10-Q

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, 2014

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.  (Check one):

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

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:

31,961,777 shares of common stock, par value $1.00 per share, outstanding as of May 5, 2014

CARDINAL FINANCIAL CORPORATION

INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:
Consolidated Statements of Condition At March 31, 2014 (unaudited) and December 31, 2013	3
Consolidated Statements of Income For the three months ended March 31, 2014 and 2013 (unaudited)	4
Consolidated Statements of Comprehensive Income For the three months ended March 31, 2014 and 2013 (unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity For the three months ended March 31, 2014 and 2013 (unaudited)	6
Consolidated Statements of Cash Flows For the three months ended March 31, 2014 and 2013 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3. Quantitative and Qualitative Disclosures About Market Risk	78
Item 4. Controls and Procedures	79
PART II — OTHER INFORMATION	80
Item 1. Legal Proceedings	80
Item 1A. Risk Factors	80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	80
Item 3. Defaults Upon Senior Securities	80
Item 4. Mine Safety Disclosures	80
Item 5. Other Information	80
Item 6. Exhibits	80
SIGNATURES	81

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

March 31, 2014 and December 31, 2013

(In thousands, except share data)

			March 31,			December 31,
			2014			2013
			(Unaudited)
Assets
Cash and due from banks			$	29,211		$	18,285
Federal funds sold			9,745			10,924
Total cash and cash equivalents			38,956			29,209
Investment securities available-for-sale			352,805			349,319
Investment securities held-to-maturity (market value of $5,542 and $5,527 at March 31, 2014 and December 31, 2013, respectively)			6,351			6,477
Investment securities - trading			4,673			3,890
Total investment securities			363,829			359,686
Other investments			15,455			19,068
Loans held for sale			265,313			373,993
Loans receivable, net of deferred fees and costs			2,345,702			2,040,168
Allowance for loan losses			(29,093		)	(27,864		)
Loans receivable, net			2,316,609			2,012,304
Premises and equipment, net			27,000			20,389
Deferred tax asset, net			3,977			5,395
Goodwill and intangibles, net			37,390			10,144
Bank-owned life insurance			32,181			32,063
Accrued interest receivable and other assets			42,627			31,979
Total assets			$	3,143,337		$	2,894,230
Liabilities and Shareholders’ Equity
Non-interest bearing deposits			$	534,064		$	433,749
Interest bearing deposits			1,842,864			1,625,110
Total deposits			2,376,928			2,058,859
Other borrowed funds			382,854			475,232
Mortgage funding checks			6,474			6,528
Escrow liabilities			1,670			1,572
Accrued interest payable and other liabilities			22,966			31,507
Total liabilities			2,790,892			2,573,698
Common stock, $1 par value	2014	2013
Shares authorized	50,000,000	50,000,000
Shares issued and outstanding	31,961,777	30,332,685	31,962			30,333
Additional paid-in capital			199,704			174,001
Retained earnings			113,055			111,323
Accumulated other comprehensive income, net			7,724			4,875
Total shareholders’ equity			352,445			320,532
Total liabilities and shareholders’ equity			$	3,143,337		$	2,894,230

See accompanying notes to consolidated financial statements.

3

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three months ended March 31, 2014 and 2013

(In thousands, except per share data)

(Unaudited)

	2014			2013
Interest income:
Loans receivable	$	24,890		$	21,009
Loans held for sale	2,477			4,555
Federal funds sold	31			114
Investment securities available-for-sale	3,085			2,393
Investment securities held-to-maturity	39			56
Other investments	138			79
Total interest income	30,660			28,206
Interest expense:
Deposits	2,821			3,423
Other borrowed funds	2,172			2,182
Total interest expense	4,993			5,605
Net interest income	25,667			22,601
Provision for loan losses	1,926			(457		)
Net interest income after provision for loan losses	23,741			23,058
Non-interest income:
Service charges on deposit accounts	535			502
Loan fees	212			219
Title insurance & other related income	—			399
Investment fee income	222			547
Realized and unrealized gains on mortgage banking activities	7,383			6,327
Net realized gain on investment securities-trading	169			38
Net realized loss on investment securities-available for sale	(17		)	—
Management fee income	21			298
Increase in cash surrender value of bank-owned life insurance	119			92
Gain (loss) on sale of real estate	—			30
Other income	24			22
Total non-interest income	8,668			8,474
Non-interest expense:
Salary and benefits	11,389			9,986
Occupancy	2,630			2,081
Professional fees	818			1,316
Depreciation	966			745
Data processing & communications	1,615			1,128
FDIC insurance premiums	383			331
Mortgage loan repurchases and settlements	—			62
Merger and acquisition expenses	3,212			—
Amortization of intangibles	200			49
Other operating expenses	4,577			4,984
Total non-interest expense	25,790			20,682
Income before income taxes	6,619			10,850
Provision for income taxes	2,329			3,670
Net income	$	4,290		$	7,180
Earnings per common share - basic	$	0.13		$	0.23
Earnings per common share - diluted	$	0.13		$	0.23
Weighted-average common shares outstanding - basic	32,127			30,634
Weighted-average common shares outstanding - diluted	32,609			31,019

See accompanying notes to consolidated financial statements.

4

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended March 31, 2014 and 2013

(In thousands)

(Unaudited)

	2014			2013
Net income	$	4,290		$	7,180
Other comprehensive income:
Unrealized loss on available-for-sale investment securities:
Unrealized holding gain (loss) arising during the period, net of tax expense of $1.7 million in 2014 and net of tax benefit of $857 thousand in 2013	2,988			(1,663		)
Less: reclassification adjustment for net losses included in net income net of tax benefit of $6 thousand in 2014 and $0 in 2013	11			—
	2,999			(1,663		)
Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $82 thousand in 2014 and net of tax expense of $460 thousand in 2013	(150		)	854
Comprehensive income	$	7,139		$	6,371

See accompanying notes to consolidated financial statements.

5

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three months ended March 31, 2014 and 2013

(In thousands)

(Unaudited)

									Accumulated
				Additional					Other
	Common	Common		Paid-in		Retained			Comprehensive
	Shares	Stock		Capital		Earnings			Income			Total
Balance, December 31, 2012	30,226	$	30,226	$	172,021	$	92,777		$	13,042		$	308,066
Stock options exercised	36	36		293		—			—			329
Stock compensation expense, net of tax benefit	—	—		366		—			—			366
Dividends on common stock of $0.05 per share	—	—		—		(1,512		)	—			(1,512		)
Change in accumulated other comprehensive income	—	—		—		—			(809		)	(809		)
Net income	—	—		—		7,180			—			7,180
Balance, March 31, 2013	30,262	$	30,262	$	172,680	$	98,445		$	12,233		$	313,620
Balance, December 31, 2013	30,333	$	30,333	$	174,001	$	111,323		$	4,875		$	320,532
Stock options exercised	12	12		101		—			—			113
Stock compensation expense, net of tax benefit	—	—		411		—			—			411
Shares issued from acquisition of United Financial Banking Companies, Inc.	1,617	1,617		25,191		—			—			26,808
Dividends on common stock of $0.08 per share	—	—		—		(2,558		)	—			(2,558		)
Change in accumulated other comprehensive income	—	—		—		—			2,849			2,849
Net income	—	—		—		4,290			—			4,290
Balance, March 31, 2014	31,962	$	31,962	$	199,704	$	113,055		$	7,724		$	352,445

See accompanying notes to consolidated financial statements.

6

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2014 and 2013

(In thousands)

(Unaudited)

	2014			2013
Cash flows from operating activities:
Net income	$	4,290		$	7,180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	966			745
Amortization of premiums, discounts and intangibles	267			(4		)
Provision for loan losses	1,926			(457		)
Loans held for sale originated	(562,594		)	(1,508,921		)
Proceeds from the sale of loans held for sale	678,657			1,766,293
Realized and unrealized gains on mortgage banking activities	(7,383		)	(6,327		)
Purchase of investment securities-trading	(678		)	(330		)
Unrealized gain on investment securities-trading	(169		)	(38		)
Unrealized loss on investment securities-available for sale	17			—
Gain on sale of other real estate owned	—			(30		)
Stock compensation expense, net of tax benefits	411			366
Increase in cash surrender value of bank-owned life insurance	(119		)	(92		)
Increase (decrease) in accrued interest receivable and other assets	(7,218		)	7,383
Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities	(10,986		)	(4,880		)
Net cash provided by operating activities	97,387			260,888
Cash flows from investing activities:
Net purchases of premises and equipment	75			(901		)
Proceeds from the sale of investment securities available-for-sale	10,617			—
Proceeds from maturity and call of investment securities available-for-sale	1,500			469
Purchase of mortgage-backed secutiries available for sale	(2,050		)	—
Purchase of other investments	(2,250		)	(1		)
Proceeds from the sale of other investments	6,762			255
Redemptions of investment securities available-for-sale	4,759			12,068
Redemptions of investment securities held-to-maturity	125			575
Acquisitions, net of cash and cash equivalents	36,472
Net increase (decrease) in loans receivable, net of deferred fees and costs	(67,959		)	20,765
Net cash provided by (used in) investing activities	(11,949		)	33,230
Cash flows from financing activities:
Net increase (decrease) in deposits	22,865			(154,740		)
Net decrease in other borrowed funds - short term	(21,057		)	(59,922		)
Net increase (decrease) in mortgage funding checks	(54		)	(6,350		)
Proceeds from FHLB advances	75,000			—
Repayment of FHLB advances	(150,000		)	—
Stock options exercised	113			329
Dividends on common stock	(2,558		)	(1,512		)
Net cash used in financing activities	(75,691		)	(222,195		)
Net increase in cash and cash equivalents	9,747			71,923
Cash and cash equivalents at beginning of the year	29,209			67,140
Cash and cash equivalents at end of the period	$	38,956		$	139,063
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,821		$	5,559
Income taxes	3,703			3,451
Acquisition of noncash assets and liabilities:
Assets acquired	265,364
Liabilities assumed	301,836

See accompanying notes to consolidated financial statements.

7

CARDINAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(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.  Under the terms of the merger agreement, UFBC shareholders received $19.13 in cash and 1.154 shares of the Company’s common stock in exchange for each share of UFBC common stock they owned immediately prior to the merger. TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014 adding eight (8) banking locations in northern Virginia, one of the Company’s target markets.

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, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. 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, 2013.

Note 2

Business Combinations

On January 16, 2014, the Company acquired UFBC, the holding company for The Business Bank, a commercial bank with approximately $356 million in assets, after purchase accounting adjustments, and 8 branches located within the northern Virginia region.  For each share of UFBC common stock outstanding, the shareholders of UFBC received a fixed exchange ratio of $19.13 in cash and 1.154 shares of the Company’s common stock.  The total consideration for the acquisition was $54.3 million, which was comprised of $26.8 million in cash and 1.6 million shares of the Company’s common stock.

In connection with the acquisition, the Company acquired all of the voting and common shares of UFBC Capital Trust I (the “Trust”), which is a wholly-owned subsidiary established for the sole purpose of issuing $5.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”).  These trust preferred securities are due in 2035 and have an interest rate of LIBOR (London Interbank Offering Rate) plus 2.10%, which adjusts quarterly.  The Trust is an unconsolidated subsidiary

8

since the Company is not the primary beneficiary of this entity.  The additional $155,000 that is payable by the Company to the Trust represents the Company’s unfunded capital investment in the Trust.

Merger and acquisition expense was $3.2 million for the three months ended March 31, 2014 which are primarily related to legal and accounting costs, contract termination expenses, system conversion and integration expenses, employee retention and severance payments.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

	January 16, 2014
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	63,313
Investment securities available-for-sale	16,278
Loans	238,272
Premises and equipment	7,652
Accrued interest receivable	522
Goodwill	24,706
Other intangible assets	2,740
Other assets	2,640
Total assets acquired	$	356,123
Liabilities assumed:
Deposits:
Non-interest bearing	90,206
Savings, NOW and money market	131,312
Certificates of deposit	73,686
Total deposits	295,204
Junior subordinated debentures issued to Trust	3,679
Other liabilities	2,953
Total liabilities assumed	$	301,836
Total consideration paid	$	54,287

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information relative to closing dates fair values becomes available.  As the Company continues to analyze the acquired assets and liabilities, there may be adjustments recorded to the carrying values.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

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

Investment securities available for sale.  The estimated fair values of investment securities available-for-sale was based on reliable and unbiased evaluations 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

9

market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Loans. The acquired loan portfolio was segregated into one of two categories for valuation purposes: purchased credit impaired loans and performing loans.  Purchased credit impaired loans were identified as those loans that were nonaccrual prior to the business combination and those loans that had been identified as potentially impaired.  Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms.  Performing loans were those loans that were currently performing in accordance with the loan contract and do not appear to have any significant credit issues.

For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the “income approach”).  Performing loans were segmented into pools based on loan type (1-4 family residential, commercial, commercial owner occupied, construction and development), and further segmented based on payment type (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity.  The estimated cash flows expected to be collected for each loan was determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates and discount rates.  Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan.  Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a credit review by management and a third party consultant on a selection of loans within the acquired portfolio.  The discount rates used were based on rates market participants might charge for cash flows with similar risk characteristics at the acquisition date.  The market rates were estimated using a build up approach which included assumptions with respect to loan servicing costs, interest rate volatility, and systemic risk, among other factors.

For loans that were identified as purchased credit impaired (“PCI”), either the above income approach was used or the asset approach was used.  The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract.  Management used the asset approach for all nonaccrual loans to reflect market participant assumptions.  Under the asset approach, the fair value of each loan was determined based on the estimated values of the underlying collateral.

The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used.  While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (“ASC”) topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.”  See Note 7 for further details.

Premises and equipment.  The land and buildings acquired were recorded at fair value as determined by third party appraisals.

Other intangible assets.  Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent.  The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source.  The CDI is being amortized over an estimated useful life of 6.7 years to approximate the existing deposit relationships acquired.

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Deposits.  The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand.  The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Junior subordinated debentures issued to Trust.  There is no active market for trust preferred securities issued by UFBC Capital Trust I; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach.  Under the income approach, the expected cash flows over the remaining estimated life of the debentures were discounted at the prevailing market rate.  The prevailing market rate was based on: (i) a third-party broker opinion; (ii) implied market yields for recent trust preferred sales; and (iii) new trust preferred issuances for instruments with similar long durations.

Note 3

Stock-Based Compensation

At March 31, 2014, 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 471,342 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of March 31, 2014.

Stock options are granted with an exercise price equal to the common stock’s fair market value at the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Most employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service. Certain stock options granted to executive officers of the Company have ten year terms and vest in increments of 25% with immediate vesting of the first 25% on the date of grant and vesting of the remaining three increments on the anniversary date of the grant.  Stock options granted to executive officers during the first quarter of 2014 have ten year terms with one-third of the options vested on the grant date and the remaining unvested options vesting over the next two years.

The Company has only made awards of stock options 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, 2014 and 2013 was $152,000 and $49,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $51,000 and $17,000 for the three months ended March 31, 2014 and 2013, respectively.

Options granted for the three months ended March 31, 2014 and 2013 were 218,000 and 202,500, respectively.  The weighted average per share fair value of stock option grants for the three months ended March 31, 2014 and 2013 was $5.60 and $5.96, respectively.  The fair values of the options granted during all periods ended March 31, 2014 and 2013 were estimated as of the grant date using the Black-Scholes option-pricing model based on the following weighted average assumptions:

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	Three Months Ended March 31,
	2014	2013
Estimated option life	6.5 Years	6.5 Years
Risk free interest rate	2.17 - 2.34%	1.23 - 1.43%
Expected volatility	37.40%	39.50%
Expected dividend yield	1.80%	1.23%

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, 2014 is summarized as follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Years)	Value
Outstanding at December 31, 2013	1,011,553		$	12.03
Granted	218,000		16.83
Exercised	(12,210	)	9.29
Forfeited	(1,800	)	11.48
Outstanding at March 31, 2014	1,215,543		$	12.89	6.02	$	5,954,977
Options exercisable at March 31, 2014	845,943		$	11.74	4.71	$	5,093,024

The intrinsic value of options exercised during the three months ended March 31, 2014 and was $103,000 and $315,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the three months ended March 31, 2014 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2013	289,150		$	5.29
Granted	218,000		5.60
Vested	(135,750	)	5.30
Forfeited	(1,800	)	4.45
Balance at March 31, 2014	369,600		$	5.47

At March 31, 2014, there was $1.9 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 2.5 years. The total fair value of shares that vested during the three months ended March 31, 2014 and 2013 was $667,000 and $392,000, respectively.

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Note 4

Segment Information

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management services.  As of June 30, 2013, the Company merged the remaining operations of its trust division and Wilson/Bennett Capital Management, Inc., both of which had been included in the wealth management services segment, into CWS.  Results for the three months ended March 31, 2013 include the operations of these subsidiaries.

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 on a best efforts basis. 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, 2014 and 2013 is as follows:

At and for the Three Months Ended March 31, 2014 (in thousands):

						Wealth Management
	Commercial		Mortgage			and					Intersegment
	Banking		Banking			Trust Services		Other			Elimination			Consolidated
Net interest income	$	25,193	$	638		$	—	$	(164	)	$	—		$	25,667
Provision for loan losses	1,926		—			—		—			—			1,926
Non-interest income	932		7,391			167		178			—			8,668
Non-interest expense	15,792		8,293			112		1,593			—			25,790
Provision for income taxes	2,895		(97		)	19		(488		)	—			2,329
Net income (loss)	$	5,512	$	(167	)	$	36	$	(1,091	)	$	—		$	4,290
Total Assets	$	3,095,847	$	321,958		$	2,301	$	387,898		$	(664,667	)	$	3,143,337
Average Assets	$	2,943,545	$	230,424		$	2,300	$	379,810		$	(534,206	)	$	3,021,873

At and for the Three Months Ended March 31, 2013 (in thousands):

							Wealth Management
	Commercial			Mortgage			and						Intersegment
	Banking			Banking			Trust Services			Other			Elimination			Consolidated
Net interest income	$	22,397		$	398		$	—		$	(194	)	$	—		$	22,601
Provision for loan losses	(542		)	85			—			—			—			(457		)
Non-interest income	794			7,101			547			42			(10		)	8,474
Non-interest expense	10,052			9,201			677			762			(10		)	20,682
Provision for income taxes	4,599			(641		)	(43		)	(245		)	—			3,670
Net income (loss)	$	9,082		$	(1,146	)	$	(87	)	$	(669	)	$	—		$	7,180
Total Assets	$	2,748,303		$	563,798		$	2,373		$	331,641		$	(827,883	)	$	2,818,232
Average Assets	$	2,840,355		$	498,024		$	2,528		$	331,480		$	(825,615	)	$	2,846,772

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

13

subsidiaries. The parent company’s net interest expense is comprised of interest income from short-term investments and interest expense on trust preferred securities.

Note 5

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013.  There were no antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation for each of the three months ended March 31, 2014 and 2013.

(In thousands,	Three Months Ended
except per share data)	2014		2013
Net income available to common shareholders	$	4,290	$	7,180
Weighted average common shares - basic	32,127		30,634
Weighted average common shares - diluted	32,609		31,019
Earnings per common share - basic	$	0.13	$	0.23
Earnings per common share - diluted	$	0.13	$	0.23

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, 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, 2014 and 2013:

(in thousands)	2014	2013
Weighted average common shares outstanding	31,686	30,242
Weighted average shares attributable to the deferred compensation plans	441	392
Total weighted average shares - basic	32,127	30,634

The following shows the composition of diluted outstanding shares for the three months ended March 31, 2014 and 2013:

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(in thousands)	2014	2013
Weighted average shares outstanding - basic (from above)	32,127	30,634
Incremental weighted average shares attributable to deferred compensation plans	248	191
Weighted average shares attributable to stock options	180	170
Incremental Shares from stock option plan	54	24
Total weighted average shares - diluted	32,609	31,019

Note 6

Investment Securities

The approximate fair value and amortized cost of investment securities at March 31, 2014 and December 31, 2013 are shown in the table below.

15

	March 31, 2014
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	76,517	$	3,181	$	(731	)	$	78,967
Mortgage-backed securities	140,475		5,058		(11		)	145,522
Municipal securities	115,585		4,946		(94		)	120,437
U.S. treasury securities	4,998		9		—			5,007
Pooled trust preferred securities	2,872		—		—			2,872
Total	$	340,447	$	13,194	$	(836	)	$	352,805
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,346		146		—			2,492
Pooled trust preferred securities	4,005		—		(955		)	3,050
Total	$	6,351	$	146	$	(955	)	$	5,542

	December 31, 2013
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	75,562	$	2,914	$	(1,548	)	$	76,928
Mortgage-backed securities	144,609		3,566		(346		)	147,829
Municipal securities	113,716		3,426		(404		)	116,738
U.S. treasury securities	4,992		37		—			5,029
Pooled trust preferred securities	2,795		—		—			2,795
Total	$	341,674	$	9,943	$	(2,298	)	$	349,319
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,472		145		—			2,617
Pooled trust preferred securities	4,005		—		(1,095		)	2,910
Total	$	6,477	$	145	$	(1,095	)	$	5,527

The fair value and amortized cost of investment securities by contractual maturity at March 31, 2014 and December 31, 2013 are shown below.  Expected maturities may differ from contractual maturities because many issuers have the right to call or prepay obligations with or without call or prepayment penalties.

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	March 31, 2014
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Within One Year	$	11,345	$	11,421	$	—	$	—
After 1 year but within 5 years	34,980		36,612		—		—
After 5 years but within 10 years	59,626		63,473		—		—
After 10 years	94,021		95,777		4,005		3,050
Mortgage-backed securities	140,475		145,522		2,346		2,492
Total	$	340,447	$	352,805	$	6,351	$	5,542

	December 31, 2013
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	cost		Value		cost		Value
Within One Year	$	8,549	$	8,690	$	—	$	—
After 1 year but within 5 years	30,120		31,672		—		—
After 5 years but within 10 years	61,665		64,876		—		—
After 10 years	96,731		96,252		4,005		2,910
Mortgage-backed securities	144,609		147,829		2,472		2,617
Total	$	341,674	$	349,319	$	6,477	$	5,527

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, 2014 and December 31, 2013.

At March 31, 2014

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	$	29,878	$	(731	)	$	—	$	—		$	29,878	$	(731	)
Mortgage-backed securities	781		(4		)	319		(7		)	1,100		(11		)
Municipal securities	7,371		(94		)	—		—			7,371		(94		)
Total temporarily impaired securities	$	38,030	$	(829	)	$	319	$	(7	)	$	38,349	$	(836	)

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	$	—	$	—	$	3,050	$	(955	)	$	3,050	$	(955	)
Total temporarily impaired securities	$	—	$	—	$	3,050	$	(955	)	$	3,050	$	(955	)

At December 31, 2013

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	$	38,554	$	(1,548	)	$	—	$	—		$	38,554	$	(1,548	)
Mortgage-backed securities	46,563		(335		)	318		(11		)	46,881		(346		)
Municipal securities	30,452		(404		)	—		—			30,452		(404		)
Total temporarily impaired securities	$	115,569	$	(2,287	)	$	318	$	(11	)	$	115,887	$	(2,298	)

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	$	—	$	—	$	2,910	$	(1,095	)	$	2,910	$	(1,095	)
Total temporarily impaired securities	$	—	$	—	$	2,910	$	(1,095	)	$	2,910	$	(1,095	)

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The Company completes reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2014, 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, 2014, 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 $2.1 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA to AA.  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, 2014, 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.

The Company owns four pooled trust preferred securities which were all previously classified as held-to-maturity within the investment securities portfolio.  As a result of the issuance of the final rules to implement Section 619 of the Financial Reform Act, commonly known as the “Volcker Rule” (the “Final Rule”), only two of the four investments were exempt from the covered fund definition.  For the two investments that were not exempt as a result of the Final Rule, the Company will be required to divest its investment in these particular pooled trust preferred securities prior to the effectiveness of the Final Rule on July 21, 2015.  As a result of this new regulation, these two investments which have a par value of $2.7 million and a carrying value of $2.4 million at March 31, 2014, were reclassified to the available-for-sale investment securities portfolio.   The Company recorded an other-than-temporary impairment of $300,000 for the year ended December 31, 2013, which was determined based on the market bid price of these investments.  No further impairment was recorded for the three months ended March 31, 2014.

The par value of the two pooled trust preferred securities still classified as held-to-maturity totaled $4.0 million at March 31, 2014.  The collateral underlying these structured securities are instruments issued by financial institutions.  The Company owns the A-3 tranches in each issuance.  Each of the bonds is rated by more than one rating agency.  One security has a composite rating of A- and the other security has a composite rating of BBB+.  Observable trading activity remains limited for these types of securities.  The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the securities, and concluded that these securities are not other-than-temporarily impaired.  The Company continuously monitors the financial condition of the underlying issues and the level of subordination below the A-3 tranches.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

In one of the pooled trust preferred securities, 62% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $178 million of the remaining $236 million, or 75% of the performing collateral defaulted or deferred payment.  In the other pooled trust preferred security, 57% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if

18

$158 million of the remaining $243 million, or 65% of the performing collateral defaulted or deferred payment. Significant judgment is involved in the evaluation of other-than-temporary impairment.  The Company does not intend to sell nor does the Company believe it is probable that it will be required to sell these pooled trust preferred securities prior to the recovery of its investment.

No other-than-temporary impairment has been recognized on the securities in the Company’s investment portfolio for the three months ended March 31, 2014.

Note 7

Loans Receivable and Allowance for Loan Losses

The loan portfolio at March 31, 2014 and December 31, 2013 consist of the following:

	2014									2013
(In thousands)	Originated			Acquired			Total			Total
Commercial and industrial	$	251,984		$	39,224		$	291,208		$	219,156
Real estate - commercial	1,064,996			126,957			1,191,953			1,048,579
Real estate - construction	390,415			24,296			414,711			363,063
Real estate - residential	319,000			13,288			332,288			299,484
Home equity lines	109,223			5,822			115,045			109,481
Consumer	3,924			1,121			5,045			4,159
	2,139,542			210,708			2,350,250			2,043,922
Net deferred fees	(4,548		)	—			(4,548		)	(3,754		)
Loans receivable, net of fees	2,134,994			210,708			2,345,702			2,040,168
Allowance for loan losses	(28,924		)	(169		)	(29,093		)	(27,864		)
Loans receivable, net	$	2,106,070		$	210,539		$	2,316,609		$	2,012,304

During the period ended March 31, 2014, as a result of the Company’s acquisition of UFBC, the loan portfolio was segregated between loans initially 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 statement of condition are as follows:

19

(in thousands)	March 31, 2014
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	20,264
Carrying amount	15,980
Other acquired loans
Outstanding principal balance	194,631
Carrying amount	194,728
Total acquired loans
Outstanding principal balance	214,895
Carrying amount	210,708

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

(in thousands)
Balance at January 1, 2014	$	—
Recorded discount at acquisition date	(3,872		)
Accretion	(315		)
Balance at March 31, 2014	$	(4,187	)

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, 2014 and 2013 is shown below.

20

	2014			2013
Beginning balance, January 1	$	27,864		$	27,400
Provision for loan losses	1,926			(457		)
Loans charged off:
Commercial and industrial	(783		)	—
Residential	—			(85		)
Consumer	(2		)	—
Total loans charged off	(785		)	(85		)
Recoveries:
Commercial and industrial	7			298
Residential	81			8
Consumer	—			1
Total recoveries	88			307
Net recoveries (charge offs)	(697		)	222
Ending balance, March 31,	$	29,093		$	27,165

For the three months ended March 31, 2014, the Company recorded an allowance for loan losses for the acquired loan portfolio of $169,000.  This amount represents credit deterioration post acquisition related to three acquired loans.  There were no impairments recorded in the purchase credit impaired portfolio as of March 31, 2014.

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, 2014 and December 31, 2013, are below:

21

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2014

(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	$	3,329		$	16,076		$	5,336	$	2,421	$	609	$	93		$	27,864
Charge-offs	(262		)	(521		)	—		—		—		(2		)	(785		)
Recoveries	2			—			5		81		—		—			88
Provision for loan losses	893			449			380		205		—		(1		)	1,926
Ending Balance, March 31, 2014	$	3,962		$	16,004		$	5,721	$	2,707	$	609	$	90		$	29,093
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	38		$	—		$	—	$	131	$	—	$	—		$	169
Collectively evaluated for impairment	3,924			16,004			5,721		2,576		609		90			28,924

Loans Receivable

At March 31, 2014

(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, 2014	$	291,208	$	1,191,953	$	414,711	$	332,288	$	115,045	$	5,045	$	2,350,250
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	299	$	1,738	$	496	$	346	$	51	$	—	$	2,930
Purchased Credit Impaired Loans	4,990		8,379		1,688		448		467		8		15,980
Collectively evaluated for impairment	285,919		1,181,836		412,527		331,494		114,527		5,037		2,331,340

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Allowance for Loan Losses

At and for the Three Months Ended March 31, 2013

(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	$	525		$	17,990	$	7,675		$	857		$	266	$	87		$	27,400
Charge-offs	—			—		—			(85		)	—		—			(85		)
Recoveries	296			—		2			8			—		1			307
Provision for loan losses	(790		)	504		(371		)	43			172		(15		)	(457		)
Ending Balance, March 31, 2013	$	31		$	18,494	$	7,306		$	823		$	438	$	73		$	27,165
Ending Balance, March 31, 2013
Individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—	$	—		$	—
Collectively evaluated for impairment	31			18,494		7,306			823			438		73			27,165

Loans Receivable

At March 31, 2013

(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, 2013	$	218,281	$	850,710	$	355,919	$	242,722	$	114,407	$	3,429	$	1,785,468
Ending Balance, March 31, 2013
Individually evaluated for impairment	$	59	$	4,359	$	1,437	$	—	$	—	$	—	$	5,855
Collectively evaluated for impairment	218,222		846,351		354,482		242,722		114,407		3,429		1,779,613

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 be 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 is always 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 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.

23

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, 2014 and December 31, 2013.  In addition, the credit quality of the loan portfolio is provided as of March 31, 2014 and December 31, 2013.

