- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-28635

VIRGINIA COMMERCE BANCORP, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA

54-1964895

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207

(Address of principal executive offices) (Zip Code)

703-534-0700

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 ¨

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). x Yes ¨ No

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ¨ No x

As of November 2, 2011, the number of outstanding shares of registrant’s common stock, par value $1.00 per share, was: 30,184,728.

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets – September 30, 2011 (unaudited) and December 31, 2010		3
	Consolidated Statements of Operations (unaudited) – Three and nine months ended September 30, 2011 and 2010		4
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Nine months ended September 30, 2011 and 2010		5
	Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2011 and 2010		6
	Notes to Consolidated Financial Statements (unaudited)		7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		51

ITEM 4.	CONTROLS AND PROCEDURES		51

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		53

ITEM 1A.	RISK FACTORS		53

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		53

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		53

ITEM 4.	(REMOVED AND RESERVED)		53

ITEM 5.	OTHER INFORMATION		53

ITEM 6.	EXHIBITS		53

SIGNATURES			54

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share and per share data)


	(Unaudited) September 30, 2011		(Audited) December 31, 2010
Assets
Cash and due from banks	$	30,925	$	36,932
Federal funds sold		—		10,455
Investment securities, available-for-sale, at fair value		569,470		374,503
Investment securities, held-to-maturity (fair value: 2011, $35,910; 2010, $38,150)		33,095		37,258
Restricted stocks, at cost		11,355		11,751
Interest bearing deposits in other banks		99,000		—
Loans held-for-sale		17,464		10,049
Loans, net of allowance for loan losses of $49,405 in 2011 and $62,442 in 2010		2,097,042		2,149,591
Bank premises and equipment, net		11,442		12,000
Accrued interest receivable		10,258		10,003
Other real estate owned, net of valuation allowance of $6,361 in 2011 and $6,782 in 2010		10,377		17,165
Other assets		51,895		71,941

Total assets	$	2,942,323	$	2,741,648

Liabilities and Stockholders’ Equity
Deposits
Demand deposits	$	389,533	$	264,744
Savings and interest-bearing demand deposits		1,187,329		1,201,288
Time deposits		792,077		781,169

Total deposits	$	2,368,939	$	2,247,201
Securities sold under agreement to repurchase and federal funds purchased		201,652		152,726
Other borrowed funds		25,000		25,000
Trust preferred capital notes		66,506		66,314
Accrued interest payable		2,580		2,751
Other liabilities		2,100		2,062
Commitments and contingent liabilities		—		—

Total liabilities	$	2,666,777	$	2,496,054

Stockholders’ Equity
Preferred stock, net of discount, $1.00 par, 1,000,000 shares authorized, Series A; $1,000 stated value; 71,000 issued and outstanding in 2011 and 2010	$	66,794	$	65,445
Common stock, $1.00 par, 50,000,000 shares authorized, issued and outstanding 2011, 29,751,460 including 49,998 in unvested restricted stock issued; 2010, 28,962,935 including 9,335 in unvested restricted stock issued		29,702		28,954
Surplus		108,543		105,056
Warrants		8,520		8,520
Retained earnings		55,565		39,208
Accumulated other comprehensive income (loss), net		6,422		(1,589	)

Total stockholders’ equity	$	275,546	$	245,594

Total liabilities and stockholders’ equity	$	2,942,323	$	2,741,648

Notes to consolidated financial statements are an integral part of these statements.

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of dollars except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Interest and dividend income:
Interest and fees on loans	$	31,456	$	33,997	$	95,144		$	100,138
Interest and dividends on investment securities:
Taxable		3,185		3,131		9,177			9,722
Tax-exempt		593		554		1,777			1,456
Dividend on restricted stocks		95		91		287			267
Interest on federal funds sold		53		59		152			137
Interest on deposits in other banks		21		—		21			—

Total interest and dividend income	$	35,403	$	37,832	$	106,558		$	111,720

Interest expense:
Deposits	$	6,485	$	8,113	$	20,178		$	25,972
Securities sold under agreement to repurchase and federal funds purchased		965		1,023		2,859			3,022
Other borrowed funds		272		272		806			806
Trust preferred capital notes		952		1,243		3,015			3,702

Total interest expense	$	8,674	$	10,651	$	26,858		$	33,502

Net interest income	$	26,729	$	27,181	$	79,700		$	78,218
Provision for loan losses		3,933		5,100		11,210			13,538

Net interest income after provision for loan losses	$	22,796	$	22,081	$	68,490		$	64,680

Non-interest income:
Service charges and other fees	$	839	$	841	$	2,430		$	2,555
Non-deposit investment services commissions		340		222		1,053			529
Fees and net gains on loans held-for-sale		744		908		1,799			1,737
Gain on sale of securities		—		—		503			139
Total other-than-temporary impairment losses		—		—		(3,107	)		(4,081	)
Portion of loss recognized in other comprehensive income		—		—		2,375			2,562

Net impairment losses		—		—		(732	)		(1,519	)
Other		17		1,134		619			1,359

Total non-interest income	$	1,940	$	3,105	$	5,672		$	4,800

Non-interest expense:
Salaries and employee benefits	$	6,591	$	6,253	$	19,676		$	18,239
Occupancy expense		2,293		2,414		7,006			7,534
FDIC insurance		864		1,312		3,394			3,953
Loss on other real estate owned		546		713		1,022			2,691
Franchise tax expense		780		720		2,326			2,155
Data processing		652		553		1,942			1,806
Other operating expense		3,167		3,346		8,497			8,428

Total non-interest expense	$	14,893	$	15,311	$	43,863		$	44,806

Income before taxes	$	9,843	$	9,875	$	30,299		$	24,674
Provision for income taxes		3,277		2,917		9,931			7,676

Net income	$	6,566	$	6,958	$	20,368		$	16,998

Effective dividend on preferred stock		1,349		1,250		4,012			3,752

Net income available to common stockholders	$	5,217	$	5,708	$	16,356		$	13,246

Earnings per common share, basic	$	0.18	$	0.21	$	0.55		$	0.49
Earnings per common share, diluted	$	0.17	$	0.20	$	0.53		$	0.46

Notes to consolidated financial statements are an integral part of these statements.

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2011 and 2010

(In thousands of dollars)

(Unaudited)


	Preferred Stock		Common Stock		Surplus		Warrants		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total Stockholders’ Equity
Balance, January 1, 2010	$	63,993	$	26,745	$	96,588	$	8,520	$	22,671		$	351					$	218,868
Comprehensive Income:
Net income										16,998					$	16,998			16,998
Other comprehensive income:
reclassification adjustment for impairment loss on securities (net of tax of $532)													987			987			987
reclassification adjustment for gain on securities (net of tax of $49)													(90	)		(90	)		(90	)
unrealized holding gains arising during the period (net of tax of $1,436)													2,667			2,667			2,667

Total comprehensive income															$	20,562

Common stock issued		—		1,905		7,370		—		—			—						9,275
Stock options exercised		—		234		242		—		—			—						476
Stock option expense		—		—		493		—		—			—						493
Discount on preferred stock		1,089		—		—		—		(1,089	)		—						—
Dividend on preferred stock		—		—		—		—		(2,662	)		—						(2,662	)

Balance, September 30, 2010	$	65,082	$	28,884	$	104,693	$	8,520	$	35,918		$	3,915					$	247,012


Balance, January 1, 2011	$	65,445	$	28,954	$	105,056	$	8,520	$	39,208		$	(1,589	)				$	245,594
Comprehensive Income:
Net income										20,368					$	20,368			20,368
Other comprehensive income:
reclassification adjustment for impairment loss on securities (net of tax of $256)													476			476			476
reclassification adjustment for gain on securities (net of tax of $176)													(327	)		(327	)		(327	)
unrealized holding gains arising during the period (net of tax of $4,230)													7,862			7,862			7,862

Total comprehensive income															$	28,379

Common stock issued		—		426		2,075		—		—			—						2,501
Stock options exercised		—		322		976		—		—			—						1,298
Stock option expense		—		—		436		—		—			—						436
Discount on preferred stock		1,349		—		—		—		(1,349	)		—						—
Dividend on preferred stock		—		—		—		—		(2,662	)		—						(2,662	)


Balance, September 30, 2011	$	66,794	$	29,702	$	108,543	$	8,520	$	55,565		$	6,422					$	275,546

Notes to consolidated financial statements are an integral part of these statements.

