home equity lines	2,176		—		—		—		—
Consumer
Installment	510		—		—		—		—
Credit cards	—		—		—		—		—
Total Loans Receivable	$	94,447	$	3,134	$	—	$	—	$	—

32

Internal Risk Rating Grades - Originated Loan Portfolio

At December 31, 2015

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	364,932	$	724	$	893	$	—	$	—
Real estate - commercial
Owner occupied	360,287		—		—		—		—
Non-owner occupied	1,058,293		3,396		—		—		—
Real estate - construction
Residential	257,679		—		—		—		—
Commercial	304,580		4,385		5,616		—		—
Real estate - residential
Single family	250,063		351		587		—		—
Multi-family	188,345		—		—		—		—
Home equity lines	153,711		—		51		—		—
Consumer
Installment	3,830		—		—		—		—
Credit cards	448		—		—		—		—
Total Loans Receivable	$	2,942,168	$	8,856	$	7,147	$	—	$	—

33

Internal Risk Rating Grades - Acquired Loan Portfolio

At December 31, 2015

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	12,744	$	52	$	342	$	—	$	—
Real estate - commercial
Owner occupied	37,450		—		—		—		—
Non-owner occupied	35,430		5,259		190		—		—
Real estate - construction
Residential	811		—		—		—		—
Commercial	—		—		530		—		—
Real estate - residential
Single family	6,420		—		—		—		—
Multi-family	—		—		—		—		—
Home equity lines	2,869		—		—		—		—
Consumer
Installment	568		—		—		—		—
Credit cards	—		—		—		—		—
Total Loans Receivable	$	96,292	$	5,311	$	1,062	$	—	$	—

Note 7

Derivative Instruments and Hedging Activities

The Company enters into rate lock commitments with its mortgage customers.  The Company is also a party to forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities.  When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings.  The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates.  Realized and unrealized gains on mortgage banking activities represents the gain recognized for the period presented and associated with these elements of fair value.  On the date the mortgage loan closes, the anticipated future sales proceeds from the loan held for sale is designated as the hedged item in a cash flow hedge relationship and the forward loan sale commitment or mortgage-backed security position is designated as the hedging instrument.

At March 31, 2016, accumulated other comprehensive income included an unrealized loss, net of tax, of $930,000 related to forward loan sales contracts and TBA mortgage-backed securities designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within thirty days of closing and, therefore, all or substantially all of the amount recorded in accumulated other comprehensive income at March 31, 2016 which is related to the Company’s cash flow hedges will be recognized in earnings during the second quarter of 2016. For the three months ended March 31, 2016, the Company recognized a loss of $590,000 related to economic hedges that do not perfectly offset.  For the three months ended March 31, 2015, the Company recognized minimal amounts due to hedge ineffectiveness.

34

At March 31, 2016, the Company had $423.1 million in residential mortgage rate lock commitments and associated forward sales, and $112.9 million in forward loan sales associated with $308.6 million of loans that had closed and were presented as held for sale.

Note 8

Fair Value of Derivative Instruments and Hedging Activities

The following tables disclose the derivative instruments’ location on the Company’s statement of condition and the fair value of those instruments at March 31, 2016 and December 31, 2015.  In addition, the gains and losses related to these derivative instruments is provided for the three months ended March 31, 2016 and 2015.

Derivative Instruments and Hedging Activities

At March 31, 2016

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivative Instruments Designated within a Hedging Relationship
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	$	684	Accrued Interest Payable and Other Liabilities	$	1,348
Interest Rate Lock Commitments	Accrued Interest Receivable and Other Assets	1,226		Accrued Interest Payable and Other Liabilities	91
TBA mortgage-backed securities	Accrued Interest Receivable and Other Assets	7		Accrued Interest Payable and Other Liabilities	1,093
Total Designated Instruments		1,917			2,532
Derivative Instruments Not Designated within a Hedging Relationship
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	$	22,948	Accrued Interest Payable and Other Liabilities	$	1,347
TBA mortgage-backed securities	Accrued Interest Receivable and Other Assets	9		Accrued Interest Payable and Other Liabilities	1,339
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	917		Accrued Interest Payable and Other Liabilities	3
Total Undesignated Instruments		23,874			2,689
Total Derivatives		$	25,791		$	5,221

35

Derivative Instruments and Hedging Activities

At December 31, 2015

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivative Instruments Designated within a Hedging Relationship
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	$	1,569	Accrued Interest Payable and Other Liabilities	$	1,419
Interest Rate Lock Commitments	Accrued Interest Receivable and Other Assets	416		Accrued Interest Payable and Other Liabilities	477
Total Derivatives Designated as Hedging Instruments		1,985			1,896
Derivative Instruments Not Designated within a Hedging Relationship
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	$	16,784	Accrued Interest Payable and Other Liabilities	$	168
TBA mortgage-backed securities	Accrued Interest Receivable and Other Assets	64		Accrued Interest Payable and Other Liabilities	181
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	313		Accrued Interest Payable and Other Liabilities	213
Total Undesignated Instruments		17,161			562
Total Derivatives		$	19,146		$	2,458

36

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2016

(in thousands)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Forward Loan Sales Commitments	$	(450	)	Other Income	$	(683	)	Other Income	$	—
Total	$	(450	)		$	(683	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Rate Lock Commitment	$	22,454		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(914		)	Other Income
Rate Lock Commitments	914			Other Income
Total	$	22,454

37

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2015

(in thousands)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Forward Loan Sales Commitments	$	(245	)	Other Income	$	706	Other Income	$	—
Total	$	(245	)		$	706		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Rate Lock Commitment	$	19,511		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(2,056		)	Other Income
Rate Lock Commitments	2,056			Other Income
Total	$	19,511

Note 9

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at March 31, 2016 is as follows:

	Commercial Banking				Mortgage Banking				Total
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2015	$	3,080	$	1,511	$	1,781	$	1,781	$	4,861	$	3,292
2016 activity:
Amortization	—		161		—		—		—		161
Balance at March 31, 2016	$	3,080	$	1,672	$	1,781	$	1,781	$	4,861	$	3,453

The aggregate amortization expense was $161,000 and $197,000 for three months ended March 31, 2016 and 2015, respectively.  The estimated amortization expense for the next five years and thereafter is as follows:

(In thousands)

2016 (April — December)	$	433
2017	454
2018	313
2019	172
Thereafter	36

38

The carrying amount of goodwill at March 31, 2016 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2015	$	24,887	$	10,120	$	35,007
Activity: None	—		—		—
Balance at March 31, 2016	$	24,887	$	10,120	$	35,007

Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.

Note 10

Commitments and Contingencies

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract.  Commitments usually have fixed expiration dates up to one year or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  These instruments represent obligations of the Company to extend credit or guarantee borrowings and are not recorded on the consolidated statements of financial condition.  The rates and terms of these instruments are competitive with others in the market in which the Company operates.

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the contractual obligations by a customer to a third party.  The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligations.  All standby letters of credit outstanding at March 31, 2016 are collateralized.

Commitments to extend credit of $1.3 billion primarily have floating rates as of March 31, 2016.  At March 31, 2016, standby letters of credit were $32.8 million. In addition, commitments to extend credit of $451.9 million as of March 31, 2016 are related to George Mason’s mortgage loan funding commitments and are of a short term nature.

These off-balance sheet financial instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.  Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument fail to perform in accordance with the terms of the contract.  The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amounts of those instruments. It is uncertain as to the amount, if any, that

39

the Company will be required to fund on these commitments as many such arrangements expire with no amounts drawn.

George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities.  The Company evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts paid to settle such claims. George Mason has a reserve of $0 and $500,000 as of March 31, 2016 and December 31, 2015, respectively.

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

Note 11

Fair Value Measurements

The fair value framework under U.S. generally accepted accounting principles defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring the fair value.  There are three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities as of the measurement date.

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Recurring Fair Value Measurements

All classes of the Company’s investment securities available-for-sale, the Company’s trading investment securities, which include cash equivalents and mutual funds, and bank-owned life insurance are recorded at fair value, measured using reliable and unbiased valuations by an industry-wide valuation service and therefore fall into the Level 2 category.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date.  In the normal course of business, George Mason enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within the time frames established by the mortgage companies.  All borrowers are evaluated for credit worthiness prior to the extension of the commitment.  Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to the investor.  To mitigate the effect of

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the interest rate risk inherent in providing rate lock commitments to borrowers, George Mason enters into either a forward sales contract to sell loans to investors when using best efforts or a TBA mortgage-backed security under mandatory delivery.  As TBA mortgage-backed securities are actively traded in an open market, TBA mortgage-backed securities fall into a Level 1category.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  Both rate lock commitments to borrowers and the forward sales contracts to investors through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value through earnings.  These valuations fall into a Level 2 category.