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At March 31, 2014

(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	$	204	$	412	$	—	$	616	$	251,368	251,984		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		274,352		274,352		—		—
Non-owner occupied	464		—		1,738		2,202		788,442		790,644		—		1,738
Real estate - construction
Residential	—		—		—		—		132,380		132,380		—		—
Commercial	—		—		246		246		257,789		258,035		—		246
Real estate - residential
Single family	225		—		—		225		223,008		223,233		—		—
Multi-family	—		—		—		—		95,767		95,767		—		—
Home equity lines	—		—		51		51		109,172		109,223		—		51
Consumer
Installment	—		—		—		—		3,334		3,334		—		—
Credit cards	—		—		—		—		590		590		—		—
	$	893	$	412	$	2,035	$	3,340	$	2,136,202	$	2,139,542	$	—	$	2,035

24

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At March 31, 2014

(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	$	—	$	—	$	757	$	757	$	38,467	39,224		$	—	$	757
Real estate - commercial
Owner occupied	—		—		—		—		64,566		64,566		—		—
Non-owner occupied	605		1,067		339		2,011		60,380		62,391		—		339
Real estate - construction
Residential	—		—		—		—		20,235		20,235		—		—
Commercial	—		—		—		—		4,061		4,061		—		—
Real estate - residential
Single family	—		—		768		768		12,520		13,288		—		768
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		5,822		5,822		—		—
Consumer
Installment	—		—		—		—		1,121		1,121		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	605	$	1,067	$	1,864	$	3,536	$	207,172	$	210,708	$	—	$	1,864

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At December 31, 2013

(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	$	101	$	316	$	—	$	417	$	218,739	219,156		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		279,631		279,631		—		—
Non-owner occupied	82		—		1,738		1,820		767,128		768,948		—		1,738
Real estate - construction
Residential	—		—		—		—		120,144		120,144		—		—
Commercial	—		—		525		525		242,394		242,919		—		525
Real estate - residential
Single family	8		—		—		8		213,537		213,545		—		—
Multi-family	—		—		—		—		85,939		85,939		—		—
Home equity lines	—		—		51		51		109,430		109,481		—		51
Consumer
Installment	—		—		—		—		3,912		3,912		—		—
Credit cards	—		—		—		—		247		247		—		—
	$	191	$	316	$	2,314	$	2,821	$	2,041,101	$	2,043,922	$	—	$	2,314

The Company had no acquired loans as of December 31, 2013.

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of March 31, 2014 and December 31, 2013, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

25

Impaired Loans - Originated Loan Portfolio

At March 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	260	$	260	$	—	$	2
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	496		2,650		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—				—		—
Home equity lines	51		51		—		—
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	—		—		—		—
By segment total:
Commercial and industrial	$	260	$	260	$	—	$	2
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	496		2,650		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Total	$	2,545	$	6,833	$	—	$	2

26

Impaired Loans - Acquired Loan Portfolio

At March 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	764	$	1,308	$	—	$	4
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	737		1,194		—		18
Real estate - construction
Residential	—		—		—		—
Commercial	2,112		2,366		—		11
Real estate - residential
Single family	422		550		—		1
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	8		9		—		—
With related allowance:
Commercial and industrial	$	40	$	39	$	38	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	346		335		131		8
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	804	$	1,347	$	38	$	4
Real estate - commercial	737		1,194		—		18
Real estate - construction	2,112		2,366		—		11
Real estate - residential	768		885		131		9
Home equity lines	—		—		—		—
Consumer	8		9		—		—
Total	$	4,429	$	5,801	$	169	$	42

27

Impaired Loans

At December 31, 2013

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	814	$	814	$	—	$	23
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	775		2,928		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	51		51		—		—
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	—		—		—		—
By segment total:
Commercial and industrial	$	814	$	814	$	—	$	23
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	775		2,928		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Total	$	3,378	$	7,665	$	—	$	23

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.  Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk, and borrower/guarantor structures.  Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness.  When evaluating whether a concession has been granted, the Company also considers whether the borrower has

28

provided additional collateral or guarantors and whether such additions adequately compensate the Company for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers.  The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

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.

Nonaccruing loans that are modified can be placed back on accrual status when both the principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

At March 31, 2014 and December 31, 2013, the Company had TDRs totaling $2.0 million and $2.3 million, respectively, all of which were on nonaccrual.  Nonaccrual TDRs that are reasonably assured of repayment according to their modified terms may be returned to accrual status by the Company upon a detailed credit evaluation of the borrower’s financial condition and prospects for repayment under the revised terms.  Consistent with regulatory guidance, upon sustained performance and classification as a TDR over the Company’s year-end, the loan will be removed from TDR status as long as the modified terms were market-based at the time of the modification.  The following table reconciles the beginning and ending balances on TDRs as of March 31, 2014 and 2013, respectively:

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2014

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2014	$	—	$	1,738	$	525		$	—	$	—	$	—	$	2,263
New TDRs	—		—		—			—		—		—		—
Increases to existing TDRs	—		—		—			—		—		—		—
Charge-Offs Post Modification	—		—		—			—		—		—		—
Sales, paydowns, or other decreases	—		—		(279		)	—		—		—		(279		)
Ending Balance, March 31, 2014	$	—	$	1,738	$	246		$	—	$	—	$	—	$	1,984

29

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2013

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2013	$	1,776		$	3,800		$	1,762		$	—	$	—	$	—	$	7,338
New TDRs	—			570			—			—		—		—		570
Increases to existing TDRs	—			—			—			—		—		—		—
Charge-Offs Post Modification	—			—			—			—		—		—		—
Sales, paydowns, or other decreases	(1,776		)	(11		)	(575		)	—		—		—		(2,362		)
Ending Balance, March 31, 2013	$	—		$	4,359		$	1,187		$	—	$	—	$	—	$	5,546

At March 31, 2014, TDRs make up one relationship with the Bank.  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 as of March 31, 2014 and December 31, 2013, respectively.

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 the period ended March 31, 2014, one loan identified as a TDR had a payment default within the last twelve months.  For the period ended December 31, 2013, one loan identified as a TDR had a payment default within the last twelve months.

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, substandard, doubtful and loss.  During 2011, the Company added an additional risk rating, other loans especially mentioned (“OLEM”), for the monitoring of credit quality.  Other loans especially mentioned 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 other loans especially mentioned, 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, 2014 and December 31, 2013.

30

Internal Risk Rating Grades - Originated Loan Portfolio

At March 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	250,162	$	1,562	$	260	$	—	$	—
Real estate - commercial
Owner occupied	274,352		—		—		—		—
Non-owner occupied	785,045		3,861		1,738		—		—
Real estate - construction
Residential	132,380		—		—		—		—
Commercial	257,539		—		496		—		—
Real estate - residential
Single family	223,008		225		—		—		—
Multi-family	95,767		—		—		—		—
Home equity lines	109,172		—		51		—		—
Consumer
Installment	3,334		—		—		—		—
Credit cards	590		—		—		—		—
	$	2,131,349	$	5,648	$	2,545	$	—	$	—

31

Internal Risk Rating Grades - Acquired Loan Portfolio

At March 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	37,858	$	562	$	804	$	—	$	—
Real estate - commercial
Owner occupied	64,566		—		—		—		—
Non-owner occupied	58,595		3,059		737		—		—
Real estate - construction
Residential	20,235		—		—		—		—
Commercial	1,367		582		2,112		—		—
Real estate - residential
Single family	12,520		—		768		—		—
Multi-family	—		—		—		—		—
Home equity lines	5,822		—		—		—		—
Consumer
Installment	1,113		—		8		—		—
Credit cards	—		—		—		—		—
	$	202,076	$	4,203	$	4,429	$	—	$	—

32

Internal Risk Rating Grades

At December 31, 2013

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	217,755	$	587	$	814	$	—	$	—
Real estate - commercial
Owner occupied	279,631		—		—		—		—
Non-owner occupied	753,872		13,338		1,738		—		—
Real estate - construction
Residential	120,144		—		—		—		—
Commercial	242,144		—		775		—		—
Real estate - residential
Single family	213,537		8		—		—		—
Multi-family	85,939		—		—		—		—
Home equity lines	109,430		—		51		—		—
Consumer
Installment	3,912		—		—		—		—
Credit cards	247		—		—		—		—
	$	2,026,611	$	13,933	$	3,378	$	—	$	—

Note 8

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.  The rate lock commitment and forward sale agreement 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 presents the gain recognized for the period presented and associated with these elements of fair value.  On the date the mortgage loan closes, the loan held for sale is designated as the hedged item in a cash flow hedge relationship and the forward loan sale commitment is designated as the hedging instrument.

At March 31, 2014, accumulated other comprehensive income included an unrealized loss, net of tax, of $150,000 related to forward loan sales contracts designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within sixty days of closing and, therefore, all or substantially all of the amount recorded in accumulated other comprehensive income at March 31, 2014 which is related to the Company’s cash flow hedges will be recognized in earnings during the second quarter of 2014. At March 31, 2014, the Company recognized minimal amounts due to hedge ineffectiveness.

33

At March 31, 2014, the Company had $327.2 million in residential mortgage rate lock commitments and associated forward sales, and $224.2 million in forward loan sales associated with $265.3 million of loans that had closed and were presented as held for sale.

Note 9

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, 2014 and December 31, 2013.  In addition, the gains and losses related to these derivative instruments is provided for the three months ended March 31, 2014 and 2013.

Derivative Instruments and Hedging Activities

At March 31, 2014

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,169		Accrued Interest Payable and Other Liabilities	1,136
Total Derivatives Designated as Hedging Instruments		1,169			1,136
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	13,487		Accrued Interest Payable and Other Liabilities	375
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	375		Accrued Interest Payable and Other Liabilities	403
Total Derivatives Not Designated as Hedging Instruments		13,862			778
Total Derivatives		$	15,031		$	1,914

34

Derivative Instruments and Hedging Activities

At December 31, 2013

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	5,489		Accrued Interest Payable and Other Liabilities	4,043
Total Derivatives Designated as Hedging Instruments		5,489			4,043
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	10,989		Accrued Interest Payable and Other Liabilities	9
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	9		Accrued Interest Payable and Other Liabilities	1,554
Total Derivatives Not Designated as Hedging Instruments		10,998			1,563
Total Derivatives		$	16,487		$	5,606

35

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2014

(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	$	(150	)	Other Income	$	(7,227	)	Other Income	$	—
Total	$	(150	)		$	(7,227	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	13,083		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	28			Other Income
Rate Lock Commitments	(28		)	Other Income
Total	$	13,083

36

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2013

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	145	Other Income	$	(145	)
Total		$	145		$	(145	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)	Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$39	Other Income	$—		Other Income	$—
Forward Loan Sales Commitments	815	Other Income	(2,886	)	Other Income	—
Total	$854		$(2,886	)		$—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	19,859		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(328		)	Other Income
Rate Lock Commitments	328			Other Income
Total	$	19,859

37

Note 10

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at March 31, 2014 is as follows:

	Mortgage Banking
(In thousands)	Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2013	$	1,781	$	1,781
2014 activity:
Acquisition of UFBC	2,740		200
Balance at March 31, 2014	$	4,521	$	1,981

The aggregate amortization expense was $200,000 and $49,000 for three months ended March 31 2014 and 2013, respectively.  The estimated amortization expense for the next five years and thereafter is as follows:

	(In thousands)
2014 (April – December)	$	556
2015	634
2016	512
2017	391
2018	269
2019 and Thereafter	178

The carrying amount of goodwill at March 31, 2014 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2013	$	24	$	10,120	$	10,144
Acquisition of UFBC	24,706		—		24,706
Balance at March 31, 2014	$	24,730	$	10,120	$	34,850

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

Note 11

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

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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, 2014 are collateralized.

Commitments to extend credit of $1.8 billion primarily have floating rates as of March 31, 2014.  At March 31, 2014, standby letters of credit were $31.4 million. Commitments to extend credit of $327.2 million as of March 31, 2014 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 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 $261,000 at each of March 31, 2014 and December 31, 2013.

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.  In addition, the Company has derivative counterparty risk relating to certain interest rate swaps it has with third parties.  This risk may arise from the inability of the third party to meet the terms of the contracts.  The Company monitors the financial condition of these third parties on an annual basis.  The Company does not expect any of these third parties to fail to meet its obligations.

Note 12

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

39

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 with the exception of its treasury securities, the Company’s trading investment securities, which include cash equivalents and mutual funds, and bank-owned life insurance are recorded at fair value using reliable and unbiased evaluations 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’s treasury securities are recorded at fair value using unadjusted quoted market prices for identical securities and therefore fall under the Level 1 category.

The Company has an interest rate swap to hedge against the change in fair value of one fixed rate commercial loan.  This loan is recorded at fair value using published yield curve rates from a national valuation service.  These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.  Commercial and residential loans are evaluated for impairment and the carrying value of such loans is recorded at fair value based on appraisals of the underlying collateral completed by third parties using Level 2 valuation inputs.

The Company’s two other interest rate swap derivatives designated as cash flow hedges are recorded at fair value using published yield curve rates from a national valuation service.  These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.

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 the interest rate risk inherent in providing rate lock commitments to borrowers, the mortgage companies enter into best efforts forward sales contracts to sell loans to investors.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  Both the rate lock commitments to the borrowers and the forward sales contracts to the 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, 2014.  Transfers between levels are recognized at the end of each reporting period.  The valuation technique used for fair value measurements

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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, 2014 and December 31, 2013 are shown below:

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At March 31, 2014
(In thousands)

	Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,007	$	5,007	$	—	$	—
U.S. government-sponsored agencies	78,967		—		78,967		—
Mortgage-backed securities	145,522		—		145,522		—
Municipal securities	120,437		—		120,437		—
Pooled trust preferred securities	2,872		—		2,872		—
Total investment securities available-for-sale	352,805		5,007		347,798		—
Investment securities — trading	4,673		—		4,673		—
Bank-owned life insurance	32,181		—		32,181		—
Derivative asset - rate lock and forward loan sales commitments	14,656		—		14,656		—
Derivative asset — interest rate lock commitments	375		—		375		—
Derivative liability - rate lock and forward loan sales commitments	1,511		—		1,511		—
Derivative liability — interest rate lock commitments	403		—		403		—

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At December 31, 2013

(In thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,029	$	5,029	$	—	$	—
U.S. government-sponsored agencies	76,928				76,928		—
Mortgage-backed securities	147,829		—		147,829		—
Municipal securities	116,738		—		116,738		—
Pooled trust preferred securities	2,795		—		2,795		—
Total investment securities available-for-sale	349,319		5,029		344,290		—
Investment securities — trading	3,890		—		3,890		—
Bank-owned life insurance	32,063		—		32,063		—
Derivative asset - rate lock and forward loan sales commitments	16,478		—		16,478		—
Derivative asset — interest rate lock commitments	9		—		9		—
Derivative liability - rate lock and forward loan sales commitments	4,052		—		4,052		—
Derivative liability — interest rate lock commitments	1,554		—		1,554		—

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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 pooled trust preferred securities held in its held-to-maturity investment securities portfolio, loans receivable — evaluated for impairment and other real estate owned.

At March 31, 2014

(in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices  in Active  markets for  Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Pooled trust preferred securities	$	3,050	$	—	$	—	3,050
Loans receivable — evaluated for impairment	2,930		—		301		2,629

At December 31, 2013

 (In thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices  in Active  markets for  Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Pooled trust preferred securities	$	2,910	$	—	$	—	$	2,910
Loans receivable — evaluated for impairment	3,378		—		301		3,077

The Company’s held-to-maturity portfolio includes investments in two pooled trust preferred securities, totaling $4.0 million of par value at March 31, 2014.  The collateral underlying these structured securities are instruments issued by financial institutions.  The Company owns the A-3 tranches in each issuance.  Observable trading activity remains limited for these types of securities.  The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the two securities, and concluded that these securities are not other-than-temporarily impaired.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the

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effects of such adverse developments on the contractual cash flows for the A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

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.  In addition, an estimate of costs to sell the collateral is assumed.  The Company values other real estate owned by obtaining an updated appraisal of the property foreclosed upon, and discounts further the appraised value to an amount equal to the expected cash proceeds upon the sale of the property.  Loans receivable — evaluated for impairment and other real estate owned are valued using third party appraisal data that is based on market comparisons and may be subject to further adjustment for certain non-observable criteria.

Loans receivable — evaluated for impairment that are measured at fair value using Level 3 inputs on a nonrecurring basis total $3.5 million at March 31, 2014.  The total amount for each period presented represents the entire population of loans receivable — evaluated for impairment, and of this amount, $3.5 million was determined to be impaired and recorded at fair value. Collateral is in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The vast majority of the Company’s collateral is real estate.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2).  However, in certain instances, the Company applies a discount to the valuation of the collateral if the collateral being evaluated is in process of construction or a residence.  In addition, the Company considers past experience of actual sales of collateral and may further discount the appraisal of the collateral being evaluated.  This is considered a Level 3 valuation.  The value of business equipment is based upon the net book value on the applicable business’s financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).  Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

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.

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.

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Investment Securities Held-to-Maturity and Other Investments

Fair values for investment securities held-to-maturity are based on quoted market prices or prices quoted for similar financial instruments.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or estimated fair value.  The estimated 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, 2014 and December 31, 2013:

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	March 31, 2014
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	38,956	38,956		38,956		$	—	$	—
Investment securities available-for-sale	352,805		352,805		5,007		347,798		—
Investment securities held-to-maturity and other investments	21,806		20,997		—		17,947		3,050
Loans held for sale	265,313		265,313		—		265,313		—
Loans receivable, net	2,316,609		2,319,069		—		301		2,318,768
Accrued interest receivable	8,184		8,184		8,184		—		—
Financial liabilities:
Demand deposits	$	534,064	$	534,064	$	534,064	$	—	$	—
Interest checking	448,163		448,163		448,163		—		—
Money market and statement savings	586,802		586,802		586,802		—		—
Certificates of deposit	807,899		812,383		—		812,383		—
Other borrowed funds	382,854		397,908		—		397,908		—
Accrued interest payable	1,014		1,014		1,014		—		—

	December 31, 2013
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	29,209	$	29,209	$	29,209	$	—	$	—
Investment securities available-for-sale	349,319		349,319		5,029		344,290		—
Investment securities held-to-maturity and other investments	25,545		24,595		—		21,685		2,910
Loans held for sale	373,993		373,993		—		373,993		—
Loans receivable, net	2,012,304		2,024,835		—		301		2,024,534
Accrued interest receivable	7,939		7,939		7,939		—		—
Financial liabilities:
Demand deposits	$	433,749	$	433,749	$	433,749	$	—	$	—
Interest checking	398,136		398,136		398,136		—		—
Money market and statement savings	475,707		475,707		475,707		—		—
Certificates of deposit	751,267		756,191		—		756,191		—
Other borrowed funds	475,232		491,236		—		491,236		—
Accrued interest payable	869		869		869		—		—

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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, 2014 and December 31, 2013 and the results of our operations for the three months ended March 31, 2014 and 2013. 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, 2013.

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

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	Consumer Protection Act (the “Financial Reform Act”) and implementation of the Volcker Rule, 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;
·	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, 2013.

Overview

We are a financial holding company formed in 1997 and headquartered in Fairfax County, Virginia.  We were formed principally in response to opportunities resulting from the consolidation of several Virginia-based banks.  These bank consolidations were typically accompanied by the dissolution of local boards of directors and relocation or termination of management and customer service professionals and a general deterioration of personalized customer service.

On January 16, 2014, we announced the completion of our 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.  Under the terms of the merger agreement, UFBC shareholders received $19.13 in cash and 1.154 shares of our common stock in exchange for each

49

share of UFBC common stock they owned immediately prior to the merger. TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014 adding eight (8) banking locations in northern Virginia, one of the Company’s target markets.  As a result of the acquisition, we added $329 million in total assets, $238 million in loans, and $295 million in deposits, after purchase accounting adjustments.  The transaction generated $24.7 million in goodwill and $2.7 million in core deposit intangible assets subject to amortization.  During March 2014, we integrated UFBC’s systems into Cardinal with minimal disruption to our customer service and operations allowing us to begin to benefit from this transaction during the remainder of 2014.

We own Cardinal Bank (the “Bank”), a Virginia state-chartered community bank with 35 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”).

Prior to June 30, 2013, the Bank had a trust division, Cardinal Trust and Investment Services.  This division merged its remaining operations as of June 30, 2013 into CWS.  In addition, as of June 30, 2013, Wilson/Bennett Capital Management, Inc., formerly the Company’s second nonbank subsidiary, merged its operations into CWS.  During the second quarter of 2013, we exited the third party institutional custody and trustee component of our trust services division due to our limited opportunity to leverage this platform.  As a result of our reorganization of the wealth management business segment, the remaining personal and commercial trust area of this business consolidated into CWS.  In addition, the remaining Wilson/Bennett clients are now serviced on the CWS platform beginning in the third quarter of 2013.  Results for the three months ended March 31, 2013 include the operations of these subsidiaries.

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.

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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, 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 comparative peer group data 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.

For purposes of our analysis, we categorize our loans into one of five categories:  commercial and industrial, commercial real estate (including construction), home equity lines of credit, residential mortgages, and consumer loans. Typically, financial institutions use their historical loss experience and trends in losses for each loan category which are then adjusted for portfolio trends and economical and environmental factors in determining their allowance for loan losses.  Prior to 2008, we experienced minimal loss history within our loan portfolio and it has only been since the economic downturn that we have recorded a higher level of loan losses.  Because of this, our allowance model uses the average loss rates of similar institutions (our custom peer group) as a baseline which is then adjusted based on our particular loan portfolio characteristics and environmental factors.  The indicated loss factors resulting from this analysis are applied for each of the five categories of loans.

Our peer groups are defined by selecting commercial banking institutions of similar size within Virginia, Maryland, and the District of Columbia. This is known as our custom peer group.  The commercial banking institutions comprising the custom peer group can change based on certain factors including but not limited to the characteristics, size, and geographic footprint of the institution. We have identified 20 banks for our custom peer group which are within $500 million to $5 billion in total assets, the majority of whom are geographically concentrated in the Washington metropolitan area in which we operate as this area has seen less of an economic downturn than other areas of the country.  We evaluate the loan quality indicators of our custom peer group to those within our national FDIC peer group, all banks in Virginia, and all banks in

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Maryland.  These baseline peer group loss rates are then adjusted by an estimated loss emergence factor in order to determine loss coverage for pass-level credits.  Finally, we make adjustments to these loss factors based on an analysis of our loan portfolio characteristics, trends, economic considerations and other conditions that should be considered in assessing our credit risk.  Our peer loss rates are updated on at least an annual basis.

In addition, 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 loans classified as special mention, a 15% loss factor to loans classified as substandard and a 50% loss factor to loans classified as doubtful. Loans classified as loss loans 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 in our portfolio, we are able to evaluate each impaired loan individually and therefore our specific reserves for impaired loans are generally less than those recommended by the listed regulatory guidelines above.

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)

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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 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, 2014, there was no reserve for impairment of PCI loans in 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 evaluations 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.  For certain of our held-to-maturity investment securities where there is minimal observable trading activity, we use a discounted cash flow approach to estimate fair value based on internal calculations and compare our results to information provided by external pricing sources.

We also fair value our interest rate lock commitments and forward loan sales commitments.  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 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.

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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.  For derivatives designated as fair value hedges, the fair value adjustments for both the hedged item and the hedging instrument are recorded through the income statement with any difference considered the ineffective portion of the hedge.

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 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 best efforts delivery forward loan sales contracts. During the rate lock commitment period, these forward loan sales contracts 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 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.  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 have adopted 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

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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 the goodwill related to our mortgage banking segment during the third quarter.  As a result of our acquisition of UFBC, we will perform our annual review of the goodwill associated with the commercial banking segment during the first quarter of 2015.

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.

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

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

An impairment loss is then recorded for the excess of the carrying amount of the assets over their fair values. Fair value is usually determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.

Valuation of Deferred Tax Assets

We record a provision for income tax expense based on the amounts of current taxes payable or refundable and the change in net deferred tax assets or liabilities during the year. Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement purposes that will reverse in future periods. When substantial uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset is reduced by a valuation allowance. The amount of any valuation allowance established is based upon an estimate of the deferred tax asset that is more likely than not to be recovered. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

New Financial Accounting Standards

The Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU No. 2014-04”), which clarifies when an in-substance repossession or foreclosure occurs, and when a

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creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan.  An in-substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, this ASU requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual and interim periods beginning after December 15, 2014. Our adoption of ASU No. 2014-04 is not expected to have a significant impact on our consolidated financial statements.

The FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU No. 2014-01”), which amends existing guidance to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. ASU No. 2014-01 is effective for annual and interim reporting periods beginning after December 15, 2014. Early adoption is permitted. Our adoption of ASU No. 2014-01 is not expected to have a significant impact on our consolidated financial statements.

2014 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.  The metropolitan Washington, D.C. area, the region in which we operate, continues to perform relatively well as compared to other geographic regions.  Our credit quality continues to remain strong despite the challenging economic environment.  At March 31, 2014, we had nonaccrual loans totaling $4.9 million, or 0.16% of total assets, and no loans contractually past due 90 days or more as to principal or interest and still accruing.  We had annualized net charge-offs of 0.17% of our average loans receivable for the three months ended March 31, 2014.

The interest rate environment and expectations that the Federal Reserve will moderate its qualitative easing (“QE”) programs may impact the results of our mortgage banking segment.  Typically, during periods of increasing interest rates, mortgage originations decrease.  The degree of the impact is dependent upon the severity and duration of QE pullback and increasing interest rates.

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 the remainder of 2014. The degree of the impact is dependent upon the duration and severity of the aforementioned conditions.

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Continued uncertainty and sluggish economic conditions 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.

Market illiquidity and concerns over credit risk continue to impact the ratings of our pooled trust preferred securities. We hold investments of $7.1 million in par value of pooled trust preferred securities, which are significantly below book value as of March 31, 2014 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.  As a result of the issuance of the final rules to complement Section 619 of the Financial Reform Act, commonly known as the Volcker Rule, which were released by federal banking agencies in late 2013 (the “Final Rule”), two of these investments are considered to be “covered funds” and are now required to be divested by us before July 2015.  These investments have a par value of $2.7 million at March 31, 2014.  During 2013, we recorded an other-than-temporary-impairment of $300,000 as a result of this new regulatory requirement.  Additional impairment on these securities may be recorded in the future if the value of these securities deteriorates further.

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, 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, 2014 and 2013, we reported net income of $4.3 million and $7.2 million, respectively, a decrease of $2.9 million, or 40%.  Net interest income after the provision for loan losses increased $683,000 to $23.7 million for the three months ended March 31, 2014 compared to $23.1 million for the three months ended March 31, 2013.  Provision for loan losses for the three months ended March 31, 2014 was $1.9 million, an increase of $2.4 million, compared to a benefit of $457,000 for the same period of 2013, a result of the organic loan growth that occurred during the first quarter of 2014.  Noninterest income for the three months ended March 31, 2014 and 2013 was $8.7 million and $8.5 million, respectively,

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an increase of $194,000.  This increase was primarily due to an increase in gains on mortgage banking activities and other fee income earned at our mortgage banking subsidiary.  For the three months ended March 31, 2014, noninterest expense increased to $25.8 million, compared to $20.7 million for the same period of 2013.  The increase in noninterest expense is primarily attributable to our acquisition of UFBC with merger and acquisition expenses of $3.2 million and an additional $1.5 million in expenses associated with the former operations of UFBC.

For the three months ended March 31, 2014, basic and diluted earnings per common share were each $0.13.  Basic and diluted earnings per common share for the three months ended March 31, 2013 were each $0.23.  Weighted average fully diluted shares outstanding for the three months ended March 31, 2014 and 2013 were 32,608,599 and 31,019,110, respectively.

Return on average assets for the three months ended March 31, 2014 and 2013 was 0.57% and 1.01%, respectively. Return on average equity for the three months ended March 31, 2014 and 2013 was 4.79% and 9.12%, respectively.

General —Business Segments

We operate in three business segments: commercial banking, mortgage banking, and wealth management services.  As of June 30, 2013, we merged operations of our trust division and Wilson/Bennett Capital Management, Inc. into CWS, both of which had been included in the wealth management services segment.  Results for the three months ended March 31, 2013 include the operations of these subsidiaries.

Net income attributable to the commercial banking segment for the three months ended March 31, 2014 was $5.5 million compared to net income of $9.1 million for the three months ended March 31, 2013.  Net interest income increased $2.8 million to $25.2 million for the three months ended March 31, 2014, compared to $22.4 million for the same period of 2013.  Provision for loan losses increased $2.5 million to $1.9 million for the three months ended March 31, 2014 compared to a benefit of $542,000 for the same period of 2013. The increase in our provision expense was primarily related to organic growth within our loan portfolio during the first quarter of 2014.  Noninterest income increased to $932,000 for the three months ended March 31, 2014 compared to $794,000 for the three months ended March 31, 2013.  Noninterest expense was $15.8 million for the three months ended March 31, 2014, compared to $10.1 million for the same period of 2013.  The increase is primarily attributable to the UFBC acquisition, as this segment recorded $2.8 million in merger and acquisition expense and had operational expenses of $1.5 million related to UFBC’s primary subsidiary, The Business Bank.  We recorded $200,000 in core deposit intangible amortization related to the UFBC acquisition.  Finally, branch expansion contributed $360,000 to the increase in noninterest expense for the first quarter of 2014.  The remaining increase in noninterest expense for the three months ended March 31, 2014 was related to several business initiatives.

The mortgage banking segment reported a net loss of $167,000 for the three months ended March 31, 2014 compared to a net loss of $1.1 million for the three months ended March 31, 2013.  The decrease in the net loss is primarily a result of decreases in noninterest expense as a result of a 24% reduction in back office support positions which began in September 2013.  Realized and unrealized gains associated with the fair value of commitments and loans held for sale increased slightly to $7.4 million for the three months ended March 31, 2014 compared to $7.1 million for the same period of 2013.

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Loan commitments are accounted for as derivative instruments and are recorded at fair value through earnings.  This causes an unrealized gain to be recognized in income at the time of the commitment.  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, the fair value of the locked commitments and the premium to the basis of existing LHFS 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.  However, this accounting creates a mismatch between the income recognition on loan production and the expense recognition for those same loans.  Direct (e.g. commissions) and indirect loan expenses associated with originating, underwriting and closing loans are deferred and recognized at the time of investor purchase of the loan which often occurs in the quarter subsequent to the original commitment, creating a mismatch in the timing of the revenue and expense.  These expenses are “netted” from the gain on sale from mortgage banking activities and contributed to the net loss recorded for the current quarter ended March 31, 2014.