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)


	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	20,368		$	16,998
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,645			1,983
Provision for loan losses		11,210			13,538
Stock based compensation expense		436			493
Deferred tax expense (benefit)		6,420			(2,593	)
Accretion of trust preferred securities discount		192			192
Amortization of premiums and accretion of security discounts, net		1,236			287
Origination of loans held-for-sale		(103,656	)		(110,046	)
Sales of loans		97,801			103,801
Gain on sale of loans		(1,560	)		(1,437	)
Gain on other real estate owned		(385	)		—
Loss on other real estate owned		1,022			2,691
Gain on sale of securities		(503	)		(139	)
Impairment loss on securities		732			1,519
Changes in other assets and other liabilities: (Increase) in accrued interest receivable		(255	)		(80	)
Decrease in other assets		8,809			6,330
Increase (decrease) in other liabilities		38			(3,683	)
(Decrease) in accrued interest payable		(171	)		—

Net Cash Provided By Operating Activities	$	43,379		$	29,854

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans	$	35,125		$	18,491
Purchase of investment securities available-for-sale		(325,168	)		(194,166	)
Proceeds from principal payments on investment securities available-for-sale		38,209			40,262
Proceeds from principal payments on investment securities held-to-maturity		3,488			7,566
Proceeds from calls and maturities of investment securities available-for-sale		90,810			106,852
Proceeds from calls and maturities of investment securities held-to-maturity		575			2,252
Proceeds from sale of investment securities available-for-sale		12,645			—
Proceeds from sale of investment securities held-to-maturity		—			8,717
Proceeds from redemption of FHLB stock		396			—
Purchase of bank premises and equipment		(1,087	)		(413	)
Proceeds from sale of other real estate owned		12,365			—

Net Cash (Used In) Investing Activities	$	(132,642	)	$	(10,439	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	121,738		$	94,151
Net increase in repurchase agreements and federal funds purchased		48,926			1,904
Net proceeds from exercise of stock options and warrants		1,298			476
Net proceeds from issuance of common stock		2,501			9,275
Dividend paid on preferred stock		(2,662	)		(2,662	)

Net Cash Provided By Financing Activities	$	171,801		$	103,144


Net Increase In Cash and Cash Equivalents		82,538			122,559
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD	$	47,387		$	25,211

CASH AND CASH EQUIVALENTS – END OF PERIOD	$	129,925		$	147,770


Supplemental Schedule of Noncash Investing Activities:
Unrealized gain on investment securities available-for-sale	$	12,321		$	5,483
Tax benefits on stock options exercised		43			61
Other real estate owned transferred from loans		6,214			4,202
Supplemental Disclosure of Cash Flow Information:
Taxes Paid	$	3,348		$	10,256
Interest Paid		27,029			34,344

Notes to consolidated financial statements are an integral part of these statements.

VIRGINIA COMMERCE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	General

The accompanying unaudited consolidated financial statements of Virginia Commerce Bancorp, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications consisting of a normal and recurring nature considered necessary to present fairly the financial positions as of September 30, 2011 and December 31, 2010, the results of operations for the three and nine months ended September 30, 2011 and 2010, and statements of cash flows and stockholders’ equity for the nine months ended September 30, 2011 and 2010. These statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2010. In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no material subsequent events to be disclosed at this time.

Operating results for the three and nine month periods ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, or any other period.

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” Topic 820 of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there had been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities and certain non-financial assets generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

An asset or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available-for-sale : Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis for September 30, 2011 and December 31, 2010, respectively:


			Fair Value Measurements at September 30, 2011 Using
(in thousands) Description	Balance as of September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investment securities available-for-sale
U.S. Government Agency obligations	$	500,873	$	—	$	500,873	$	—
Pooled trust preferred securities	$	454	$	—	$	454	$	—
Obligations of states and political subdivisions	$	68,143	$	—	$	68,143	$	—


			Fair Value Measurements at December 31, 2010 Using
(in thousands) Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investment securities available-for-sale
U.S. Government Agency obligations	$	310,610	$	—	$	310,610	$	—
Pooled trust preferred securities	$	430	$	—	$	430	$	—
Obligations of states and political subdivisions	$	63,463	$	—	$	63,463	$	—

At September 30, 2011 and December 31, 2010, the Company did not have any liabilities measured at fair value on a recurring basis.

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans held for sale : Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price

secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the periods ended September 30, 2011, and December 31, 2010. Gains and losses on the sale of loans are recognized in fees and net gains on loans held-for-sale on the Consolidated Statements of Income.

Impaired Loans : Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate, financial assets, personal or business assets including equipment, inventory, and accounts receivable. The vast majority of the 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 outside of the Company, using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or 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 receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans are measured at fair value on a nonrecurring basis through the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned / Foreclosed Assets: Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at the lesser of book value or fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in net expenses for foreclosed assets.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for September 30, 2011 and December 31, 2010, respectively:


			Carrying value at September 30, 2011
(in thousands) Description	Balance as of September 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	62,760	$	—	$	53,966	$	8,794
Other real estate owned	$	10,377	$	—	$	6,288	$	4,089


			Carrying value at December 31, 2010
(in thousands) Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	88,764	$	—	$	77,061	$	11,703
Other real estate owned	$	17,165	$	—	$	17,127	$	38

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments

For those short-term instruments, including interest-bearing deposits in other banks, the carrying amount is a reasonable estimate of fair value.

Securities

For securities held for investment purposes, fair values are based upon quoted market prices, when available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data. The carrying value of restricted stock approximates fair value based on the redemption provisions of the issuers.

Loans Held-for-Sale

Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.

Loan Receivables

For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits and Borrowings

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For all other deposits and borrowings, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

At September 30, 2011 and December 31, 2010, the fair value of loan commitments and stand-by letters of credit were deemed immaterial, and therefore, are not included in the table below.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

		$2,368,939		$2,368,939		$2,368,939		$2,368,939
	September 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and short-term investments	$	129,925	$	129,925	$	47,387	$	47,387
Investment securities		602,565		605,380		411,761		412,653
Restricted stock		11,355		11,355		11,751		11,751
Loans held-for-sale		17,464		17,464		10,049		10,049
Loan receivables		2,097,042		2,215,500		2,149,591		2,224,687
Accrued interest receivable		10,258		10,258		10,003		10,003

		$2,368,939		$2,368,939		$2,368,939		$2,368,939
	September 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial liabilities:
Deposits	$	2,368,939	$	2,312,434	$	2,247,201	$	2,206,542
Securities sold under agreements to repurchase and federal funds purchased		201,652		219,492		152,726		173,105
Other borrowed funds		25,000		25,311		25,000		25,533
Trust preferred capital notes		66,506		81,396		66,314		81,461
Accrued interest payable		2,580		2,580		2,751		2,751

In the normal course of business, the Company is subject to market risk which includes interest rate risk (the risk that general interest rate levels will change). As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to structure maturities of assets and liabilities to the extent believed necessary to mitigate this risk.

2.	Investment Securities

Amortized cost and fair value of the investment securities available-for-sale and held-to-maturity as of September 30, 2011 and December 31, 2010, are as follows (dollars in thousands):


September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available-for-sale:
U.S. Government Agency obligations	$	490,509	$	10,561	$	(197	)	$	500,873
Pooled trust preferred securities		5,438		52		(5,036	)		454
Obligations of states and political subdivisions		63,642		4,536		(35	)		68,143

	$	559,589	$	15,149	$	(5,268	)	$	569,470

Held-to-maturity:
U.S. Government Agency obligations	$	4,260	$	250	$	—		$	4,510
Obligations of state and political subdivisions		28,835		2,565		—			31,400

	$	33,095	$	2,815	$	—		$	35,910


December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available-for-sale:
U.S. Government Agency obligations	$	307,973	$	5,527	$	(2,890	)	$	310,610
Pooled trust preferred securities		5,919		—		(5,489	)		430
Obligations of states and political subdivisions		63,051		1,077		(665	)		63,463

	$	376,943	$	6,604	$	(9,044	)	$	374,503

Held-to-maturity:
U.S. Government Agency obligations	$	6,113	$	309	$	—		$	6,422
Obligations of state and political subdivisions		31,145		827		(244	)		31,728

	$	37,258	$	1,136	$	(244	)	$	38,150

The amortized cost of securities pledged as collateral for repurchase agreements, certain public deposits, and other purposes was $242.3 million and $258.2 million at September 30, 2011 and December 31, 2010, respectively.