There were no significant transfers into and out of Level 1, Level 2 and Level 3 measurements in the fair value hierarchy during the three months ended March 31, 2016.  Transfers between levels are recognized at the end of each reporting period.  The valuation technique used for fair value measurements using significant other observable inputs (Level 2) is the market approach for each class of assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 are shown below:

At March 31, 2016

(In Thousands)

			Fair Value Measurements Using
			Quoted Prices in Active markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Investment securities available-for-sale:
U.S. government-sponsored agencies	$	67,902	$	—	$	67,902	$	—
Mortgage-backed securities	163,049		—		163,049		—
Municipal securities	177,029		—		177,029		—
Total investment securities available-for-sale	407,980		—		407,980		—
Investment securities — trading	6,221		—		6,221		—
Bank-owned life insurance	33,102		—		33,102		—
Derivative asset - rate lock and forward loan sales commitments	23,632		—		23,632		—
Derivative asset — interest rate lock commitments	2,143		—		2,143		—
Derivative asset — TBA mortgage-backed securities	16		16		—		—
Derivative liability - rate lock and forward loan sales commitments	2,695		—		2,695		—
Derivative liability — interest rate lock commitments	94		—		94		—
Derivative liability — TBA mortgage-backed securities	2,432		2,432		—		—

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At December 31, 2015

(In Thousands)

			Fair Value Measurements Using
			Quoted Prices in Active markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Investment securities available-for-sale:
U.S. government-sponsored agencies	$	72,905	$	—	$	72,905	$	—
Mortgage-backed securities	162,724		—		162,724		—
Municipal securities	178,448		—		178,448		—
Total investment securities available-for-sale	414,077		—		414,077		—
Investment securities — trading	5,881		—		5,881		—
Bank-owned life insurance	32,978		—		32,978		—
Derivative asset - rate lock and forward loan sales commitments	18,353		—		18,353		—
Derivative asset — interest rate lock commitments	729		—		729		—
Derivative asset — TBA mortgage-backed securities	64		64		—		—
Derivative liability - rate lock and forward loan sales commitments	1,587		—		1,587		—
Derivative liability — interest rate lock commitments	690		—		690		—
Derivative liability — TBA mortgage-backed securities	181		181		—		—

Nonrecurring Fair Value Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis and are not included in the tables above.  These assets include the valuation of the Company’s loans receivable — evaluated for impairment and other real estate owned. Neither was measured at fair value at March 31, 2016 or December 31, 2015.

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The Company’s loans receivable — evaluated for impairment are measured at the present value of its expected future cash flows discounted at the loan’s coupon rate, or at the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.  The Company measures the collateral value on loans receivable — evaluated for impairment by obtaining an updated appraisal of the underlying collateral and may discount further the appraised value, if necessary, to an amount equal to the expected cash proceeds in the event the loan is foreclosed upon and the collateral is sold.  This third party appraisal data is based on market comparisons and may be subject to further adjustment for certain non-observable criteria.  In addition, an estimate of costs to sell the collateral is assumed.

Although management uses its best judgment in estimating the fair value of financial instruments, there are inherent limitations in any estimation technique.  Because of the wide range of valuation techniques and the numerous estimates and assumptions which must be made, it may be difficult to make reasonable comparisons between the Company’s fair value information and that of other banking institutions.  It is important that the many uncertainties be considered when using the estimated fair value disclosures and that, because of these uncertainties, the aggregate fair value amount should not be construed as representative of the underlying value of the Company.

Fair Value of Financial Instruments

The assumptions used and the estimates disclosed represent management’s best judgment of appropriate valuation methods for estimating the fair value of financial instruments.  These estimates are based on pertinent information available to management at the valuation date.  In certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and management’s evaluation of those factors change.

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

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents is used as a reasonable estimate of fair value.

Investment Securities Held-to-Maturity and Other Investments

Fair values for certain investment securities held-to-maturity are based on quoted market prices or prices quoted for similar financial instruments.  For the pooled trust preferred securities that are held-to-maturity, the Company estimates the fair value of these securities through the use of internal calculations and through information provided by external pricing sources.  Certain other investments such as Federal Home Loan Bank stock is recorded at cost as this is the estimated fair value based on its redemption provisions.

Loans Held for Sale

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

Loans Receivable, Net

In order to determine the fair market value for loans receivable, the loan portfolio was segmented based on loan type, credit quality and maturities.  For certain variable rate loans with no significant credit concerns and frequent repricings, estimated fair values are based on current carrying amounts.  The fair values of other loans are estimated using discounted cash flow analyses, at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  The fair value analysis also included other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, as appropriate.  This method of estimating fair value does not incorporate the exit-price concept of fair value which is appropriate for this disclosure.

Deposits

The fair values for demand deposits are equal to the carrying amount since they are payable on demand at the reporting date.  The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit (CDs) approximate their fair value at the reporting date.  Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on CDs to a schedule of aggregated expected monthly maturities on time deposits.

Other Borrowed Funds

The fair value of other borrowed funds is estimated using a discounted cash flow calculation that applies interest rates currently available for loans with similar terms.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

The following summarizes the carrying amount of these financial assets and liabilities that the Company has not recorded at fair value on a recurring basis at March 31, 2016 and December 31, 2015:

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	March 31, 2016
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	60,868	$	60,868	$	60,868	$	—	$	—
Investment securities held-to-maturity and other investments	23,225		22,735		—		22,735		—
Loans held for sale	365,489		365,489		—		365,489		—
Loans receivable, net	3,069,571		3,100,905		—		1,667		3,099,238
Accrued interest receivable	10,621		10,621		10,621		—		—
Financial liabilities:
Demand deposits	$	687,493	$	687,493	$	687,493	$	—	$	—
Interest checking	459,377		459,377		459,377		—		—
Money market and statement savings	757,620		757,620		757,620		—		—
Certificates of deposit	1,240,537		1,241,177		—		1,241,177		—
Other borrowed funds	437,065		446,746		—		446,746		—
Accrued interest payable	1,260		1,260		1,260		—		—

	December 31, 2015
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	39,337	$	39,337	$	39,337	$	—	$	—
Investment securities held-to-maturity and other investments	24,803		24,278		—		20,970		3,308
Loans held for sale	383,768		383,768		—		383,768		—
Loans receivable, net	3,024,587		3,005,260		—		707		3,004,553
Accrued interest receivable	10,633		10,633		10,633		—		—
Financial liabilities:
Demand deposits	$	657,398	$	657,398	$	657,398	$	—	$	—
Interest checking	451,545		451,545		451,545		—		—
Money market and statement savings	740,372		740,372		740,372		—		—
Certificates of deposit	1,183,456		1,185,188		—		1,185,188		—
Other borrowed funds	537,965		540,755		—		540,755		—
Accrued interest payable	1,266		1,266		1,266		—		—

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

The following presents management’s discussion and analysis of our consolidated financial condition at March 31, 2016 and December 31, 2015 and the results of our operations for the three months ended March 31, 2016 and 2015. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Caution About Forward-Looking Statements

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

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

·the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;

·changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchases of mortgage loans sold and other estimates;

·changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;

·decrease in the volume of loan originations at our mortgage banking subsidiary as a result of the cyclical nature of mortgage banking, changes in interest rates, economic conditions, decreased economic activity, and slowdowns in the housing market which would negatively impact the income recorded on the sales of loans held for sale;

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

·declines in the prices of assets and market illiquidity may cause us to record an other-than-temporary impairment or other losses, specifically in our pooled trust preferred securities portfolio resulting from increases in underlying issuers’ defaulting or deferring payments;

·changes in operations within the wealth management services segment, its customer base and assets under management;

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

·legislative and regulatory changes, including the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”) and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in the scope and cost of FDIC insurance and other coverages;

·exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;

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

·the ability to successfully manage our growth or implement our growth strategies as we implement new or change internal operating systems or if we are unable to identify attractive markets, locations or opportunities to expand in the future;

·the effects of future economic, business and market conditions;

·governmental monetary and fiscal policies;

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·changes in accounting policies, rules and practices;

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

·maintaining capital levels adequate to support our growth;

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

·competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

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

·problems with technology utilized by us;

·changing trends in customer profiles and behavior; and

·other factors described from time to time in our reports filed with the Securities and Exchange Commission.

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  In addition, our past results of operations do not necessarily indicate our future results.

In addition, this section should be read in conjunction with the description of our “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.

Overview

We are a financial holding company formed in 1997 and headquartered in Fairfax County, Virginia.  We own Cardinal Bank, or the Bank, a Virginia state-chartered community bank with 31 banking offices located in Northern Virginia and the greater Washington D.C. metropolitan area.  The Bank offers a wide range of traditional bank loan and deposit products and services to both our commercial and retail customers.  Our commercial relationship managers focus on attracting small and medium sized businesses as well as government contractors, commercial real estate developers and builders and professionals, such as physicians, accountants and attorneys.

Additionally, we complement our core banking operations by offering a wide range of services through our various subsidiaries, including mortgage banking through George Mason Mortgage, LLC (“George Mason”) and retail securities brokerage through Cardinal Wealth Services, Inc. (“CWS”).

Net interest income is our primary source of revenue. We define revenue as net interest income plus noninterest income. As discussed further in the interest rate sensitivity section, we manage our balance sheet and interest rate risk exposure to maximize, and concurrently stabilize, net interest income. We do this by monitoring our liquidity position and the spread between the interest rates earned on interest-earning assets and the interest rates paid on interest-bearing liabilities. We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it entirely.  In addition to management of interest rate risk, we analyze our loan portfolio for exposure to credit risk. Loan defaults and foreclosures are inherent risks in the banking industry, and we attempt to limit our exposure to these risks by carefully underwriting and then monitoring our extensions of credit. In addition to net interest income, noninterest income is an important source of revenue for us and includes, among other things, service charges on deposits and loans, investment fee income, gains and losses on sales of investment securities available-for-sale, and gains on sales of mortgage loans.