During 2012 and 2013, we expanded the mortgage banking business segment through increases in loan origination officers and number of locations, which contributed to increases in noninterest expense.  As a result of the changes in production levels due to the current economic environment within the markets in which we operate, we are actively monitoring each expense category at the mortgage subsidiary with the goal of returning George Mason to meaningful profitability during 2014.

The wealth management services segment, which includes CWS, recorded net income of $36,000 for the three months ended March 31, 2014, compared to a net loss of $87,000 for the three months ended March 31, 2013.  During 2013, we streamlined the business operations within this business segment, which contributed to the net loss reported.

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 impacted 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, 2014 and 2013, net interest income was $25.7 million and $22.6 million, respectively.  The yields on our loans receivable portfolio decreased 29 basis points for the three months ended March 31, 2014 compared to the same period of 2013.  This decrease was partially offset by the decrease in the rate of our interest-bearing deposits of 10 basis points as we have taken efforts to reduce our overall funding costs as a result of the current low interest rate environment.  In addition, our funding costs related to other borrowed funds decreased 74 basis points for the three months ended March 31, 2014 compared to the same three month period of 2013, again as a result of our efforts to reduce funding costs.

Our net interest margin, on a tax-equivalent basis, which is calculated as net interest income divided by average interest earning assets, was 3.64% and 3.35% for the three months ended March 31, 2014 and 2013, respectively.  Our net interest margin was positively impacted as a result of the yield we earned in our loans held for sale portfolio.  As the volume of our loans held for sale has decreased, we have used these funds for loans originated in our loans receivable portfolio contributing to our margin increase.  In addition, our net interest margin was positively impacted through the contribution of earnings assets and interest-bearing liabilities from UFBC; the addition of these assets and liabilities added $2.3 million to net interest income and 0.01% to the net interest margin for the three months ended March 31, 2014.

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Interest income on loans receivable increased $3.9 million to $24.9 million for the three months ended March 31, 2014 compared to $21.0 million for the same three month period of 2013.  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 $2.5 million and $4.6 million for the three months ended March 31, 2014 and 2013, respectively, a decrease of $2.1 million, reflecting the significant decrease in origination activity within the mortgage banking segment during the past twelve months.

Interest income on investment securities increased $734,000 for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase in interest income in our investment securities portfolio is attributable to our purchasing over $139 million in investment securities during the third and fourth quarters of 2013 as a result of having excess cash available to invest due to the decrease in the loans held for sale portfolio during these same periods.

Total interest expense decreased $612,000 for the three months ended March 31, 2014 as compared to the same period of 2013.  This decrease was primarily related to a decrease in wholesale funding.  Average brokered certificates of deposit decreased $262.2 million as of March 31, 2014 as compared to March 31, 2013.  We traditionally use this type of wholesale funding to support our loans held for sale originations.  As the volume of mortgage loan originations has decreased, so has our reliance on this funding source.

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.

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

Three Months Ended March 31, 2014, 2013 and 2012

(In thousands)

	2014							2013							2012
				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	$	259,650		$	3,218	4.96	%	$	218,584		$	2,192	4.00	%	$	248,835		$	2,633	4.22	%
Real estate - commercial	1,159,091			12,623		4.36	%	825,509			10,212		4.91	%	737,218			10,189		5.53	%
Real estate - construction	397,199			4,829		4.86	%	374,301			4,799		5.12	%	304,367			3,981		5.23	%
Real estate - residential	304,546			3,109		4.08	%	234,630			2,702		4.60	%	216,572			2,740		5.06	%
Home equity lines	114,720			1,060		3.70	%	116,539			1,068		3.72	%	121,269			1,119		3.71	%
Consumer	6,465			83		5.21	%	3,725			48		5.14	%	3,054			39		5.07	%
Total loans	2,241,671			24,922		4.45	%	1,773,288			21,021		4.74	%	1,631,315			20,701		5.08	%
Loans held for sale	218,094			2,477		4.54	%	496,038			4,555		3.67	%	397,567			4,038		4.06	%
Investment securities available-for-sale	342,127			3,408		3.98	%	244,297			2,624		4.30	%	270,268			2,994		4.43	%
Investment securities held-to-maturity	8,306			39		1.87	%	11,121			56		2.01	%	12,765			84		2.64	%
Other investments	15,521			133		3.40	%	13,539			79		6.88	%	16,456			49		1.19	%
Federal funds sold	31,790			31		0.40	%	185,174			114		0.25	%	38,436			21		0.22	%
Total interest-earning assets and interest income (2)	2,857,509			31,010		4.34	%	2,723,457			28,449		4.18	%	2,366,807			27,887		4.71	%
Noninterest-earning assets:
Cash and due from banks	35,831							14,166							16,752
Premises and equipment, net	24,849							19,425							18,260
Goodwill and other intangibles, net	32,849							10,267							10,472
Accrued interest and other assets	100,878							106,841							99,281
Allowance for loan losses	(30,043		)					(27,384		)					(27,063		)
Total assets	$	3,021,873						$	2,846,772						$	2,484,509
Liabilities and Shareholders’ Equity
Interest - bearing liabilities:
Interest - bearing deposits:
Interest checking	420,285			534		0.52	%	345,087			536		0.63	%	183,179			291		0.64	%
Money markets	312,656			238		0.30	%	277,927			211		0.30	%	183,342			189		0.41	%
Statement savings	247,568			167		0.27	%	209,820			139		0.27	%	217,699			196		0.36	%
Certificates of deposit	754,081			1,882		1.01	%	992,907			2,537		1.03	%	967,728			2,883		1.19	%
Total interest - bearing deposits	1,734,590			2,821		0.66	%	1,825,741			3,423		0.76	%	1,551,948			3,559		0.92	%
Other borrowed funds	375,775			2,173		2.34	%	287,645			2,182		3.08	%	342,475			2,373		2.79	%
Total interest-bearing liabilities and interest expense	2,110,365			4,994		0.96	%	2,113,386			5,605		1.08	%	1,894,423			5,932		1.26	%
Noninterest-bearing liabilities:
Demand deposits	519,016							377,518							291,659
Other liabilities	34,529							40,925							33,059
Common shareholders’ equity	357,963							314,943							265,368
Total liabilities and shareholders’ equity	$	3,021,873						$	2,846,772						$	2,484,509
Net interest income and net interest margin (2)				$	26,016	3.64	%				$	22,844	3.35	%				$	21,955	3.71	%

(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 33% for all periods presented.

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Rate and Volume Analysis

Three Months Ended March 31, 2014, 2013 and 2012

(In thousands)

	2014 Compared to 2013									2013 Compared to 2012
	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	$	406		$	620		$	1,026		$	(320	)	$	(121	)	$	(441	)
Real estate - commercial	4,010			(1,599		)	2,411			1,303			(1,280		)	23
Real estate - construction	284			(254		)	30			924			(106		)	818
Real estate - residential	797			(390		)	407			234			(272		)	(38		)
Home equity lines	(3		)	(5		)	(8		)	(52		)	1			(51		)
Consumer	34			1			35			8			1			9
Total loans	5,528			(1,627		)	3,901			2,097			(1,777		)	320
Loans held for sale	(2,552		)	474			(2,078		)	1,000			(483		)	517
Investment securities available-for-sale	1,051			(267		)	784			(288		)	(82		)	(370		)
Investment securities held-to-maturity	(14		)	(3		)	(17		)	(11		)	(17		)	(28		)
Other investments	189			(135		)	54			(163		)	193			30
Federal funds sold	(95		)	12			(83		)	80			13			93
Total interest income (2)	4,107			(1,546		)	2,561			2,715			(2,153		)	562
Interest expense:
Interest - bearing deposits:
Interest checking	115			(117		)	(2		)	249			(4		)	245
Money markets	26			1			27			96			(74		)	22
Statement savings	31			(3		)	28			(13		)	(44		)	(57		)
Certificates of deposit	(611		)	(44		)	(655		)	45			(391		)	(346		)
Total interest - bearing deposits	(439		)	(163		)	(602		)	377			(513		)	(136		)
Other borrowed funds	678			(687		)	(9		)	(398		)	207			(191		)
Total interest expense	239			(850		)	(611		)	(21		)	(306		)	(327		)
Net interest income (2)	$	3,868		$	(696	)	$	3,172		$	2,736		$	(1,847	)	$	889

(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 33% for all periods presented.

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

Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2014 and 2013 was $1.9 million and a benefit of $457,000, respectively. The increase in our provision expense during 2014 compared to 2013 is primarily a result of our organic loan growth during the first quarter of 2014.

During 2014, we recorded charge-offs of $783,000 related to one commercial relationship that deteriorated during the first quarter.  Recoveries from previously charged-off loans totaled $88,000 for the three months ended March 31, 2014, most of which were related to previously charged off residential real estate loans and home equity loans.  Nonperforming loans at March 31, 2014 and December 31, 2013, were $4.9 million and $2.3 million, respectively. The increase in nonperforming loans is directly related to those loans that were nonperforming at UFBC.  Due to our assessment of the underlying credit related to these loans, we chose to maintain them on a status of nonaccrual post acquisition.

The allowance for loan losses was $29.1 million at March 31, 2014 and $27.9 million at December 31, 2013. Our allowance for loan losses ratio as a percent of total loans was 1.24% and 1.37% at March 31, 2014 and December 31, 2013, respectively.  The decrease in the allowance for loan losses ratio is due to $238 million in acquired loans that were added to the balance sheet during the first quarter of 2014 as these loans do not have an associated allowance.  Our

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allowance for loans losses ratio on the originated loans receivable portfolio was 1.36% at March 31, 2014.

A sluggish job market 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, 2014, 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, 2014 and 2013

(In thousands)

	2014			2013
Beginning balance, January 1	$	27,864		$	27,400
Provision for loan losses	1,926			(457		)
Loans charged off:
Commercial and industrial	(783		)	—
Residential	—			(85		)
Consumer	(2		)	—
Total loans charged off	(785		)	(85		)
Recoveries:
Commercial and industrial	7			298
Residential	81			8
Consumer	—			1
Total recoveries	88			307
Net (charge offs) recoveries	(697		)	222
Ending balance, March 31,	$	29,093		$	27,165

	March 31,			March 31,
	2014			2013
Loans:
Balance at period end	$	2,345,702		$	1,782,916
Allowance for loan losses to loans receivable net of fees	1.24		%	1.52		%
Annualized net charge-offs to average loans receivable	0.12		%	-0.05		%

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Allocation of the Allowance for Loan Losses

At March 31, 2014 and December 31, 2013

(In thousands)

	March 31,				December 31,
	2014				2013
	Allocation		% of Total*		Allocation		% of Total*
Commercial and industrial	$	3,962	12.39	%	$	3,329	10.72	%
Real estate - commercial	16,004		50.72	%	16,076		51.30	%
Real estate - construction	5,721		17.65	%	5,336		17.77	%
Real estate - residential	2,707		14.14	%	2,421		14.65	%
Home equity lines	609		4.90	%	609		5.36	%
Consumer	90		0.20	%	93		0.20	%
Total allowance for loan losses	$	29,093	100.00	%	$	27,864	100.00	%

* Percentage of loan type to the total loan portfolio.

Nonperforming Loans

At March 31, 2014 and December 31, 2013

(In thousands)

	March 31,		December 31,
	2014		2013
Nonaccruing loans	$	4,947	$	2,314
Loans contractually past-due 90 days or more and still accruing	—		—
Total nonperforming loans	$	4,947	$	2,314

Noninterest Income

Noninterest income includes service charges on deposits and loans, realized and unrealized gains on mortgage banking activities, investment fee income, management 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, 2014 and 2013 was $8.7 million and $8.5 million, respectively.  Realized and unrealized gains (losses) on mortgage banking activities, which are reported net of commission & incentive expense, totaled $7.4 million for the three months ended March 31, 2014 compared to $6.3 million for the same period of 2013.  Noninterest income related to title insurance services and management fees from managed mortgage company affiliates has decreased to $21,000 for the three months ended March 31, 2014 compared to $697,000 for the same period of 2013 as George Mason has exited these lines of business.  Investment fee income decreased $325,000 to $222,000 for the three months ended March 31, 2014 compared to $547,000 for the same period of 2013.  The decrease in investment fee income is a result of the restructuring we completed in our wealth management business segment during 2013.

The increase in net gains from mortgage banking activities is mainly due to changes in the unrealized gains associated with the fair market value of our locked commitments and closed loans held for sale.  For the first quarter of 2014, the unrealized gain decreased $5.9 million as compared to the year ago quarter.  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 “best efforts” 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

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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 recognized and deferred 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 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 loan production and the expense recognition for those same loans.

As mentioned, 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.

For the first quarter of 2014, we closed $551.4 million in mortgage originations.  This compares to $1.08 billion in mortgage originations for the three months ended March 31, 2013.  The decrease in mortgage originations is a result of an increased interest rate environment which has decreased existing home borrowers’ interest in refinancing their current mortgage.  As a result, refinance activity has decreased to only 18% of our loan origination volume for the first quarter of 2014 compared to 48% for the same period of 2013.  Because of the decrease in loan origination volumes, we have reduced our back office staffing by approximately 24% at our mortgage banking segment, which began last year.  We continue to closely monitor each expense category at our mortgage subsidiary in relation to production expectations.

The increase in the cash surrender value of our bank-owned life insurance for the three months ended March 31, 2014 and 2013 was $119,000 and $92,000, respectively.

Noninterest income represented 25% and 27% of our total revenues for the three months ended March 31, 2014 and 2013, 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, 2014 was $25.8 million, compared to $20.7 million for the same period of 2013, an increase of $5.1 million, or 25%.  As previously mentioned, our merger and acquisition expenses related to the UFBC acquisition were $3.2 million for 2014.  We also recognized an additional $1.5 million in noninterest expense related to UFBC during the first quarter of 2014, which is contributing to the increase in expenses in 2014 as compared to 2013.

For the quarter ended March 31, 2014, salaries and benefits expense increased to $11.4 million from $10.0 million for the quarter ended March 31, 2013.  The increase in salaries and benefits expense during 2014 compared to 2013 is primarily a result of the increase in staffing within our commercial banking segment as a result of the UFBC acquisition.  Because the integration of UFBC’s back office systems into Cardinal’s did not occur until March 2014, the staffing levels at UFBC remained near their preacquisition levels.  We expect salary and benefits expense to decrease during the second quarter of 2014 as we have completed the UFBC integration.

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Occupancy expense was $2.6 million for the three months ended March 31, 2014, an increase of $549,000 when compared to the same period of 2013.  The increase in occupancy expense during 2014 as compared to 2013 is primarily attributable to the eight additional branch office locations of UFBC.  During the second quarter of 2014, we will consolidate select branch offices that overlap existing markets as a result of the UFBC acquisition. In addition, we added two branch offices in the last six months of 2013 which contribute to the increase in occupancy expense for 2014.  The increases in depreciation expense and data processing & communications for 2014 compared to 2013 can also be attributed to the UFBC acquisition.  Our expectation of cost savings associated with the UFBC acquisition is approximately 50% of their total expense base, of which we expect to begin to realize during the second quarter of 2014.

Professional fees decreased $498,000 to $818,000 for the three months ended March 31, 2014 compared to $1.3 million for the same period of 2013 as a result of the decrease in temporary staffing we had at George Mason to handle the increase in loan origination volume we experienced during the first quarter of 2013; all due to the increase in refinance activity during that period.  The level of temporary staffing was maintained at George Mason until the beginning of the third quarter of 2013 when we experienced a significant decrease in loan origination volumes as a result of mortgage market conditions.

Income Taxes

For the three months ended March 31, 2014, we recorded a provision for income taxes of $2.3 million, compared to $3.7 million for the same period of 2013.  Our effective tax rate for the three months ended March 31, 2014 and 2013 was 35.2% and 33.8%, 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 $3.14 billion and $2.89 billion at March 31, 2014 and December 31, 2013, respectively.  In connection with the closing of the UFBC acquisition, we added $329 million in total assets to our balance sheet.  We recorded $24.7 million in goodwill and $2.7 million of core deposit intangibles.  Additional information on the assets acquired and liabilities assumed can be found in the discussion below.

Investment Securities

Our investment securities portfolio is used as a source of income and liquidity.  Investment securities were $363.8 million at March 31, 2014, compared to $359.7 million at December 31, 2013, an increase of $4.1 million.  The increase in investment securities was a result of the securities we acquired in the UFBC acquisition during 2014.  The investment 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.

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Investment Securities

At March 31, 2014 and December 31, 2013

(In thousands)

	Amortized		Fair		Average
	Cost		Value		Yield
Available-for-sale at March 31, 2014
U.S. government-sponsored agencies
One to five years	$	26,548	$	27,766	2.98	%
Five to ten years	19,998		21,769		3.82	%
After ten years	29,971		29,432		3.59	%
Total U.S. government-sponsored agencies	76,517		78,967		3.44	%
Mortgage-backed securities (1)
One to five years	241		245		4.71	%
Five to ten years	25,386		26,074		3.48	%
After ten years	114,848		119,203		3.77	%
Total mortgage-backed securities	140,475		145,522		3.72	%
Tax exempt municipal securities (2)
Within one year	4,443		4,515		3.89	%
One to five years	7,928		8,342		3.49	%
Five to ten years	35,359		37,020		3.57	%
After ten years	60,738		62,969		3.59	%
Taxable municipal securities
Within one year	1,904		1,899		0.65	%
Five to ten years	4,269		4,684		4.99	%
After ten years	944		1,008		5.33	%
Total municipal securities	115,585		120,437		3.61	%
U. S. treasury securities
Within one year	4,998		5,007		2.36	%
Total U.S. treasury securities	4,998		5,007		2.36	%
Pooled trust preferred & corporate securities
One to five years	504		504		0.35	%
After ten years	2,368		2,368		1.49	%
Total pooled trust preferred & corporate securities	2,872		2,872		1.29	%
Total investment securities available-for-sale	$	340,447	$	352,805	3.58	%

	Amortized		Fair		Average
	Cost		Value		Yield
Held-to-maturity at March 31, 2014
Mortgage-backed securities (1)
One to five years	$	589	$	625	4.62	%
Five to ten years	121		130		5.42	%
After ten years	1,636		1,737		2.02	%
Total mortgage-backed securities	2,346		2,492		2.85	%
Pooled trust preferred securities
After ten years	4,005		3,050		1.10	%
Total pooled trust preferred securities	4,005		3,050		1.10	%
Total investment securities held-to-maturity	6,351		5,542		1.75	%
Total investment securities	$	346,798	$	358,347	3.53	%

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	Amortized		Fair		Average
	Cost		Value		Yield
Available-for-sale at December 31, 2013
U.S. government-sponsored agencies
One to five years	$	25,591	$	26,863	3.07	%
Five to ten years	20,000		21,404		3.82	%
After ten years	29,971		28,661		3.59	%
Total U.S. government-sponsored agencies	75,562		76,928		3.47	%
Mortgage-backed securities (1)
One to five years	99		101		4.66	%
Five to ten years	25,883		26,134		3.57	%
After ten years	118,627		121,594		3.78	%
Total mortgage-backed securities	144,609		147,829		3.74	%
Tax exempt municipal securities (2)
Within one year	3,557		3,661		4.44	%
One to five years	4,529		4,809		3.83	%
Five to ten years	37,392		38,870		3.55	%
After ten years	62,970		63,744		3.61	%
Taxable municipal securities
Five to ten years	4,273		4,602		4.99	%
After ten years	995		1,052		5.33	%
Total municipal securities	113,716		116,738		3.69	%
U. S. treasury securities
Within one year	4,992		5,029		2.36	%
Total U.S. treasury securities	4,992		5,029		2.36	%
Pooled trust preferred securities
After ten years	2,795		2,795		1.49	%
Total pooled trust preferred securities	2,795		2,795		1.49	%
Total investment securities available-for-sale	$	341,674	$	349,319	3.63	%

	Amortized		Fair		Average
	Cost		Value		Yield
Held-to-maturity at December 31, 2013
Mortgage-backed securities (1)
One to five years	$	663	$	703	4.63	%
Five to ten years	131		137		5.44	%
After ten years	1,678		1,777		2.02	%
Total mortgage-backed securities	2,472		2,617		2.90	%
Pooled trust preferred securities
After ten years	4,005		2,910		1.11	%
Total pooled trust preferred securities	4,005		2,910		1.11	%
Total investment securities held-to-maturity	6,477		5,527		1.79	%
Total investment securities	$	348,151	$	354,846	3.58	%

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We complete reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2014, 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, 2014, 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).

We have $2.1 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA to AA.  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, 2014, 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.

We own four pooled trust preferred securities which were all previously classified as held-to-maturity within the investment securities portfolio.  As a result of the issuance of the Final Rule, only two of the four investments were exempt from the covered fund definition.  For the two investments that were not exempt as a result of the Final Rule, we will be required to divest our investment in these particular pooled trust preferred securities prior to the effectiveness of the Final Rule on July 21, 2015.  As a result of this new regulation, these two investments which have a par value of $2.7 million and a carrying value of $2.4 million at March 31, 2014, were reclassified to the available-for-sale investment securities portfolio.  We recorded an other-than-temporary impairment of $300,000 for the year ended December 31, 2013, which was determined based on the market bid price of these investments.  No further impairment was recorded for the three months ended March 31, 2014.

The par value of the two pooled trust preferred securities still classified as held-to-maturity totaled $4.0 million at March 31, 2014.  The collateral underlying these structured securities are instruments issued by financial institutions.  We own the A-3 tranches in each issuance.  Each of the bonds are rated by more than one rating agency.  One security has a composite rating of A-, one security has a composite rating of BBB+.  Observable trading activity remains limited for these types of securities.  We have estimated the fair value of these securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below our A-3 tranches, and the actual and expected performance of the underlying collateral, we expect to receive all contractual interest and principal payments recovering the amortized cost basis of each of the securities, and concluded that these securities are not other-than-temporarily impaired.  We continuously monitor the financial condition of the underlying issues and the level of subordination below the A-3 tranches.  We also utilize a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows

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for the A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

In one of the pooled trust preferred securities issues, 59% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $178 million of the remaining $236 million, or 75% of the performing collateral defaulted or deferred payment.  In the other pooled trust preferred security, 57% of the principal balance is subordinate to our class of ownership, and it is estimated that a break in contractual cash flow would occur if $158 million of the remaining $243 million, or 65% of the performing collateral defaulted or deferred payment.  Significant judgment is involved in the evaluation of other-than-temporary impairment.  We do not intend to sell nor do we believe it is probable we will be required to sell these pooled trust preferred securities prior to the recovery of our investment.

No other-than-temporary impairment has been recognized on the securities in our investment portfolio as of March 31, 2014.

We hold $13.7 million in FHLB stock at March 31, 2014, which is included in other investments on the statement of condition.

Loans Receivable

Total loans receivable, net of deferred fees and costs, were $2.3 billion and $2.04 billion at March 31, 2014 and December 31, 2013, respectively.  See the following table for details on the loans receivable portfolio.  As a result of our acquisition of UFBC, we added $238 million in loans, net of negative $3.9 million fair value adjustments, for the period ended March 31, 2014.  See further details regarding the acquired loans in Note 7 to the consolidated financial statements.  For the quarter ended March 31, 2014, net new organic loan growth was approximately $67 million, representing annualized loan growth of 13%.

Loans held for sale at March 31, 2014 were $265.3 million compared to $374.0 million at December 31, 2013.  The decrease in our loans held for sale balances at March 31, 2014 compared to December 31, 2013 is directly attributable to the decrease in loans closed during the first quarter of 2014.  Loans closed at our mortgage subsidiary totaled $551.4 million for the three months ended March 31, 2014 compared to $797.3 million for the quarter ended December 31, 2013.  Loans held for sale are valued at the lower of cost or fair value.

Loans Receivable

At March 31, 2014 and December 31, 2013

(In thousands)

	March 31, 2014					December 31, 2013
Commercial and industrial	$	291,208		12.39	%	$	219,156		10.72	%
Real estate - commercial	1,191,953			50.72	%	1,048,579			51.30	%
Real estate - construction	414,711			17.65	%	363,063			17.77	%
Real estate - residential	332,288			14.14	%	299,484			14.65	%
Home equity lines	115,045			4.90	%	109,481			5.36	%
Consumer	5,045			0.20	%	4,159			0.20	%
Gross loans	$	2,350,250		100.00	%	2,043,922			100.00	%
Net deferred (fees) costs	(4,548		)			(3,754		)
Less: allowance for loan losses	(29,093		)			(27,864		)
Loans receivable, net	$	2,316,609				$	2,012,304

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Deposits

Total deposits were $2.38 billion at March 31, 2014 compared to $2.06 billion at December 31, 2013.  As a result of our acquisition of UFBC, we added $295 million in deposits, net of positive $1.2 million fair value adjustments to the certificates of deposit portfolio, for the period ended March 31, 2014.  See the following table for details on certificates of deposit with balances of $100,000 or more.

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

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in increments of less than $250,000 so that principal and interest are eligible for FDIC insurance protection.  At March 31, 2014 and December 31, 2013, we had $45.1 million and $72.7 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  The decrease in our CDARS deposits is primarily due to our repayment of obligations the Company had in the network’s one-way buy program.  Brokered certificates of deposit not in the CDARS network were $260.6 million and $228.5 million at March 31, 2014 and December 31, 2013, respectively. We use this type of funding to lock in low cost term funding to support mortgage loans we originate and intend to sell.

Certificates of Deposit of $100,000 or More

At March 31, 2014

(In thousands)

	Fixed Term		No-Penalty*		Total
Maturities:
Three months or less	$	72,972	$	4,955	$	77,927
Over three months through six months	47,310		4,783		52,093
Over six months through twelve months	58,254		8,398		66,652
Over twelve months	121,929		35,049		156,978
	$	300,465	$	53,185	$	353,650

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

Borrowings

Other borrowed funds decreased $92.4 million to $382.9 million at March 31, 2014, compared to $475.2 million at December 31, 2013.  FHLB advances increased to $240.0 million at March 31, 2014 compared to $215.0 million at December 31, 2013.  Customer repurchase agreements increased $8.9 million to $103.5 million at March 31, 2014 compared to $94.6 million at December 31, 2013.  We had federal funds purchased of $15.0 million outstanding at March 31, 2014 compared to $45.0 million at December 31, 2013.  The following table provides information on our borrowings.

In connection with the acquisition, we acquired all of the voting and common shares of UFBC Capital Trust I (the “Trust”), which is a wholly-owned subsidiary established for the sole purpose of issuing $5.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”).  These trust preferred securities are due in 2035 and have an interest rate of LIBOR (London Interbank Offering Rate) plus 2.10%, which adjusts quarterly.  The Trust is an unconsolidated subsidiary since we are not the primary beneficiary of this entity.  The additional $155,000 that is payable by us to the Trust represents our unfunded capital investment in the Trust.

Short-Term Borrowings and Other Borrowed Funds

At March 31, 2014

(In thousands)

			Amount
	Interest Rate		Outstanding
Other short-term borrowed funds:
Customer repurchase agreements	0.14	%	$	103,547
Federal Funds Purchased	0.47	%	15,000
Total other short-term borrowed funds and weighted average	0.18	%	$	118,547
Other borrowed funds:
Trust preferred	2.50	%	$	24,307
FHLB advances - long term	3.32	%	240,000
Other borrowed funds and weighted average rate	3.24	%	$	264,307
Total other borrowed funds and weighted average rate	2.30	%	$	382,854

Shareholders’ Equity

Shareholders’ equity at March 31, 2014 was $352.4 million compared to $320.5 million at December 31, 2013, an increase of $31.9 million, or 10%. The increase in shareholders’ equity at March 31, 2014 compared to December 31, 2013 is primarily attributable to shares issued as a result of our acquisition of UFBC.  For each share of UFBC common stock outstanding, the shareholders of UFBC received a fixed exchange ratio of $19.13 in cash and 1.154 shares of our common stock.  We issued 1.6 million shares of our common stock and added $25.2 million in additional paid in capital for a total of $26.8 million in additional capital.  Net income of $4.3 million for the three months ended March 31, 2014 also contributed to the increase in equity less dividends of $2.6 million that were declared during 2014.  In addition, accumulated other comprehensive income increased $2.8 million for the three months ended March 31, 2014.

Book value per share at March 31, 2014 was $11.03 compared to $10.57 at December 31, 2013. Tangible book value per share (which is book value per share less goodwill and other intangible assets) at March 31, 2014 was $9.86 compared to $10.23 at December 31, 2013.

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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.  As of June 30, 2013, we merged operations of our trust division and Wilson/Bennett into CWS, both of which had been included in the wealth management services segment.  Results for the three months ended March 31, 2014 include the operations of these subsidiaries prior to their closure.

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, 2014, the commercial banking segment recorded net income of $5.5 million compared to $9.1 million for the same period of 2013.  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, 2014, total assets for this segment were $3.01 billion, loans receivable, net of deferred fees and costs, were $2.35 billion and total deposits were $2.38 billion. At March 31, 2013, total assets for this segment were $2.75 billion, loans receivable, net of deferred fees and costs, were $1.78 billion and total deposits were $2.09 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 on a best efforts basis.

For the three months ended March 31, 2014 and 2013, the mortgage banking segment recorded net losses of $167,000 and $1.1 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, 2014, total assets for this segment were $322.0 million; loans held for sale were $265.3 million and mortgage funding checks were $6.5 million. At March 31, 2013, total assets for this segment were $563.8 million; loans held for sale were $534.7 million and mortgage funding checks were $45.3 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, 2014 and 2013, the wealth management services segment recorded net income of $36,000 and a net loss of $87,000, 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, 2014, total assets were $2.3 million and managed and custodial assets were $179 million. At March 31, 2013, total assets were $2.4 million and managed and custodial assets were $324 million.   The decrease in managed and custodial assets at March 31, 2014 compared to a year ago is a direct result of our wealth management reorganization.

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Additional information pertaining to our business segments can be found in Note 4 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. The guidelines define capital as both Tier 1 (which includes common shareholders’ equity and certain debt obligations) and Tier 2 (which includes certain other debt obligations, a portion of the allowance for loan losses, and 45% of any unrealized gains in equity securities).

At March 31, 2014, our Tier 1 and total (Tier 1 and Tier 2) risk-based capital ratios were 10.72% and 11.71%, respectively. At December 31, 2013, our Tier 1 and total risk-based capital ratios were 11.85% and 12.89%, respectively.  Our regulatory capital levels for the Bank and bank holding company meet those established for well-capitalized institutions.  The decrease in our risk-based capital ratios at March 31, 2014 compared to December 31, 2013 was a primarily a result of the increase in risk weighted assets we acquired from UFBC during 2014.