Management evaluates securities for other-than-temporary (“OTTI”) impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. An impairment is considered to be other-than-temporary if the Company (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis.

Provided below is a summary of all securities which were in an unrealized loss position at September 30, 2011 and December 31, 2010, that were evaluated for other-than-temporary impairment, and deemed to not have an other-than-temporary impairment. Presently, the Company does not intend to sell any of these securities, does not expect to be required to sell these securities, and expects to recover the entire amortized cost of all the securities. For U.S. Government Agency obligations and obligations of states and political subdivisions, the unrealized losses result from market or interest rate risk, while the unrealized losses pertaining to the pooled trust preferred securities are due to both performance and credit ratings, as well as interest rate risk.

		$(2,890)		$(2,890)			$(2,890)		$(2,890)			$(2,890)		$(2,890)
At September 30, 2011	Less Than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale:
U.S. Government Agency obligations	$	46,315	$	(197	)	$	—	$	—		$	46,315	$	(197	)
Pooled trust preferred securities		—		—			293		(2,601	)		293		(2,601	)
Obligations of states and political subdivisions		814		(35	)		—		—			814		(35	)

	$	47,129	$	(232	)	$	293	$	(2,601	)	$	47,422	$	(2,833	)

		$(2,890)		$(2,890)			$(2,890)		$(2,890)			$(2,890)		$(2,890)
At December 31, 2010	Less Than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale:
U.S. Government Agency obligations	$	124,111	$	(2,890	)	$	—	$	—		$	124,111	$	(2,890	)
Pooled trust preferred securities		—		—			267		(2,611	)		267		(2,611	)
Obligations of states and political subdivisions		22,579		(665	)		—		—			22,579		(665	)

	$	146,690	$	(3,555	)	$	267	$	(2,611	)	$	146,957	$	(6,166	)

Held-to maturity:
Obligations of states/political subdivisions	$	4,608	$	(244	)	$	—	$	—		$	4,608	$	(244	)

As of September 30, 2011, the Company had three pooled trust preferred securities that were deemed to be OTTI based on a present value analysis of expected future cash flows. The following table provides further information on these three securities as of and for the nine months ended September 30, 2011 (in thousands):


Security	Class	Moody’s Ratings (Lowest Assigned Rating)	Par Value		Book Value/ Fair Value		Unrealized Loss		Defaults and Deferrals		% of Defaults and Deferrals to Collateral			Excess Sub (1)			Estimated Incremental Defaults Required to Break Yield (2)		Cumulative Other Comprehensive Loss (3)			Amount of OTTI Related to Credit Loss (3)
PreTSL VI	Mezz	D	$	374	$	143	$	231	$	30,000		73.6	%		-60.6	%		BROKEN	$	(52	)	$	283
PreTSL X	B-1	C		945		9		936		233,595		50.0	%		-80.4	%		BROKEN		487			449
PreTSL XXVI	C-2	C		1,949		9		1,940		272,500		28.3	%		-71.0	%		BROKEN		1,940			—

Total			$	3,268	$	161	$	3,107											$	2,375		$	732

(1)

Excess subordination is the difference between the remaining performing collateral and the amount of bonds outstanding that are pari passu and senior to the class the Company owns. Negative excess subordination indicates there is not enough performing collateral in the pool to cover the outstanding balance of all classes senior to those the Company owns.

(2)

A break in yield for a given class means that defaults/deferrals have reached such a level that the class would not receive all of its contractual cash flows (principal and interest) by maturity (so that it is not just a temporary interest shortfall, but an actual loss in yield on the investment). This represents additional defaults beyond those assumed in our cash flow modeling.

(3)

Pre-tax.

As of September 30, 2011, the Company had one pooled trust preferred security that was deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The security had a fair value of $293 thousand. The following table provides further information on this security as of and for the nine months ended September 30, 2011 (in thousands):

Security

Class

Moody’s

Ratings

(Lowest

Assigned

Rating)

Par
Value

Book
Value/
Fair
Value

Unrealized
Loss

Defaults
and
Deferrals

% of Defaults
and Deferrals
to Collateral

Excess
Sub (1)

Estimated
Incremental
Defaults
Required to
Break Yield
(2)

Cumulative Other
Comprehensive
Loss (3)

Amount of
OTTI
Related to
Credit
Loss (3)

PreTSL XXVII

2,902

293

2,609

91,800

28.1

-3.18

51,000

2,609

—

(1)

(2)

(3)

Pre-tax.

The following table presents a roll-forward of the credit loss component amount of OTTI recognized in earnings:


(in thousands)
Amount recognized through December 31, 2010	$	3,468
Additions:
Initial credit impairments		—
Subsequent credit impairments		732

Amount recognized through September 30, 2011	$	4,200

Management has evaluated each of these securities for potential impairment under ASC 325 “Investments-Other” and the most recently issued related guidance, and has reviewed each of the issues’ collateral participants’ most

recent earnings, capital and loan loss reserve levels, and non-performing loan levels to estimate a future deferral and default rate in basis points for the remaining life of each security. As of September 30, 2011, we used 25 basis points for PreTSLs VI and X following an internal credit assessment of one bank holding company whose issues were significant in relationship to the totals outstanding in each pool. We used 75 basis points for PreTSL XXVI and 25 basis points for PreTSL XXVII in expected deferrals and defaults as a percentage of remaining collateral for future periods. In performing a detailed present value cash flow analysis for each security, the deferral and default rate was treated the same. If this analysis results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, a credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed used discount rates equal to the credit spread at the time of purchase for each security and then added the current 3-month LIBOR spot rate. The analysis also assumed 15% recoveries on deferrals after two years and prepayments of 1% per year on each security. As of September 30, 2011, there were 3 out of 5 performing issuers in PreTSL VI, 33 out of 53 in PreTSL X, 48 out of 72 in PreTSL XXVI, and 33 out of 49 in PreTSL XXVII.

Our investment in Federal Home Loan Bank (“FHLB”) stock totaled $5.6 million at September 30, 2011. FHLB stock is generally viewed as a long-term investment and as a restricted security, which is carried at cost, because there is no market for the stock, other than FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess stock in 2010, in light of the FHLB’s consistent payment of dividends in 2010 and consistent net income since the quarter ended June 30, 2009 through the second quarter of 2011, we do not consider this investment to be other-than-temporarily impaired at September 30, 2011, and no impairment has been recognized. FHLB stock is shown in restricted stocks on the Consolidated Balance Sheets and is not part of the available-for-sale securities portfolio.