Critical Accounting Policies

General

U.S. generally accepted accounting principles (“GAAP”) are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters.  Management must use assumptions,

47

judgments and estimates when applying these principles where precise measurements are not possible or practical.  These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates.  Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements.  Actual results, in fact, could differ from initial estimates.

The accounting policies we view as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, accounting for purchased credit-impaired loans, the fair value measurements of certain assets and liabilities, accounting for economic hedging activities, accounting for impairment testing of goodwill, accounting for the impairment of amortizing intangible assets and other long-lived assets, and the valuation of deferred tax assets.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level that represents management’s best estimate of known and inherent losses in our loan portfolio.  Both the amount of the provision expense and the level of the allowance for loan losses are impacted by many factors, including general and industry-specific economic conditions, actual and expected credit losses, historical trends and specific conditions of individual borrowers.  Unusual and infrequently occurring events, such as weather-related disasters, may impact our assessment of possible credit losses.  As a part of our analysis, we use our historical losses, loss emergence experience and qualitative factors, such as levels of and trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and ability and depth of management, national and local economic trends and conditions, and concentrations of credit, competition, and loan review results to support our estimates.

The allowance for loan losses is based first on a segmentation of the loan portfolio by general loan type, or portfolio segments.  For originated loans, certain portfolio segments are further disaggregated and evaluated collectively for impairment based on classes, which are largely based on the type of collateral underlying each loan.  For purposes of this analysis, we categorize loans into one of five segments:  commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer loans.  We also maintain an allowance for loan losses for acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

During the fourth quarter of 2014, we transitioned to using our historical loss experience and trends in losses for each category which were then adjusted for portfolio trends and economic and environmental factors in determining the allowance for loan losses.  The indicated loss factors resulting from this analysis are applied to each of the five categories of loans.  Prior to the fourth quarter of 2014, the allowance model used the average loss rates of similar institutions based on its custom peer group as a baseline, which was adjusted for its particular loan portfolio characteristics and environmental factors.  These changes did not have an impact to the overall allowance.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. We individually assign loss factors to all loans that have been identified as having loss attributes, as indicated by deterioration in the financial condition of the borrower or a decline in underlying collateral value if the loan is collateral dependent.  In certain cases, we apply, in accordance with regulatory guidelines, a 5% loss factor to all loans classified as special mention, a 15% loss factor to all loans classified as substandard and a 50% loss factor to all loans classified as doubtful.  Loans classified as loss loans are fully reserved or charged-off.   However, in most instances, we evaluate the impairment of certain loans on a loan by loan basis for those loans that are adversely risk rated.  For these loans, we analyze the fair value of the collateral underlying the loan and consider estimated costs to sell the collateral on a discounted basis.  If the net collateral value is less than the loan balance (including accrued interest and any unamortized premium or discount associated with the loan) we recognize an impairment and establish a specific reserve for the impaired loan. Because of the limited number of impaired loans within the portfolio, we are able to evaluate each impaired loan individually and therefore specific reserves for impaired loans are generally less than those recommended by the listed regulatory guidelines above.

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The general component relates to groups of homogeneous loans not designated for a specific allowance and are collectively evaluated for impairment. The general component is based on historical loss experience adjusted for qualitative factors. To arrive at the general component, the loan portfolio is grouped by loan type. A weighted average historical loss rate is computed for each group of loans over the trailing seven year period.   We selected a seven year evaluation period as a result of the limited historical loss experience we have incurred, even during the recent economic downturn.  We also believe that a seven year time horizon represents a full economic cycle.  The historical loss factors are updated at least annually, unless a more frequent review of such factors is warranted.  In addition to the use of historical loss factors, a qualitative adjustment factor is applied. This qualitative adjustment factor, which may be favorable or unfavorable, represents management’s judgment that inherent losses in a given group of loans are different from historical loss rates due to environmental factors unique to that specific group of loans. These factors may relate to growth rate factors within the particular loan group; whether the recent loss history for a particular group of loans differs from its historical loss rate; the amount of loans in a particular group that have recently been designated as impaired and that may be indicative of future trends for this group; reported or observed difficulties that other banks are having with loans in the particular group; changes in the experience, ability, and depth of lending personnel; changes in the nature and volume of the loan portfolio and in the terms of loans; and changes in the volume and severity of past due loans, nonaccrual loans, and adversely classified loans. The sum of the historical loss rate and the qualitative adjustment factor comprise the estimated annual loss rate. To adjust for inherent loss levels within the loan portfolio, a loss emergence factor is estimated based on an evaluation of the period of time it takes for a loan within each of our loan segments to deteriorate to the point an impairment loss is recorded within the allowance.  The loss emergence factor is applied to the estimated annual loss rate to determine the expected annual loss amount.

Credit losses are an inherent part of our business and, although we believe the methodologies for determining the allowance for loan losses and the current level of the allowance are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment.  Additional provisions for such losses, if necessary, would be recorded in the commercial banking or mortgage banking segments, as appropriate, and would negatively impact earnings.

Allowance for Loan Losses - Acquired Loans

Acquired loans accounted for under ASC 310-30

For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

Acquired loans accounted for under ASC 310-20

Subsequent to the acquisition date, we establish our allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

Purchased Credit-Impaired Loans

Purchased credit-impaired (PCI) loans, which are the loans acquired in our acquisition of UFBC, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans’ expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over

49

the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).  At March 31, 2016, there was no reserve for impairment of PCI loans within our allowance for loan losses.

We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform better than originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

Fair Value Measurements

We determine the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.  Our investment securities available-for-sale are recorded at fair value using reliable and unbiased valuations by an industry-wide valuation service.  This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

We also fair value our interest rate lock commitments, forward loan sales commitments, and mortgage-backed securities used to hedge our interest rate lock commitments and loans held for sale.  The fair value of our interest rate lock commitments considers the expected premium (discount) to par and we apply certain fallout rates for those rate lock commitments for which we do not close a mortgage loan.  In addition, we calculate the effects of the changes in interest rates from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices.  The fair value of the forward sales contracts to investors and mortgage-backed securities considers the market price movement of the same type of security between the trade date and the balance sheet date.  At loan closing, the fair value of the interest rate lock commitment is included in the cost basis of loans held for sale, which are carried at the lower of cost or fair value.

Accounting for Economic Hedging Activities

We record all derivative instruments on the statement of condition at their fair values. We do not enter into derivative transactions for speculative purposes. For derivatives designated as hedges, we contemporaneously document the hedging relationship, including the risk management objective and strategy for undertaking the hedge, how effectiveness will be assessed at inception and at each reporting period and the method for measuring ineffectiveness.  We evaluate the effectiveness of these transactions at inception and on an ongoing basis.  Ineffectiveness is recorded through earnings.  For derivatives designated as cash flow hedges, the fair value adjustment is recorded as a component of other comprehensive income, except for the ineffective portion which is recorded in earnings. 

We discontinue hedge accounting prospectively when it is determined that the derivative is no longer highly effective. In situations in which cash flow hedge accounting is discontinued, we continue to carry the derivative at its fair value on the statement of condition and recognize any subsequent changes in fair value in earnings over the term of the forecasted transaction. When hedge accounting is discontinued because it is probable that a forecasted transaction will

50

not occur, we recognize immediately in earnings any gains and losses that were accumulated in other comprehensive income.

In the normal course of business, we enter into contractual commitments, including rate lock commitments, to finance residential mortgage loans. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the time frame established by us. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to residential mortgage loans intended to be sold are considered derivatives, and are marked to market through earnings.

To mitigate the effect of the interest rate risk inherent in providing rate lock commitments, we economically hedge our commitments by entering into either a forward loan sales contract under best efforts or a trade of mortgage —backed securities for mandatory delivery (the “residual hedge”). During the rate lock commitment period, these forward loan sales contracts and the residual hedge are marked to market through earnings and are not designated as accounting hedges. Exclusive of the fair value elements of the rate lock commitment related to servicing and the wholesale and retail rate spread, the changes in fair value related to movements in market rates of the rate lock commitments and the forward loan sales contracts and residual hedge generally move in opposite directions, and the net impact of changes in these valuations on net income during the loan commitment period is generally inconsequential. At the closing of the loan, the loan commitment derivative expires and we record a loan held for sale and continue to be obligated under the same forward loan sales contract under best efforts.  For mandatory delivery, we close out of the trading mortgage-backed securities assigned within the residual hedge and replace them with a forward sales contract once a price has been accepted by an investor.  The forward sales contract is then designated as a hedge against the variability in cash to be received from the loan sale.  Loans held for sale are accounted for at the lower of cost or fair value.

Accounting for Impairment Testing of Goodwill

We test goodwill for impairment pursuant to ASU 2011-08, Testing Goodwill for Impairment.  This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. We perform our annual review of goodwill during the third quarter.