The following table provides additional information pertaining to our capital ratios.

Capital Components

At March 31, 2014 and December 31, 2013

(In thousands)

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
	Amount		Ratio		Amount		Ratio			Amount		Ratio
Cardinal Financial Corporation (Consolidated):
At March 31, 2014
Total risk-based capital	$	353,010	11.71	%	$	241,267	>	8.00	%	$	301,584	>	10.00	%
Tier I risk-based capital	323,331		10.72	%	120,633		>	4.00	%	180,950		>	6.00	%
Leverage capital ratio	323,331		10.82	%	119,561		>	4.00	%	149,451		>	5.00	%
At December 31, 2013
Total risk-based capital	$	349,894	12.89	%	$	217,111	>	8.00	%	$	271,389	>	10.00	%
Tier I risk-based capital	321,513		11.85	%	108,555		>	4.00	%	162,833		>	6.00	%
Leverage capital ratio	321,513		11.70	%	109,928		>	4.00	%	137,410		>	5.00	%

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
	Amount		Ratio		Amount		Ratio			Amount		Ratio
Cardinal Bank:
At March 31, 2014
Total risk-based capital	$	350,646	11.69	%	$	238,985	>	8.00	%	$	298,732	>	10.00	%
Tier I risk-based capital	320,967		10.70	%	119,493		>	4.00	%	179,239		>	6.00	%
Leverage capital ratio	320,967		10.74	%	120,016		>	4.00	%	150,020		>	5.00	%
At December 31, 2013
Total risk-based capital	$	343,392	12.73	%	$	215,733	>	8.00	%	$	269,666	>	10.00	%
Tier I risk-based capital	315,011		11.68	%	107,867		>	4.00	%	161,800		>	6.00	%
Leverage capital ratio	315,011		11.54	%	109,212		>	4.00	%	136,515		>	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, 2014 and December 31, 2013, we had $45.1 million and $72.7 million, respectively, in CDARS deposits, which are considered to be brokered deposits.  The decrease in our CDARS deposits is primarily due to our repayment of obligations the Company had in the network’s one-way buy program.  Brokered certificates of deposit not in the CDARS network were $260.6 million and $228.5 million at March 31, 2014 and December 31, 2013, respectively.

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We also maintain secured lines of credit with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta. 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 $391.8 million at March 31, 2014 or 12.5% of total assets. We held investments that are classified as held-to-maturity in the amount of $6.4 million at March 31, 2014. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged roughly half of its investment securities and a portion of its commercial real estate and residential real estate loan portfolios to the Federal Home Loan Bank of Atlanta (“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 Federal Home Loan Bank of Atlanta at March 31, 2014 was $490.7 million. Borrowing capacity with the Federal Reserve Bank of Richmond was $101.8 million at March 31, 2014. 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.

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

Contractual Obligations

At March 31, 2014

(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	$	502,196	$	254,200	$	202,302	$	42,435	$	3,259
Brokered certificates of deposit	305,703		131,860		159,438		14,405		—
Advances from the Federal Home Loan Bank of Atlanta	240,000		10,000		125,000		75,000		30,000
Trust preferred securities	24,307		—		—		—		24,307
Operating lease obligations	37,662		8,738		12,638		8,114		8,172
Total	$	1,109,868	$	404,798	$	499,378	$	139,954	$	65,738

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

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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 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 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 standby 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, 2014 and December 31, 2013, commitments to extend credit were $1.80 billion and $1.49 billion, respectively.  Standby letters of credit were $31.4 million and $28.0 million at March 31, 2014 and December 31, 2013, respectively. Commitments to extend credit of $327.2 million as of March 31, 2014 are related to the mortgage banking segment’s mortgage loan funding commitments and are of a short term nature, compared to $210.9 million as of December 31, 2013.  The increase in mortgage loan funding commitments is related to the increased origination production at George Mason during the first quarter of 2014 as compared to the fourth quarter of 2013.

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 do not expect any third-party investor to fail to meet its obligation.  In addition, we have derivative counterparty risk relating to three interest rate swaps we have with third parties.  This risk may arise from the inability of the third party to meet the terms of the contract.  We continuously monitor the financial condition of these third parties.  We do not expect these third parties to 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, and for other

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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.  As of March 31, 2014, the reserve for loan repurchases had a balance of $261,000.

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, 2014, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 0.50% in a down 100 basis point scenario and would increase by less than 0.70% 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 1.80% in a down 100 basis point scenario and would increase less than 1.80% 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, 2014, our asset/liability position was neutral based on our interest rate sensitivity model.  Our net interest income would decrease by less than 0.50% in a down 100 basis point scenario and would increase by less than 0.70% 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 1.80% in a down 100 basis point scenario and would increase less than 1.80% 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 do not expect any third-party investor to fail to meet its obligation.  In addition, we have derivative counterparty risk relating to certain interest rate swaps we have with third parties.  This risk may arise from the inability of the third party to meet the terms of the contracts.  We monitor the financial condition of these third parties on an annual basis.  We do not expect these third parties 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, these officers concluded that the Company’s disclosure controls and procedures were effective.

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. 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.

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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, 2013.  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, 2014, 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

3.1Bylaws of Cardinal Financial Corporation (restated in electronic format as of March 24, 2014).

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

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

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

32.2Statement 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, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (furnished herewith).

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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 8, 2014	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: May 8, 2014	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: May 8, 2014	/s/ Jennifer L. Deacon
	Jennifer L. Deacon
	Executive Vice President and Chief Accounting Officer
	(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Bylaws of Cardinal Financial Corporation (restated in electronic format as of March 24, 2014).
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2	Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (furnished herewith).

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EX-3.1

Exhibit 3.1

BYLAWS

OF

CARDINAL FINANCIAL CORPORATION

(restated in electronic format to reflect all amendments through February 19, 2014)

ARTICLE I

Shareholder Matters

Section 1.1.Annual Meetings.

A.The annual meeting of the shareholders of the Corporation shall be held at such a time and place as may be decided by the Board of Directors and indicated in the notice of the meeting.

B.At the annual meeting of the shareholders of the Corporation, Directors shall be elected and reports of the affairs of the Corporation shall be received and considered. Any other business may be transacted which is within the powers of the shareholders, except that, if any shareholder shall bring new business before the annual meeting, the shareholder must give advance notice as set forth in Section 1.6 of these Bylaws.

C.The Board of Directors may designate any place, either within or without the Commonwealth of Virginia, as the place of meeting for any annual meeting or for any special meeting.  If no place is designated by the Board, the place of meeting shall be the principal office of the Corporation.

Section 1.2.Special Meetings.  A special meeting of the shareholders may be called for any purpose or purposes whatsoever at any time, but only by the President or the Chairman of the Board of Directors, or the Board of Directors.

Section 1.3.Notice of Meetings.  Notice of the time and place of every annual meeting or special meeting shall be mailed to each Shareholder of record entitled to vote at the meeting at his address as it appears on the records of the Corporation not less than ten (10) nor more than sixty (60) days before the date of such meeting (except as a different time may be specified by law).

Section 1.4.Quorum.  A majority of the votes entitled to be cast on a matter by a voting group constitutes a quorum of such voting group for action on such matter.  If there is not a quorum at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the shareholders present or represented by proxy without notice, other than by announcement at the meeting, until there is a quorum.

Section 1.5.Voting.  Except as the Articles of Incorporation otherwise provide, at any meeting of the shareholders, each outstanding share, regardless of class, is entitled to one vote on each matter voted on at a shareholders’ meeting.

Section 1.6.Notice of Shareholder Business.  (a) At an annual meeting of the shareholders of the Corporation, only such business shall be conducted as shall have been properly brought before the meeting.  To be brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder.  For business to be properly brought before an annual meeting by a shareholder, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation.  To be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than sixty (60) days nor more than ninety (90) days prior to the date of the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that in the event that less than seventy (70) days’ notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by a shareholder, to be timely, must be so received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made.  A shareholder’s notice to the Secretary of the Corporation shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation’s books of the shareholder proposing such business and of any other person or entity who is the record or beneficial owner of any shares of the Corporation and who, to the knowledge of the shareholder proposing such business, supports such proposal, (c) the class and number of shares of the Corporation which are beneficially owned and owned of record by the shareholder proposing such business on the date of his notice to the Corporation and the number of shares so owned by any person or entity who, to the knowledge of the shareholder proposing such business, supports such proposal and (d) any material interest (financial or other) of such shareholder in such proposal.  Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 1.6.  The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.6. and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

(b)Nothing in Section 1.6(a) shall be interpreted to mean that a shareholder shall not be permitted to ask pertinent questions or to express his or her views on any pertinent matter.

Section 1.7.Order of Business.  All meetings of shareholders shall be conducted in accordance with such rules as are prescribed by the Chairman of the meeting and he shall determine the order of business at all meetings of the shareholders.

Section 1.8.Inspectors.  The Board of Directors, in advance of any meeting of shareholders, may, but shall not be required to, appoint one or more inspectors to act at such meeting or any adjournment thereof.  If any of the inspectors so appointed shall fail to appear or act, the Chairman of the meeting may appoint one or more inspectors.  The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all shareholders.  On request of the Chairman of the meeting, the inspectors shall make a report of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them.  No director or candidate for the office of director shall act as an inspector of an election of directors.  Inspectors need not be shareholders.

ARTICLE II

Directors

Section 2.1.General Powers.  The business and affairs of the Corporation shall be managed under the direction of the Board of Directors and, except as otherwise expressly provided by law or by the Articles of Incorporation, or by these Bylaws, all of the powers of the Corporation shall be exercised by or under the authority of said Board of Directors.

Section 2.2. Number and Qualification.  The Board of Directors shall consist of eleven (11) Directors. Except for individuals who are on the Board of Directors on April 21, 2004 (who may be reelected one or more times, regardless of age) or as waived by the Board of Directors, no one who is seventy years of age or older shall be eligible to stand for election to the Board of Directors.

As more particularly described in the Articles of Incorporation, the directors shall be divided into three classes (A, B and C) as nearly equal in number as possible.  The initial term of office for members of Class A shall expire at the first annual meeting of stockholders after their election; the initial term of office for members of Class B shall expire at the second annual meeting of stockholders after their election; and the initial term of office for members of Class C shall expire at the third annual meeting of stockholders after their election.  At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, and shall continue to hold office until their respective successors are elected and qualify.

In the event of any increase or decrease in the number of directors fixed by the Bylaws, all classes of directors shall be increased or decreased as equally as may be possible.  Newly-created directorships resulting from an increase by not more than two in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause, shall be filled by the affirmative vote of a majority of the directors then in office, whether or not a quorum.  Each director so chosen shall hold office until the expiration of the term of the director, if any, whom he has been chosen to succeed or, if none, until the expiration of the term of the class assigned to the additional directorship to which he has been elected, or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.  Any director or the entire Board of Directors may be removed from office at any time but only for cause and only by the affirmative vote of the holders of more than two-thirds of each class of the voting stock of the Corporation then outstanding at a meeting called for that purpose.

Section 2.3.Election of Directors.  The Directors shall be elected at the annual meeting of shareholders, and shall hold their offices until their successors are elected in accordance with the Articles of Incorporation.  Nominations for the election of Directors shall be given in the manner provided in Section 2.5.

Section 2.4.Honorary and Advisory Directors.  The Board may appoint to the position of Honorary Director or the position of Advisory Director such person or persons as it deems appropriate.  Honorary Directors shall be entitled to receive notice of, and to attend all meetings of the Board, but they shall not be Directors and shall not be entitled to vote, nor shall they be counted in determining a quorum of the Board. Advisory Directors shall be entitled only to notice of meetings of Advisory or other Boards of the Corporation to which they shall be appointed.  Honorary and Advisory Directors shall receive such compensation as may be authorized by the Board of attendance at meetings of Advisory or other Boards to which such Advisory or Honorary Directors are appointed.

Section 2.5.Nominations. Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made by or at the direction of the Board of Directors, or by any shareholder of the Corporation entitled to vote for the election of Directors who complies with the notice procedures set forth in this Section 2.5(a).  Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation.  To be timely, a shareholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the date of the scheduled annual meeting, regardless of postponements, deferrals, or adjournments of that meeting to a later date; provided, however, in the event that less than seventy (70) days’ notice or prior public disclosure of the date of the meeting is given or made, notice by the shareholder to be timely must be so received not later than the close of business on

the 10th day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made.  Such shareholder’s notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and address of such shareholder and of any other person or entity who is the record or beneficial owner of shares of the Corporation and who, to the knowledge of the shareholder giving notice, supports such nominee(s) and (ii) the class and number of shares of the Corporation which are beneficially owned and owned of record by such shareholder and by any other person or entity who is the record or beneficial owner of shares of the Corporation and who, to the knowledge of the shareholder giving the notice, supports such nominee(s).  At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation the information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless in accordance with the procedures set forth in this Section 2.5(a).  The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 2.6.Meetings of Directors.  Meetings of the Board of Directors shall be held at places within or without the Commonwealth of Virginia and at times fixed by resolution of the Board of Directors, or upon call of the Chairman of the Board of Directors or the President.  The Secretary, or officer performing his duties, shall give at least twenty-four (24) hours’ notice by telegraph, letter, telephone or in person, of all meetings of the Directors; provided, that notice need not be given of regular meetings held at times and places fixed by resolution of the Board.  Regular meetings of the Board of Directors shall be held at least once in every calendar quarter. Meetings may be held at any time without notice if all of the Directors are present, or if those not present waive notice either before or after the meeting.  Neither the business to be transacted nor the purpose of any annual or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

Section 2.7.Quorum.  A majority of the members of the Board of Directors shall constitute a quorum.

Section 2.8.Compensation.  The Board of Directors shall fix the compensation of the Directors.

Section 2.9.Committees.  The Board of Directors may create committees and appoint members of committees in accordance with Virginia law.

ARTICLE III

Officers

Section 3.1.Election.  The Officers of the Corporation shall consist of the Chairman of the Board of Directors, the President, one or more Vice Presidents, a Secretary, a Chief Financial Officer, one or more Assistant Secretaries, and such other officers as may be elected as provided in Section 3.3 of this Article.  All Officers shall be elected by the Board of Directors, and shall hold office until their successors are elected and qualify.  Vacancies may be filled at any meeting of the Board of Directors.  Subject to any applicable provision of Virginia law, more than one office may be combined in the same person as the Board of Directors may determine.

Section 3.2.Removal of Officers.  Any Officer of the Corporation may be summarily removed with or without cause, at any time, by a resolution passed by affirmative vote of a majority of all of the Directors; provided that any such removal shall not affect an Officer’s right to any compensation to which he is entitled under any employment contract between him and the Corporation.

Section 3.3.Other Officers.  Other Officers may from time to time be appointed by the Board of Directors, and such Officers shall hold office for such term as may be designated by the said Board of Directors.

Section 3.4.Chairman of the Board.  The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall preside at all meetings of the Directors and all meetings of the shareholders.  He shall appoint all standing committees and temporary committees.  He shall be a member ex- officio of all standing committees and shall have all powers and duties as may be prescribed by the Board of Directors or by the Bylaws.

In the absence of the Chairman of the Board, the Vice Chairman shall preside at all meetings of the Directors and at meetings of the shareholders and in the absence of the Chairman of the Board, the duties and responsibilities of such offices shall devolve upon the Vice Chairman.  The Board, at any time may assign the duties of the Vice Chairman to the Lead Director.

Section 3.5.President.  The President shall have the duties assigned to him from time to time by the Chairman or the Board of Directors.

Section 3.6. Vice Presidents.  The Corporation may have one or more Executive Vice Presidents, Senior Vice Presidents or Vice Presidents.  The duties and responsibilities of such Vice President are those delegated to him or her by the Board of Directors or the Chairman.

Section 3.7.Secretary.  The Secretary shall have the duties and responsibilities prescribed by law for the secretary of a Virginia corporation.

Section 3.8.Surety Bonds.  All Officers and employees who shall have charge or possession of money, securities or property of the Corporation must, before entering upon their duties, be covered by a bond with a surety company approved by the Board of Directors and state and federal authorities.  The costs of such bond shall be borne by the Corporation.

ARTICLE IV

Capital Stock

Section 4.1.Form.  Shares of the Corporation shall, when fully paid, be evidenced by certificates containing such information as is required by law and approved by the Board of Directors.  Alternatively, the Board of Directors may authorize the issuance of some or all shares without certificates.  In such event, within a reasonable time after issuance, the Corporation shall mail to the shareholder a written confirmation of its records with respect to such shares containing the information required by law.  When issued, certificates shall be signed by the Chief Executive Officer and by the Chief Financial Officer or Secretary or an Assistant Secretary, or by any other two Officers authorized by resolution of the Board of Directors.  Any or all of the signatures on a share certificate may be facsimile.  If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such individual were such officer, transfer agent or registrar on the date of issue.

Section 4.2.Transfer of Stock.  The Board of Directors may make rules and regulations concerning the issue, registration and transfer of shares and/or certificates representing the shares of the Corporation.  Transfers of shares and/or of the certificates representing such shares shall be made upon the books of the Corporation by surrender of the certificates representing such shares, if any, accompanied by written assignments given by the record owners thereof or their attorneys-in-fact.

Section 4.3.Restrictions on Transfer of Stock.  Any restrictions that may be imposed by law, by the Articles of Incorporation or Bylaws of the Corporation, or by an agreement among shareholders of the Corporation, or by an agreement among shareholders of the Corporation, shall be noted conspicuously on the front or back of all certificates representing shares of stock of the Corporation or shall be otherwise communicated in accordance with the requirements of law.

Section 4.4.Lost, Destroyed or Mutilated Certificates. The holder of stock of the Corporation shall immediately notify the Corporation of any loss, destruction, or mutilation of the certificate therefor, and the Corporation may in its discretion cause one or more new certificates or a written confirmation of its records for the same aggregate number of shares to be issued to such Stockholder upon the surrender of the mutilated certificate, or upon satisfactory proof of such loss or destruction accompanied by the deposit of a bond in such form and amount and with such surety as the Corporation may require.

Section 4.5.Holder of Record.  The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law.

Section 4.6.Record Date.  The Board of Directors shall fix in advance the record date in order to make a determination of shareholders for any purpose, including the determination of shareholders entitled to notice of or to vote at any shareholders’ meeting or entitled to payment of any dividend or distribution to shareholders.  Such record date shall not be more than seventy (70) days prior to the date on which the particular action requiring such determination of shareholders is to be taken.

Section 4.7.Control Share Acquisitions.  Article 14.1 of the Virginia Stock Corporation Act shall not apply to the Corporation.

ARTICLE V

Miscellaneous Provisions

Section 5.1.Seal.  The seal of the Corporation shall be circular in shape with the name of the Corporation around the circumference thereof, and the word “SEAL” in the center thereof.

Section 5.2.Examination of the Books and Records.  The books and records of account of the Corporation, the minutes of the proceedings of the shareholders, the Board and Committees appointed by the Board of Directors and the records of the shareholders showing the names and addresses of all shareholders and the number of shares held by each, shall be subject to inspection during the normal business hours by any person who is a duly qualified Director of the Corporation at the time he makes such inspection.  Shareholders shall have such rights to inspect records of the Corporation as are prescribed by applicable law.

Section 5.3.Checks, Notes and Drafts.  Checks, notes, drafts, and other orders for the payment of money shall be signed by such persons as the Board of Directors from time to time may authorize.

Section 5.4.Voting of Stock Held.  Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board of Directors, the President or any Vice President may from time to time appoint an attorney or attorneys as agent or agents of the Corporation to cast in the name of the Corporation the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation, any of whose stock or securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by any such other corporation; and such Officers may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers, or other instruments as may be necessary or

proper in the premises; or any of such Officers may himself attend any meeting of the holders of stock or other securities of any such other corporation and there vote or exercise any or all other powers of the Corporation as the holder of such stock or other securities of such other corporation.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Bernard H. Clineburg, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2014 of Cardinal Financial Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2014	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark A. Wendel, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2014 of Cardinal Financial Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2014	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

STATEMENT OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2014 (the “Form 10-Q”) of Cardinal Financial Corporation (the “Company”), I, Bernard H. Clineburg, Chairman and Chief Executive Officer, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(a)           the Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(b)           the information contained in the Form 10-Q fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for, the periods presented in the Form 10-Q.

Date: May 8, 2014	/s/ Bernard H. Clineburg
	Bernard H. Clineburg
	Chairman and Chief Executive Officer

EX-32.2

Exhibit 32.2

STATEMENT OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2014 (the “Form 10-Q”) of Cardinal Financial Corporation (the “Company”), I, Mark A. Wendel, Executive Vice President and Chief Financial Officer, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(a)           the Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(b)           the information contained in the Form 10-Q fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for, the periods presented in the Form 10-Q.

Date: May 8, 2014	/s/ Mark A. Wendel
	Mark A. Wendel
	Executive Vice President and Chief Financial Officer

XML

Loans Receivable and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		12 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013	Dec. 31, 2013 item
Loans receivable and allowance for loan losses
Loans receivable, gross	$ 2,350,250	$ 1,785,468	$ 2,043,922
Net deferred fees	(4,548)		(3,754)
Loans receivable, net of fees	2,345,702		2,040,168
Allowance for loan losses	(29,093)	(27,165)	(27,864)
Loans receivable, net	2,316,609		2,012,304
Allowance for loan losses
Balance at the beginning of the period	27,864	27,400	27,400
Provision for loan losses	1,926	(457)
Charge offs	(785)	(85)
Recoveries	88	307
Net recoveries (charge offs)	(697)	222
Balance at the end of the period	29,093	27,165	27,864
Ending Balance, Collectively evaluated for impairment	28,924	27,165
Ending Balance, Individually evaluated for impairment	169
Loans Receivable
Ending Balance	2,350,250	1,785,468	2,043,922
Ending Balance, Individually evaluated for impairment	2,930	5,855
Purchased Credit Impaired Loans	15,980
Ending Balance, Collectively evaluated for impairment	2,331,340	1,779,613
Number of acquired loans	3		0
Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	2,139,542
Net deferred fees	(4,548)
Loans receivable, net of fees	2,134,994
Allowance for loan losses	(28,924)
Loans receivable, net	2,106,070
Allowance for loan losses
Balance at the end of the period	28,924
Loans Receivable
Ending Balance	2,139,542
Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	210,708
Loans receivable, net of fees	210,708
Allowance for loan losses	(169)
Loans receivable, net	210,539
Allowance for loan losses
Balance at the end of the period	169
Loans Receivable
Ending Balance	210,708
Commercial and industrial
Allowance for loan losses
Charge offs	(783)
Recoveries	7	298
Residential
Allowance for loan losses
Charge offs		(85)
Recoveries	81	8
Consumer
Allowance for loan losses
Charge offs	(2)
Recoveries		1
Commercial and industrial
Loans receivable and allowance for loan losses
Loans receivable, gross	291,208	218,281	219,156
Allowance for loan losses	(3,962)	(31)
Allowance for loan losses
Balance at the beginning of the period	3,329	525	525
Provision for loan losses	893	(790)
Charge offs	(262)
Recoveries	2	296
Balance at the end of the period	3,962	31
Ending Balance, Collectively evaluated for impairment	3,924	31
Ending Balance, Individually evaluated for impairment	38
Loans Receivable
Ending Balance	291,208	218,281	219,156
Ending Balance, Individually evaluated for impairment	299	59
Purchased Credit Impaired Loans	4,990
Ending Balance, Collectively evaluated for impairment	285,919	218,222
Commercial and industrial | Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	251,984
Loans Receivable
Ending Balance	251,984
Commercial and industrial | Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	39,224
Loans Receivable
Ending Balance	39,224
Real estate - commercial
Loans receivable and allowance for loan losses
Loans receivable, gross	1,191,953	850,710	1,048,579
Allowance for loan losses	(16,004)	(18,494)
Allowance for loan losses
Balance at the beginning of the period	16,076	17,990	17,990
Provision for loan losses	449	504
Charge offs	(521)
Balance at the end of the period	16,004	18,494
Ending Balance, Collectively evaluated for impairment	16,004	18,494
Loans Receivable
Ending Balance	1,191,953	850,710	1,048,579
Ending Balance, Individually evaluated for impairment	1,738	4,359
Purchased Credit Impaired Loans	8,379
Ending Balance, Collectively evaluated for impairment	1,181,836	846,351
Real estate - commercial | Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	1,064,996
Loans Receivable
Ending Balance	1,064,996
Real estate - commercial | Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	126,957
Loans Receivable
Ending Balance	126,957
Real estate - construction
Loans receivable and allowance for loan losses
Loans receivable, gross	414,711	355,919	363,063
Allowance for loan losses	(5,721)	(7,306)
Allowance for loan losses
Balance at the beginning of the period	5,336	7,675	7,675
Provision for loan losses	380	(371)
Recoveries	5	2
Balance at the end of the period	5,721	7,306
Ending Balance, Collectively evaluated for impairment	5,721	7,306
Loans Receivable
Ending Balance	414,711	355,919	363,063
Ending Balance, Individually evaluated for impairment	496	1,437
Purchased Credit Impaired Loans	1,688
Ending Balance, Collectively evaluated for impairment	412,527	354,482
Real estate - construction | Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	390,415
Loans Receivable
Ending Balance	390,415
Real estate - construction | Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	24,296
Loans Receivable
Ending Balance	24,296
Real estate - residential
Loans receivable and allowance for loan losses
Loans receivable, gross	332,288	242,722	299,484
Allowance for loan losses	(2,707)	(823)
Allowance for loan losses
Balance at the beginning of the period	2,421	857	857
Provision for loan losses	205	43
Charge offs		(85)
Recoveries	81	8
Balance at the end of the period	2,707	823
Ending Balance, Collectively evaluated for impairment	2,576	823
Ending Balance, Individually evaluated for impairment	131
Loans Receivable
Ending Balance	332,288	242,722	299,484
Ending Balance, Individually evaluated for impairment	346
Purchased Credit Impaired Loans	448
Ending Balance, Collectively evaluated for impairment	331,494	242,722
Real estate - residential | Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	319,000
Loans Receivable
Ending Balance	319,000
Real estate - residential | Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	13,288
Loans Receivable
Ending Balance	13,288
Home Equity Lines
Loans receivable and allowance for loan losses
Loans receivable, gross	115,045	114,407	109,481
Allowance for loan losses	(609)	(438)	(609)
Allowance for loan losses
Balance at the beginning of the period		266	266
Provision for loan losses		172
Balance at the end of the period	609	438	609
Ending Balance, Collectively evaluated for impairment	609	438
Loans Receivable
Ending Balance	115,045	114,407	109,481
Ending Balance, Individually evaluated for impairment	51
Purchased Credit Impaired Loans	467
Ending Balance, Collectively evaluated for impairment	114,527	114,407
Home Equity Lines | Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	109,223
Loans Receivable
Ending Balance	109,223
Home Equity Lines | Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	5,822
Loans Receivable
Ending Balance	5,822
Consumer
Loans receivable and allowance for loan losses
Loans receivable, gross	5,045	3,429	4,159
Allowance for loan losses	(90)	(73)
Allowance for loan losses
Balance at the beginning of the period	93	87	87
Provision for loan losses	(1)	(15)
Charge offs	(2)
Recoveries		1
Balance at the end of the period	90	73
Ending Balance, Collectively evaluated for impairment	90	73
Loans Receivable
Ending Balance	5,045	3,429	4,159
Purchased Credit Impaired Loans	8
Ending Balance, Collectively evaluated for impairment	5,037	3,429
Consumer | Originated
Loans receivable and allowance for loan losses
Loans receivable, gross	3,924
Loans Receivable
Ending Balance	3,924
Consumer | Acquired
Loans receivable and allowance for loan losses
Loans receivable, gross	1,121
Loans Receivable
Ending Balance	$ 1,121

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Fair Value of Derivative Instruments and Hedging Activities (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Derivatives Not Designated as Hedging Instruments
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Income on Derivative	$ 13,083	$ 19,859
Forward Loan Sales Commitments | Derivatives Not Designated as Hedging Instruments | Other Income
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Income on Derivative	28	(328)
Rate Lock Commitments | Derivatives Not Designated as Hedging Instruments | Realized and unrealized gains on mortgage banking activities
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Income on Derivative	13,083	19,859
Rate Lock Commitments | Derivatives Not Designated as Hedging Instruments | Other Income
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Income on Derivative	(28)	328
Derivatives in Fair Value Hedging Relationships
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Income on Derivative		145
Amount of Gain (Loss) Recognized in Income on Hedged Item		(145)
Derivatives in Fair Value Hedging Relationships | Interest Rate Swaps | Other Income
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Income on Derivative		145
Amount of Gain (Loss) Recognized in Income on Hedged Item		(145)
Derivatives in Cash Flow Hedging Relationships
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)	(150)	854
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	(7,227)	(2,886)
Derivatives in Cash Flow Hedging Relationships | Interest Rate Swaps | Other Income
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)		39
Derivatives in Cash Flow Hedging Relationships | Forward Loan Sales Commitments | Other Income
Impact of Derivative Instruments on the Statement of Income
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)	(150)	815
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	$ (7,227)	$ (2,886)

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Derivative Instruments and Hedging Activities (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Derivative Instruments and Hedging Activities
Period from closing within which loans held for sale are generally sold	60 days
Loans closed and presented as held for sale	$ 265,313,000	$ 373,993,000
Residential mortgage rate lock commitments and associated forward sales
Derivative Instruments and Hedging Activities
Notional amount	327,200,000
Forward loan sales commitments
Derivative Instruments and Hedging Activities
Notional amount	224,200,000
Derivatives in cash flow hedging relationships | Forward loan sales commitments
Derivative Instruments and Hedging Activities
Accumulated Other Comprehensive Income (Loss), Cumulative Changes in Net Gain (Loss) from Cash Flow Hedges, Effect Net of Tax	$ 150,000