Loans

Major classifications of loans, excluding loans held-for-sale, are summarized as follows:


	September 30,2011		December 31, 2010
	(Dollars in thousands)
Commercial	$	229,651	$	218,600
Real estate-one-to-four family residential:
Permanent first and second		261,171		269,514
Home equity loans and lines		125,409		131,397

Total real estate-one-to-four family residential	$	386,580	$	400,911
Real estate-multi-family residential		72,472		77,316
Real estate-non-farm, non-residential:
Owner-occupied		466,432		464,368
Non-owner-occupied		659,871		674,448

Total real estate-non-farm, non-residential	$	1,126,303	$	1,138,816
Real estate-construction:
Residential		151,721		177,582
Commercial		171,922	$	187,028

Total real estate-construction	$	323,643		364,610
Consumer		8,882		12,557
Farmland		2,538		2,418

Total loans	$	2,150,069	$	2,215,228

Less unearned income		3,622		3,195
Less allowance for loan losses		49,405		62,442

Loans, net	$	2,097,042	$	2,149,591

Classes of loans by risk rating as of September 30, 2011, excluding loans held-for-sale, are summarized as follows (dollars in thousands):


Internal Risk Rating Grades	Pass		Watch		Special Mention		Substandard		Doubtful		Total Loans

Commercial	$	151,442	$	44,599	$	4,153	$	26,540	$	2,917	$	229,651
Real estate-one-to-four family residential:
Permanent first and second		209,367		17,764		8,208		25,832		—		261,171
Home equity loans and lines		109,057		5,517		1,818		6,768		2,249		125,409

Total real estate-one-to-four family residential	$	318,424	$	23,281	$	10,026	$	32,600	$	2,249	$	386,580
Real estate-multi-family residential		68,481		3,505		—		486		—		72,472
Real estate-non-farm, non-residential:
Owner-occupied		370,914		57,306		18,759		19,453		—		466,432
Non-owner-occupied		462,188		119,448		21,196		57,039		—		659,871

Total real estate-non-farm, non-residential	$	833,102	$	176,754	$	39,955	$	76,492	$	—	$	1,126,303
Real estate-construction:
Residential		66,030		30,635		12,903		42,153		—		151,721
Commercial		60,135		60,441		25,594		25,752		—		171,922

Total real estate-construction	$	126,165	$	91,076	$	38,497	$	67,905	$	—	$	323,643
Consumer		8,424		235		92		131		—		8,882
Farmland		2,538		—		—		—		—		2,538

Total	$	1,508,576	$	339,450	$	92,723	$	204,154	$	5,166	$	2,150,069

Classes of loans by risk rating as of December 31, 2010, excluding loans held-for-sale, are summarized as follows (dollars in thousands):


Internal Risk Rating Grades	Pass		Watch		Special Mention		Substandard		Doubtful		Total Loans

Commercial	$	135,287	$	34,544	$	16,332	$	30,305	$	2,132	$	218,600
Real estate-one-to-four family residential:
Permanent first and second		214,844		12,832		14,294		25,944		1,600		269,514
Home equity loans and lines		113,600		6,685		1,736		9,118		258		131,397

Total real estate-one-to-four family residential	$	328,444	$	19,517	$	16,030	$	35,062	$	1,858	$	400,911
Real estate-multi-family residential		62,651		14,665		—		—		—		77,316
Real estate-non-farm, non-residential:
Owner-occupied		351,744		46,026		27,652		38,946		—		464,368
Non-owner-occupied		455,172		122,993		36,997		59,286		—		674,448

Total real estate-non-farm, non-residential	$	806,916	$	169,019	$	64,649	$	98,232	$	—	$	1,138,816
Real estate-construction:
Residential		55,646		34,123		34,649		53,164		—		177,582
Commercial		52,286		52,006		52,169		30,567		—		187,028

Total real estate-construction	$	107,932	$	86,129	$	86,818	$	83,731	$	—	$	364,610
Consumer		12,153		170		67		167		—		12,557
Farmland		2,418		—		—		—		—		2,418

Total	$	1,455,801	$	324,044	$	183,896	$	247,497	$	3,990	$	2,215,228

Loan risk-ratings for the Bank are defined as follows:

Pass. Loans to persons or entities with a strong to acceptable financial condition, adequate collateral margins, adequate cash flow to service long-term debt, adequate liquidity and sound net worth. These entities are profitable now, with projections indicating continued profitability into the foreseeable future. Closely held corporations or businesses where a majority of the profits are withdrawn by the owners or paid in dividends are included in this rating category. Overall, these loans are basically sound.

Watch. These loans are characterized by greater than average risk. Borrowers may have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in

making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class may include inadequate credit or financial information. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited.

Special Mention. Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses can result in deteriorating prospects for the asset or in the institution’s credit position at some future date. Other assets especially mentioned (“OAEMs”) are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. A loan classified as substandard is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual assets.

Doubtful. A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status and have a defined work-out strategy.

Loss. Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.

As of September 30, 2011 and 2010, there were $239 thousand and $254 thousand, respectively, in checking account overdrafts that were reclassified on the consolidated balance sheets as loans.

4.	Allowance for Loan Losses

An analysis of the allowance for loan losses for the nine months ended September 30, 2011, and the year ended December 31, 2010 is shown below (dollars in thousands):


	September 30, 2011			December 31, 2010
Allowance, at beginning of period	$	62,442		$	65,152
Provision charged against income		11,210			20,594
Recoveries added to reserve		804			4,174
Losses charged to reserve		(25,051	)		(27,478	)

Allowance, at end of period	$	49,405		$	62,442


Allowance for Loan Losses - By Segment
(dollars in thousands) For the nine months ended September 30, 2011	Commercial			Non-Farm, Non-Res. Real Estate			Real Estate Construction			Consumer			Real Estate 1-4 Family Residential			Real Estate Multi- Family			Farmland			Unallocated			Total

Allowance for loan losses:
Beginning Balance	$	9,972		$	16,453		$	26,584		$	373		$	8,337		$	619		$	63		$	41		$	62,442
Charge-offs		(2,056	)		(6,474	)		(13,407	)		(103	)		(3,011	)		—			—			—			(25,051	)
Recoveries		497			36			117			13			141			—			—			—			804
Provision		(5	)		5,148			2,162			50			3,901			(7	)		(2	)		(37	)		11,210

Ending Balance	$	8,408		$	15,163		$	15,456		$	333		$	9,368		$	612		$	61		$	4		$	49,405


Ending Balance:
Individually evaluated for impairment		4,170			5,220			6,721			83			4,801			—			—			—			20,995
Collectively evaluated for impairment		4,238			9,943			8,735			250			4,567			612			61			4			28,410

Financing Receivables:
Ending Balance	$	229,651		$	1,126,303		$	323,643		$	8,882		$	386,580		$	72,472		$	2,538		$	—		$	2,150,069

Ending Balance:
Individually evaluated for impairment		29,457			79,677			74,036			131			35,253			486			—			—			219,040
Collectively evaluated for impairment	$	200,194		$	1,046,626		$	249,607		$	8,751		$	351,327		$	71,986		$	2,538		$	—		$	1,931,029


Allowance for Loan Losses - By Segment
(dollars in thousands) For the twelve months ended December 31, 2010	Commercial		Non-Farm, Non-Res. Real Estate		Real Estate Construction		Consumer		Real Estate 1-4 Family Residential		Real Estate Multi- Family		Farmland		Unallocated		Total

Allowance for loan losses:

Ending Balance	$	9,972	$	16,453	$	26,584	$	373	$	8,337	$	619	$	63	$	41	$	62,442


Ending Balance:
Individually evaluated for impairment		4,009		9,689		14,999		60		3,423		—		—		—		32,180
Collectively evaluated for impairment		5,963		6,764		11,585		313		4,914		619		63		41		30,262

Financing Receivables:
Ending Balance	$	218,600	$	1,138,816	$	364,610	$	12,557	$	400,911	$	77,316	$	2,418	$	—	$	2,215,228

Ending Balance:
Individually evaluated for impairment		33,660		105,756		90,444		167		37,628		—		—		—		267,655
Collectively evaluated for impairment	$	184,940	$	1,033,060	$	274,166	$	12,390	$	363,283	$	77,316	$	2,418	$	—	$	1,947,573

Information about impaired loans as of and for the nine months ended September 30, 2011 and the year ended December 31, 2010 is as follows (dollars in thousands):


	September 30, 2011		December 31, 2010
Non-accrual loans for which a specific allowance has been provided	$	19,486	$	27,717
Non-accrual loans for which no specific allowance has been provided		25,350		29,441
Other impaired loans for which a specific allowance has been provided		64,269		93,227
Other impaired loans for which no specific allowance has been provided		109,935		117,270

Total impaired loans	$	219,040	$	267,655

Allowance provided for impaired loans, included in the allowance for loan losses	$	20,995	$	32,180

Average balance in impaired loans	$	230,457	$	254,014

Interest income recognized	$	7,778	$	10,977

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across our loan portfolio.