In the event we are required to perform a Step 1 fair value evaluation of the reporting unit, we make estimates of the discounted cash flows from the expected future operations of the reporting unit. This discounted cash flow analysis involves the use of unobservable inputs including:  estimated future cash flows from operations; an estimate of a terminal value; a discount rate; and other inputs.  Our estimated future cash flows are largely based on our historical actual cash flows.  If the analysis indicates that the fair value of the reporting unit is less than its carrying value, we do an analysis to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all its assets and liabilities. If the implied fair value of the goodwill is less than the carrying value, an impairment loss is recognized.

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New Financial Accounting Standards

In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.  The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU

2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting. The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

2016 Economic Environment

The banking environment and the markets in which we conduct our businesses will continue to be strongly influenced by developments in the U.S. and global economies, as well as the continued implementation of rulemaking from recent financial reforms.  Although global economic conditions remain unsettled, the metropolitan Washington, D.C. area, the region in which we operate, continues to perform relatively well compared to other regions.  Although we believe that our region has weathered the recession better than most over the past several years, a protracted low interest rate environment, and the burden of regulatory requirements enacted in response to the recent financial crisis make for a challenging operating environment.  We continue to consider future economic events and their impact on our performance.

Our credit quality continues to remain strong.  At March 31, 2016, we had no loans on nonaccrual and no loans contractually past due 90 days or more as to principal or interest and still accruing.  We recorded annualized net recoveries of 0.06% of our average loans receivable for the quarter ended March 31, 2016.

Market illiquidity and concerns over credit risk continue to impact the ratings of our pooled trust preferred securities. We hold investments of $3.8 million in par value of pooled trust preferred securities, which are below book value as of March 31, 2016 due to the lack of liquidity in the market, deferrals and defaults of issuers, and continued investor apprehension for investing in these types of investments.

We expect challenging economic and operating conditions and an evolving regulatory regime to continue for the foreseeable future.  These conditions could continue to affect the markets in which we do business and could adversely impact our results for 2016. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions and the nature of new banking regulations.

While our loan growth has continued to be strong, continued uncertainty and sluggish economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses.  Deterioration in real estate values and household incomes may also result in higher credit losses for us.  Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially. The systems by which we set limits and monitor the level of our credit exposure to individual entities and industries also may not function as we have anticipated.

Liquidity is essential to our business.  The primary sources of funding for our Bank include customer deposits and wholesale funding.  Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits.  This situation may arise due to circumstances that we may be unable to control,

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such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or us.  Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events.  While we believe we have a healthy liquidity position, any of the above factors could materially impact our liquidity position in the future.

The U.S. government continues to enact legislation and develop various programs and initiatives designed to regulate the financial services industry, stabilize the housing markets and stimulate the economy.  The banking industry is awaiting many of the regulations resulting from the implementation of the Financial Reform Act.  We remain unsure of the full impact this legislation will have on our business, operations, or our financial condition.

Statements of Income

General

For the three months ended March 31, 2016 and 2015, we reported net income of $13.1 million and $13.7 million, respectively, a decrease of $665,000, or 5%.  Net interest income after the provision for loan losses increased $3.3 million to $30.7 million for the three months ended March 31, 2016 compared to $27.4 million for the three months ended March 31, 2015.  Provision for loan losses recorded for the three months ended March 31, 2016 was $250,000, compared to provision expense of $130,000 for the same period of 2015.  Noninterest income for the three months ended March 31, 2016 and 2015 was $15.3 million and $17.6 million, respectively, a decrease of $2.3 million.  This decrease was primarily due to a decrease in realized and unrealized gains on mortgage banking activities of $2.0 million for the first quarter of 2016 compared to the same 2015 period.  For the three months ended March 31, 2016, noninterest expense increased to $26.3 million, compared to $24.1 million for the same period of 2015.  The increase in noninterest expense is primarily attributable to an increase in salary and benefits expense, a result of an increase in the variable components or our compensation and additional staffing on both the sales and operational areas of the Company over the past year as a result of our continued growth and increased regulatory environment.

For the three months ended March 31, 2016, basic and diluted earnings per common share were $0.40 and $0.39, respectively.  Basic and diluted earnings per common share for the three months ended March 31, 2015 were each $0.42.  Weighted average fully diluted shares outstanding for the three months ended March 31, 2016 and 2015 were 33,435,858 and 33,071,317, respectively.

Return on average assets for the three months ended March 31, 2016 and 2015 was 1.31% and 1.62%, respectively. Return on average equity for the three months ended March 31, 2016 and 2015 was 12.34% and 14.13%, respectively.

General —Business Segments

We operate in three business segments: commercial banking, mortgage banking, and wealth management services.

Net income attributable to the commercial banking segment for the three months ended March 31, 2016 was $10.2 million compared to net income of $8.9 million for the three months ended March 31, 2015.  Net interest income increased $3.4 million to $30.5 million for the three months ended March 31, 2016, compared to $27.1 million for the same period of 2015.  Provision for loan losses was $250,000 for the three months ended March 31, 2016 compared to a provision of $130,000 for the same period of 2015.  Noninterest income decreased to $1.2 million for the three months ended March 31, 2016 compared to $1.3 million for the three months ended March 31, 2015.  Noninterest expense was $16.5 million for the three months ended March 31, 2016, compared to $15.1 million for the same period of 2015.  The increase in noninterest expense was primarily attributable to increases in staffing and the variable component of our compensation at the Bank.

The mortgage banking segment reported net income of $3.6 million for the three months ended March 31, 2016 compared to net income of $6.0 million for the three months ended March 31, 2015.  Realized and unrealized gains associated with the fair value of commitments and loans held for sale decreased to $14.1 million for the three months

53

ended March 31, 2016 compared to $16.2 million for the same period of 2015, a result of a decrease in the volume of loans sold.  Noninterest expense increased $1.6 million to $9.0 million for the three months ended March 31, 2016 compared to $7.3 million for the same period of 2015.

The wealth management services segment, which includes CWS, recorded net income of $10,000 for the three months ended March 31, 2016, compared to net income of $1,000 for the three months ended March 31, 2015.

Net Interest Income

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is affected primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. For the three months ended March 31, 2016 and 2015, net interest income was $30.7 million and $27.4 million, respectively.  The yields on our loans receivable portfolio decreased 17 basis points for the three months ended March 31, 2016 compared to the same period of 2015 as a result of the low interest rate environment.  The yield on our loans held for sale portfolio increased slightly by 7 basis points.  The yields of our interest-bearing deposits increased 5 basis points as we have increased rates on certain savings and certificates of deposit products to remain competitive in our market.  However, to offset this slight increase, we have reduced our rates on our interest checking products and costs related to other borrowed funds.  Other borrowed funds costs decreased by 42 basis points primarily due to a restructuring of a portion of our fixed rate FHLB advance portfolio during February 2015.  This restructuring reduced our FHLB advance funding costs from 3.33% to 2.80%.

Our net interest margin, on a tax-equivalent basis, which is calculated as net interest income divided by average interest earning assets, was 3.31% and 3.45% for the three months ended March 31, 2016 and 2015, respectively.  Our net interest margin decreased as a result of the decrease in yield on our interest-earning assets due to the low interest rate environment.

Interest income on loans receivable increased $3.5 million to $31.0 million for the three months ended March 31, 2016 compared to $27.5 million for the same three month period of 2015.  The increase in interest income on loans receivable is primarily a result of the increase in the volume of the loans receivable portfolio.  Interest income on loans held for sale was $3.0 million for the three months ended March 31, 2016 and $2.5 million for the same period of 2015.

Interest income on investment securities increased $437,000 to $3.2 million for the three months ended March 31, 2016 as compared to $2.7 million for the three months ended March 31, 2015. The increase in interest income in our investment securities portfolio is attributable to purchases of securities that occurred during the third and fourth quarters of 2015.

Total interest expense increased $1.3 million to $6.7 million for the three months ended March 31, 2016 as compared to $5.5 million for the same period of 2015.  The increase is primarily attributable to the increase in deposits, specifically certificates of deposit over the past year.  Certificates of deposit increased $178.4 million year over year, as a result of organic growth.  Brokered certificates of deposit increased $66.8 million year over year as a result of the increase in loans held for sale as wholesale funding is used to support this segment of our loan portfolio.

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The following tables present an analysis of average earning assets and interest-bearing liabilities with related components of interest income and interest expense on a tax equivalent basis.