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Stock-Based Compensation (Details) (USD $)	3 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013	Mar. 31, 2014 Stock options	Mar. 31, 2013 Stock options	Mar. 31, 2014 Stock options Director	Mar. 31, 2014 Stock options Employee	Mar. 31, 2014 Stock options Executive officer item	Mar. 31, 2014 Stock options Executive officer Awards granted during the first quarter of 2014	Nov. 23, 2008 Option Plan	Dec. 31, 1998 Option Plan	Mar. 31, 2014 Equity Plan
Stock-based Compensation
Number of stock-based employee compensation plans	2
Number of shares of common stock reserved for issuance										625,000
Number of shares of the company's common stock available for future grants and awards									0		471,342
Term					10 years	10 years	10 years	10 years
Increments in which the stock options vest and become fully exercisable, beginning after the first year of their service (as a percent)						20.00%
Increments in which the stock options vest (as a percent)							25.00%
Percentage vesting of options on the date of grant							25.00%	33.00%
Vesting period of remaining unvested awards								2 years
Number of increments in which stock options vest							3
Total compensation cost charged against income	$ 152,000	$ 49,000
Total income tax benefit recognized in the income statement for share-based compensation arrangements	51,000	17,000
Granted (in shares)			218,000	202,500
Weighted average per share fair value of stock option grants (in dollars per share)			$ 5.60	$ 5.96
Weighted average assumptions used in estimation of fair values of options
Estimated option life			6 years 6 months	6 years 6 months
Risk free interest rate, low end of range (as a percent)			2.17%	1.23%
Risk free interest rate, high end of range (as a percent)			2.34%	1.43%
Expected volatility (as a percent)			37.40%	39.50%
Expected dividend yield (as a percent)			1.80%	1.23%
Term of the U.S. Treasury note on which the risk free interest rate is based	7 years
Stock option, number of shares
Outstanding at the beginning of the period (in shares)			1,011,553
Granted (in shares)			218,000	202,500
Exercised (in shares)		(36,000)	(12,210)
Forfeited (in shares)			(1,800)
Outstanding at the end of the period (in shares)			1,215,543
Options exercisable at the end of the period (in shares)			845,943
Stock option, weighted average exercise price
Outstanding at the beginning of the period (in dollars per share)			$ 12.03
Granted (in dollars per share)			$ 16.83
Exercised (in dollars per share)			$ 9.29
Forfeited (in dollars per share)			$ 11.48
Outstanding at the end of the period (in dollars per share)			$ 12.89
Options exercisable at the end of the period (in dollars per share)			$ 11.74
Stock option, weighted average remaining contractual term
Outstanding at the end of the period			6 years 7 days
Options exercisable at the end of the period			4 years 8 months 16 days
Stock option, aggregate intrinsic value
Outstanding at the end of the period (in dollars)			5,954,977
Options exercisable at the end of the period (in dollars)			5,093,024
Intrinsic value of options exercised (in dollars)			103,000	315,000
Non-vested stock options, number of shares
Balance at the beginning of the period (in shares)			289,150
Granted (in shares)			218,000	202,500
Vested (in shares)			(135,750)
Forfeited (in shares)			(1,800)
Balance at the end of the period (in shares)			369,600
Non-vested stock options, weighted average grant date fair value
Balance at the beginning of the period (in dollars per share)			$ 5.29
Granted (in dollars per share)			$ 5.60	$ 5.96
Vested (in dollars per share)			$ 5.30
Forfeited (in dollars per share)			$ 4.45
Balance at the end of the period (in dollars per share)			$ 5.47
Additional stock-based compensation information
Total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans	1,900,000
Expected weighted-average period for recognition of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans	2 years 6 months
The total fair value of shares that vested	$ 667,000	$ 392,000

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2014

Earnings Per Share

Schedule of calculation of basic and diluted earnings per share

(In thousands,	Three Months Ended
except per share data)	2014		2013
Net income available to common shareholders	$	4,290	$	7,180
Weighted average common shares - basic	32,127		30,634
Weighted average common shares - diluted	32,609		31,019
Earnings per common share - basic	$	0.13	$	0.23
Earnings per common share - diluted	$	0.13	$	0.23

Schedule of composition of basic outstanding shares

(in thousands)	2014	2013
Weighted average common shares outstanding	31,686	30,242
Weighted average shares attributable to the deferred compensation plans	441	392
Total weighted average shares - basic	32,127	30,634

Schedule of composition of diluted outstanding shares

(in thousands)	2014	2013
Weighted average shares outstanding - basic (from above)	32,127	30,634
Incremental weighted average shares attributable to deferred compensation plans	248	191
Weighted average shares attributable to stock options	180	170
Incremental Shares from stock option plan	54	24
Total weighted average shares - diluted	32,609	31,019

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Goodwill and Other Intangibles (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2014 Commercial Banking	Mar. 31, 2014 Mortgage Banking	Dec. 31, 2013 Mortgage Banking
Goodwill
Balance at the beginning of the period	$ 10,144	$ 24	$ 10,120	$ 10,120
Acquisition of UFBC	24,706	24,706
Balance at the end of the period	$ 34,850	$ 24,730	$ 10,120	$ 10,120

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Loans Receivable and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013
Nonaccrual and Past Due Loans
Total Loans	$ 2,350,250	$ 2,043,922	$ 1,785,468
Originated
Nonaccrual and Past Due Loans
30-59 Days Past Due	893	191
60-89 Days Past Due	412	316
90 Days or More Past Due (includes nonaccrual)	2,035	2,314
Total Past Due	3,340	2,821
Current	2,136,202	2,041,101
Total Loans	2,139,542
Nonaccrual Loans	2,035	2,314
Acquired
Nonaccrual and Past Due Loans
30-59 Days Past Due	605
60-89 Days Past Due	1,067
90 Days or More Past Due (includes nonaccrual)	1,864
Total Past Due	3,536
Current	207,172
Total Loans	210,708
Nonaccrual Loans	1,864
Commercial and industrial
Nonaccrual and Past Due Loans
Total Loans	291,208	219,156	218,281
Commercial and industrial | Originated
Nonaccrual and Past Due Loans
30-59 Days Past Due	204	101
60-89 Days Past Due	412	316
Total Past Due	616	417
Current	251,368	218,739
Total Loans	251,984
Commercial and industrial | Acquired
Nonaccrual and Past Due Loans
90 Days or More Past Due (includes nonaccrual)	757
Total Past Due	757
Current	38,467
Total Loans	39,224
Nonaccrual Loans	757
Owner occupied | Originated
Nonaccrual and Past Due Loans
Current	274,352	279,631
Total Loans	274,352	279,631
Owner occupied | Acquired
Nonaccrual and Past Due Loans
Current	64,566
Total Loans	64,566
Non-owner occupied | Originated
Nonaccrual and Past Due Loans
30-59 Days Past Due	464	82
90 Days or More Past Due (includes nonaccrual)	1,738	1,738
Total Past Due	2,202	1,820
Current	788,442	767,128
Total Loans	790,644	768,948
Nonaccrual Loans	1,738	1,738
Non-owner occupied | Acquired
Nonaccrual and Past Due Loans
30-59 Days Past Due	605
60-89 Days Past Due	1,067
90 Days or More Past Due (includes nonaccrual)	339
Total Past Due	2,011
Current	60,380
Total Loans	62,391
Nonaccrual Loans	339
Residential | Originated
Nonaccrual and Past Due Loans
Current	132,380	120,144
Total Loans	132,380	120,144
Residential | Acquired
Nonaccrual and Past Due Loans
Current	20,235
Total Loans	20,235
Commercial | Originated
Nonaccrual and Past Due Loans
90 Days or More Past Due (includes nonaccrual)	246	525
Total Past Due	246	525
Current	257,789	242,394
Total Loans	258,035	242,919
Nonaccrual Loans	246	525
Commercial | Acquired
Nonaccrual and Past Due Loans
Current	4,061
Total Loans	4,061
Single family | Originated
Nonaccrual and Past Due Loans
30-59 Days Past Due	225	8
Total Past Due	225	8
Current	223,008	213,537
Total Loans	223,233	213,545
Single family | Acquired
Nonaccrual and Past Due Loans
90 Days or More Past Due (includes nonaccrual)	768
Total Past Due	768
Current	12,520
Total Loans	13,288
Nonaccrual Loans	768
Multi-family | Originated
Nonaccrual and Past Due Loans
Current	95,767	85,939
Total Loans	95,767	85,939
Home Equity Lines
Nonaccrual and Past Due Loans
Total Loans	115,045	109,481	114,407
Home Equity Lines | Originated
Nonaccrual and Past Due Loans
90 Days or More Past Due (includes nonaccrual)	51	51
Total Past Due	51	51
Current	109,172	109,430
Total Loans	109,223
Nonaccrual Loans	51	51
Home Equity Lines | Acquired
Nonaccrual and Past Due Loans
Current	5,822
Total Loans	5,822
Installment | Originated
Nonaccrual and Past Due Loans
Current	3,334	3,912
Total Loans	3,334	3,912
Installment | Acquired
Nonaccrual and Past Due Loans
Current	1,121
Total Loans	1,121
Credit cards | Originated
Nonaccrual and Past Due Loans
Current	590	247
Total Loans	$ 590	$ 247

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Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Investment Securities Available-for-Sale, Total temporary impaired securities
Less than 12 months, Fair Value	$ 38,030	$ 115,569
Less than 12 months, Unrealized loss	(829)	(2,287)
12 months or more, Fair Value	319	318
12 months or more, Unrealized loss	(7)	(11)
Total Fair Value	38,349	115,887
Total Unrealized loss	(836)	(2,298)
Investment Securities Held-to-Maturity, Total temporary impaired securities
12 months or more, Fair Value	3,050	2,910
12 months or more, Unrealized loss	(955)	(1,095)
Total Fair Value	3,050	2,910
Total Unrealized loss	(955)	(1,095)
U.S. government-sponsored agencies
Investment Securities Available-for-Sale, Total temporary impaired securities
Less than 12 months, Fair Value	29,878	38,554
Less than 12 months, Unrealized loss	(731)	(1,548)
Total Fair Value	29,878	38,554
Total Unrealized loss	(731)	(1,548)
Mortgage-backed securities
Investment Securities Available-for-Sale, Total temporary impaired securities
Less than 12 months, Fair Value	781	46,563
Less than 12 months, Unrealized loss	(4)	(335)
12 months or more, Fair Value	319	318
12 months or more, Unrealized loss	(7)	(11)
Total Fair Value	1,100	46,881
Total Unrealized loss	(11)	(346)
Municipal securities
Investment Securities Available-for-Sale, Total temporary impaired securities
Less than 12 months, Fair Value	7,371	30,452
Less than 12 months, Unrealized loss	(94)	(404)
Total Fair Value	7,371	30,452
Total Unrealized loss	(94)	(404)
Pooled trust preferred securities
Investment Securities Held-to-Maturity, Total temporary impaired securities
12 months or more, Fair Value	3,050	2,910
12 months or more, Unrealized loss	(955)	(1,095)
Total Fair Value	3,050	2,910
Total Unrealized loss	$ (955)	$ (1,095)

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Fair Value Measurements (Details) (USD $)	Mar. 31, 2014 item	Dec. 31, 2013
Fair Value Measurements
Investment securities available-for-sale	$ 352,805,000	$ 349,319,000
Investment securities - trading	4,673,000	3,890,000
Investment securities held-to-maturity	5,542,000	5,527,000
Number of pooled trust preferred securities	2
Total par value	4,000,000
Transfer in and out between level 1, level 2 and level 3	0
Derivatives in fair value hedging relationships | Interest rate swaps
Fair Value Measurements
Number of fixed rate commercial loan hedged	1
Derivatives designated as cash flow hedges | Interest rate swaps
Fair Value Measurements
Number of derivatives	2
U.S. treasury securities
Fair Value Measurements
Investment securities available-for-sale	5,007,000	5,029,000
U.S. government-sponsored agencies
Fair Value Measurements
Investment securities available-for-sale	78,967,000	76,928,000
Mortgage-backed securities
Fair Value Measurements
Investment securities available-for-sale	145,522,000	147,829,000
Investment securities held-to-maturity	2,492,000	2,617,000
Municipal securities
Fair Value Measurements
Investment securities available-for-sale	120,437,000	116,738,000
Pooled trust preferred securities
Fair Value Measurements
Investment securities available-for-sale	2,872,000	2,795,000
Investment securities held-to-maturity	3,050,000	2,910,000
Quoted Prices in Active markets for Identical Assets (Level 1)
Fair Value Measurements
Investment securities available-for-sale	5,007,000	5,029,000
Significant Other Observable Inputs (Level 2)
Fair Value Measurements
Investment securities available-for-sale	347,798,000	344,290,000
Loans receivable - evaluated for impairment	301,000	301,000
Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loans receivable - evaluated for impairment	2,318,768,000	2,024,534,000
Recurring Fair Value Measurements | Balance
Fair Value Measurements
Investment securities available-for-sale	352,805,000	349,319,000
Investment securities - trading	4,673,000	3,890,000
Bank-owned life insurance	32,181,000	32,063,000
Recurring Fair Value Measurements | Balance | Rate Lock and Forward Loan Sales Commitments
Fair Value Measurements
Derivative liability	1,511,000	4,052,000
Derivative asset	14,656,000	16,478,000
Recurring Fair Value Measurements | Balance | Interest rate lock commitments
Fair Value Measurements
Derivative liability	403,000	1,554,000
Derivative asset	375,000	9,000
Recurring Fair Value Measurements | Balance | U.S. treasury securities
Fair Value Measurements
Investment securities available-for-sale	5,007,000	5,029,000
Recurring Fair Value Measurements | Balance | U.S. government-sponsored agencies
Fair Value Measurements
Investment securities available-for-sale	78,967,000	76,928,000
Recurring Fair Value Measurements | Balance | Mortgage-backed securities
Fair Value Measurements
Investment securities available-for-sale	145,522,000	147,829,000
Recurring Fair Value Measurements | Balance | Municipal securities
Fair Value Measurements
Investment securities available-for-sale	120,437,000	116,738,000
Recurring Fair Value Measurements | Balance | Pooled trust preferred securities
Fair Value Measurements
Investment securities available-for-sale	2,872,000	2,795,000
Recurring Fair Value Measurements | Quoted Prices in Active markets for Identical Assets (Level 1)
Fair Value Measurements
Investment securities available-for-sale	5,007,000	5,029,000
Recurring Fair Value Measurements | Quoted Prices in Active markets for Identical Assets (Level 1) | U.S. treasury securities
Fair Value Measurements
Investment securities available-for-sale	5,007,000	5,029,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2)
Fair Value Measurements
Investment securities available-for-sale	347,798,000	344,290,000
Investment securities - trading	4,673,000	3,890,000
Bank-owned life insurance	32,181,000	32,063,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Rate Lock and Forward Loan Sales Commitments
Fair Value Measurements
Derivative liability	1,511,000	4,052,000
Derivative asset	14,656,000	16,478,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Interest rate lock commitments
Fair Value Measurements
Derivative liability	403,000	1,554,000
Derivative asset	375,000	9,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2) | U.S. government-sponsored agencies
Fair Value Measurements
Investment securities available-for-sale	78,967,000	76,928,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Mortgage-backed securities
Fair Value Measurements
Investment securities available-for-sale	145,522,000	147,829,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Municipal securities
Fair Value Measurements
Investment securities available-for-sale	120,437,000	116,738,000
Recurring Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Pooled trust preferred securities
Fair Value Measurements
Investment securities available-for-sale	2,872,000	2,795,000
Nonrecurring Fair Value Measurements | Balance
Fair Value Measurements
Loans receivable - evaluated for impairment	2,930,000	3,378,000
Nonrecurring Fair Value Measurements | Balance | Pooled trust preferred securities
Fair Value Measurements
Investment securities held-to-maturity	3,050,000	2,910,000
Nonrecurring Fair Value Measurements | Significant Other Observable Inputs (Level 2)
Fair Value Measurements
Loans receivable - evaluated for impairment	301,000	301,000
Nonrecurring Fair Value Measurements | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loans receivable - evaluated for impairment	2,629,000	3,077,000
Nonrecurring Fair Value Measurements | Significant Unobservable Inputs (Level 3) | Pooled trust preferred securities
Fair Value Measurements
Investment securities held-to-maturity	$ 3,050,000	$ 2,910,000

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Fair Value of Derivative Instruments and Hedging Activities (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Derivative Instruments and Hedging Activities
Asset Derivatives, Fair Value	$ 15,031	$ 16,487
Liability Derivatives, Fair Value	1,914	5,606
Derivatives Designated as Hedging Instruments
Derivative Instruments and Hedging Activities
Asset Derivatives, Fair Value	1,169	5,489
Liability Derivatives, Fair Value	1,136	4,043
Derivatives Designated as Hedging Instruments | Forward Loan Sales Commitments | Accrued Interest Receivable and Other Assets
Derivative Instruments and Hedging Activities
Asset Derivatives, Fair Value	1,169	5,489
Derivatives Designated as Hedging Instruments | Forward Loan Sales Commitments | Accrued Interest Payable and Other Liabilities
Derivative Instruments and Hedging Activities
Liability Derivatives, Fair Value	1,136	4,043
Derivatives Not Designated as Hedging Instruments
Derivative Instruments and Hedging Activities
Asset Derivatives, Fair Value	13,862	10,998
Liability Derivatives, Fair Value	778	1,563
Derivatives Not Designated as Hedging Instruments | Rate Lock and Forward Loan Sales Commitments | Accrued Interest Receivable and Other Assets
Derivative Instruments and Hedging Activities
Asset Derivatives, Fair Value	13,487	10,989
Derivatives Not Designated as Hedging Instruments | Rate Lock and Forward Loan Sales Commitments | Accrued Interest Payable and Other Liabilities
Derivative Instruments and Hedging Activities
Liability Derivatives, Fair Value	375	9
Derivatives Not Designated as Hedging Instruments | Rate Lock Commitments | Accrued Interest Receivable and Other Assets
Derivative Instruments and Hedging Activities
Asset Derivatives, Fair Value	375	9
Derivatives Not Designated as Hedging Instruments | Rate Lock Commitments | Accrued Interest Payable and Other Liabilities
Derivative Instruments and Hedging Activities
Liability Derivatives, Fair Value	$ 403	$ 1,554

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net income	$ 4,290	$ 7,180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	966	745
Amortization of premiums, discounts and intangibles	267	(4)
Provision for loan losses	1,926	(457)
Loans held for sale originated	(562,594)	(1,508,921)
Proceeds from the sale of loans held for sale	678,657	1,766,293
Realized and unrealized gains on mortgage banking activities	(7,383)	(6,327)
Purchase of investment securities-trading	(678)	(330)
Unrealized gain on investment securities-trading	(169)	(38)
Unrealized loss on investment securities-available for sale	17
Gain on sale of other real estate owned		(30)
Stock compensation expense, net of tax benefits	411	366
Increase in cash surrender value of bank-owned life insurance	(119)	(92)
Increase (decrease) in accrued interest receivable and other assets	(7,218)	7,383
Increase (decrease) in accrued interest payable, escrow liabilities and other liabilities	(10,986)	(4,880)
Net cash provided by operating activities	97,387	260,888
Cash flows from investing activities:
Net purchases of premises and equipment	75	(901)
Proceeds from the sale of investment securities available-for-sale	10,617
Proceeds from maturity and call of investment securities available-for-sale	1,500	469
Purchase of mortgage-backed securities available for sale	(2,050)
Purchase of other investments	(2,250)	(1)
Proceeds from the sale of other investments	6,762	255
Redemptions of investment securities available-for-sale	4,759	12,068
Redemptions of investment securities held-to-maturity	125	575
Acquisitions, net of cash and cash equivalents	36,472
Net increase (decrease) in loans receivable, net of deferred fees and costs	(67,959)	20,765
Net cash provided by (used in) investing activities	(11,949)	33,230
Cash flows from financing activities:
Net increase (decrease) in deposits	22,865	(154,740)
Net decrease in other borrowed funds - short term	(21,057)	(59,922)
Net increase (decrease) in mortgage funding checks	(54)	(6,350)
Proceeds from FHLB advances	75,000
Repayment of FHLB advances	(150,000)
Stock options exercised	113	329
Dividends on common stock	(2,558)	(1,512)
Net cash used in financing activities	(75,691)	(222,195)
Net increase in cash and cash equivalents	9,747	71,923
Cash and cash equivalents at beginning of the year	29,209	67,140
Cash and cash equivalents at end of the period	38,956	139,063
Cash paid during the period for:
Interest	4,821	5,559
Income taxes	3,703	3,451
Acquisition of noncash assets and liabilities:
Assets acquired	265,364
Liabilities assumed	$ 301,836

XML

Loans Receivable and Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Originated
Recorded Investment
Total	$ 2,545	$ 3,378
Unpaid Principal Balance
Total	6,833	7,665
Interest Income Recognized
Total	2	23
Acquired
Recorded Investment
Total	4,429
Unpaid Principal Balance
Total	5,801
With related allowance	169
Interest Income Recognized
Total	42
Commercial and industrial | Originated
Recorded Investment
With no related allowance	260	814
Total	260	814
Unpaid Principal Balance
With no related allowance	260	814
Total	260	814
Interest Income Recognized
With no related allowance	2	23
Total	2	23
Commercial and industrial | Acquired
Recorded Investment
With no related allowance	764
With related allowance	40
Total	804
Unpaid Principal Balance
With no related allowance	1,308
With related allowance	39
Total	1,347
With related allowance	38
Interest Income Recognized
With no related allowance	4
Total	4
Real estate - commercial | Originated
Recorded Investment
Total	1,738	1,738
Unpaid Principal Balance
Total	3,872	3,872
Real estate - commercial | Acquired
Recorded Investment
Total	737
Unpaid Principal Balance
Total	1,194
Interest Income Recognized
Total	18
Non-owner occupied | Originated
Recorded Investment
With no related allowance	1,738	1,738
Unpaid Principal Balance
With no related allowance	3,872	3,872
Non-owner occupied | Acquired
Recorded Investment
With no related allowance	737
Unpaid Principal Balance
With no related allowance	1,194
Interest Income Recognized
With no related allowance	18
Real estate - construction | Originated
Recorded Investment
Total	496	775
Unpaid Principal Balance
Total	2,650	2,928
Real estate - construction | Acquired
Recorded Investment
Total	2,112
Unpaid Principal Balance
Total	2,366
Interest Income Recognized
Total	11
Commercial | Originated
Recorded Investment
With no related allowance	496	775
Unpaid Principal Balance
With no related allowance	2,650	2,928
Commercial | Acquired
Recorded Investment
With no related allowance	2,112
Unpaid Principal Balance
With no related allowance	2,366
Interest Income Recognized
With no related allowance	11
Home Equity Lines | Originated
Recorded Investment
With no related allowance	51	51
Total	51	51
Unpaid Principal Balance
With no related allowance	51	51
Total	51	51
Real estate - residential | Acquired
Recorded Investment
Total	768
Unpaid Principal Balance
Total	885
With related allowance	131
Interest Income Recognized
Total	9
Single family | Acquired
Recorded Investment
With no related allowance	422
With related allowance	346
Unpaid Principal Balance
With no related allowance	550
With related allowance	335
With related allowance	131
Interest Income Recognized
With no related allowance	1
With related allowance	8
Consumer | Acquired
Recorded Investment
With no related allowance	8
Total	8
Unpaid Principal Balance
With no related allowance	9
Total	$ 9

XML

Goodwill and Other Intangibles (Tables)

3 Months Ended

Mar. 31, 2014

Goodwill and Other Intangibles

Schedule of information concerning amortizable other intangible assets

	Mortgage Banking
(In thousands)	Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2013	$	1,781	$	1,781
2014 activity:
Acquisition of UFBC	2,740		200
Balance at March 31, 2014	$	4,521	$	1,981

Schedule of estimated amortization expense for the next five years and thereafter

The aggregate amortization expense was $200,000 and $49,000 for three months ended March 31 2014 and 2013, respectively.  The estimated amortization expense for the next five years and thereafter is as follows:

	(In thousands)
2014 (April – December)	$	556
2015	634
2016	512
2017	391
2018	269
2019 and Thereafter	178

Schedule of the carrying amount of goodwill

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2013	$	24	$	10,120	$	10,144
Acquisition of UFBC	24,706		—		24,706
Balance at March 31, 2014	$	24,730	$	10,120	$	34,850

XML

Fair Value of Derivative Instruments and Hedging Activities (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value of Derivative Instruments and Hedging Activities

Schedule of the derivative instruments' location on the Company's statement of condition and the fair value of those instruments

Derivative Instruments and Hedging Activities

At March 31, 2014

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,169		Accrued Interest Payable and Other Liabilities	1,136
Total Derivatives Designated as Hedging Instruments		1,169			1,136
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	13,487		Accrued Interest Payable and Other Liabilities	375
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	375		Accrued Interest Payable and Other Liabilities	403
Total Derivatives Not Designated as Hedging Instruments		13,862			778
Total Derivatives		$	15,031		$	1,914

Derivative Instruments and Hedging Activities

At December 31, 2013

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	5,489		Accrued Interest Payable and Other Liabilities	4,043
Total Derivatives Designated as Hedging Instruments		5,489			4,043
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	10,989		Accrued Interest Payable and Other Liabilities	9
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	9		Accrued Interest Payable and Other Liabilities	1,554
Total Derivatives Not Designated as Hedging Instruments		10,998			1,563
Total Derivatives		$	16,487		$	5,606

Schedule of the gains and losses related to derivative instruments

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2014

(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	$	(150	)	Other Income	$	(7,227	)	Other Income	$	—
Total	$	(150	)		$	(7,227	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	13,083		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	28			Other Income
Rate Lock Commitments	(28		)	Other Income
Total	$	13,083

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2013

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	145	Other Income	$	(145	)
Total		$	145		$	(145	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)	Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$39	Other Income	$—		Other Income	$—
Forward Loan Sales Commitments	815	Other Income	(2,886	)	Other Income	—
Total	$854		$(2,886	)		$—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	19,859		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(328		)	Other Income
Rate Lock Commitments	328			Other Income
Total	$	19,859

XML

Loans Receivable and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		12 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013	Dec. 31, 2013 item
Reconciliation of beginning and ending balances on TDR
Beginning Balance	$ 2,263	$ 7,338	$ 7,338
New TDRs		570
Sales, paydowns, or other decreases	(279)	(2,362)
Ending Balance	1,984	5,546	2,263
Number of relationships with the Bank made by the TDRs	1
Number of acquired loans classified as TDRs	0
Troubled Debt Restructurings with Payment Default In The Previous Twelve Months
Number of Loans	1		1
Restructured loans, loan loss reserves	0		0
Commercial and industrial
Reconciliation of beginning and ending balances on TDR
Beginning Balance		1,776	1,776
Sales, paydowns, or other decreases		(1,776)
Real estate - commercial
Reconciliation of beginning and ending balances on TDR
Beginning Balance		3,800	3,800
New TDRs		570
Sales, paydowns, or other decreases		(11)
Ending Balance	1,738	4,359	1,738
Real estate - construction
Reconciliation of beginning and ending balances on TDR
Beginning Balance	525	1,762	1,762
Sales, paydowns, or other decreases	(279)	(575)
Ending Balance	$ 246	$ 1,187

XML

Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Measurements

Schedule of assets and liabilities measured at fair value on a recurring basis

At March 31, 2014
(In thousands)

	Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,007	$	5,007	$	—	$	—
U.S. government-sponsored agencies	78,967		—		78,967		—
Mortgage-backed securities	145,522		—		145,522		—
Municipal securities	120,437		—		120,437		—
Pooled trust preferred securities	2,872		—		2,872		—
Total investment securities available-for-sale	352,805		5,007		347,798		—
Investment securities — trading	4,673		—		4,673		—
Bank-owned life insurance	32,181		—		32,181		—
Derivative asset - rate lock and forward loan sales commitments	14,656		—		14,656		—
Derivative asset — interest rate lock commitments	375		—		375		—
Derivative liability - rate lock and forward loan sales commitments	1,511		—		1,511		—
Derivative liability — interest rate lock commitments	403		—		403		—

At December 31, 2013

(In thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,029	$	5,029	$	—	$	—
U.S. government-sponsored agencies	76,928				76,928		—
Mortgage-backed securities	147,829		—		147,829		—
Municipal securities	116,738		—		116,738		—
Pooled trust preferred securities	2,795		—		2,795		—
Total investment securities available-for-sale	349,319		5,029		344,290		—
Investment securities — trading	3,890		—		3,890		—
Bank-owned life insurance	32,063		—		32,063		—
Derivative asset - rate lock and forward loan sales commitments	16,478		—		16,478		—
Derivative asset — interest rate lock commitments	9		—		9		—
Derivative liability - rate lock and forward loan sales commitments	4,052		—		4,052		—
Derivative liability — interest rate lock commitments	1,554		—		1,554		—

Schedule of certain assets and liabilities measured at fair value on a nonrecurring basis

At March 31, 2014

(in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices  in Active  markets for  Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Pooled trust preferred securities	$	3,050	$	—	$	—	3,050
Loans receivable — evaluated for impairment	2,930		—		301		2,629

At December 31, 2013

 (In thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices  in Active  markets for  Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Pooled trust preferred securities	$	2,910	$	—	$	—	$	2,910
Loans receivable — evaluated for impairment	3,378		—		301		3,077

Summary of the carrying amount of financial assets and liabilities that the Company has not recorded at fair value on a recurring basis

	March 31, 2014
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	38,956	38,956		38,956		$	—	$	—
Investment securities available-for-sale	352,805		352,805		5,007		347,798		—
Investment securities held-to-maturity and other investments	21,806		20,997		—		17,947		3,050
Loans held for sale	265,313		265,313		—		265,313		—
Loans receivable, net	2,316,609		2,319,069		—		301		2,318,768
Accrued interest receivable	8,184		8,184		8,184		—		—
Financial liabilities:
Demand deposits	$	534,064	$	534,064	$	534,064	$	—	$	—
Interest checking	448,163		448,163		448,163		—		—
Money market and statement savings	586,802		586,802		586,802		—		—
Certificates of deposit	807,899		812,383		—		812,383		—
Other borrowed funds	382,854		397,908		—		397,908		—
Accrued interest payable	1,014		1,014		1,014		—		—

	December 31, 2013
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	29,209	$	29,209	$	29,209	$	—	$	—
Investment securities available-for-sale	349,319		349,319		5,029		344,290		—
Investment securities held-to-maturity and other investments	25,545		24,595		—		21,685		2,910
Loans held for sale	373,993		373,993		—		373,993		—
Loans receivable, net	2,012,304		2,024,835		—		301		2,024,534
Accrued interest receivable	7,939		7,939		7,939		—		—
Financial liabilities:
Demand deposits	$	433,749	$	433,749	$	433,749	$	—	$	—
Interest checking	398,136		398,136		398,136		—		—
Money market and statement savings	475,707		475,707		475,707		—		—
Certificates of deposit	751,267		756,191		—		756,191		—
Other borrowed funds	475,232		491,236		—		491,236		—
Accrued interest payable	869		869		869		—		—