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. A TDR loan is a loan that has been restructured with a modification that could include interest rate modification, deferral of interest or principal or an extension of term. At September 30, 2011, the Company had $22.9 million in real estate construction, $35.1 million in non-farm/non-residential, $9.5 million in commercial and $4.2 million in real estate permanent one-to-four- family that were modified in troubled debt restructurings and considered impaired. Included in this amount of $71.7 million, the Bank had troubled debt restructurings that were performing in accordance with their modified terms of $68.1 million at September 30, 2011.

Information about new troubled debt restructurings during the three and nine months ended September 30, 2011 is as follows (dollars in thousands):

Troubled Debt Restructurings (TDRs) –

New TDRs by Loan Type


	7/1/2011 to 9/30/2011				1/1/2011 to 9/30/2011
Loan Type:	# of Loans		Balance		# of Loans		Balance
Commercial		—	$	—		—	$	—
Real estate-one-to-four family residential:
Permanent first and seconds		2		336		5		934
Home equity loans and lines		—		—		—		—

Total real estate-one-to-four family residential		2	$	336		5	$	934
Real estate-multi-family residential		—	$	—		—	$	—
Real estate-non-farm, non-residential:
Owner-occupied		1		648		1		648
Non-owner-occupied		—		—		1		1,481

Total real estate-non-farm, non-residential		1	$	648		2	$	2,129
Real estate-construction:
Residential-owner-occupied		—		—		—		—
Residential-builder		—		—		—		—
Commercial		—		—		1		1,355

Total real estate-construction		—	$	—		1	$	1,355
Farmland		—		—		—		—
Consumer		—		—		—		—

Total Loans		3	$	984		8	$	4,418

Information about troubled debt restructurings within the prior twelve months that defaulted during the three and nine months ended September 30, 2011 is as follows (dollars in thousands):

Troubled Debt Restructurings (TDRs) –

TDRs Restructured Within Prior 12 Months That Defaulted in Selected Periods


	Defaults occurring in 3 ^rd Quarter 2011 (7/1/2011 - 9/30/2011)						Defaults occurring Year-to-Date (1/1/2011 - 9/30/2011)
Loan Type:	# of Loans		Balance at Restructure		Current Balance		# of Loans		Balance at Restructure		Current Balance
Commercial		1	$	737	$	748		1	$	737	$	748
Real estate-one-to-four family residential:
Permanent first and seconds		—		—		—		1		94		87
Home equity loans and lines		—		—		—		—		—		—

Total real estate-one-to-four family residential		—	$	—	$	—		1	$	94	$	87
Real estate-multi-family residential		—	$	—	$	—		—	$	—	$	—
Real estate-non-farm, non-residential:
Owner-occupied		1		2,699		2,752		1		2,699		2,752
Non-owner-occupied		—		—		—		—		—		—

Total real estate-non-farm, non-residential		1	$	2,699	$	2,752		1	$	2,699	$	2,752
Real estate-construction:
Residential-owner-occupied		—		—		—		—		—		—
Residential-builder		—		—		—		—		—		—
Commercial		—		—		—		—		—		—

Total real estate-construction		—	$	—	$	—		—	$	—	$	—
Farmland		—		—		—		—		—		—
Consumer		—		—		—		—		—		—

Total Loans		2	$	3,436	$	3,500		3	$	3,530	$	3,587

Information about past due loans and impaired loans as of September 30, 2011 and December 31, 2010, is as follows (dollars in thousands):


September 30, 2011 Non-Accrual and Past Due by Class	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current(1)		Total Loans		90+ Days Past Due and Still Accruing		Non- Accrual Loans
Commercial	$	568	$	173	$	5,279	$	6,020	$	223,631	$	229,651	$	89	$	5,486
Real estate-one-to-four family residential:
Permanent first and second		47		1,811		701		2,559		258,612		261,171		—		1,960
Home equity loans and lines		—		99		2,355		2,454		122,955		125,409		—		3,051

Total real estate-one-to-four family residential	$	47	$	1,910	$	3,056		5,013	$	381,567	$	386,580	$	—	$	5,011
Real estate-multi-family residential		—		—		486		486		71,986		72,472		—		486
Real estate-non-farm, non-residential:
Owner-occupied		3,583		—		3,577		7,160		459,272		466,432		—		3,689
Non-owner-occupied		847		5,225		3,878		9,950		649,921		659,871		—		3,878

Total real estate-non-farm, non-residential	$	4,430	$	5,225	$	7,455	$	17,110	$	1,109,193	$	1,126,303	$	—	$	7,567
Real estate-construction:
Residential		573		—		11,604		12,177		139,544		151,721		574		20,181
Commercial		—		—		6,083		6,083		165,839		171,922		—		6,083

Total real estate-construction	$	573	$	—	$	17,687	$	18,260	$	305,383	$	323,643	$	574	$	26,264
Consumer		42		—		4		46		8,836		8,882		—		22
Farmland		—		—		—		—		2,538		2,538		—		—

Total Loans	$	5,660	$	7,308	$	33,967	$	46,935	$	2,103,134	$	2,150,069	$	663	$	44,836

(1)	For the purposes of this table, loans 1-29 days past due are included in the balance of “Current” loans.


December 31, 2010 Non-Accrual and Past Due by Class	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current(1)		Total Loans		90+ Days Past Due and Still Accruing		Non- Accrual Loans
Commercial	$	2,642	$	157	$	3,542	$	6,341	$	212,259	$	218,600	$	—	$	3,719
Real estate-one-to-four family residential:
Permanent first and second		734		4,028		4,631		9,393		260,121		269,514				5,285
Home equity loans and lines		2,225		679		1,472		4,376		127,021		131,397		242		1,529

Total real estate-one-to-four family residential	$	2,959	$	4,707	$	6,103	$	13,769	$	387,142	$	400,911	$	242	$	6,814
Real estate-multi-family residential		—		—		—		—		77,316		77,316		—		—
Real estate-non-farm, non-residential:
Owner-occupied		1,909		—		8,942		10,851		453,517		464,368		—		8,942
Non-owner-occupied		—		—		4,114		4,114		670,334		674,448		—		4,114

Total real estate-non-farm, non-residential	$	1,909	$	—	$	13,056	$	14,965	$	1,123,851	$	1,138,816	$	—	$	13,056
Real estate-construction:
Residential		—		—		27,189		27,189		150,393		177,582		—		27,189
Commercial		—		—		6,361		6,361		180,667		187,028		—		6,361

Total realestate-construction	$	—	$	—	$	33,550	$	33,550	$	331,060	$	364,610	$	—	$	33,550
Consumer		347		—		19		366		12,191		12,557		—		19
Farmland		—		—		—		—		2,418		2,418		—		—

Total Loans	$	7,857	$	4,864	$	56,270	$	68,991	$	2,146,237	$	2,215,228	$	242	$	57,158

(1)	For the purposes of this table, loans 1-29 days past due are included in the balance of “Current” loans.


Impaired Loans as of 9/30/2011	Recorded Investment (Bank Balance)		Unpaid Principal Balance (Customer Balance)		Related Allowance		Quarterly Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	14,143	$	14,220	$	—	$	12,963	$	437
Real estate-one-to-four family residential:
Permanent first and second		15,586		15,724		—		13,952		470
Home equity loans and lines		3,381		3,385		—		3,280		111
Real estate-multi-family residential		486		495		—		491		17
Real estate-non-farm/non-residential:
Owner-occupied		16,830		17,223		—		21,273		718
Non-owner-occupied		29,980		30,010		—		30,015		1,013
Real estate construction:
Residential		27,875		27,887		—		19,695		665
Commercial		27,004		27,019		—		27,549		930
Consumer		—		—		—		—		—
Farmland		—		—		—		—		—

With an allowance recorded:
Commercial	$	15,314	$	15,338	$	4,170	$	17,322	$	585
Real estate-one-to-four family residential:
Permanent first and second		10,841		10,881		3,492		10,742		363
Home equity loans and lines		5,445		5,485		1,309		5,308		179
Real estate-multi-family residential		—		—		—		—		—
Real estate-non-farm/non-residential:
Owner-occupied		3,271		3,288		989		5,714		193
Non-owner-occupied		29,596		29,642		4,231		31,337		1,058
Real estate construction:
Residential		14,278		14,388		6,157		25,597		863
Commercial		4,879		4,894		564		5,099		172
Consumer		131		133		83		120		4
Farmland		—		—		—		—		—