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

Three Months Ended March 31, 2016, 2015 and 2014

(In thousands)

	2016							2015							2014
				Interest		Average					Interest		Average					Interest		Average
	Average			Income/		Yield/		Average			Income/		Yield/		Average			Income/		Yield/
	Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets
Interest-earning assets:
Loans (1):
Commercial and industrial	$	266,353		$	2,492	3.74	%	$	315,644		$	3,015	3.61	%	$	176,864		$	2,272	5.14	%
Commercial and industrial - tax exempt	105,386			738		2.80	%	34,298			168		1.96	%	82,786			946		4.57	%
Real estate - commercial	1,532,293			16,410		4.28	%	1,258,988			14,257		4.53	%	1,159,091			12,623		4.36	%
Real estate - construction	549,907			6,350		4.62	%	445,913			5,246		4.70	%	397,199			4,829		4.86	%
Real estate - residential	441,134			4,052		3.67	%	391,070			3,717		3.80	%	304,546			3,109		4.08	%
Home equity lines	160,240			1,258		3.16	%	133,737			1,092		3.31	%	114,720			1,060		3.70	%
Consumer	5,284			62		4.72	%	4,807			66		5.56	%	6,465			83		5.21	%
Total loans	3,060,597			31,362		4.10	%	2,584,457			27,561		4.27	%	2,241,671			24,922		4.45	%
Loans held for sale	304,653			2,957		3.88	%	260,524			2,484		3.81	%	218,094			2,477		4.54	%
Investment securities	419,678			3,948		3.76	%	332,801			3,231		3.88	%	365,954			3,580		3.91	%
Federal funds sold	55,018			65		0.47	%	52,022			28		0.22	%	31,790			31		0.40	%
Total interest-earning assets and interest income (2)	3,839,946			38,332		3.99	%	3,229,804			33,304		4.07	%	2,857,509			31,010		4.34	%
Noninterest-earning assets:
Cash and due from banks	21,169							20,232							35,831
Premises and equipment, net	25,185							25,208							24,849
Goodwill and other intangibles, net	36,498							37,235							32,849
Accrued interest and other assets	105,663							98,009							100,878
Allowance for loan losses	(32,113		)					(28,828		)					(30,043		)
Total assets	$	3,996,348						$	3,381,660						$	3,021,873
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	457,528			458		0.40	%	424,284			519		0.50	%	420,285			534		0.52	%
Money markets	451,303			410		0.37	%	367,485			289		0.31	%	312,656			238		0.30	%
Statement savings	301,734			313		0.42	%	263,938			197		0.30	%	247,568			167		0.27	%
Certificates of deposit	784,306			2,390		1.23	%	616,797			1,808		1.18	%	518,336			1,387		1.08	%
Brokered certificates of deposit	398,455			901		0.91	%	358,104			673		0.76	%	235,745			495		0.85	%
Total interest - bearing deposits	2,393,326			4,472		0.75	%	2,030,608			3,486		0.70	%	1,734,590			2,821		0.66	%
Other borrowed funds	487,087			2,259		1.87	%	350,331			1,975		2.29	%	375,775			2,173		2.34	%
Total interest-bearing liabilities and interest expense	2,880,413			6,731		0.94	%	2,380,939			5,461		0.93	%	2,110,365			4,994		0.96	%
Noninterest-bearing liabilities:
Demand deposits	653,432							579,059							519,016
Other liabilities	38,986							32,926							34,529
Common shareholders’ equity	423,517							388,736							357,963
Total liabilities and shareholders’ equity	$	3,996,348						$	3,381,660						$	3,021,873
Net interest income and net interest margin (2)				$	31,601	3.31	%				$	27,843	3.45	%				$	26,016	3.64	%

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

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 35% for all periods presented.

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Rate and Volume Analysis

Three Months Ended March 31, 2016, 2015 and 2014

(In thousands)

	2016 Compared to 2015									2015 Compared to 2014
	Change Due to									Change Due to
	Average			Average			Increase			Average			Average			Increase
	Volume (3)			Rate			(Decrease)			Volume (3)			Rate			(Decrease)
Interest income:
Loans (1):
Commercial and industrial	$	(422	)	$	88		$	(334	)	$	1,948		$	(1,205	)	$	743
Commercial and industrial - tax exempt	348			222			570			(554		)	(224		)	(778		)
Real estate - commercial	3,095			(942		)	2,153			1,088			546			1,634
Real estate - construction	1,210			(106		)	1,104			603			(186		)	417
Real estate - residential	476			(141		)	335			883			(275		)	608
Home equity lines	224			(58		)	166			162			(130		)	32
Consumer	7			(11		)	(4		)	(21		)	4			(17		)
Total loans	4,938			(949		)	3,989			4,109			(1,470		)	2,639
Loans held for sale	421			52			473			482			(475		)	7
Investment securities available-for-sale	843			(126		)	717			(324		)	(25		)	(349		)
Federal funds sold	2			35			37			21			(24		)	(3		)
Total interest income (2)	6,203			(987		)	5,216			4,288			(1,994		)	2,294
Interest expense:
Interest - bearing deposits:
Interest checking	51			(112		)	(61		)	5			(20		)	(15		)
Money markets	55			66			121			42			9			51
Statement savings	21			95			116			11			19			30
Certificates of deposit	491			91			582			265			156			421
Brokered certificates of deposit	77			151			228			256			(78		)	178
Total interest - bearing deposits	695			291			986			579			86			665
Other borrowed funds	793			(509		)	284			(148		)	(50		)	(198		)
Total interest expense	1,488			(218		)	1,270			431			36			467
Net interest income (2)	$	4,716		$	(769	)	$	3,947		$	3,857		$	(2,030	)	$	1,827

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

(2) Interest income for loans receivable and investment securities available-for-sale is reported on a fully taxable-equivalent basis at a rate of 35% for all periods presented.

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

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Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2016 and 2015 was $250,000 and $130,000, respectively.  The increase in our provision expense during 2016 compared to 2015 is primarily a result of loan growth during 2016.

The allowance for loan losses was $32.4 million at March 31, 2016 and $31.7 million at December 31, 2015. Our allowance for loan losses ratio as a percent of total loans was 1.04% for each of the periods ended March 31, 2016 and December 31, 2015.

During 2016, we recorded charge-offs of $90,000 related to commercial and residential loans.  Recoveries from previously charged-off loans totaled $524,000 for the three months ended March 31, 2016.  During the first quarter of 2016, we received recoveries on two commercial relationships totaling $501,000.  Nonperforming loans at March 31, 2016 and December 31, 2015, were $0 and $451,000, respectively. The decrease in nonperforming loans is primarily a result of one nonperforming loan paying off in total during 2016.

A sluggish job market and declining home values could adversely affect our home equity lines of credit, credit card and other loan portfolios, including causing increases in delinquencies and default rates, which we expect could impact our charge-offs and provision for loan losses.  Deterioration in commercial and residential real estate values, employment data and household incomes may also result in higher credit losses in our commercial loan portfolio.  Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer.  At March 31, 2016, our commercial real estate (including construction lending) portfolio was 68% of our total loan portfolio.  A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries may not function as we have anticipated.

Additional information on the allowance for loan losses, its allocation to the loans receivable portfolio and information on nonperforming loans can be found in the following tables.

Allowance for Loan Losses

Three Months Ended March 31, 2016 and 2015

(In thousands)

	2016			2015
Beginning balance, January 1	$	31,723		$	28,275
Provision for loan losses	250			130
Loans charged off:
Commercial and industrial	(39		)	(3		)
Residential	(51		)	—
Consumer	—			(16		)
Total loans charged off	(90		)	(19		)
Recoveries:
Commercial and industrial	512			485
Residential	12			10
Consumer	—			3
Total recoveries	524			498
Net recoveries	434			479
Ending balance, March 31,	$	32,407		$	28,884

	March 31,			March 31,
	2016			2015
Loans:
Balance at period end	$	3,101,978		$	2,625,430
Allowance for loan losses to loans receivable net of fees	1.04		%	1.10		%
Annualized net recoveries to average loans receivable	-0.06		%	-0.07		%

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Allocation of the Allowance for Loan Losses

At March 31, 2016 and December 31, 2015

(In thousands)

	March 31,				December 31,
	2016				2015
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	1,551	11.71	%	$	1,623	12.40	%
Real estate - commercial	21,097		50.22	%	20,356		49.02	%
Real estate - construction	7,714		18.12	%	7,877		18.74	%
Real estate - residential	1,619		14.59	%	1,462		14.56	%
Home equity lines	396		5.20	%	377		5.12	%
Consumer	30		0.16	%	28		0.16	%
Total allowance for loan losses	$	32,407	100.00	%	$	31,723	100.00	%

* Percentage of loan type to the total loan portfolio.

Nonperforming Loans

At March 31, 2016 and December 31, 2015

(In thousands)

	March 31,		December 31,
	2016		2015
Nonaccruing loans	$	—	$	451
Loans contractually past-due 90 days or more and still accruing	—		—
Total nonperforming loans	$	—	$	451

Noninterest Income

Noninterest income includes service charges on deposits and loans, realized and unrealized gains on mortgage banking activities, investment fee income, and gains on sales of investment securities available-for-sale, and continues to be an important factor in our operating results.

Noninterest income for the three months ended March 31, 2016 and 2015 was $15.3 million and $17.6 million, respectively.  Realized and unrealized gains on mortgage banking activities, which are reported net of commission & incentive expense, totaled $14.1 million for the three months ended March 31, 2016 compared to $16.2 million for the same period of 2015.