XML

Organization (Details) (USD $)	3 Months Ended
	Mar. 31, 2014 item	Jan. 16, 2014 UFBC item	Mar. 08, 2014 TBB Cardinal Bank item
Organization
Number of nonbank subsidiaries	1
Business combinations
Cash paid to UFBC shareholders in exchange for each share of UFBC common stock (in dollars per share)		$ 19.13
Number of shares paid to UFBC shareholders in exchange for each share of UFBC common stock		1.154
Number of banking locations added		8	8

XML

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Parenthetical) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Dividends on common stock (in dollars per share)	$ 0.08	$ 0.05

XML

Business Combinations (Details) (USD $)	3 Months Ended			0 Months Ended		3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Jan. 16, 2014 Trust	Jan. 16, 2014 Trust Not primary beneficiary	Jan. 16, 2014 UFBC item	Mar. 31, 2014 UFBC	Mar. 31, 2014 UFBC CDI	Jan. 16, 2014 UFBC CDI
Business combinations
Total assets acquired					$ 356,123,000
Number of branches					8
Cash paid to UFBC shareholders in exchange for each share of UFBC common stock (in dollars per share)					$ 19.13
Number of Company shares offered to UFBC shareholders in exchange for each share of UFBC common stock					1.154
Total purchase price					54,287,000
Cash consideration					26,800,000
Number of shares of the entity's common stock issued					1,600,000
Trust preferred securities issued				5,000,000
Interest rate basis				LIBOR
Basis spread on variable rate (as a percent)				2.10%
Additional amount payable for unfunded capital investment			155,000
Merger and acquisition expense	3,212,000					3,200,000
Assets acquired:
Cash and cash equivalents					63,313,000
Investment securities available-for-sale					16,278,000
Loans					238,272,000
Premises and equipment					7,652,000
Accrued interest receivable					522,000
Goodwill	34,850,000	10,144,000			24,706,000
Other intangible assets					2,740,000
Other assets					2,640,000
Total assets acquired					356,123,000
Deposits:
Non-interest bearing					90,206,000
Savings, NOW and money market					131,312,000
Certificates of deposit					73,686,000
Total deposits					295,204,000
Junior subordinated debentures issued to Trust					3,679,000
Other liabilities					2,953,000
Total liabilities assumed					301,836,000
Total consideration paid					54,287,000
Number of categories acquired loan portfolio was segregated for valuation purposes					2
Threshold amount of certificates of deposit excluded from core deposit intangibles								$ 250,000
Estimated useful life							6 years 8 months 12 days

XML

Loans Receivable and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014
Acquired
Loans receivable and allowance for loan losses
Outstanding principal balance	$ 214,895
Carrying amount	210,708
Credit impaired acquired loans
Loans receivable and allowance for loan losses
Outstanding principal balance	20,264
Carrying amount	15,980
Other acquired loans
Loans receivable and allowance for loan losses
Outstanding principal balance	194,631
Carrying amount	$ 194,728

XML

Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Financial assets:
Investment securities available-for-sale	$ 352,805	$ 349,319
Financial liabilities:
Demand deposits	534,064	433,749
Other borrowed funds	382,854	475,232
Quoted Prices in Active markets for Identical Assets (Level 1)
Financial assets:
Cash and cash equivalents	38,956	29,209
Investment securities available-for-sale	5,007	5,029
Accrued interest receivable	8,184	7,939
Financial liabilities:
Demand deposits	534,064	433,749
Interest checking	448,163	398,136
Money market and statement savings	586,802	475,707
Accrued interest payable	1,014	869
Significant Other Observable Inputs (Level 2)
Financial assets:
Investment securities available-for-sale	347,798	344,290
Investment securities held-to-maturity and other investments	17,947	21,685
Loans held for sale	265,313	373,993
Loans receivable, net	301	301
Financial liabilities:
Certificates of deposit	812,383	756,191
Other borrowed funds	397,908	491,236
Significant Unobservable Inputs (Level 3)
Financial assets:
Investment securities held-to-maturity and other investments	3,050	2,910
Loans receivable, net	2,318,768	2,024,534
Carrying Amount
Financial assets:
Cash and cash equivalents	38,956	29,209
Investment securities available-for-sale	352,805	349,319
Investment securities held-to-maturity and other investments	21,806	25,545
Loans held for sale	265,313	373,993
Loans receivable, net	2,316,609	2,012,304
Accrued interest receivable	8,184	7,939
Financial liabilities:
Demand deposits	534,064	433,749
Interest checking	448,163	398,136
Money market and statement savings	586,802	475,707
Certificates of deposit	807,899	751,267
Other borrowed funds	382,854	475,232
Accrued interest payable	1,014	869
Estimated Fair Value
Financial assets:
Cash and cash equivalents	38,956	29,209
Investment securities available-for-sale	352,805	349,319
Investment securities held-to-maturity and other investments	20,997	24,595
Loans held for sale	265,313	373,993
Loans receivable, net	2,319,069	2,024,835
Accrued interest receivable	8,184	7,939
Financial liabilities:
Demand deposits	534,064	433,749
Interest checking	448,163	398,136
Money market and statement savings	586,802	475,707
Certificates of deposit	812,383	756,191
Other borrowed funds	397,908	491,236
Accrued interest payable	$ 1,014	$ 869

XML

CONSOLIDATED STATEMENTS OF CONDITION (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Assets
Cash and due from banks	$ 29,211	$ 18,285
Federal funds sold	9,745	10,924
Total cash and cash equivalents	38,956	29,209
Investment securities available-for-sale	352,805	349,319
Investment securities held-to-maturity (market value of $5,542 and $5,527 at March 31, 2014 and December 31, 2013, respectively)	6,351	6,477
Investment securities - trading	4,673	3,890
Total investment securities	363,829	359,686
Other investments	15,455	19,068
Loans held for sale	265,313	373,993
Loans receivable, net of deferred fees and costs	2,345,702	2,040,168
Allowance for loan losses	(29,093)	(27,864)
Loans receivable, net	2,316,609	2,012,304
Premises and equipment, net	27,000	20,389
Deferred tax asset, net	3,977	5,395
Goodwill and intangibles, net	37,390	10,144
Bank-owned life insurance	32,181	32,063
Accrued interest receivable and other assets	42,627	31,979
Total assets	3,143,337	2,894,230
Liabilities and Shareholders' Equity
Non-interest bearing deposits	534,064	433,749
Interest bearing deposits	1,842,864	1,625,110
Total deposits	2,376,928	2,058,859
Other borrowed funds	382,854	475,232
Mortgage funding checks	6,474	6,528
Escrow liabilities	1,670	1,572
Accrued interest payable and other liabilities	22,966	31,507
Total liabilities	2,790,892	2,573,698
Common stock, $1 par value; 50,000,000 Shares authorized; 31,961,777 and 30,332,685 Shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively	31,962	30,333
Additional paid-in capital	199,704	174,001
Retained earnings	113,055	111,323
Accumulated other comprehensive income, net	7,724	4,875
Total shareholders' equity	352,445	320,532
Total liabilities and shareholders' equity	$ 3,143,337	$ 2,894,230

XML

Loans Receivable and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013
Internal Risk Rating Grades
Loans receivable, gross	$ 2,350,250	$ 2,043,922	$ 1,785,468
Originated
Internal Risk Rating Grades
Loans receivable, gross	2,139,542
Acquired
Internal Risk Rating Grades
Loans receivable, gross	210,708
Commercial and industrial
Internal Risk Rating Grades
Loans receivable, gross	291,208	219,156	218,281
Commercial and industrial | Originated
Internal Risk Rating Grades
Loans receivable, gross	251,984
Commercial and industrial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	39,224
Real estate - commercial
Internal Risk Rating Grades
Loans receivable, gross	1,191,953	1,048,579	850,710
Real estate - commercial | Originated
Internal Risk Rating Grades
Loans receivable, gross	1,064,996
Real estate - commercial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	126,957
Owner occupied | Originated
Internal Risk Rating Grades
Loans receivable, gross	274,352	279,631
Owner occupied | Acquired
Internal Risk Rating Grades
Loans receivable, gross	64,566
Non-owner occupied | Originated
Internal Risk Rating Grades
Loans receivable, gross	790,644	768,948
Non-owner occupied | Acquired
Internal Risk Rating Grades
Loans receivable, gross	62,391
Real estate - construction
Internal Risk Rating Grades
Loans receivable, gross	414,711	363,063	355,919
Real estate - construction | Originated
Internal Risk Rating Grades
Loans receivable, gross	390,415
Real estate - construction | Acquired
Internal Risk Rating Grades
Loans receivable, gross	24,296
Residential | Originated
Internal Risk Rating Grades
Loans receivable, gross	132,380	120,144
Residential | Acquired
Internal Risk Rating Grades
Loans receivable, gross	20,235
Commercial | Originated
Internal Risk Rating Grades
Loans receivable, gross	258,035	242,919
Commercial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	4,061
Real estate - residential
Internal Risk Rating Grades
Loans receivable, gross	332,288	299,484	242,722
Real estate - residential | Originated
Internal Risk Rating Grades
Loans receivable, gross	319,000
Real estate - residential | Acquired
Internal Risk Rating Grades
Loans receivable, gross	13,288
Single family | Originated
Internal Risk Rating Grades
Loans receivable, gross	223,233	213,545
Single family | Acquired
Internal Risk Rating Grades
Loans receivable, gross	13,288
Multi-family | Originated
Internal Risk Rating Grades
Loans receivable, gross	95,767	85,939
Home Equity Lines
Internal Risk Rating Grades
Loans receivable, gross	115,045	109,481	114,407
Home Equity Lines | Originated
Internal Risk Rating Grades
Loans receivable, gross	109,223
Home Equity Lines | Acquired
Internal Risk Rating Grades
Loans receivable, gross	5,822
Consumer
Internal Risk Rating Grades
Loans receivable, gross	5,045	4,159	3,429
Consumer | Originated
Internal Risk Rating Grades
Loans receivable, gross	3,924
Consumer | Acquired
Internal Risk Rating Grades
Loans receivable, gross	1,121
Installment | Originated
Internal Risk Rating Grades
Loans receivable, gross	3,334	3,912
Installment | Acquired
Internal Risk Rating Grades
Loans receivable, gross	1,121
Credit cards | Originated
Internal Risk Rating Grades
Loans receivable, gross	590	247
Pass | Originated
Internal Risk Rating Grades
Loans receivable, gross	2,131,349	2,026,611
Pass | Acquired
Internal Risk Rating Grades
Loans receivable, gross	202,076
Pass | Commercial and industrial | Originated
Internal Risk Rating Grades
Loans receivable, gross	250,162	217,755
Pass | Commercial and industrial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	37,858
Pass | Owner occupied | Originated
Internal Risk Rating Grades
Loans receivable, gross	274,352	279,631
Pass | Owner occupied | Acquired
Internal Risk Rating Grades
Loans receivable, gross	64,566
Pass | Non-owner occupied | Originated
Internal Risk Rating Grades
Loans receivable, gross	785,045	753,872
Pass | Non-owner occupied | Acquired
Internal Risk Rating Grades
Loans receivable, gross	58,595
Pass | Residential | Originated
Internal Risk Rating Grades
Loans receivable, gross	132,380	120,144
Pass | Residential | Acquired
Internal Risk Rating Grades
Loans receivable, gross	20,235
Pass | Commercial | Originated
Internal Risk Rating Grades
Loans receivable, gross	257,539	242,144
Pass | Commercial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	1,367
Pass | Single family | Originated
Internal Risk Rating Grades
Loans receivable, gross	223,008	213,537
Pass | Single family | Acquired
Internal Risk Rating Grades
Loans receivable, gross	12,520
Pass | Multi-family | Originated
Internal Risk Rating Grades
Loans receivable, gross	95,767	85,939
Pass | Home Equity Lines | Originated
Internal Risk Rating Grades
Loans receivable, gross	109,172	109,430
Pass | Home Equity Lines | Acquired
Internal Risk Rating Grades
Loans receivable, gross	5,822
Pass | Installment | Originated
Internal Risk Rating Grades
Loans receivable, gross	3,334	3,912
Pass | Installment | Acquired
Internal Risk Rating Grades
Loans receivable, gross	1,113
Pass | Credit cards | Originated
Internal Risk Rating Grades
Loans receivable, gross	590	247
OLEM | Originated
Internal Risk Rating Grades
Loans receivable, gross	5,648	13,933
OLEM | Acquired
Internal Risk Rating Grades
Loans receivable, gross	4,203
OLEM | Commercial and industrial | Originated
Internal Risk Rating Grades
Loans receivable, gross	1,562	587
OLEM | Commercial and industrial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	562
OLEM | Non-owner occupied | Originated
Internal Risk Rating Grades
Loans receivable, gross	3,861	13,338
OLEM | Non-owner occupied | Acquired
Internal Risk Rating Grades
Loans receivable, gross	3,059
OLEM | Commercial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	582
OLEM | Single family | Originated
Internal Risk Rating Grades
Loans receivable, gross	225	8
Substandard | Originated
Internal Risk Rating Grades
Loans receivable, gross	2,545	3,378
Substandard | Acquired
Internal Risk Rating Grades
Loans receivable, gross	4,429
Substandard | Commercial and industrial | Originated
Internal Risk Rating Grades
Loans receivable, gross	260	814
Substandard | Commercial and industrial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	804
Substandard | Non-owner occupied | Originated
Internal Risk Rating Grades
Loans receivable, gross	1,738	1,738
Substandard | Non-owner occupied | Acquired
Internal Risk Rating Grades
Loans receivable, gross	737
Substandard | Commercial | Originated
Internal Risk Rating Grades
Loans receivable, gross	496	775
Substandard | Commercial | Acquired
Internal Risk Rating Grades
Loans receivable, gross	2,112
Substandard | Single family | Acquired
Internal Risk Rating Grades
Loans receivable, gross	768
Substandard | Home Equity Lines | Originated
Internal Risk Rating Grades
Loans receivable, gross	51	51
Substandard | Installment | Acquired
Internal Risk Rating Grades
Loans receivable, gross	$ 8

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unrealized holding gain (loss) arising during the period, tax expense (benefit)	$ 1,700	$ (857)
Reclassification adjustment for net losses included in net income, tax benefit	6	0
Unrealized gain (loss) on derivative instruments designated as cash flow hedges, tax expense (benefit)	$ (82)	$ 460

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Earnings Per Share
Antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation (in shares)	0	0
Calculation of basic and diluted earnings per common share
Net income available to common shareholders (in dollars)	$ 4,290	$ 7,180
Weighted-average common shares outstanding - basic (in shares)	32,127,000	30,634,000
Weighted-average common shares outstanding - diluted (in shares)	32,609,000	31,019,000
Earnings per common share - basic (in dollars per share)	$ 0.13	$ 0.23
Earnings per common share - diluted (in dollars per share)	$ 0.13	$ 0.23
Composition of basic outstanding shares
Weighted average common shares outstanding	31,686,000	30,242,000
Weighted average shares attributable to deferred compensation plans	441,000	392,000
Total weighted average shares - basic	32,127,000	30,634,000
Composition of diluted outstanding shares
Weighted-average common shares outstanding - basic (in shares)	32,127,000	30,634,000
Incremental weighted average shares attributable to deferred compensation plans	248,000	191,000
Weighted average shares attributable to vested stock options	180,000	170,000
Incremental Shares from stock option plan	54,000	24,000
Total weighted average shares - diluted	32,609,000	31,019,000

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Business Combinations (Tables)

3 Months Ended

Mar. 31, 2014

Business Combinations

Schedule of assets acquired and liabilities assumed in the acquisition at estimated fair values as of the closing date of the transaction

	January 16, 2014
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	63,313
Investment securities available-for-sale	16,278
Loans	238,272
Premises and equipment	7,652
Accrued interest receivable	522
Goodwill	24,706
Other intangible assets	2,740
Other assets	2,640
Total assets acquired	$	356,123
Liabilities assumed:
Deposits:
Non-interest bearing	90,206
Savings, NOW and money market	131,312
Certificates of deposit	73,686
Total deposits	295,204
Junior subordinated debentures issued to Trust	3,679
Other liabilities	2,953
Total liabilities assumed	$	301,836
Total consideration paid	$	54,287

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Investment Securities Available-for-Sale
Gross Amortized cost	$ 340,447	$ 341,674
Gross Unrealized Gains	13,194	9,943
Gross Unrealized Losses	(836)	(2,298)
Fair Value	352,805	349,319
Investment Securities Held-to-Maturity
Gross Amortized cost	6,351	6,477
Gross Unrealized Gains	146	145
Gross Unrealized Losses	(955)	(1,095)
Fair Value	5,542	5,527
Available-for-Sale, Amortized cost
Within One Year	11,345	8,549
After 1 year but within 5 years	34,980	30,120
After 5 years but within 10 years	59,626	61,665
After 10 years	94,021	96,731
Mortgage-backed securities	140,475	144,609
Total	340,447	341,674
Available-for-Sale, Fair Value
Within One Year	11,421	8,690
After 1 year but within 5 years	36,612	31,672
After 5 years but within 10 years	63,473	64,876
After 10 years	95,777	96,252
Mortgage-backed securities	145,522	147,829
Fair Value	352,805	349,319
Held-to-Maturity, Amortized cost
After 10 years	4,005	4,005
Mortgage-backed securities	2,346	2,472
Total	6,351	6,477
Held-to-Maturity, Fair Value
After 10 years	3,050	2,910
Mortgage-backed securities	2,492	2,617
Fair Value	5,542	5,527
U.S. government-sponsored agencies
Investment Securities Available-for-Sale
Gross Amortized cost	76,517	75,562
Gross Unrealized Gains	3,181	2,914
Gross Unrealized Losses	(731)	(1,548)
Fair Value	78,967	76,928
Available-for-Sale, Fair Value
Fair Value	78,967	76,928
Mortgage-backed securities
Investment Securities Available-for-Sale
Gross Amortized cost	140,475	144,609
Gross Unrealized Gains	5,058	3,566
Gross Unrealized Losses	(11)	(346)
Fair Value	145,522	147,829
Investment Securities Held-to-Maturity
Gross Amortized cost	2,346	2,472
Gross Unrealized Gains	146	145
Fair Value	2,492	2,617
Available-for-Sale, Fair Value
Fair Value	145,522	147,829
Held-to-Maturity, Fair Value
Fair Value	2,492	2,617
Municipal securities
Investment Securities Available-for-Sale
Gross Amortized cost	115,585	113,716
Gross Unrealized Gains	4,946	3,426
Gross Unrealized Losses	(94)	(404)
Fair Value	120,437	116,738
Available-for-Sale, Fair Value
Fair Value	120,437	116,738
U.S. treasury securities
Investment Securities Available-for-Sale
Gross Amortized cost	4,998	4,992
Gross Unrealized Gains	9	37
Fair Value	5,007	5,029
Available-for-Sale, Fair Value
Fair Value	5,007	5,029
Pooled trust preferred securities
Investment Securities Available-for-Sale
Gross Amortized cost	2,872	2,795
Fair Value	2,872	2,795
Investment Securities Held-to-Maturity
Gross Amortized cost	4,005	4,005
Gross Unrealized Losses	(955)	(1,095)
Fair Value	3,050	2,910
Available-for-Sale, Fair Value
Fair Value	2,872	2,795
Held-to-Maturity, Fair Value
Fair Value	$ 3,050	$ 2,910

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Segment Information (Tables)

3 Months Ended

Mar. 31, 2014

Segment Information

Schedule of information about the reportable segments and reconciliation of this information to the consolidated financial statements

At and for the Three Months Ended March 31, 2014 (in thousands):

						Wealth Management
	Commercial		Mortgage			and					Intersegment
	Banking		Banking			Trust Services		Other			Elimination			Consolidated
Net interest income	$	25,193	$	638		$	—	$	(164	)	$	—		$	25,667
Provision for loan losses	1,926		—			—		—			—			1,926
Non-interest income	932		7,391			167		178			—			8,668
Non-interest expense	15,792		8,293			112		1,593			—			25,790
Provision for income taxes	2,895		(97		)	19		(488		)	—			2,329
Net income (loss)	$	5,512	$	(167	)	$	36	$	(1,091	)	$	—		$	4,290
Total Assets	$	3,095,847	$	321,958		$	2,301	$	387,898		$	(664,667	)	$	3,143,337
Average Assets	$	2,943,545	$	230,424		$	2,300	$	379,810		$	(534,206	)	$	3,021,873

At and for the Three Months Ended March 31, 2013 (in thousands):

							Wealth Management
	Commercial			Mortgage			and						Intersegment
	Banking			Banking			Trust Services			Other			Elimination			Consolidated
Net interest income	$	22,397		$	398		$	—		$	(194	)	$	—		$	22,601
Provision for loan losses	(542		)	85			—			—			—			(457		)
Non-interest income	794			7,101			547			42			(10		)	8,474
Non-interest expense	10,052			9,201			677			762			(10		)	20,682
Provision for income taxes	4,599			(641		)	(43		)	(245		)	—			3,670
Net income (loss)	$	9,082		$	(1,146	)	$	(87	)	$	(669	)	$	—		$	7,180
Total Assets	$	2,748,303		$	563,798		$	2,373		$	331,641		$	(827,883	)	$	2,818,232
Average Assets	$	2,840,355		$	498,024		$	2,528		$	331,480		$	(825,615	)	$	2,846,772

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income
Balance at Dec. 31, 2012	$ 308,066	$ 30,226	$ 172,021	$ 92,777	$ 13,042
Balance (in shares) at Dec. 31, 2012	30,226,000	30,226,000
Increase (Decrease) in Stockholders' Equity
Stock options exercised	329	36	293
Stock options exercised (in shares)	36,000	36,000
Stock compensation expense, net of tax benefit	366		366
Dividends on common stock of $0.08 and $0.05 per share for the three months ended March 31, 2014 and 2013, respectively	(1,512)			(1,512)
Change in accumulated other comprehensive income	(809)				(809)
Net income	7,180			7,180
Balance at Mar. 31, 2013	313,620	30,262	172,680	98,445	12,233
Balance (in shares) at Mar. 31, 2013	30,262,000	30,262,000
Balance at Dec. 31, 2013	320,532	30,333	174,001	111,323	4,875
Balance (in shares) at Dec. 31, 2013	30,333,000	30,333,000
Increase (Decrease) in Stockholders' Equity
Stock options exercised	113	12	101
Stock options exercised (in shares)		12,000
Stock compensation expense, net of tax benefit	411		411
Shares issued from acquisition of United Financial Banking Companies, Inc.	26,808	1,617	25,191
Shares issued from acquisition of United Financial Banking Companies, Inc. (in shares)		1,617,000
Dividends on common stock of $0.08 and $0.05 per share for the three months ended March 31, 2014 and 2013, respectively	(2,558)			(2,558)
Change in accumulated other comprehensive income	2,849				2,849
Net income	4,290			4,290
Balance at Mar. 31, 2014	$ 352,445	$ 31,962	$ 199,704	$ 113,055	$ 7,724
Balance (in shares) at Mar. 31, 2014	31,962,000	31,962,000

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CONSOLIDATED STATEMENTS OF CONDITION (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
CONSOLIDATED STATEMENTS OF CONDITION
Investment securities held-to-maturity, market value (in dollars)	$ 5,542	$ 5,527
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, Shares authorized	50,000,000	50,000,000
Common stock, Shares issued	31,961,777	30,332,685
Common stock, Shares outstanding	31,961,777	30,332,685

XML

Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2014

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 8

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.  The rate lock commitment and forward sale agreement 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 presents the gain recognized for the period presented and associated with these elements of fair value.  On the date the mortgage loan closes, the loan held for sale is designated as the hedged item in a cash flow hedge relationship and the forward loan sale commitment is designated as the hedging instrument.

At March 31, 2014, accumulated other comprehensive income included an unrealized loss, net of tax, of $150,000 related to forward loan sales contracts designated as the hedging instrument in the cash flow hedge. Loans held for sale are generally sold within sixty days of closing and, therefore, all or substantially all of the amount recorded in accumulated other comprehensive income at March 31, 2014 which is related to the Company’s cash flow hedges will be recognized in earnings during the second quarter of 2014. At March 31, 2014, the Company recognized minimal amounts due to hedge ineffectiveness.

At March 31, 2014, the Company had $327.2 million in residential mortgage rate lock commitments and associated forward sales, and $224.2 million in forward loan sales associated with $265.3 million of loans that had closed and were presented as held for sale.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2014	May 05, 2014
Document and Entity Information
Entity Registrant Name	CARDINAL FINANCIAL CORP
Entity Central Index Key	0001060523
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		31,961,777
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

XML

Fair Value of Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2014

Fair Value of Derivative Instruments and Hedging Activities

Fair Value of Derivative Instruments and Hedging Activities

Note 9

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, 2014 and December 31, 2013.  In addition, the gains and losses related to these derivative instruments is provided for the three months ended March 31, 2014 and 2013.

Derivative Instruments and Hedging Activities

At March 31, 2014

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	1,169		Accrued Interest Payable and Other Liabilities	1,136
Total Derivatives Designated as Hedging Instruments		1,169			1,136
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	13,487		Accrued Interest Payable and Other Liabilities	375
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	375		Accrued Interest Payable and Other Liabilities	403
Total Derivatives Not Designated as Hedging Instruments		13,862			778
Total Derivatives		$	15,031		$	1,914

Derivative Instruments and Hedging Activities

At December 31, 2013

(in thousands)

	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives Designated as Hedging Instruments
Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	5,489		Accrued Interest Payable and Other Liabilities	4,043
Total Derivatives Designated as Hedging Instruments		5,489			4,043
Derivatives Not Designated as Hedging Instruments
Rate Lock and Forward Loan Sales Commitments	Accrued Interest Receivable and Other Assets	10,989		Accrued Interest Payable and Other Liabilities	9
Rate Lock Commitments	Accrued Interest Receivable and Other Assets	9		Accrued Interest Payable and Other Liabilities	1,554
Total Derivatives Not Designated as Hedging Instruments		10,998			1,563
Total Derivatives		$	16,487		$	5,606

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2014

(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	$	(150	)	Other Income	$	(7,227	)	Other Income	$	—
Total	$	(150	)		$	(7,227	)		$	—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	13,083		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	28			Other Income
Rate Lock Commitments	(28		)	Other Income
Total	$	13,083

Impact of Derivative Instruments on the Statement of Income

For the Three Months Ended March 31, 2013

(in thousands)

Derivatives in Fair Value Hedging Relationships	Locations of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Hedged Item	Amount of Gain (Loss) Recognized in Income on Hedged Item
Interest Rate Swaps	Other Income	$	145	Other Income	$	(145	)
Total		$	145		$	(145	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)	Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$39	Other Income	$—		Other Income	$—
Forward Loan Sales Commitments	815	Other Income	(2,886	)	Other Income	—
Total	$854		$(2,886	)		$—

	Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments
Interest Rate Lock Commitments	$	19,859		Realized and unrealized gains on mortgage banking activities
Forward Loan Sales Commitments	(328		)	Other Income
Rate Lock Commitments	328			Other Income
Total	$	19,859

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CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Interest income:
Loans receivable	$ 24,890	$ 21,009
Loans held for sale	2,477	4,555
Federal funds sold	31	114
Investment securities available-for-sale	3,085	2,393
Investment securities held-to-maturity	39	56
Other investments	138	79
Total interest income	30,660	28,206
Interest expense:
Deposits	2,821	3,423
Other borrowed funds	2,172	2,182
Total interest expense	4,993	5,605
Net interest income	25,667	22,601
Provision for loan losses	1,926	(457)
Net interest income after provision for loan losses	23,741	23,058
Non-interest income:
Service charges on deposit accounts	535	502
Loan fees	212	219
Title insurance & other related income		399
Investment fee income	222	547
Realized and unrealized gains on mortgage banking activities	7,383	6,327
Net realized gain on investment securities-trading	169	38
Net realized loss on investment securities-available for sale	(17)
Management fee income	21	298
Increase in cash surrender value of bank-owned life insurance	119	92
Gain (loss) on sale of real estate		30
Other income	24	22
Total non-interest income	8,668	8,474
Non-interest expense:
Salary and benefits	11,389	9,986
Occupancy	2,630	2,081
Professional fees	818	1,316
Depreciation	966	745
Data processing & communications	1,615	1,128
FDIC insurance premiums	383	331
Mortgage loan repurchases and settlements		62
Merger and acquisition expenses	3,212
Amortization of intangibles	200	49
Other operating expenses	4,577	4,984
Total non-interest expense	25,790	20,682
Income before income taxes	6,619	10,850
Provision for income taxes	2,329	3,670
Net income	$ 4,290	$ 7,180
Earnings per common share - basic (in dollars per share)	$ 0.13	$ 0.23
Earnings per common share - diluted (in dollars per share)	$ 0.13	$ 0.23
Weighted-average common shares outstanding - basic (in shares)	32,127	30,634
Weighted-average common shares outstanding - diluted (in shares)	32,609	31,019

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Stock-Based Compensation

3 Months Ended

Mar. 31, 2014

Stock-Based Compensation

Stock-Based Compensation

Note 3

Stock-Based Compensation

At March 31, 2014, 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 471,342 shares of the Company’s common stock available for future grants and awards in the Equity Plan as of March 31, 2014.

Stock options are granted with an exercise price equal to the common stock’s fair market value at the date of grant. Director stock options have ten year terms and vest and become fully exercisable at the grant date. Most employee stock options have ten year terms and vest and become fully exercisable in 20% increments beginning after their first year of service. Certain stock options granted to executive officers of the Company have ten year terms and vest in increments of 25% with immediate vesting of the first 25% on the date of grant and vesting of the remaining three increments on the anniversary date of the grant.  Stock options granted to executive officers during the first quarter of 2014 have ten year terms with one-third of the options vested on the grant date and the remaining unvested options vesting over the next two years.

The Company has only made awards of stock options 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, 2014 and 2013 was $152,000 and $49,000, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $51,000 and $17,000 for the three months ended March 31, 2014 and 2013, respectively.