Total:
Commercial	$	29,457	$	29,558	$	4,170	$	30,285	$	1,022
Real estate-one-to-four family residential		35,253		35,475		4,801		33,282		1,123
Real estate multi-family residential		486		495		—		491		17
Real estate non-farm/non-residential		79,677		80,163		5,220		88,339		2,982
Construction		74,036		74,188		6,721		77,940		2,630
Consumer		131		133		83		120		4
Farmland		—		—		—		—		—
Total Impaired Loans	$	219,040	$	220,012	$	20,995	$	230,457	$	7,778


Impaired Loans as of 12/31/10	Recorded Investment (Bank Balance)		Unpaid Principal Balance (Customer Balance)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	24,054	$	30,794	$	—	$	14,916	$	645
Real estate-one-to-four family residential:
Permanent first and second		17,743		20,462		—		13,852		599
Home equity loans and lines		3,878		3,878		—		2,846		123
Real estate-multi-family residential		—		—		—		799		35
Real estate-non-farm/non-residential:
Owner-occupied		36,130		36,738		—		26,259		1,135
Non-owner-occupied		29,823		30,734		—		23,124		999
Real estate construction:
Residential		14,042		19,947		—		20,069		867
Commercial		21,020		21,070		—		14,300		618
Consumer		21		21		—		30		1
Farmland		—		—		—		—		—

With an allowance recorded:
Commercial	$	9,602	$	9,614	$	4,009	$	15,180	$	656
Real estate-one-to-four family residential:
Permanent first and second		10,508		10,925		2,236		12,024		520
Home equity loans and lines		5,498		5,634		1,187		4,367		189
Real estate-multi-family residential		—		—		—		—		—
Real estate-non-farm/non-residential:
Owner-occupied		7,345		8,211		2,197		9,409		407
Non-owner-occupied		32,459		32,831		7,492		31,090		1,344
Real estate construction:
Residential		39,824		47,602		10,071		48,009		2,079
Commercial		15,559		17,959		4,928		17,398		752
Consumer		149		151		60		257		11
Farmland		—		—		—		—		—

Total :
Commercial	$	33,660	$	40,408	$	4,009	$	30,096	$	1,301
Real estate-one-to-four family residential:		37,628		40,899		3,423		33,088		1,430
Real estate multi-family residential		—		—		—		799		35
Real estate non-farm/non-residential		105,756		108,081		9,689		89,880		3,884
Construction		90,444		107,011		14,999		99,865		4,316
Consumer		167		248		60		287		12
Farmland		—		—		—		—		—
Total Impaired Loans	$	267,655	$	296,647	$	32,180	$	254,014	$	10,977

In performing a specific reserve analysis on all impaired loans as of September 30, 2011, current third party appraisals were used with respect to approximately 60% of impaired loans to assist with the evaluation of collateral values for the purpose of establishing specific reserves. When a loan is identified as impaired and collateral dependent, a current evaluation of collateral value via third party appraisal or other valuation methodology is conducted within the calendar quarter of identification when possible, but not less than 90 days after identification. Charge-offs and specific reserves are established upon determination of collateral value. During the interim between identification of an impaired loan and receipt of a current appraisal of the related collateral, specific reserves are established based upon interim methodologies including discounted cash flow analysis, tax assessment values and review of market comparables. In general, variances between charge-offs and fair value of collateral is limited to estimates of projected costs of sale. Costs of sale are estimated at 10% of value. Partially charged-off loans remain non-performing until such time as a viable restructuring plan is developed. Upon execution of a forbearance agreement including modified terms, an impaired loan will be re-classified from non-performing to a troubled debt restructuring, but will continue to be identified as impaired until the loan performs under the modified terms for the remainder of the calendar year in which it was restructured, but not less than 90 days. As noted above, in the majority of cases, external appraisals are used to establish fair value of the related collateral. In the interim prior to receipt of a current appraisal or in those situations where a current appraisal is not deemed practical or necessary, discounted cash flow analysis, tax assessment values, review of market comparables and other methodologies are used to establish fair value. Impaired loans which do not have a specific reserve are those loans which have been identified to have sufficient collateral coverage, based upon the fair value of collateral, to repay the entire principal balance due from collateral liquidation.

5.	Earnings Per Common Share

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of dilutive potential common stock. As of September 30, 2011, and 2010, there were 3,556,728 and 4,413,473 anti-dilutive stock options and warrants outstanding, respectively.


	Three Months Ended								Nine Months Ended
	September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
	Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount		Shares		Per Share Amount
Basic earnings per share		29,746,581	$	0.18		27,599,007	$	0.21		29,557,306	$	0.55		27,159,404	$	0.49
Effect of dilutive securities:
Stock options		1,120,281				1,294,962				1,099,183				1,326,847

Diluted earnings per share		30,866,862	$	0.17		28,893,969	$	0.20		30,656,489	$	0.53		28,486,251	$	0.46

6.	Stock Compensation Plan

At September 30, 2011, the Company had two stock-based compensation plans, the 1998 Stock Option Plan and the 2010 Equity Plan. The 2010 Equity Plan replaced the 1998 Stock Option Plan and as such no further options may be granted under the 1998 Stock Option Plan. Included in salaries and employee benefits expense for the three months ended September 30, 2011 and 2010 is stock-based compensation expense of $153 thousand and $161 thousand, respectively. Included in salaries and employee benefits expense for the nine months ended September 30, 2011 and 2010 is stock-based compensation expense of $436 thousand and $493 thousand, respectively. For all periods presented, stock-based compensation expense is based on the estimated fair value of 1,014,870 options granted between January 2006 and September 2011, as adjusted, amortized on a straight-line basis over a five year requisite service period. As of September 30, 2011, there was $1.1 million remaining of total unrecognized compensation expense related to these option awards which will be recognized over the remaining requisite service periods.

The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2011 and 2010:


	2011	2010
Expected volatility	32.21%	32.21%
Expected dividends	0.00%	0.00%
Expected term (in years)	7.2	7.2
Risk-free rate	2.33% to 2.81%	3.17% to 3.50%

Stock option plan activity for the nine months ended September 30, 2011, is summarized below:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value* ($000)
Outstanding at January 1, 2011		1,685,178		$	8.70
Granted		182,327			6.05
Exercised		(142,477	)		1.63
Forfeited		(24,735	)		14.59

Outstanding at September 30, 2011		1,700,293		$	8.92		4.3 years	$	—
Exercisable at September 30, 2011		1,282,946		$	9.52		3.1 years	$	—

*	Intrinsic value is the amount by which the fair value of underlying common stock exceeds the exercise price of a stock option on exercise date.

The total value of in-the-money options exercised during the nine months ended September 30, 2011 was $610 thousand.

Restricted stock awards generally vest in equal installments over five years. The compensation expense associated with these awards is based on the grant date fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period.

A summary of the non-vested restricted stock activity under the 2010 Equity Plan for the nine months ended September 30, 2011 is summarized below:


	Number of Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Non-vested at the beginning of year		9,335	$	6.65
Granted		40,663		4.71
Vested		—		—
Forfeited		—		—

Non-vested at end of the period		49,998	$	5.99	$	293,488

We recognized share-based compensation expense associated with shares of restricted stock of $43 thousand for the nine months ended September 30, 2011.

7.	Capital Requirements

A comparison of the September 30, 2011 capital ratios of the Company and its wholly-owned subsidiary, Virginia Commerce Bank (the “Bank”), with the minimum regulatory guidelines is as follows:


	Actual Capital			Minimum Capital Requirements			Minimum to be “Well-Capitalized” Under Prompt Corrective Action Provisions
Total Risk-Based Capital:
Company		15.71	%		8.00	%		—
Bank		15.42	%		8.00	%		10.00	%

Tier 1 Risk-Based Capital:
Company		14.46	%		4.00	%		—
Bank		14.17	%		4.00	%		6.00	%

Leverage Ratio:
Company		11.60	%		4.00	%		—
Bank		11.39	%		4.00	%		5.00	%

8.	Other Borrowed Funds and Lines of Credit

The Bank maintains a $444.3 million line of credit with the Federal Home Loan Bank (“FHLB”) of Atlanta. The interest rate and term of each advance from the line is dependent upon the advance and commitment type. Advances on the line are secured by all of the Bank’s qualifying first liens and home equity lines-of-credit on one-to-four unit single-family dwellings. As of September 30, 2011, the book value of these qualifying loans totaled approximately $158.4 million and the amount of available credit using this collateral was $136.1 million. Advances on the line of credit in excess of this amount require pledging of additional assets, including other types of loans and investment securities. As of September 30, 2011 and December 31, 2010, the Bank had $25.0 million in advances outstanding that mature on September 21, 2012, but are callable by the FHLB on any quarterly interest payment date. The Bank has additional short-term lines of credit totaling $47.0 million with nonaffiliated banks at September 30, 2011, on which there were no amounts outstanding.