The change in net gains from mortgage banking activities is mainly due to changes in the unrealized gains associated with the fair value of our locked commitments and closed loans held for sale.  For the three months ended March 31, 2016, the unrealized gains decreased $1.5 million to $27.0 million, compared to $28.5 million for the three months ended March 31, 2015.  In accordance with GAAP, if a lender enters into a mortgage loan commitment with a customer and intends to sell the mortgage loan after it is funded, the written loan commitment is to be accounted for as a derivative instrument and is to be recorded at fair value through earnings.  George Mason enters into commitments where individual loans are “locked in” at a specified interest rate for a fixed period.  At the time of commitment, George Mason also enters into a forward contract with an investor to sell the loan at an agreed upon price if, and after, the loan is closed. This price represents the fair value of the “interest rate lock commitment” (“IRLC”) and is an unrealized gain that is included in earnings during the period of the IRLC.  This gain is also recognized earlier in earnings than the expenses associated with originating, underwriting and closing the loan, which, under GAAP, are deferred and recognized by the Company at the time of loan sale to the investor.  When the loan actually closes, the unrealized gain is added to the basis of the ensuing loan held for sale (LHFS).  At any point in time (e.g. quarter end) the fair value of the existing IRLCs (not yet closed) and the premium to the basis of existing LHFS (loans closed but not yet purchased by investors) represent unrealized gains that have been recognized in income, either in the current period or prior periods.  At the time the loan is sold to investors, the “investor buy price” is equal to the basis of the loan held for sale, and there is no gain or loss recognized.  This accounting creates a mismatch between the income recognition on

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loan production and the expense recognition for those same loans.  Direct costs associated with loan origination, such as commission and salaries, are recorded as a reduction to realized and unrealized gains on mortgage banking activities when the loan is sold to an investor.

For the three months ended March 31, 2016 and 2015, we closed $769.1 million and $843.7 million in mortgage originations, respectively.  The decrease in mortgage originations is a result of a decrease in refinance activity for the three months ended March 31, 2016 compared to the same period of 2016.   Refinance activity decreased to 38% of our total loan origination volume for the 2016 compared to 51% for the same period of 2015, demonstrating our continued focus on the more stable purchase money mortgage business.

Investment fee income decreased to $85,000 for the three months ended March 31, 2016 compared to $115,000 for the same period of 2015.

The increase in the cash surrender value of our bank-owned life insurance for the three months ended March 31, 2016 and 2015 was $124,000 and $118,000, respectively.

Noninterest income represented 33% and 39% of our total revenues for the three months ended March 31, 2016 and 2015, respectively.

Noninterest Expense

Noninterest expense includes, among other things, salaries and benefits, occupancy costs, professional fees, depreciation, data processing, telecommunications and miscellaneous expenses. Noninterest expense for the three months ended March 31, 2016 was $26.3 million, compared to $24.1 million for the same period of 2015, an increase of $2.1 million, or 9%.

For the quarter ended March 31, 2016, salaries and benefits expense increased to $15.5 million from $12.1 million for the quarter ended March 31, 2015.  The increase in noninterest expense is primarily attributable to an increase in salary and benefits expense, a result of an increase in the variable components or our compensation and additional staffing on both the sales and operational areas of the Company over the past year as a result of our continued growth and increased regulatory environment.

Occupancy expense was $2.6 million for the three months ended March 31, 2016 compared to $2.5 million for the same period of 2015.

Professional fees were $1.1 million and $1.6 million for the three months ended March 31, 2016 and 2015, respectively.  The decrease in professional fees for 2016 was a result of increased legal fees recorded during 2015 as a result of litigation which was settled during the second quarter of 2015.

Income Taxes

For the three months ended March 31, 2016, we recorded a provision for income taxes of $6.4 million, compared to $7.0 million for the same period of 2015.  Our effective tax rate for the three months ended March 31, 2016 and 2015 was 32.8% and 33.9%, respectively.  Our effective tax rate is less than the statutory rate because of income we receive on tax-exempt investments.  See also “Critical Accounting Policies — Valuation of Deferred Tax Assets.”

Statements of Condition

Total assets were $4.07 billion and $4.03 billion at March 31, 2016 and December 31, 2015, respectively.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $418.0 million at March 31, 2016, compared to $423.8 million at December 31, 2015, a decrease of $5.8 million.  The decrease in investment securities was a result of maturities, calls, and scheduled principal payments.  The investment

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securities portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and trading securities. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management.  Investment securities held-to-maturity are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. Investment securities-trading are securities we purchase to economically hedge against fair value changes in our nonqualified deferred compensation plan liability.  These securities include cash equivalents, equities and mutual funds.  See the following table for additional information on our investment securities portfolio.

Investment Securities

At March 31, 2016 and December 31, 2015

(In thousands)

	Amortized		Fair		Average
Available-for-sale at March 31, 2016	Cost		Value		Yield
U.S. government-sponsored agencies
Within one year	$	5,023	$	5,095	3.92	%
One to five years	40,170		42,808		3.33	%
After ten years	19,999		19,999		2.60	%
Total U.S. government-sponsored agencies	65,192		67,902		3.15	%
Mortgage-backed securities (1)
One to five years	2,019		2,083		2.66	%
Five to ten years	46,450		49,709		3.26	%
After ten years	107,337		111,257		3.00	%
Total mortgage-backed securities	155,806		163,049		3.07	%
Tax exempt municipal securities (2)
Within one year	2,488		2,518		4.02	%
One to five years	21,568		22,742		3.07	%
Five to ten years	29,448		30,960		3.55	%
After ten years	76,828		80,618		3.18	%
Taxable municipal securities
One to five years	3,241		3,525		4.96	%
Five to ten years	2,242		2,412		4.07	%
After ten years	33,609		34,254		3.31	%
Total municipal securities	169,424		177,029		3.31	%
Total investment securities available-for-sale	$	390,422	$	407,980	3.19	%

	Amortized		Fair		Average
Held-to-maturity at March 31, 2016	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	1	$	1	8.14	%
Total mortgage-backed securities	1		1		8.14	%
Pooled trust preferred securities
After ten years	3,813		3,323		1.46	%
Total pooled trust preferred securities	3,813		3,323		1.46	%
Total investment securities held-to-maturity	3,814		3,324		1.46	%
Total investment securities	$	394,236	$	411,304	3.17	%

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	Amortized		Fair		Average
Available-for-sale at December 31, 2015	Cost		Value		Yield
U.S. government-sponsored agencies
Within one year	$	5,538	$	5,643	3.62	%
One to five years	35,244		36,887		3.23	%
Five to ten years	4,957		5,453		4.06	%
After ten years	24,878		24,922		2.71	%
Total U.S. government-sponsored agencies	70,617		72,905		3.14	%
Mortgage-backed securities (1)
One to five years	2,029		2,065		2.66	%
Five to ten years	46,626		48,086		3.26	%
After ten years	110,304		112,573		3.02	%
Total mortgage-backed securities	158,959		162,724		3.09	%
Tax exempt municipal securities (2)
Within one year	3,687		3,739		4.25	%
One to five years	14,021		14,727		3.13	%
Five to ten years	30,896		32,448		3.53	%
After ten years	84,717		88,085		3.17	%
Taxable municipal securities
One to five years	3,245		3,506		4.96	%
Five to ten years	2,242		2,342		4.07	%
After ten years	33,748		33,601		3.30	%
Total municipal securities	172,556		178,448		3.33	%
Total investment securities available-for-sale	$	402,132	$	414,077	3.20	%

	Amortized		Fair		Average
Held-to-maturity at December 31, 2015	Cost		Value		Yield
Mortgage-backed securities (1)
One to five years	$	3	$	3	8.13	%
Total mortgage-backed securities	3		3		8.13	%
Pooled trust preferred securities
After ten years	3,833		3,308		1.18	%
Total pooled trust preferred securities	3,833		3,308		1.18	%
Total investment securities held-to-maturity	3,836		3,311		1.19	%
Total investment securities	$	405,968	$	417,388	3.18	%

(1) Based on contractual maturities.

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

We complete reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2016, the majority of our investment securities portfolio consisted of securities rated AAA by a leading rating agency.  Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk.  At March 31, 2016, 99% of our mortgage-related investment securities portfolio is guaranteed by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA).

At March 31, 2016, certain of our investment grade securities were in an unrealized loss position.  Investment securities with unrealized losses are a result of pricing changes in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government.  Other mortgage-backed securities and municipal securities have third party protective elements and there are no negative indications that the contractual cash flows will not be received when due.  We do not intend to sell nor do we believe we will be required to sell any of our temporarily impaired securities prior to the recovery of their amortized cost.

No other-than-temporary impairment has been recognized for the securities in our investment portfolio as of March 31, 2016.

We hold $16.6 million in FHLB stock at March 31, 2016, which is included in other investments on the statement of condition.

Loans Receivable

Total loans receivable, net of deferred fees and costs, were $3.10 billion at March 31, 2016 and $3.06 billion at December 31, 2015.  See the following table for details on the loans receivable portfolio.

Loans held for sale at March 31, 2016 were $365.5 million compared to $383.8 million at December 31, 2015.  Loans closed at our mortgage subsidiary totaled $769.1 million for the three months ended March 31, 2016 compared to $843.7 million for the three months ended March 31, 2015.  Loans held for sale are valued at the lower of cost or fair value.

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Loans Receivable

At March 31, 2016 and December 31, 2015

(In thousands)

	March 31, 2016					December 31, 2015
Commercial and industrial	$	363,688		11.71	%	$	379,687		12.40	%
Real estate - commercial	1,559,724			50.22	%	1,500,305			49.02	%
Real estate - construction	562,944			18.12	%	573,601			18.74	%
Real estate - residential	453,308			14.59	%	445,766			14.56	%
Home equity lines	161,480			5.20	%	156,631			5.12	%
Consumer	4,833			0.16	%	4,846			0.16	%
Gross loans	$	3,105,977		100.00	%	3,060,836			100.00	%
Net deferred (fees) costs	(3,999		)			(4,526		)
Less: allowance for loan losses	(32,407		)			(31,723		)
Loans receivable, net	$	3,069,571				$	3,024,587

Deposits

Total deposits were $3.15 billion at March 31, 2016 compared to $3.03 billion at December 31, 2015.  See the following table for details on certificates of deposit with balances of $250,000 or more.