Options granted for the three months ended March 31, 2014 and 2013 were 218,000 and 202,500, respectively.  The weighted average per share fair value of stock option grants for the three months ended March 31, 2014 and 2013 was $5.60 and $5.96, respectively.  The fair values of the options granted during all periods ended March 31, 2014 and 2013 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,
	2014	2013
Estimated option life	6.5 Years	6.5 Years
Risk free interest rate	2.17 - 2.34%	1.23 - 1.43%
Expected volatility	37.40%	39.50%
Expected dividend yield	1.80%	1.23%

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, 2014 is summarized as follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Years)	Value
Outstanding at December 31, 2013	1,011,553		$	12.03
Granted	218,000		16.83
Exercised	(12,210	)	9.29
Forfeited	(1,800	)	11.48
Outstanding at March 31, 2014	1,215,543		$	12.89	6.02	$	5,954,977
Options exercisable at March 31, 2014	845,943		$	11.74	4.71	$	5,093,024

The intrinsic value of options exercised during the three months ended March 31, 2014 and was $103,000 and $315,000, respectively.

A summary of the status of the Company’s non-vested stock options and changes during the three months ended March 31, 2014 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2013	289,150		$	5.29
Granted	218,000		5.60
Vested	(135,750	)	5.30
Forfeited	(1,800	)	4.45
Balance at March 31, 2014	369,600		$	5.47

At March 31, 2014, there was $1.9 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 2.5 years. The total fair value of shares that vested during the three months ended March 31, 2014 and 2013 was $667,000 and $392,000, respectively.

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Business Combinations

3 Months Ended

Mar. 31, 2014

Business Combinations

Business Combinations

Note 2

Business Combinations

On January 16, 2014, the Company acquired UFBC, the holding company for The Business Bank, a commercial bank with approximately $356 million in assets, after purchase accounting adjustments, and 8 branches located within the northern Virginia region.  For each share of UFBC common stock outstanding, the shareholders of UFBC received a fixed exchange ratio of $19.13 in cash and 1.154 shares of the Company’s common stock.  The total consideration for the acquisition was $54.3 million, which was comprised of $26.8 million in cash and 1.6 million shares of the Company’s common stock.

In connection with the acquisition, the Company acquired all of the voting and common shares of UFBC Capital Trust I (the “Trust”), which is a wholly-owned subsidiary established for the sole purpose of issuing $5.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”).  These trust preferred securities are due in 2035 and have an interest rate of LIBOR (London Interbank Offering Rate) plus 2.10%, which adjusts quarterly.  The Trust is an unconsolidated subsidiary

since the Company is not the primary beneficiary of this entity.  The additional $155,000 that is payable by the Company to the Trust represents the Company’s unfunded capital investment in the Trust.

Merger and acquisition expense was $3.2 million for the three months ended March 31, 2014 which are primarily related to legal and accounting costs, contract termination expenses, system conversion and integration expenses, employee retention and severance payments.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

	January 16, 2014
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	63,313
Investment securities available-for-sale	16,278
Loans	238,272
Premises and equipment	7,652
Accrued interest receivable	522
Goodwill	24,706
Other intangible assets	2,740
Other assets	2,640
Total assets acquired	$	356,123
Liabilities assumed:
Deposits:
Non-interest bearing	90,206
Savings, NOW and money market	131,312
Certificates of deposit	73,686
Total deposits	295,204
Junior subordinated debentures issued to Trust	3,679
Other liabilities	2,953
Total liabilities assumed	$	301,836
Total consideration paid	$	54,287

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information relative to closing dates fair values becomes available.  As the Company continues to analyze the acquired assets and liabilities, there may be adjustments recorded to the carrying values.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

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

Investment securities available for sale.  The estimated fair values of investment securities available-for-sale was based on reliable and unbiased evaluations 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.

Loans. The acquired loan portfolio was segregated into one of two categories for valuation purposes: purchased credit impaired loans and performing loans.  Purchased credit impaired loans were identified as those loans that were nonaccrual prior to the business combination and those loans that had been identified as potentially impaired.  Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms.  Performing loans were those loans that were currently performing in accordance with the loan contract and do not appear to have any significant credit issues.

For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the “income approach”).  Performing loans were segmented into pools based on loan type (1-4 family residential, commercial, commercial owner occupied, construction and development), and further segmented based on payment type (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity.  The estimated cash flows expected to be collected for each loan was determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates and discount rates.  Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan.  Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a credit review by management and a third party consultant on a selection of loans within the acquired portfolio.  The discount rates used were based on rates market participants might charge for cash flows with similar risk characteristics at the acquisition date.  The market rates were estimated using a build up approach which included assumptions with respect to loan servicing costs, interest rate volatility, and systemic risk, among other factors.

For loans that were identified as purchased credit impaired (“PCI”), either the above income approach was used or the asset approach was used.  The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract.  Management used the asset approach for all nonaccrual loans to reflect market participant assumptions.  Under the asset approach, the fair value of each loan was determined based on the estimated values of the underlying collateral.

The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used.  While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (“ASC”) topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.”  See Note 7 for further details.

Premises and equipment.  The land and buildings acquired were recorded at fair value as determined by third party appraisals.

Other intangible assets.  Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent.  The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source.  The CDI is being amortized over an estimated useful life of 6.7 years to approximate the existing deposit relationships acquired.

Deposits.  The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand.  The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Junior subordinated debentures issued to Trust.  There is no active market for trust preferred securities issued by UFBC Capital Trust I; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach.  Under the income approach, the expected cash flows over the remaining estimated life of the debentures were discounted at the prevailing market rate.  The prevailing market rate was based on: (i) a third-party broker opinion; (ii) implied market yields for recent trust preferred sales; and (iii) new trust preferred issuances for instruments with similar long durations.

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Stock-Based Compensation (Tables)

3 Months Ended

Mar. 31, 2014

Stock-Based Compensation

Schedule of weighted average assumptions used in estimation of the fair value of options granted as of the grant date using the Black-Scholes option-pricing model

	Three Months Ended March 31,
	2014	2013
Estimated option life	6.5 Years	6.5 Years
Risk free interest rate	2.17 - 2.34%	1.23 - 1.43%
Expected volatility	37.40%	39.50%
Expected dividend yield	1.80%	1.23%

Summary of stock option activity

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Years)	Value
Outstanding at December 31, 2013	1,011,553		$	12.03
Granted	218,000		16.83
Exercised	(12,210	)	9.29
Forfeited	(1,800	)	11.48
Outstanding at March 31, 2014	1,215,543		$	12.89	6.02	$	5,954,977
Options exercisable at March 31, 2014	845,943		$	11.74	4.71	$	5,093,024

Summary of the status of the Company's non-vested stock options and changes during the reporting period

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Balance at December 31, 2013	289,150		$	5.29
Granted	218,000		5.60
Vested	(135,750	)	5.30
Forfeited	(1,800	)	4.45
Balance at March 31, 2014	369,600		$	5.47

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Goodwill and Other Intangibles

3 Months Ended

Mar. 31, 2014

Goodwill and Other Intangibles

Goodwill and Other Intangibles

Note 10

Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at March 31, 2014 is as follows:

	Mortgage Banking
(In thousands)	Gross Carrying Amount		Accumulated Amortization
Balance at December 31, 2013	$	1,781	$	1,781
2014 activity:
Acquisition of UFBC	2,740		200
Balance at March 31, 2014	$	4,521	$	1,981

The aggregate amortization expense was $200,000 and $49,000 for three months ended March 31 2014 and 2013, respectively.  The estimated amortization expense for the next five years and thereafter is as follows:

	(In thousands)
2014 (April – December)	$	556
2015	634
2016	512
2017	391
2018	269
2019 and Thereafter	178

The carrying amount of goodwill at March 31, 2014 was as follows:

(In thousands)	Commercial Banking		Mortgage Banking		Total
Balance at December 31, 2013	$	24	$	10,120	$	10,144
Acquisition of UFBC	24,706		—		24,706
Balance at March 31, 2014	$	24,730	$	10,120	$	34,850

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

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Investment Securities

3 Months Ended

Mar. 31, 2014

Investment Securities

Investment Securities

Note 6

Investment Securities

The approximate fair value and amortized cost of investment securities at March 31, 2014 and December 31, 2013 are shown in the table below.

	March 31, 2014
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	76,517	$	3,181	$	(731	)	$	78,967
Mortgage-backed securities	140,475		5,058		(11		)	145,522
Municipal securities	115,585		4,946		(94		)	120,437
U.S. treasury securities	4,998		9		—			5,007
Pooled trust preferred securities	2,872		—		—			2,872
Total	$	340,447	$	13,194	$	(836	)	$	352,805
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,346		146		—			2,492
Pooled trust preferred securities	4,005		—		(955		)	3,050
Total	$	6,351	$	146	$	(955	)	$	5,542

	December 31, 2013
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	75,562	$	2,914	$	(1,548	)	$	76,928
Mortgage-backed securities	144,609		3,566		(346		)	147,829
Municipal securities	113,716		3,426		(404		)	116,738
U.S. treasury securities	4,992		37		—			5,029
Pooled trust preferred securities	2,795		—		—			2,795
Total	$	341,674	$	9,943	$	(2,298	)	$	349,319
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,472		145		—			2,617
Pooled trust preferred securities	4,005		—		(1,095		)	2,910
Total	$	6,477	$	145	$	(1,095	)	$	5,527

The fair value and amortized cost of investment securities by contractual maturity at March 31, 2014 and December 31, 2013 are shown below.  Expected maturities may differ from contractual maturities because many issuers have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2014
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Within One Year	$	11,345	$	11,421	$	—	$	—
After 1 year but within 5 years	34,980		36,612		—		—
After 5 years but within 10 years	59,626		63,473		—		—
After 10 years	94,021		95,777		4,005		3,050
Mortgage-backed securities	140,475		145,522		2,346		2,492
Total	$	340,447	$	352,805	$	6,351	$	5,542

	December 31, 2013
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	cost		Value		cost		Value
Within One Year	$	8,549	$	8,690	$	—	$	—
After 1 year but within 5 years	30,120		31,672		—		—
After 5 years but within 10 years	61,665		64,876		—		—
After 10 years	96,731		96,252		4,005		2,910
Mortgage-backed securities	144,609		147,829		2,472		2,617
Total	$	341,674	$	349,319	$	6,477	$	5,527

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, 2014 and December 31, 2013.

At March 31, 2014

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	$	29,878	$	(731	)	$	—	$	—		$	29,878	$	(731	)
Mortgage-backed securities	781		(4		)	319		(7		)	1,100		(11		)
Municipal securities	7,371		(94		)	—		—			7,371		(94		)
Total temporarily impaired securities	$	38,030	$	(829	)	$	319	$	(7	)	$	38,349	$	(836	)

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	$	—	$	—	$	3,050	$	(955	)	$	3,050	$	(955	)
Total temporarily impaired securities	$	—	$	—	$	3,050	$	(955	)	$	3,050	$	(955	)

At December 31, 2013

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	$	38,554	$	(1,548	)	$	—	$	—		$	38,554	$	(1,548	)
Mortgage-backed securities	46,563		(335		)	318		(11		)	46,881		(346		)
Municipal securities	30,452		(404		)	—		—			30,452		(404		)
Total temporarily impaired securities	$	115,569	$	(2,287	)	$	318	$	(11	)	$	115,887	$	(2,298	)

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	$	—	$	—	$	2,910	$	(1,095	)	$	2,910	$	(1,095	)
Total temporarily impaired securities	$	—	$	—	$	2,910	$	(1,095	)	$	2,910	$	(1,095	)

The Company completes reviews for other-than-temporary impairment at least quarterly.  As of March 31, 2014, 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, 2014, 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 $2.1 million in non-government non-agency mortgage-related securities.  These securities are rated from AAA to AA.  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, 2014, 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.

The Company owns four pooled trust preferred securities which were all previously classified as held-to-maturity within the investment securities portfolio.  As a result of the issuance of the final rules to implement Section 619 of the Financial Reform Act, commonly known as the “Volcker Rule” (the “Final Rule”), only two of the four investments were exempt from the covered fund definition.  For the two investments that were not exempt as a result of the Final Rule, the Company will be required to divest its investment in these particular pooled trust preferred securities prior to the effectiveness of the Final Rule on July 21, 2015.  As a result of this new regulation, these two investments which have a par value of $2.7 million and a carrying value of $2.4 million at March 31, 2014, were reclassified to the available-for-sale investment securities portfolio.   The Company recorded an other-than-temporary impairment of $300,000 for the year ended December 31, 2013, which was determined based on the market bid price of these investments.  No further impairment was recorded for the three months ended March 31, 2014.

The par value of the two pooled trust preferred securities still classified as held-to-maturity totaled $4.0 million at March 31, 2014.  The collateral underlying these structured securities are instruments issued by financial institutions.  The Company owns the A-3 tranches in each issuance.  Each of the bonds is rated by more than one rating agency.  One security has a composite rating of A- and the other security has a composite rating of BBB+.  Observable trading activity remains limited for these types of securities.  The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the securities, and concluded that these securities are not other-than-temporarily impaired.  The Company continuously monitors the financial condition of the underlying issues and the level of subordination below the A-3 tranches.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

In one of the pooled trust preferred securities, 62% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $178 million of the remaining $236 million, or 75% of the performing collateral defaulted or deferred payment.  In the other pooled trust preferred security, 57% of the principal balance is subordinate to the Company’s class of ownership, and it is estimated that a break in contractual cash flow would occur if $158 million of the remaining $243 million, or 65% of the performing collateral defaulted or deferred payment. Significant judgment is involved in the evaluation of other-than-temporary impairment.  The Company does not intend to sell nor does the Company believe it is probable that it will be required to sell these pooled trust preferred securities prior to the recovery of its investment.

No other-than-temporary impairment has been recognized on the securities in the Company’s investment portfolio for the three months ended March 31, 2014.

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Segment Information

3 Months Ended

Mar. 31, 2014

Segment Information

Segment Information

Note 4

Segment Information

The Company operates in three business segments: commercial banking, mortgage banking, and wealth management services.  As of June 30, 2013, the Company merged the remaining operations of its trust division and Wilson/Bennett Capital Management, Inc., both of which had been included in the wealth management services segment, into CWS.  Results for the three months ended March 31, 2013 include the operations of these subsidiaries.

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 on a best efforts basis. 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, 2014 and 2013 is as follows:

At and for the Three Months Ended March 31, 2014 (in thousands):

						Wealth Management
	Commercial		Mortgage			and					Intersegment
	Banking		Banking			Trust Services		Other			Elimination			Consolidated
Net interest income	$	25,193	$	638		$	—	$	(164	)	$	—		$	25,667
Provision for loan losses	1,926		—			—		—			—			1,926
Non-interest income	932		7,391			167		178			—			8,668
Non-interest expense	15,792		8,293			112		1,593			—			25,790
Provision for income taxes	2,895		(97		)	19		(488		)	—			2,329
Net income (loss)	$	5,512	$	(167	)	$	36	$	(1,091	)	$	—		$	4,290
Total Assets	$	3,095,847	$	321,958		$	2,301	$	387,898		$	(664,667	)	$	3,143,337
Average Assets	$	2,943,545	$	230,424		$	2,300	$	379,810		$	(534,206	)	$	3,021,873

At and for the Three Months Ended March 31, 2013 (in thousands):

							Wealth Management
	Commercial			Mortgage			and						Intersegment
	Banking			Banking			Trust Services			Other			Elimination			Consolidated
Net interest income	$	22,397		$	398		$	—		$	(194	)	$	—		$	22,601
Provision for loan losses	(542		)	85			—			—			—			(457		)
Non-interest income	794			7,101			547			42			(10		)	8,474
Non-interest expense	10,052			9,201			677			762			(10		)	20,682
Provision for income taxes	4,599			(641		)	(43		)	(245		)	—			3,670
Net income (loss)	$	9,082		$	(1,146	)	$	(87	)	$	(669	)	$	—		$	7,180
Total Assets	$	2,748,303		$	563,798		$	2,373		$	331,641		$	(827,883	)	$	2,818,232
Average Assets	$	2,840,355		$	498,024		$	2,528		$	331,480		$	(825,615	)	$	2,846,772

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.

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Earnings Per Share

3 Months Ended

Mar. 31, 2014

Earnings Per Share

Earnings Per Share

Note 5

Earnings Per Share

The following is the calculation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013.  There were no antidilutive outstanding stock options excluded from the weighted average shares outstanding for the diluted earnings per share calculation for each of the three months ended March 31, 2014 and 2013.

(In thousands,	Three Months Ended
except per share data)	2014		2013
Net income available to common shareholders	$	4,290	$	7,180
Weighted average common shares - basic	32,127		30,634
Weighted average common shares - diluted	32,609		31,019
Earnings per common share - basic	$	0.13	$	0.23
Earnings per common share - diluted	$	0.13	$	0.23

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, 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, 2014 and 2013:

(in thousands)	2014	2013
Weighted average common shares outstanding	31,686	30,242
Weighted average shares attributable to the deferred compensation plans	441	392
Total weighted average shares - basic	32,127	30,634

The following shows the composition of diluted outstanding shares for the three months ended March 31, 2014 and 2013:

(in thousands)	2014	2013
Weighted average shares outstanding - basic (from above)	32,127	30,634
Incremental weighted average shares attributable to deferred compensation plans	248	191
Weighted average shares attributable to stock options	180	170
Incremental Shares from stock option plan	54	24
Total weighted average shares - diluted	32,609	31,019

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Loans Receivable and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Loans Receivable and Allowance for Loan Losses

Loans Receivable and Allowance for Loan Losses

Note 7

Loans Receivable and Allowance for Loan Losses

The loan portfolio at March 31, 2014 and December 31, 2013 consist of the following:

	2014									2013
(In thousands)	Originated			Acquired			Total			Total
Commercial and industrial	$	251,984		$	39,224		$	291,208		$	219,156
Real estate - commercial	1,064,996			126,957			1,191,953			1,048,579
Real estate - construction	390,415			24,296			414,711			363,063
Real estate - residential	319,000			13,288			332,288			299,484
Home equity lines	109,223			5,822			115,045			109,481
Consumer	3,924			1,121			5,045			4,159
	2,139,542			210,708			2,350,250			2,043,922
Net deferred fees	(4,548		)	—			(4,548		)	(3,754		)
Loans receivable, net of fees	2,134,994			210,708			2,345,702			2,040,168
Allowance for loan losses	(28,924		)	(169		)	(29,093		)	(27,864		)
Loans receivable, net	$	2,106,070		$	210,539		$	2,316,609		$	2,012,304

During the period ended March 31, 2014, as a result of the Company’s acquisition of UFBC, the loan portfolio was segregated between loans initially 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 statement of condition are as follows:

(in thousands)	March 31, 2014
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	20,264
Carrying amount	15,980
Other acquired loans
Outstanding principal balance	194,631
Carrying amount	194,728
Total acquired loans
Outstanding principal balance	214,895
Carrying amount	210,708

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

(in thousands)
Balance at January 1, 2014	$	—
Recorded discount at acquisition date	(3,872		)
Accretion	(315		)
Balance at March 31, 2014	$	(4,187	)

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, 2014 and 2013 is shown below.

	2014			2013
Beginning balance, January 1	$	27,864		$	27,400
Provision for loan losses	1,926			(457		)
Loans charged off:
Commercial and industrial	(783		)	—
Residential	—			(85		)
Consumer	(2		)	—
Total loans charged off	(785		)	(85		)
Recoveries:
Commercial and industrial	7			298
Residential	81			8
Consumer	—			1
Total recoveries	88			307
Net recoveries (charge offs)	(697		)	222
Ending balance, March 31,	$	29,093		$	27,165

For the three months ended March 31, 2014, the Company recorded an allowance for loan losses for the acquired loan portfolio of $169,000.  This amount represents credit deterioration post acquisition related to three acquired loans.  There were no impairments recorded in the purchase credit impaired portfolio as of March 31, 2014.

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, 2014 and December 31, 2013, are below:

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2014

(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	$	3,329		$	16,076		$	5,336	$	2,421	$	609	$	93		$	27,864
Charge-offs	(262		)	(521		)	—		—		—		(2		)	(785		)
Recoveries	2			—			5		81		—		—			88
Provision for loan losses	893			449			380		205		—		(1		)	1,926
Ending Balance, March 31, 2014	$	3,962		$	16,004		$	5,721	$	2,707	$	609	$	90		$	29,093
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	38		$	—		$	—	$	131	$	—	$	—		$	169
Collectively evaluated for impairment	3,924			16,004			5,721		2,576		609		90			28,924

Loans Receivable

At March 31, 2014

(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, 2014	$	291,208	$	1,191,953	$	414,711	$	332,288	$	115,045	$	5,045	$	2,350,250
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	299	$	1,738	$	496	$	346	$	51	$	—	$	2,930
Purchased Credit Impaired Loans	4,990		8,379		1,688		448		467		8		15,980
Collectively evaluated for impairment	285,919		1,181,836		412,527		331,494		114,527		5,037		2,331,340

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2013

(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	$	525		$	17,990	$	7,675		$	857		$	266	$	87		$	27,400
Charge-offs	—			—		—			(85		)	—		—			(85		)
Recoveries	296			—		2			8			—		1			307
Provision for loan losses	(790		)	504		(371		)	43			172		(15		)	(457		)
Ending Balance, March 31, 2013	$	31		$	18,494	$	7,306		$	823		$	438	$	73		$	27,165
Ending Balance, March 31, 2013
Individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—	$	—		$	—
Collectively evaluated for impairment	31			18,494		7,306			823			438		73			27,165

Loans Receivable

At March 31, 2013

(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, 2013	$	218,281	$	850,710	$	355,919	$	242,722	$	114,407	$	3,429	$	1,785,468
Ending Balance, March 31, 2013
Individually evaluated for impairment	$	59	$	4,359	$	1,437	$	—	$	—	$	—	$	5,855
Collectively evaluated for impairment	218,222		846,351		354,482		242,722		114,407		3,429		1,779,613

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 be 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 is always 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 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, 2014 and December 31, 2013.  In addition, the credit quality of the loan portfolio is provided as of March 31, 2014 and December 31, 2013.

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At March 31, 2014

(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	$	204	$	412	$	—	$	616	$	251,368	251,984		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		274,352		274,352		—		—
Non-owner occupied	464		—		1,738		2,202		788,442		790,644		—		1,738
Real estate - construction
Residential	—		—		—		—		132,380		132,380		—		—
Commercial	—		—		246		246		257,789		258,035		—		246
Real estate - residential
Single family	225		—		—		225		223,008		223,233		—		—
Multi-family	—		—		—		—		95,767		95,767		—		—
Home equity lines	—		—		51		51		109,172		109,223		—		51
Consumer
Installment	—		—		—		—		3,334		3,334		—		—
Credit cards	—		—		—		—		590		590		—		—
	$	893	$	412	$	2,035	$	3,340	$	2,136,202	$	2,139,542	$	—	$	2,035

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At March 31, 2014

(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	$	—	$	—	$	757	$	757	$	38,467	39,224		$	—	$	757
Real estate - commercial
Owner occupied	—		—		—		—		64,566		64,566		—		—
Non-owner occupied	605		1,067		339		2,011		60,380		62,391		—		339
Real estate - construction
Residential	—		—		—		—		20,235		20,235		—		—
Commercial	—		—		—		—		4,061		4,061		—		—
Real estate - residential
Single family	—		—		768		768		12,520		13,288		—		768
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		5,822		5,822		—		—
Consumer
Installment	—		—		—		—		1,121		1,121		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	605	$	1,067	$	1,864	$	3,536	$	207,172	$	210,708	$	—	$	1,864

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At December 31, 2013

(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	$	101	$	316	$	—	$	417	$	218,739	219,156		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		279,631		279,631		—		—
Non-owner occupied	82		—		1,738		1,820		767,128		768,948		—		1,738
Real estate - construction
Residential	—		—		—		—		120,144		120,144		—		—
Commercial	—		—		525		525		242,394		242,919		—		525
Real estate - residential
Single family	8		—		—		8		213,537		213,545		—		—
Multi-family	—		—		—		—		85,939		85,939		—		—
Home equity lines	—		—		51		51		109,430		109,481		—		51
Consumer
Installment	—		—		—		—		3,912		3,912		—		—
Credit cards	—		—		—		—		247		247		—		—
	$	191	$	316	$	2,314	$	2,821	$	2,041,101	$	2,043,922	$	—	$	2,314

The Company had no acquired loans as of December 31, 2013.

Additional information on the Company’s impaired loans that were evaluated for specific reserves as of March 31, 2014 and December 31, 2013, including the recorded investment on the statement of condition and the unpaid principal balance, is shown below:

Impaired Loans - Originated Loan Portfolio

At March 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	260	$	260	$	—	$	2
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	496		2,650		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—				—		—
Home equity lines	51		51		—		—
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	—		—		—		—
By segment total:
Commercial and industrial	$	260	$	260	$	—	$	2
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	496		2,650		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Total	$	2,545	$	6,833	$	—	$	2

Impaired Loans - Acquired Loan Portfolio

At March 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	764	$	1,308	$	—	$	4
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	737		1,194		—		18
Real estate - construction
Residential	—		—		—		—
Commercial	2,112		2,366		—		11
Real estate - residential
Single family	422		550		—		1
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	8		9		—		—
With related allowance:
Commercial and industrial	$	40	$	39	$	38	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	346		335		131		8
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	804	$	1,347	$	38	$	4
Real estate - commercial	737		1,194		—		18
Real estate - construction	2,112		2,366		—		11
Real estate - residential	768		885		131		9
Home equity lines	—		—		—		—
Consumer	8		9		—		—
Total	$	4,429	$	5,801	$	169	$	42

Impaired Loans

At December 31, 2013

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	814	$	814	$	—	$	23
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	775		2,928		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	51		51		—		—
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	—		—		—		—
By segment total:
Commercial and industrial	$	814	$	814	$	—	$	23
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	775		2,928		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Total	$	3,378	$	7,665	$	—	$	23

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.  Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk, and borrower/guarantor structures.  Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness.  When evaluating whether a concession has been granted, the Company also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Company for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers.  The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

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.

Nonaccruing loans that are modified can be placed back on accrual status when both the principal and interest are current and it is probable that the Company will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

At March 31, 2014 and December 31, 2013, the Company had TDRs totaling $2.0 million and $2.3 million, respectively, all of which were on nonaccrual.  Nonaccrual TDRs that are reasonably assured of repayment according to their modified terms may be returned to accrual status by the Company upon a detailed credit evaluation of the borrower’s financial condition and prospects for repayment under the revised terms.  Consistent with regulatory guidance, upon sustained performance and classification as a TDR over the Company’s year-end, the loan will be removed from TDR status as long as the modified terms were market-based at the time of the modification.  The following table reconciles the beginning and ending balances on TDRs as of March 31, 2014 and 2013, respectively:

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2014

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2014	$	—	$	1,738	$	525		$	—	$	—	$	—	$	2,263
New TDRs	—		—		—			—		—		—		—
Increases to existing TDRs	—		—		—			—		—		—		—
Charge-Offs Post Modification	—		—		—			—		—		—		—
Sales, paydowns, or other decreases	—		—		(279		)	—		—		—		(279		)
Ending Balance, March 31, 2014	$	—	$	1,738	$	246		$	—	$	—	$	—	$	1,984

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2013

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2013	$	1,776		$	3,800		$	1,762		$	—	$	—	$	—	$	7,338
New TDRs	—			570			—			—		—		—		570
Increases to existing TDRs	—			—			—			—		—		—		—
Charge-Offs Post Modification	—			—			—			—		—		—		—
Sales, paydowns, or other decreases	(1,776		)	(11		)	(575		)	—		—		—		(2,362		)
Ending Balance, March 31, 2013	$	—		$	4,359		$	1,187		$	—	$	—	$	—	$	5,546

At March 31, 2014, TDRs make up one relationship with the Bank.  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 as of March 31, 2014 and December 31, 2013, respectively.

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 the period ended March 31, 2014, one loan identified as a TDR had a payment default within the last twelve months.  For the period ended December 31, 2013, one loan identified as a TDR had a payment default within the last twelve months.

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, substandard, doubtful and loss.  During 2011, the Company added an additional risk rating, other loans especially mentioned (“OLEM”), for the monitoring of credit quality.  Other loans especially mentioned 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 other loans especially mentioned, 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, 2014 and December 31, 2013.