9.	Trust Preferred Capital Notes

On December 19, 2002, the Company completed a private placement issuance of $15.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust II) which issued $470 thousand in common equity to the Company. These securities bear a floating rate of interest, adjusted semi-annually, of 330 basis points over six month LIBOR, which as of November 2, 2011 was 3.70%. These securities have been callable at par since December 30, 2007, on any semi-annual interest payment date, but have not been redeemed to date. On December 20, 2005, the Company completed a private placement of $25.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust III) which issued $774 thousand in common equity to the Company. These securities had a fixed rate of interest of 6.19% until February 23, 2011, at which time they converted to a floating rate, adjusted quarterly, of 142 basis points over three month LIBOR, which as of November 2, 2011 was 1.72%. These securities became callable at par beginning February 23, 2011.

On September 24, 2008, the Company completed a private placement, to its directors and certain executive officers, of $25.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust IV) which issued $775 thousand in common equity to the Company. These securities bear a fixed rate of interest of 10.20% and are callable at par beginning September 24, 2013. In connection with the issuance of the trust preferred securities, the Company also issued warrants to purchase an aggregate of 1.5 million shares of common stock to the purchasers. The warrants have a five year term and an exercise price of $6.83 per share.

The principal asset of each trust is a similar amount of the Company’s junior subordinated debt securities with an approximately 30 year term from issuance and like interest rates to the trust preferred securities. The obligations of the Company with respect to the trust preferred securities constitute a full and unconditional guarantee by the Company of each trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, resulting in a deferral of distribution payments on the related trust preferred securities. If the Company defers interest payments on the junior subordinated debt securities, or otherwise is in default of the obligations in respect to the trust preferred securities, the Company would be prohibited from making dividend payments to its shareholders, and from most purchases, redemptions or acquisitions of the Company’s common stock.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy purposes up to 25.0% of Tier 1 capital after its inclusion. The portion of the trust preferred securities not qualifying as Tier 1 capital may be included as part of total qualifying capital in Tier 2 capital, subject to limitation.

10.

Preferred Stock and Warrant

On December 12, 2008, the Company entered into a Letter Agreement (“Agreement”) with the United States Department of the Treasury (“Treasury”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, whereby the Company issued and sold to the Treasury 71,000 shares of fixed rate cumulative perpetual preferred stock with a par value of $1.00 and a liquidation amount of $1,000 per share, for a total price of $71.0 million. In addition, the Treasury received a warrant to purchase 2,696,203 shares of the Company’s common stock at an exercise price of $3.95 per share. Subject to certain restrictions, the preferred stock and the warrant are transferable by the Treasury. The allocated carrying values at September 30, 2011, of the preferred stock and the warrant, based on their relative fair values, were $62.5 million and $8.5 million, respectively.

The preferred stock pays dividends quarterly, beginning February 2009, at a rate of 5% per year for the first five years, then increases to 9% thereafter. The Company may redeem the preferred stock at any time, subject to approval by the Treasury after consultation with the Board of Governors of the Federal Reserve System (the “Federal Reserve”), at the liquidation amount of $1,000 per share plus any accrued and unpaid dividends. Approval from the Treasury is required to pay common stock dividends or to repurchase shares of the Company’s common stock prior to December 12, 2011, unless the preferred stock has been fully redeemed.

The warrant has a ten year term and is immediately exercisable. Pursuant to the terms of the Agreement, the Treasury will not exercise voting rights with respect to any shares of common stock it acquires upon exercise of the warrant; voting rights may be exercised by any other holder.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This management’s discussion and analysis and other portions of this report, contain forward-looking statements within the meaning of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies, including but not limited to our outlook on earnings, and statements regarding asset quality, concentrations of credit risk, our deposit portfolio and expected future changes in our deposit portfolio, the adequacy of the allowance for loan losses, projected growth, capital position, our plans regarding and expected future levels of our non-performing assets, business opportunities in our markets, strategic initiatives to capitalize on those opportunities and general economic conditions. When we use words such as “may,” “will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases, you should consider them as identifying forward-looking statements. These forward-looking statements are not guarantees of future performance. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results may differ materially from those indicated herein.

Our forward-looking statements are subject to the following principal risks and uncertainties:

•

adverse governmental or regulatory policies may be enacted;

•

the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) could increase our regulatory compliance burden and associated costs, place restrictions on certain products and services, and limit our future capital raising strategies;

•

the interest rate environment may compress margins and adversely affect net interest income;

•

adverse effects may be caused by changes to credit quality;

•

competition from other financial services companies in our markets could adversely affect operations;

•

our concentrations of commercial, commercial real estate and construction loans, may adversely affect our earnings and results of operations;

•

an economic slowdown could adversely affect credit quality, loan originations and the value of collateral securing the Company’s loans; and

•

social and political conditions such as war, political unrest and terrorism or natural disasters could have unpredictable negative effects on our businesses and the economy.

Other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements are discussed under “Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.

Non-GAAP Presentations

The Company prepares its financial statements under accounting principles generally accepted in the United States, or “GAAP”. However, this report also refers to certain non-GAAP financial measures that the Company believes, when considered together with GAAP financial measures, provide investors with important information regarding our operational performance. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

Adjusted operating earnings is a non-GAAP financial measure that reflects net income excluding taxes, loan loss provisions, gains or losses on other real estate owned, impairment losses on securities, gain on sale of securities and death benefits received from bank owned life insurance. These excluded items are difficult to predict and we believe that adjusted operating earnings provides the Company and investors with a valuable measure of the Company’s operational performance and a valuable tool to evaluate the Company’s financial results. Calculation of adjusted operating earnings for the three months ended September 30, 2011, September 30, 2010, and June 30, 2011 is as follows:


	Three Months Ended September 30,					Three Months Ended June 30,
(in thousands)	2011		2010			2011

Net Income	$	6,566	$	6,958		$	8,836
Adjustments to net income:
Provision for loan losses		3,933		5,100			1,434
Loss on other real estate owned		546		713			320
Impairment loss on securities		—		—			—
Gain on sale of securities		—		—			—
Provision for income taxes		3,277		2,917			4,254
Death benefits received from bank owned life insurance		—		(1,045	)		(361	)

Adjusted Operating Earnings	$	14,322	$	14,643		$	14,483

The adjusted efficiency ratio is a non-GAAP financial measure that is computed by dividing non-interest expense, excluding gains or losses on other real estate owned, by the sum of net interest income on a tax equivalent basis and non-interest income before impairment losses on securities, gain on sale of securities and death benefits received from bank owned life insurance. We believe that this measure provides investors with important information about our operating efficiency. Comparison of our adjusted efficiency ratio with those of other companies may not be possible because other companies may calculate the adjusted efficiency ratio differently. Calculation of the adjusted efficiency ratio for the three months and nine months ended September 30, 2011 and September 30, 2010 is as follows:


(in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Summary Operating Results:
Non-interest expense	$	14,893		$	15,311		$	43,863		$	44,806
Loss on other real estate owned		546			713			1,022			2,691

Non-interest expense, excluding gains or losses on other real estate owned	$	14,347		$	14,598		$	42,841		$	42,115

Net interest income		26,729			27,181			79,700			78,218
Non-interest income		1,940			3,105			5,672			4,800
Impairment loss on securities		—			—			732			1,519
Gain on sale of securities		—			—			(503	)		(139	)
Death benefits received from bank owned life insurance		—			(1,045	)		(361	)		(1,045	)

Total (1)	$	28,669		$	29,241		$	85,240		$	83,353

Efficiency Ratio, adjusted		49.4	%		49.3	%		49.6	%		49.9	%

(1)	Tax Equivalent Income of $29,048 for the three months ended September 30, 2011 and $86,394 for the nine months ended September 30, 2011. Tax Equivalent Income of $30,657 for the three months ended September 30, 2010 and $85,402 for the nine months ended September 30, 2010.