Certificates of Deposit that Meet or Exceed FDIC Insurance Limit

At March 31, 2016

(In thousands)

Maturities:	Fixed Term		No-Penalty*		Total
Three months or less	$	17,429	$	48,210	$	65,639
Over three months through six months	29,607		4,289		33,896
Over six months through twelve months	68,526		3,918		72,444
Over twelve months	130,008		9,598		139,606
	$	245,570	$	66,015	$	311,585

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

We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the

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CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At March 31, 2016 and December 31, 2015, we had $64.4 million and $67.0 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $387.3 million and $340.0 million at March 31, 2016 and December 31, 2015, respectively. We use this type of funding to lock in low cost term funding to support mortgage loans we originate and intend to sell.

Borrowings

Other borrowed funds were $437.1 million at March 31, 2016 compared to $538.0 million at December 31, 2015.  FHLB advances at March 31, 2016 and December 31, 2015 were $305.0 million and $355.0 million, respectively.  Customer repurchase agreements decreased $5.9 million to $107.7 million at March 31, 2016 compared to $113.6 million at December 31, 2015.  We had no federal funds purchased outstanding at March 31, 2016 compared to $45.0 million at December 31, 2015.  In addition, FHLB advances decreased $50.0 million to $305.0 million at March 31, 2016 compared to $355.0 million at December 31, 2015 due to scheduled maturities. The following table provides information on our borrowings.

Short-Term Borrowings and Other Borrowed Funds

At March 31, 2016

(In thousands)

			Amount
	Interest Rate		Outstanding
Other short-term borrowed funds:
Customer repurchase agreements	0.17	%	$	107,670
Total other short-term borrowed funds and weighted average rate	0.17	%	$	107,670
Other borrowed funds:
Trust preferred	3.26	%	$	24,395
FHLB advances - long term	2.52	%	305,000
Other borrowed funds and weighted average rate	2.57	%	$	329,395
Total other borrowed funds and weighted average rate	1.98	%	$	437,065

Shareholders’ Equity

Shareholders’ equity at March 31, 2016 was $426.5 million compared to $413.1 million at December 31, 2015, an increase of $13.4 million, or 3%. The increase in shareholders’ equity at March 31, 2016 compared to December 31, 2015 is primarily attributable to net income of $13.1 million recorded for the three months ended March 31, 2016 less dividends of $3.9 million that were declared during 2016.  In addition, accumulated other comprehensive income increased $3.1 million for the three months ended March 31, 2016.

Book value per share at March 31, 2016 was $13.16 compared to $12.76 at December 31, 2015. Tangible book value per share (which is book value per share less goodwill and other intangible assets) at March 31, 2016 was $12.04 compared to $11.63 at December 31, 2015.

Business Segment Operations

We provide banking and non-banking financial services and products through our subsidiaries. We operate in three business segments, commercial banking, mortgage banking and wealth management services.

Commercial Banking

The commercial banking segment includes both commercial and consumer lending and provides customers such products as commercial loans, real estate loans, and other business financing and consumer loans. In addition, this segment also provides customers with various deposit products including demand deposit accounts, savings accounts and certificates of deposit.

For the three months ended March 31, 2016, the commercial banking segment recorded net income of $10.2 million compared to $8.9 million for the same period of 2015.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for the commercial banking segment for the periods presented.  At March 31, 2016, total assets for this segment were $4.0 billion, loans receivable, net of deferred fees and costs, were $3.10 billion and total deposits were $3.15 billion. At March 31, 2015, total assets for this segment were $3.37 billion, loans receivable, net of deferred fees and costs, were $2.63 billion and total deposits were $2.65 billion.

Mortgage Banking

The operations of the mortgage banking segment are conducted through George Mason. George Mason engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market.

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For the three months ended March 31, 2016 and 2015, the mortgage banking segment recorded net income of $3.6 million and $6.0 million, respectively.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for the mortgage banking segment for the periods presented.  At March 31, 2016, total assets for this segment were $406.2 million; loans held for sale were $365.5 million and mortgage funding checks were $28.8 million. At March 31, 2015, total assets for this segment were $358.0 million; loans held for sale were $315.0 million and mortgage funding checks were $23.0 million.

Wealth Management Services

The wealth management services segment provides investment and financial services to businesses and individuals, including financial planning, retirement/estate planning, and investment management.

For the three months ended March 31, 2016 and 2015, the wealth management services segment recorded net income of $10,000 and $1,000, respectively.  See “Statements of Income — General—Business Segments” above for additional information regarding the operating results for this business segment for the periods presented.  At March 31, 2016, total assets were $513,000 and managed and custodial assets were $268 million. At March 31, 2015, total assets were $2.4 million and managed and custodial assets were $282 million.

Additional information pertaining to our business segments can be found in Note 3 to the notes to consolidated financial statements.

Capital Resources

Capital adequacy is an important measure of our financial stability and performance. Our objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profile of the financial institution. On January 1, 2015, the new Basel III regulatory risk-based capital rules became effective.  Basel III includes new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%, which is increased from 4%; (iii) a total capital ratio of 8%, which is unchanged from the current rules; and (iv) a Tier 1 leverage ratio of 4%.

Beginning January 1, 2016, a capital conservation buffer requirement is being phased in at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and is applicable to our CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, we consider our new minimum capital ratios to be as follows: 5.125% for CET1; 6.625% for Tier 1 capital; and 8.625% for Total capital.  Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

This new regulatory standard also provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, deferred tax assets related to temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Basel III prescribes a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

Total risk-based capital to risk-weighted assets was 11.50% at March 31, 2016 compared to 11.37% at December 31, 2015.  Our Tier 1 risk-based capital ratio was 10.64% at March 31, 2016 compared to 10.52% at December 31, 2015.  Common equity Tier 1 capital was 9.99% at March 31, 2016 compared to 9.86% at December 31, 2015.

Accordingly, our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions at both March 31, 2016 and December 31, 2015.

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The following table shows the minimum capital requirements and our capital position at March 31, 2016 and December 31, 2015 for the Company and for the Bank.

Capital Components

At March 31, 2016 and December 31, 2015

(In thousands)

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
Cardinal Financial Corporation (Consolidated):	Amount		Ratio		Amount			Ratio		Amount			Ratio
At March 31, 2016
Total risk-based capital	$	439,830	11.50	%	$	329,917	>	8.625	%		N/A	>	N/A
Tier I risk-based capital	406,975		10.64	%	253,415		>	6.625	%	N/A		>	N/A
Common Equity Tier 1 risk-based capital	381,975		9.99	%	196,038		>	5.125	%	N/A		>	N/A
Leverage capital ratio	406,975		10.28	%	159,152		>	4.000	%	N/A		>	N/A
At December 31, 2015
Total risk-based capital	$	428,554	11.37	%	$	301,450	>	8.00	%		N/A	>	N/A
Tier I risk-based capital	396,382		10.52	%	226,087		>	6.00	%	N/A		>	N/A
Common equity tier I capital	371,382		9.86	%	169,565		>	4.50	%	N/A		>	N/A
Leverage capital ratio	396,382		10.18	%	156,757		>	4.00	%	N/A		>	N/A

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
Cardinal Bank:	Amount		Ratio		Amount			Ratio		Amount			Ratio
At March 31, 2016
Total risk-based capital	$	435,833	11.45	%	$	328,181	>	8.625	%	$	380,499	>	10.00	%
Tier I risk-based capital	402,978		10.59	%	252,081		>	6.625	%	304,399		>	8.00	%
Common Equity Tier 1 risk-based capital	402,978		10.59	%	195,006		>	5.125	%	247,324		>	6.50	%
Leverage capital ratio	402,978		10.23	%	157,366		>	4.000	%	196,707		>	5.00	%
At December 31, 2015
Total risk-based capital	$	424,302	11.32	%	$	299,886	>	8.00	%	$	374,857	>	10.00	%
Tier I risk-based capital	392,130		10.46	%	224,914		>	6.00	%	299,886		>	8.00	%
Common equity tier I capital	392,130		10.46	%	168,686		>	4.50	%	243,657		>	6.50	%
Leverage capital ratio	392,130		10.13	%	154,862		>	4.00	%	193,578		>	5.00	%

Liquidity

Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. We must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash.  The objective of our liquidity management program is to ensure that we always have sufficient resources to meet the demands of our depositors and borrowers. Stable core deposits and a strong capital position provide the base for our liquidity position. We believe we have demonstrated our ability to attract deposits because of our convenient branch locations, personal service and pricing.

In addition to deposits, we have access to different wholesale funding markets. These markets include the brokered CD market, the repurchase agreement market and the federal funds market. We are a member of the Certificates of Deposit Account Registry Service (“CDARS”).  CDARS allows our customers to access FDIC insurance protection on multi-million dollar certificates of deposit through our Bank.  When a customer places a large deposit through CDARS, we place their funds into certificates of deposit with other banks in the CDARS network in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At March 31, 2016 and December 31, 2015, we had $64.4 million and $67.0 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  Brokered certificates of deposit not in the CDARS network were $387.3 million and $340.0 million at March 31, 2016 and December 31, 2015, respectively.