Internal Risk Rating Grades - Originated Loan Portfolio

At March 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	250,162	$	1,562	$	260	$	—	$	—
Real estate - commercial
Owner occupied	274,352		—		—		—		—
Non-owner occupied	785,045		3,861		1,738		—		—
Real estate - construction
Residential	132,380		—		—		—		—
Commercial	257,539		—		496		—		—
Real estate - residential
Single family	223,008		225		—		—		—
Multi-family	95,767		—		—		—		—
Home equity lines	109,172		—		51		—		—
Consumer
Installment	3,334		—		—		—		—
Credit cards	590		—		—		—		—
	$	2,131,349	$	5,648	$	2,545	$	—	$	—

Internal Risk Rating Grades - Acquired Loan Portfolio

At March 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	37,858	$	562	$	804	$	—	$	—
Real estate - commercial
Owner occupied	64,566		—		—		—		—
Non-owner occupied	58,595		3,059		737		—		—
Real estate - construction
Residential	20,235		—		—		—		—
Commercial	1,367		582		2,112		—		—
Real estate - residential
Single family	12,520		—		768		—		—
Multi-family	—		—		—		—		—
Home equity lines	5,822		—		—		—		—
Consumer
Installment	1,113		—		8		—		—
Credit cards	—		—		—		—		—
	$	202,076	$	4,203	$	4,429	$	—	$	—

Internal Risk Rating Grades

At December 31, 2013

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	217,755	$	587	$	814	$	—	$	—
Real estate - commercial
Owner occupied	279,631		—		—		—		—
Non-owner occupied	753,872		13,338		1,738		—		—
Real estate - construction
Residential	120,144		—		—		—		—
Commercial	242,144		—		775		—		—
Real estate - residential
Single family	213,537		8		—		—		—
Multi-family	85,939		—		—		—		—
Home equity lines	109,430		—		51		—		—
Consumer
Installment	3,912		—		—		—		—
Credit cards	247		—		—		—		—
	$	2,026,611	$	13,933	$	3,378	$	—	$	—

XML

Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 item	Mar. 31, 2013	Dec. 31, 2013
Segment Information
Number of business segments	3
Segment reporting
Net interest income	$ 25,667	$ 22,601
Provision for loan losses	1,926	(457)
Non-interest income	8,668	8,474
Non-interest expense	25,790	20,682
Provision for income taxes	2,329	3,670
Net income	4,290	7,180
Total Assets	3,143,337	2,818,232	2,894,230
Average Assets	3,021,873	2,846,772
Operating segment | Commercial Banking
Segment reporting
Net interest income	25,193	22,397
Provision for loan losses	1,926	(542)
Non-interest income	932	794
Non-interest expense	15,792	10,052
Provision for income taxes	2,895	4,599
Net income	5,512	9,082
Total Assets	3,095,847	2,748,303
Average Assets	2,943,545	2,840,355
Operating segment | Mortgage Banking
Segment reporting
Net interest income	638	398
Provision for loan losses		85
Non-interest income	7,391	7,101
Non-interest expense	8,293	9,201
Provision for income taxes	(97)	(641)
Net income	(167)	(1,146)
Total Assets	321,958	563,798
Average Assets	230,424	498,024
Operating segment | Wealth Management Services
Segment reporting
Non-interest income	167	547
Non-interest expense	112	677
Provision for income taxes	19	(43)
Net income	36	(87)
Total Assets	2,301	2,373
Average Assets	2,300	2,528
Other
Segment reporting
Net interest income	(164)	(194)
Non-interest income	178	42
Non-interest expense	1,593	762
Provision for income taxes	(488)	(245)
Net income	(1,091)	(669)
Total Assets	387,898	331,641
Average Assets	379,810	331,480
Intersegment Elimination
Segment reporting
Non-interest income		(10)
Non-interest expense		(10)
Total Assets	(664,667)	(827,883)
Average Assets	$ (534,206)	$ (825,615)

XML

Commitments and Contingencies (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2014 George Mason Exposure to repurchase loans previously sold to investors	Dec. 31, 2013 George Mason Exposure to repurchase loans previously sold to investors	Mar. 31, 2014 Floating rates	Mar. 31, 2014 Mortgage loan funding George Mason
Commitments and Contingencies
Maximum expiration period of commitments	1 year
Commitments to extend credit				$ 1,800,000,000	$ 327,200,000
Standby letters of credit outstanding	31,400,000
Amounts drawn	0
Reserve for estimated exposure to repurchase loans previously sold to investors		$ 261,000	$ 261,000

XML

Fair Value Measurements

3 Months Ended

Mar. 31, 2014

Fair Value Measurements

Fair Value Measurements

Note 12

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 with the exception of its treasury securities, the Company’s trading investment securities, which include cash equivalents and mutual funds, and bank-owned life insurance are recorded at fair value using reliable and unbiased evaluations 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’s treasury securities are recorded at fair value using unadjusted quoted market prices for identical securities and therefore fall under the Level 1 category.

The Company has an interest rate swap to hedge against the change in fair value of one fixed rate commercial loan.  This loan is recorded at fair value using published yield curve rates from a national valuation service.  These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.  Commercial and residential loans are evaluated for impairment and the carrying value of such loans is recorded at fair value based on appraisals of the underlying collateral completed by third parties using Level 2 valuation inputs.

The Company’s two other interest rate swap derivatives designated as cash flow hedges are recorded at fair value using published yield curve rates from a national valuation service.  These observable rates and inputs are applied to a third party industry-wide valuation model, and therefore, the valuations fall into a Level 2 category.

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 the interest rate risk inherent in providing rate lock commitments to borrowers, the mortgage companies enter into best efforts forward sales contracts to sell loans to investors.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  Both the rate lock commitments to the borrowers and the forward sales contracts to the 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, 2014.  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, 2014 and December 31, 2013 are shown below:

At March 31, 2014
(In thousands)

	Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,007	$	5,007	$	—	$	—
U.S. government-sponsored agencies	78,967		—		78,967		—
Mortgage-backed securities	145,522		—		145,522		—
Municipal securities	120,437		—		120,437		—
Pooled trust preferred securities	2,872		—		2,872		—
Total investment securities available-for-sale	352,805		5,007		347,798		—
Investment securities — trading	4,673		—		4,673		—
Bank-owned life insurance	32,181		—		32,181		—
Derivative asset - rate lock and forward loan sales commitments	14,656		—		14,656		—
Derivative asset — interest rate lock commitments	375		—		375		—
Derivative liability - rate lock and forward loan sales commitments	1,511		—		1,511		—
Derivative liability — interest rate lock commitments	403		—		403		—

At December 31, 2013

(In thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices in Active markets for Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Investment securities available-for-sale:
U.S. treasury securities	$	5,029	$	5,029	$	—	$	—
U.S. government-sponsored agencies	76,928				76,928		—
Mortgage-backed securities	147,829		—		147,829		—
Municipal securities	116,738		—		116,738		—
Pooled trust preferred securities	2,795		—		2,795		—
Total investment securities available-for-sale	349,319		5,029		344,290		—
Investment securities — trading	3,890		—		3,890		—
Bank-owned life insurance	32,063		—		32,063		—
Derivative asset - rate lock and forward loan sales commitments	16,478		—		16,478		—
Derivative asset — interest rate lock commitments	9		—		9		—
Derivative liability - rate lock and forward loan sales commitments	4,052		—		4,052		—
Derivative liability — interest rate lock commitments	1,554		—		1,554		—

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 pooled trust preferred securities held in its held-to-maturity investment securities portfolio, loans receivable — evaluated for impairment and other real estate owned.

At March 31, 2014

(in thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices  in Active  markets for  Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Pooled trust preferred securities	$	3,050	$	—	$	—	3,050
Loans receivable — evaluated for impairment	2,930		—		301		2,629

At December 31, 2013

 (In thousands)

			Fair Value Measurements Using
Description	Balance		Quoted Prices  in Active  markets for  Identical Assets (Level 1)		Significant  Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Pooled trust preferred securities	$	2,910	$	—	$	—	$	2,910
Loans receivable — evaluated for impairment	3,378		—		301		3,077

The Company’s held-to-maturity portfolio includes investments in two pooled trust preferred securities, totaling $4.0 million of par value at March 31, 2014.  The collateral underlying these structured securities are instruments issued by financial institutions.  The Company owns the A-3 tranches in each issuance.  Observable trading activity remains limited for these types of securities.  The Company has estimated the fair value of the securities through the use of internal calculations and through information provided by external pricing services.  Given the level of subordination below the A-3 tranches, and the actual and expected performance of the underlying collateral, the Company expects to receive all contractual interest and principal payments recovering the amortized cost basis of each of the two securities, and concluded that these securities are not other-than-temporarily impaired.  The Company also utilizes a multi-scenario model which assumes varying levels of additional defaults and deferrals and the effects of such adverse developments on the contractual cash flows for the A-3 tranches.  In each of the adverse scenarios, there was no indication of a break to the A-3 contractual cash flows.

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.  In addition, an estimate of costs to sell the collateral is assumed.  The Company values other real estate owned by obtaining an updated appraisal of the property foreclosed upon, and discounts further the appraised value to an amount equal to the expected cash proceeds upon the sale of the property.  Loans receivable — evaluated for impairment and other real estate owned are valued using third party appraisal data that is based on market comparisons and may be subject to further adjustment for certain non-observable criteria.

Loans receivable — evaluated for impairment that are measured at fair value using Level 3 inputs on a nonrecurring basis total $3.5 million at March 31, 2014.  The total amount for each period presented represents the entire population of loans receivable — evaluated for impairment, and of this amount, $3.5 million was determined to be impaired and recorded at fair value. Collateral is in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The vast majority of the Company’s collateral is real estate.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2).  However, in certain instances, the Company applies a discount to the valuation of the collateral if the collateral being evaluated is in process of construction or a residence.  In addition, the Company considers past experience of actual sales of collateral and may further discount the appraisal of the collateral being evaluated.  This is considered a Level 3 valuation.  The value of business equipment is based upon the net book value on the applicable business’s financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).  Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

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.

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

Loans Held for Sale

Loans held for sale are carried at the lower of cost or estimated fair value.  The estimated 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, 2014 and December 31, 2013:

	March 31, 2014
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	38,956	38,956		38,956		$	—	$	—
Investment securities available-for-sale	352,805		352,805		5,007		347,798		—
Investment securities held-to-maturity and other investments	21,806		20,997		—		17,947		3,050
Loans held for sale	265,313		265,313		—		265,313		—
Loans receivable, net	2,316,609		2,319,069		—		301		2,318,768
Accrued interest receivable	8,184		8,184		8,184		—		—
Financial liabilities:
Demand deposits	$	534,064	$	534,064	$	534,064	$	—	$	—
Interest checking	448,163		448,163		448,163		—		—
Money market and statement savings	586,802		586,802		586,802		—		—
Certificates of deposit	807,899		812,383		—		812,383		—
Other borrowed funds	382,854		397,908		—		397,908		—
Accrued interest payable	1,014		1,014		1,014		—		—

	December 31, 2013
	Carrying		Estimated		Fair Value Measurements Using
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	29,209	$	29,209	$	29,209	$	—	$	—
Investment securities available-for-sale	349,319		349,319		5,029		344,290		—
Investment securities held-to-maturity and other investments	25,545		24,595		—		21,685		2,910
Loans held for sale	373,993		373,993		—		373,993		—
Loans receivable, net	2,012,304		2,024,835		—		301		2,024,534
Accrued interest receivable	7,939		7,939		7,939		—		—
Financial liabilities:
Demand deposits	$	433,749	$	433,749	$	433,749	$	—	$	—
Interest checking	398,136		398,136		398,136		—		—
Money market and statement savings	475,707		475,707		475,707		—		—
Certificates of deposit	751,267		756,191		—		756,191		—
Other borrowed funds	475,232		491,236		—		491,236		—
Accrued interest payable	869		869		869		—		—

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Investment Securities (Tables)

3 Months Ended

Mar. 31, 2014

Investment Securities

Schedule of approximate fair value and amortized cost of investment securities

	March 31, 2014
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	76,517	$	3,181	$	(731	)	$	78,967
Mortgage-backed securities	140,475		5,058		(11		)	145,522
Municipal securities	115,585		4,946		(94		)	120,437
U.S. treasury securities	4,998		9		—			5,007
Pooled trust preferred securities	2,872		—		—			2,872
Total	$	340,447	$	13,194	$	(836	)	$	352,805
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,346		146		—			2,492
Pooled trust preferred securities	4,005		—		(955		)	3,050
Total	$	6,351	$	146	$	(955	)	$	5,542

	December 31, 2013
	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	cost		Gains		Losses			value
Investment Securities Available-for-Sale
U.S. government-sponsored agencies	$	75,562	$	2,914	$	(1,548	)	$	76,928
Mortgage-backed securities	144,609		3,566		(346		)	147,829
Municipal securities	113,716		3,426		(404		)	116,738
U.S. treasury securities	4,992		37		—			5,029
Pooled trust preferred securities	2,795		—		—			2,795
Total	$	341,674	$	9,943	$	(2,298	)	$	349,319
Investment Securities Held-to-Maturity
Mortgage-backed securities	2,472		145		—			2,617
Pooled trust preferred securities	4,005		—		(1,095		)	2,910
Total	$	6,477	$	145	$	(1,095	)	$	5,527

Schedule of fair value and amortized cost of investment securities by contractual maturity

	March 31, 2014
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Within One Year	$	11,345	$	11,421	$	—	$	—
After 1 year but within 5 years	34,980		36,612		—		—
After 5 years but within 10 years	59,626		63,473		—		—
After 10 years	94,021		95,777		4,005		3,050
Mortgage-backed securities	140,475		145,522		2,346		2,492
Total	$	340,447	$	352,805	$	6,351	$	5,542

	December 31, 2013
	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(In thousands)	cost		Value		cost		Value
Within One Year	$	8,549	$	8,690	$	—	$	—
After 1 year but within 5 years	30,120		31,672		—		—
After 5 years but within 10 years	61,665		64,876		—		—
After 10 years	96,731		96,252		4,005		2,910
Mortgage-backed securities	144,609		147,829		2,472		2,617
Total	$	341,674	$	349,319	$	6,477	$	5,527

Schedule of 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, 2014

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	$	29,878	$	(731	)	$	—	$	—		$	29,878	$	(731	)
Mortgage-backed securities	781		(4		)	319		(7		)	1,100		(11		)
Municipal securities	7,371		(94		)	—		—			7,371		(94		)
Total temporarily impaired securities	$	38,030	$	(829	)	$	319	$	(7	)	$	38,349	$	(836	)

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	$	—	$	—	$	3,050	$	(955	)	$	3,050	$	(955	)
Total temporarily impaired securities	$	—	$	—	$	3,050	$	(955	)	$	3,050	$	(955	)

At December 31, 2013

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	$	38,554	$	(1,548	)	$	—	$	—		$	38,554	$	(1,548	)
Mortgage-backed securities	46,563		(335		)	318		(11		)	46,881		(346		)
Municipal securities	30,452		(404		)	—		—			30,452		(404		)
Total temporarily impaired securities	$	115,569	$	(2,287	)	$	318	$	(11	)	$	115,887	$	(2,298	)

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	$	—	$	—	$	2,910	$	(1,095	)	$	2,910	$	(1,095	)
Total temporarily impaired securities	$	—	$	—	$	2,910	$	(1,095	)	$	2,910	$	(1,095	)

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Goodwill and Other Intangibles (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Accumulated Amortization
Aggregate amortization expense	$ 200	$ 49
Estimated amortization expense
2014 (April - December)	556
2015	634
2016	512
2017	391
2018	269
2019 and Thereafter	178
Mortgage Banking
Gross Carrying Amount
Balance at the beginning of the period	1,781
Acquisition of UFBC	2,740
Balance at the end of the period	4,521
Accumulated Amortization
Balance at the beginning of the period	1,781
Balance at the end of the period	$ 1,981

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Loans Receivable and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014
Changes in the accretable discount which includes income recognized from contractual interest cash flows
Recorded discount at acquisition date	$ (3,872)
Accretion	(315)
Balance at the end of the period	$ (4,187)

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 4,290	$ 7,180
Unrealized loss on available-for-sale investment securities:
Unrealized holding gain (loss) arising during the period, net of tax expense of $1.7 million in 2014 and net of tax benefit of $857 thousand in 2013	2,988	(1,663)
Less: reclassification adjustment for net losses included in net income net of tax benefit of $6 thousand in 2014 and $0 in 2013	11
Total unrealized gain (loss) on available-for-sale investment securities	2,999	(1,663)
Unrealized gain (loss) on derivative instruments designated as cash flow hedges, net of tax benefit of $82 thousand in 2014 and net of tax expense of $460 thousand in 2013	(150)	854
Comprehensive income	$ 7,139	$ 6,371

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Organization

3 Months Ended

Mar. 31, 2014

Organization

Organization

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.  Under the terms of the merger agreement, UFBC shareholders received $19.13 in cash and 1.154 shares of the Company’s common stock in exchange for each share of UFBC common stock they owned immediately prior to the merger. TBB, which was headquartered in Vienna, Virginia, merged into Cardinal Bank effective March 8, 2014 adding eight (8) banking locations in northern Virginia, one of the Company’s target markets.

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, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. 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, 2013.

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Loans Receivable and Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2014

Loans Receivable and Allowance for Loan Losses

Schedule of loan portfolio

	2014									2013
(In thousands)	Originated			Acquired			Total			Total
Commercial and industrial	$	251,984		$	39,224		$	291,208		$	219,156
Real estate - commercial	1,064,996			126,957			1,191,953			1,048,579
Real estate - construction	390,415			24,296			414,711			363,063
Real estate - residential	319,000			13,288			332,288			299,484
Home equity lines	109,223			5,822			115,045			109,481
Consumer	3,924			1,121			5,045			4,159
	2,139,542			210,708			2,350,250			2,043,922
Net deferred fees	(4,548		)	—			(4,548		)	(3,754		)
Loans receivable, net of fees	2,134,994			210,708			2,345,702			2,040,168
Allowance for loan losses	(28,924		)	(169		)	(29,093		)	(27,864		)
Loans receivable, net	$	2,106,070		$	210,539		$	2,316,609		$	2,012,304

Schedule of outstanding principal balance and related carrying amount of acquired loans

(in thousands)	March 31, 2014
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	20,264
Carrying amount	15,980
Other acquired loans
Outstanding principal balance	194,631
Carrying amount	194,728
Total acquired loans
Outstanding principal balance	214,895
Carrying amount	210,708

Schedule of changes in the accretable discount which includes income recognized from contractual interest cash flows

(in thousands)
Balance at January 1, 2014	$	—
Recorded discount at acquisition date	(3,872		)
Accretion	(315		)
Balance at March 31, 2014	$	(4,187	)

Schedule of Company's allowance for loan losses

	2014			2013
Beginning balance, January 1	$	27,864		$	27,400
Provision for loan losses	1,926			(457		)
Loans charged off:
Commercial and industrial	(783		)	—
Residential	—			(85		)
Consumer	(2		)	—
Total loans charged off	(785		)	(85		)
Recoveries:
Commercial and industrial	7			298
Residential	81			8
Consumer	—			1
Total recoveries	88			307
Net recoveries (charge offs)	(697		)	222
Ending balance, March 31,	$	29,093		$	27,165

Schedule of 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

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2014

(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	$	3,329		$	16,076		$	5,336	$	2,421	$	609	$	93		$	27,864
Charge-offs	(262		)	(521		)	—		—		—		(2		)	(785		)
Recoveries	2			—			5		81		—		—			88
Provision for loan losses	893			449			380		205		—		(1		)	1,926
Ending Balance, March 31, 2014	$	3,962		$	16,004		$	5,721	$	2,707	$	609	$	90		$	29,093
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	38		$	—		$	—	$	131	$	—	$	—		$	169
Collectively evaluated for impairment	3,924			16,004			5,721		2,576		609		90			28,924

Loans Receivable

At March 31, 2014

(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, 2014	$	291,208	$	1,191,953	$	414,711	$	332,288	$	115,045	$	5,045	$	2,350,250
Ending Balance, March 31, 2014
Individually evaluated for impairment	$	299	$	1,738	$	496	$	346	$	51	$	—	$	2,930
Purchased Credit Impaired Loans	4,990		8,379		1,688		448		467		8		15,980
Collectively evaluated for impairment	285,919		1,181,836		412,527		331,494		114,527		5,037		2,331,340

Allowance for Loan Losses

At and for the Three Months Ended March 31, 2013

(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	$	525		$	17,990	$	7,675		$	857		$	266	$	87		$	27,400
Charge-offs	—			—		—			(85		)	—		—			(85		)
Recoveries	296			—		2			8			—		1			307
Provision for loan losses	(790		)	504		(371		)	43			172		(15		)	(457		)
Ending Balance, March 31, 2013	$	31		$	18,494	$	7,306		$	823		$	438	$	73		$	27,165
Ending Balance, March 31, 2013
Individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—	$	—		$	—
Collectively evaluated for impairment	31			18,494		7,306			823			438		73			27,165

Loans Receivable

At March 31, 2013

(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, 2013	$	218,281	$	850,710	$	355,919	$	242,722	$	114,407	$	3,429	$	1,785,468
Ending Balance, March 31, 2013
Individually evaluated for impairment	$	59	$	4,359	$	1,437	$	—	$	—	$	—	$	5,855
Collectively evaluated for impairment	218,222		846,351		354,482		242,722		114,407		3,429		1,779,613

Schedule of Company's nonaccrual and past due loans

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At March 31, 2014

(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	$	204	$	412	$	—	$	616	$	251,368	251,984		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		274,352		274,352		—		—
Non-owner occupied	464		—		1,738		2,202		788,442		790,644		—		1,738
Real estate - construction
Residential	—		—		—		—		132,380		132,380		—		—
Commercial	—		—		246		246		257,789		258,035		—		246
Real estate - residential
Single family	225		—		—		225		223,008		223,233		—		—
Multi-family	—		—		—		—		95,767		95,767		—		—
Home equity lines	—		—		51		51		109,172		109,223		—		51
Consumer
Installment	—		—		—		—		3,334		3,334		—		—
Credit cards	—		—		—		—		590		590		—		—
	$	893	$	412	$	2,035	$	3,340	$	2,136,202	$	2,139,542	$	—	$	2,035

Nonaccrual and Past Due Loans - Acquired Loan Portfolio

At March 31, 2014

(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	$	—	$	—	$	757	$	757	$	38,467	39,224		$	—	$	757
Real estate - commercial
Owner occupied	—		—		—		—		64,566		64,566		—		—
Non-owner occupied	605		1,067		339		2,011		60,380		62,391		—		339
Real estate - construction
Residential	—		—		—		—		20,235		20,235		—		—
Commercial	—		—		—		—		4,061		4,061		—		—
Real estate - residential
Single family	—		—		768		768		12,520		13,288		—		768
Multi-family	—		—		—		—		—		—		—		—
Home equity lines	—		—		—		—		5,822		5,822		—		—
Consumer
Installment	—		—		—		—		1,121		1,121		—		—
Credit cards	—		—		—		—		—		—		—		—
	$	605	$	1,067	$	1,864	$	3,536	$	207,172	$	210,708	$	—	$	1,864

Nonaccrual and Past Due Loans - Originated Loan Portfolio

At December 31, 2013

(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	$	101	$	316	$	—	$	417	$	218,739	219,156		$	—	$	—
Real estate - commercial
Owner occupied	—		—		—		—		279,631		279,631		—		—
Non-owner occupied	82		—		1,738		1,820		767,128		768,948		—		1,738
Real estate - construction
Residential	—		—		—		—		120,144		120,144		—		—
Commercial	—		—		525		525		242,394		242,919		—		525
Real estate - residential
Single family	8		—		—		8		213,537		213,545		—		—
Multi-family	—		—		—		—		85,939		85,939		—		—
Home equity lines	—		—		51		51		109,430		109,481		—		51
Consumer
Installment	—		—		—		—		3,912		3,912		—		—
Credit cards	—		—		—		—		247		247		—		—
	$	191	$	316	$	2,314	$	2,821	$	2,041,101	$	2,043,922	$	—	$	2,314

Schedule of additional information on the Company's impaired loans that were evaluated for specific reserves, including the recorded investment on the statement of condition and the unpaid principal balance

Impaired Loans - Originated Loan Portfolio

At March 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	260	$	260	$	—	$	2
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	496		2,650		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—				—		—
Home equity lines	51		51		—		—
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	—		—		—		—
By segment total:
Commercial and industrial	$	260	$	260	$	—	$	2
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	496		2,650		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Total	$	2,545	$	6,833	$	—	$	2

Impaired Loans - Acquired Loan Portfolio

At March 31, 2014

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	764	$	1,308	$	—	$	4
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	737		1,194		—		18
Real estate - construction
Residential	—		—		—		—
Commercial	2,112		2,366		—		11
Real estate - residential
Single family	422		550		—		1
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	8		9		—		—
With related allowance:
Commercial and industrial	$	40	$	39	$	38	$	—
Real estate - commercial							—
Owner occupied	—		—		—		—
Non-owner occupied	—		—		—		—
Real estate - construction							—
Residential	—		—		—		—
Commercial	—		—		—		—
Real estate - residential							—
Single family	346		335		131		8
Multi-family	—		—		—		—
Home equity lines	—		—		—		—
Consumer	—		—		—		—
By segment total:
Commercial and industrial	$	804	$	1,347	$	38	$	4
Real estate - commercial	737		1,194		—		18
Real estate - construction	2,112		2,366		—		11
Real estate - residential	768		885		131		9
Home equity lines	—		—		—		—
Consumer	8		9		—		—
Total	$	4,429	$	5,801	$	169	$	42

Impaired Loans

At December 31, 2013

(In thousands)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
With no related allowance:
Commercial and industrial	$	814	$	814	$	—	$	23
Real estate - commercial
Owner occupied	—		—		—		—
Non-owner occupied	1,738		3,872		—		—
Real estate - construction
Residential	—		—		—		—
Commercial	775		2,928		—		—
Real estate - residential
Single family	—		—		—		—
Multi-family	—		—		—		—
Home equity lines	51		51		—		—
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	—		—		—		—
By segment total:
Commercial and industrial	$	814	$	814	$	—	$	23
Real estate - commercial	1,738		3,872		—		—
Real estate - construction	775		2,928		—		—
Real estate - residential	—		—		—		—
Home equity lines	51		51		—		—
Total	$	3,378	$	7,665	$	—	$	23

Schedule of reconciliation of beginning and ending balances on TDR

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2014

(In thousands)

	Commercial and Industrial		Real Estate - Commercial		Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2014	$	—	$	1,738	$	525		$	—	$	—	$	—	$	2,263
New TDRs	—		—		—			—		—		—		—
Increases to existing TDRs	—		—		—			—		—		—		—
Charge-Offs Post Modification	—		—		—			—		—		—		—
Sales, paydowns, or other decreases	—		—		(279		)	—		—		—		(279		)
Ending Balance, March 31, 2014	$	—	$	1,738	$	246		$	—	$	—	$	—	$	1,984

Troubled Debt Restructurings

At and For the Three Months Ended March 31, 2013

(In thousands)

	Commercial and Industrial			Real Estate - Commercial			Real Estate - Construction			Real Estate - Residential		Home Equity Lines		Consumer		Total
Beginning Balance, January 1, 2013	$	1,776		$	3,800		$	1,762		$	—	$	—	$	—	$	7,338
New TDRs	—			570			—			—		—		—		570
Increases to existing TDRs	—			—			—			—		—		—		—
Charge-Offs Post Modification	—			—			—			—		—		—		—
Sales, paydowns, or other decreases	(1,776		)	(11		)	(575		)	—		—		—		(2,362		)
Ending Balance, March 31, 2013	$	—		$	4,359		$	1,187		$	—	$	—	$	—	$	5,546

Summary of the risk ratings by portfolio segment and class segment

Internal Risk Rating Grades - Originated Loan Portfolio

At March 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	250,162	$	1,562	$	260	$	—	$	—
Real estate - commercial
Owner occupied	274,352		—		—		—		—
Non-owner occupied	785,045		3,861		1,738		—		—
Real estate - construction
Residential	132,380		—		—		—		—
Commercial	257,539		—		496		—		—
Real estate - residential
Single family	223,008		225		—		—		—
Multi-family	95,767		—		—		—		—
Home equity lines	109,172		—		51		—		—
Consumer
Installment	3,334		—		—		—		—
Credit cards	590		—		—		—		—
	$	2,131,349	$	5,648	$	2,545	$	—	$	—

Internal Risk Rating Grades - Acquired Loan Portfolio

At March 31, 2014

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	37,858	$	562	$	804	$	—	$	—
Real estate - commercial
Owner occupied	64,566		—		—		—		—
Non-owner occupied	58,595		3,059		737		—		—
Real estate - construction
Residential	20,235		—		—		—		—
Commercial	1,367		582		2,112		—		—
Real estate - residential
Single family	12,520		—		768		—		—
Multi-family	—		—		—		—		—
Home equity lines	5,822		—		—		—		—
Consumer
Installment	1,113		—		8		—		—
Credit cards	—		—		—		—		—
	$	202,076	$	4,203	$	4,429	$	—	$	—

Internal Risk Rating Grades

At December 31, 2013

(In thousands)

	Pass		OLEM		Substandard		Doubtful		Loss
Commercial and industrial	$	217,755	$	587	$	814	$	—	$	—
Real estate - commercial
Owner occupied	279,631		—		—		—		—
Non-owner occupied	753,872		13,338		1,738		—		—
Real estate - construction
Residential	120,144		—		—		—		—
Commercial	242,144		—		775		—		—
Real estate - residential
Single family	213,537		8		—		—		—
Multi-family	85,939		—		—		—		—
Home equity lines	109,430		—		51		—		—
Consumer
Installment	3,912		—		—		—		—
Credit cards	247		—		—		—		—
	$	2,026,611	$	13,933	$	3,378	$	—	$	—

XML

Investment Securities (Details 3) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014 item	Dec. 31, 2013
Investment Securities and Other Investments
Percentage of the company's mortgage-related securities guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association	99.00%
Investment	$ 6,351,000	$ 6,477,000
Number of pooled trust preferred securities	2
Number of pooled trust preferred securities classified as held-to-maturity securities	2
Number of pooled trust preferred securities exempt from the covered fund definition	2
Number of pooled trust preferred securities not exempt from the covered fund definition	2
Number of pooled trust preferred securities reclassified to available-for-sale securities	2
Par value of investments reclassified to the available-for-sale investment securities	2,700,000
Carrying value of pooled trust securities reclassified to the available-for-sale investment securities	2,400,000
Other-than-temporary impairment recognized	0	300,000
Par value of investments classified as held-to-maturity	4,000,000
Other-than-temporary impairment recognized on remaining securities	0
Previously classified
Investment Securities and Other Investments
Number of pooled trust preferred securities classified as held-to-maturity securities	4
Minimum
Investment Securities and Other Investments
Number of rating agencies that rate each bond	1
A-
Investment Securities and Other Investments
Number of pooled trust preferred securities	1
Non-government non-agency mortgage-related securities
Investment Securities and Other Investments
Investment	2,100,000
First pooled trust preferred securities
Investment Securities and Other Investments
Percentage of principal balance subordinate to the entity's class of ownership	62.00%
Amount of performing collateral defaulted or deferred payment which is expected to result in the occurrence of a break in contractual cash flow	178,000,000
Remaining performing collateral	236,000,000
Percentage of the performing collateral defaulted or deferred payment which is expected to result in the occurrence of a break in contractual cash flow	75.00%
Other pooled trust preferred securities
Investment Securities and Other Investments
Percentage of principal balance subordinate to the entity's class of ownership	57.00%
Amount of performing collateral defaulted or deferred payment which is expected to result in the occurrence of a break in contractual cash flow	158,000,000
Remaining performing collateral	$ 243,000,000
Percentage of the performing collateral defaulted or deferred payment which is expected to result in the occurrence of a break in contractual cash flow	65.00%

XML

Commitments and Contingencies

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies

Commitments and Contingencies

Note 11

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, 2014 are collateralized.

Commitments to extend credit of $1.8 billion primarily have floating rates as of March 31, 2014.  At March 31, 2014, standby letters of credit were $31.4 million. Commitments to extend credit of $327.2 million as of March 31, 2014 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 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 $261,000 at each of March 31, 2014 and December 31, 2013.

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.  In addition, the Company has derivative counterparty risk relating to certain interest rate swaps it has with third parties.  This risk may arise from the inability of the third party to meet the terms of the contracts.  The Company monitors the financial condition of these third parties on an annual basis.  The Company does not expect any of these third parties to fail to meet its obligations.