We also maintain secured lines of credit with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta (“FHLB”) for which we can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces our reliance on any one source for funding.

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

We have established a formal liquidity contingency plan which establishes a liquidity management team and provides guidelines for liquidity management. For our liquidity management program, we first determine our current liquidity position and then forecast liquidity based on anticipated changes in the balance sheet. In this forecast, we expect to maintain a liquidity cushion. We also stress test our liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. We believe that we have sufficient resources to meet our liquidity needs.

                Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $468.8 million at March 31, 2016 or 11.5% of total assets. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its investment securities and a portion of its commercial real estate and residential real estate loan portfolios to the FHLB with additional investment securities and certain loans in its commercial & industrial loan portfolio pledged to the Federal Reserve Bank of Richmond. Additional borrowing capacity at the FHLB at March 31, 2016 was approximately $781.3 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $183.5 million at March 31, 2016. These facilities are subject to the FHLB and the Federal Reserve approving disbursement to us.  In addition, we have unsecured federal funds purchased lines of $315 million available to us.  We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.

Contractual Obligations

We have entered into a number of long-term contractual obligations to support our ongoing activities. These contractual obligations will be funded through operating revenues and liquidity sources held or available to us and exclude contractual interest costs, where applicable.

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The required payments under such obligations are detailed in the following table.

Contractual Obligations

At March 31, 2016

(In thousands)

	Payments Due by Period
	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
Long-Term Debt Obligations:
Certificates of deposit	$	788,756	$	414,766	$	283,672	$	60,792	$	29,526
Brokered certificates of deposit	451,781		274,589		177,192		—		—
Advances from the Federal Home Loan Bank of Atlanta	305,000		20,000		130,000		135,000		20,000
Trust preferred securities	24,395		—		—		—		24,395
Operating lease obligations	34,190		8,601		13,347		7,195		5,047
Total	$	1,604,122	$	717,956	$	604,211	$	202,987	$	78,968

Financial Instruments with Off-Balance-Sheet Risk and Credit Risk

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

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. We evaluate each customer’s credit worthiness on a case-by-case basis and require collateral to support financial instruments when deemed necessary.  The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include deposits held by us, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates up to one year or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future funding requirements. These instruments represent obligations to extend credit or guarantee borrowings and are not recorded on the consolidated statements of condition.  The rates and terms of these instruments are competitive with others in the market in which we do business.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers.  Those lines of credit may not be drawn upon to the total extent to which we have committed.

Standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We hold certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

At March 31, 2016 and December 31, 2015, commitments to extend credit were $1.3 billion and $1.5 billion, respectively.  Standby letters of credit were $32.8 million and $32.5 million at March 31, 2016 and December 31, 2015, respectively. In addition, commitments to extend credit of $451.9 million at March 31, 2016 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature, compared to $247.4 million at December 31, 2015.  The increase in mortgage loan funding commitments is related to the increased origination production at George Mason during the first quarter of 2016 as compared to the fourth quarter of 2015.

We have counter-party risk which may arise from the possible inability of George Mason’s third-party investors to meet the terms of their forward sales contracts. George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  We continuously monitor the financial condition of these third parties.  We do not expect these third parties to fail to meet their obligations.

George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor,

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and for other exposure to its investors related to loan sales activities. We evaluate the merits of each claim and estimate the reserve based on actual and expected claims received and consider the historical amounts paid to settle such claims.  We have taken steps to limit our exposure to such loan repurchases through agreements entered into with various investors.  As a result, we receive a limited number of additional claims.

Interest Rate Sensitivity

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

We employ an independent consulting firm to model our interest rate sensitivity.  We use a net interest income simulation model as our primary tool to measure interest rate sensitivity. Many assumptions are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, and savings accounts as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the current level of interest rates.  In the ramped down rate change, the model moves rates gradually down 100 basis points over the first year and then rates remain flat in the second year.

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

At March 31, 2016, our asset/liability position was slightly asset sensitive based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.6% in a down 100 basis point scenario and would increase by less than 2.1% in an up 200 basis point scenario over a one-year time frame.  In the two-year time horizon, our net interest income would decrease by less than 2.8% in a down 100 basis point scenario and would increase less than 2.2% in an up 200 basis point scenario.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our Asset/Liability Committee is responsible for reviewing our liquidity requirements and maximizing our net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. Interest rate risk arises because the assets of the Bank and the liabilities of the Bank have different maturities and characteristics. In order to measure this interest rate risk, we use a simulation process that measures the impact of changing interest rates on net interest income. This model is run for the Bank by an independent consulting firm. The simulations incorporate assumptions related to expected activity in the balance sheet. For maturing assets, assumptions are developed for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that reprice during the modeled time period. These assumptions also cover how we expect rates to change on non-maturity deposits such as interest checking, money market checking, and savings accounts as well as certificates of deposit. Based on inputs that include the most recent period end balance sheet, the current level of interest rates and the developed assumptions, the model then produces an expected level of net interest income assuming that interest rates remain unchanged. This becomes the base case. Next, the model determines the impact on net interest income given specified changes in interest rates. The rate simulations are performed for a two year period and include ramped rate changes of down 100 basis points and up 200 basis points. The down 200 basis point scenario was discontinued given the current level of interest rates.  In the ramped down rate change, the model moves rates gradually down 100 basis points over the first year and then rates remain flat in the second year.

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

At March 31, 2016, our asset/liability position was slightly asset sensitive based on our interest rate sensitivity model.  Our net interest income would decrease by less than 1.6% in a down 100 basis point scenario and would increase by less than 2.1% in an up 200 basis point scenario over a one-year time frame.  In the two-year time horizon, our net interest income would decrease by less than 2.8% in a down 100 basis point scenario and would increase less than 2.2% in an up 200 basis point scenario.

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

We have counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts.  George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk.  We monitor the financial condition of these third parties on an annual basis.  We do not expect any third-party investor to fail to meet its obligation.

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Item 4.  Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act).  As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on and as of the date of such evaluation, because of the material weakness in internal control over financial reporting as described in our 2015 Form 10-K, related to the process of estimating the allowance for loan losses, the aforementioned officers concluded that the Company’s disclosure controls and procedures were not effective.  The Company’s remediation efforts related to this material weakness are ongoing.

The Company also maintains a system of internal accounting controls that is designed to provide assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and are properly recorded. This system is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and an internal audit program to monitor its effectiveness. Except as described below, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that materially affected, or are likely to materially affect, our internal control over financial reporting.

Remediation Plan for Material Weakness in Internal Control Over Financial Reporting

In response to the material weakness identified above, the Company has implemented changes to its internal control over financial reporting, including changes to the allowance for loan losses process owners and control operators.  However, the Company has not yet come to the conclusion that the material weakness has been fully remediated as of the date of this filing.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

In the ordinary course of our operations, we become party to various legal proceedings.  Currently, we are not party to any material legal proceedings, and no such proceedings except as noted above are, to management’s knowledge, threatened against us.

Item 1A.  Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities, including the risk factors that are outlined in our Annual Report on Form 10-K for the year ended December 31, 2015.  There have been no material changes in our risk factors from those disclosed.

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

(a)  None.

(b)  Not applicable.

(c)  For the three months ended March 31, 2016, we did not purchase shares of our common stock.

Item 3.  Defaults Upon Senior Securities

(a)  None.

(b)  None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

(a)  None.

(b)  None.

Item 6.  Exhibits

10.1Amendment to Employment Agreement of Christopher W. Bergstrom, included as Exhibit 10.1 to the Current Report on Form 8-K filed April 4, 2016 and incorporated herein by reference.

10.2Amendment to Employment Agreement of Bernard H. Clineburg, included as Exhibit 10.1 to the Current Report on Form 8-K filed February 11, 2016 and incorporated herein by reference.

31.1Rule 13a-14(a) Certification of Principal Executive Officer

31.2Rule 13a-14(a) Certification of Chief Executive Officer

31.3Rule 13a-14(a) Certification of Chief Financial Officer

32.1Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.3        Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Condition, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	CARDINAL FINANCIAL CORPORATION
	(Registrant)
Date:  May 6, 2016	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Executive Chairman
	(Principal Executive Officer)
Date:  May 6, 2016	/s/ Christopher W. Bergstrom
	Christopher W. Bergstrom
	President and Chief Executive Officer
Date:  May 6, 2016	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)
Date:  May 6, 2016	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Executive Vice President and Chief Accounting Officer
	(Principal Accounting Officer)

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Exhibit No.	Description
10.1	Amendment to Employment Agreement of Christopher W. Bergstrom, included as Exhibit 10.1 to the Current Report on Form 8-K filed April 4, 2016 and incorporated herein by reference.
10.2	Amendment to Employment Agreement of Bernard H. Clineburg, included as Exhibit 10.1 to the Current Report on Form 8-K filed February 11, 2016 and incorporated herein by reference.
31.1	Rule 13a-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Executive Officer
31.3	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Statement of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2	Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.3	Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Condition, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes.

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