The tangible common equity ratio is a non-GAAP financial measure representing the ratio of tangible common equity to tangible assets. Tangible common equity and tangible assets are non-GAAP financial measures derived from GAAP-based amounts. We calculate tangible common equity for the Company by excluding the balance of intangible assets and outstanding preferred stock issued to the U.S. Treasury from total stockholders’ equity. We calculate tangible assets by excluding the balance of intangible assets from total assets. We had no intangible assets for the periods presented. We believe that this is consistent with the treatment by regulatory agencies, which exclude

intangible assets from the calculation of regulatory capital ratios. Accordingly, we believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our capital position and ratios. However, these non-GAAP financial measures are supplemental and are not substitutes for an analysis based on a GAAP measure. As other companies may use different calculations for non-GAAP measures, our presentation may not be comparable to other similarly titled measures reported by other companies. Calculation of the Company’s tangible common equity ratio as of September 30, 2011, September 30, 2010, June 30, 2011 and March 31, 2011 is as follows:


(in thousands)	As of September 30,						June 30,			March 31,
	2011			2010			2011			2011
Tangible common equity:
Total stockholders’ equity	$	275,546		$	247,012		$	267,124		$	253,373

Less:
Outstanding TARP senior preferred stock		66,794			65,082			66,334			65,873
Intangible assets		—			—			—			—
Tangible common equity	$	208,752		$	181,930		$	200,790		$	187,500

Total tangible assets	$	2,942,323		$	2,846,003		$	2,797,775		$	2,783,633

Tangible common equity ratio		7.17	%		6.39	%		7.18	%		6.74	%

General

The following presents management’s discussion and analysis of the consolidated financial condition and results of operations of Virginia Commerce Bancorp, Inc. and subsidiaries (the “Company”) as of the dates and for the periods indicated. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto, and other financial data appearing elsewhere in this report. The Company is the parent bank holding company for Virginia Commerce Bank (the “Bank”), a Virginia state-chartered bank that commenced operations in May 1988. The Bank pursues a traditional community banking strategy, offering a full range of business and consumer banking services through twenty-eight branch offices, one residential mortgage office and one wealth management office.

Headquartered in Arlington, Virginia, the Bank serves the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun, Prince William, Spotsylvania and Stafford Counties and the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park. Its service area also covers, to a lesser extent, Washington, D.C. and the nearby Maryland counties of Montgomery and Prince Georges. The Bank’s customer base includes small-to-medium sized businesses including firms that have contracts with the U.S. government, associations, retailers and industrial businesses, professionals and their firms, business executives, investors and consumers.

Critical Accounting Policies

For the period ended September 30, 2011, there were no changes in the Company’s critical accounting policies as reflected in the Company’s most recent annual report.

The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The allowance for loan losses is an estimate of the losses that are inherent in our loan portfolio. The allowance is based on two basic principles of accounting: (i) “Accounting for Contingencies” (ASC 450, “Contingencies”), which requires that losses be accrued when they are probable of occurring and estimable and (ii) “Accounting by Creditors for Impairment of a Loan” (ASC 310, “Receivables”), which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

Our allowance for loan losses has two basic components: the specific allowance and the general allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for impaired loans. Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses based on the Company’s calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans, representing 1-4 family residential first and second trusts, including home equity lines-of-credit, are collectively evaluated for impairment based upon factors such as levels and trends in delinquencies, trends in loss and problem loan identification, trends in volumes and concentrations, local and national economic trends and conditions including estimated levels of housing price depreciation/homeowners’ loss of equity, competitive factors and other considerations. These factors are converted into reserve percentages and applied against the homogenous loan pool balances. Impaired loans which meet the criteria for substandard, doubtful and loss are segregated from performing loans within the portfolio. Internally classified loans are then grouped by loan type (commercial, commercial real estate, commercial construction, residential real estate, residential construction or installment). The general formula is used to estimate the loss of non-classified loans. These un-criticized loans are also segregated by loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, quality of the loan review system and the effect of external factors (i.e. competition and regulatory requirements). The factors assigned differ by loan type. The general allowance recognizes potential losses whose impact on the portfolio has yet to be recognized by a specific allowance. Allowance factors and the overall size of the allowance may change from period to period based on management’s assessment of the above described factors and the relative weights given to each factor. Further information regarding the allowance for loan losses is provided under the caption “Allowance for Loan Losses/Provision for Loan Loss Expense” later in this report and in Note 4 to the Consolidated Financial Statements.

The Company’s 1998 Stock Option Plan (the “1998 Plan”), which is shareholder-approved, permitted the grant of share options to its directors and officers for up to 2.3 million shares of common stock. The Company’s 2010 Equity Plan, which is also shareholder-approved and replaces the 1998 Plan, permits the grant of share-based awards in the form of stock options, stock appreciation rights, restricted and unrestricted stock, performance units, options and other awards to its directors, officers and employees for up to 1.5 million shares of common stock. To date, the Company has granted stock options and restricted stock under the 2010 Plan. The Company also has option awards outstanding under the 1998 Plan, but since May 2, 2010, the effective date of the 2010 Plan, no new awards can be granted under the 1998 Plan. The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted.

Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest based on 5 years of continuous service and have 10-year contractual terms. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that currently uses historical volatility of the Company’s stock based on a 7.2 year expected term, before exercise, for the options granted, and a risk-free interest rate based on the United States Department of the Treasury (the “Treasury”) curve in effect at the time of the grant to estimate total stock-based compensation expense. This amount is then amortized on a straight-line basis over the requisite service period, currently 5 years, to salaries and benefits expense. Restricted stock awards generally vest in equal installments over 5 years. The compensation expense associated with these awards is based on the grant date fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized ratably over the requisite service period. See Note 6 to the Consolidated Financial Statements for additional information regarding the plans and related expense.

On a quarterly basis the Company reviews any securities which are considered to be impaired as defined by accounting guidance, to determine if the impairment is deemed to be other-than-temporary. If it is determined that the impairment is other-than-temporary, i.e. impaired because of credit issues rather than interest rate, the investment is written down through the Consolidated Statements of Operations in accordance with accounting guidance.

Results of Operations

For the three months ended September 30, 2011, the Company recorded net income of $6.6 million. After an effective dividend of $1.3 million to the U.S. Treasury on the Company’s TARP preferred stock, the Company reported net income available to common stockholders of $5.2 million, or $0.17 per diluted common share, compared to net income available to common stockholders of $5.7 million, or $0.20 per diluted common share, in the third quarter of 2010. For the nine months ended September 30, 2011, the Company reported net income available to common stockholders of $16.4 million, or $0.53 per diluted common share, compared to net income available to common stockholders of $13.2 million, or $0.46 per diluted common share, for the same period in 2010. The higher earnings reported for the three months ended September 30, 2010, were largely attributable to $1.0 million of death benefits received from bank-owned life insurance during that quarter. Earnings improvement for the nine-month period ended September 30, 2011, as compared to the same period in 2010, was attributable to lower provisions for loan losses, higher net interest margins and non-interest expense reduction.

Adjusted operating earnings for the three months ended September 30, 2011, were $14.3 million, down $321 thousand, or 2.2%, compared to $14.6 million for the three months ended September 30, 2010. On a sequential basis, adjusted operating earnings were down $161 thousand for the three months ended September 30, 2011. The Company calculates adjusted operating earnings by excluding taxes, provisions for loan losses, losses on other real estate owned, gains on sale of securities, death benefits received from bank owned life insurance, and impairment losses on securities.

Total assets increased $200.7 million, or 7.3%, from $2.74 billion at December 31, 2010, to $2.94 billion at September 30, 2011, as total investment securities grew $190.8 million, or 46.3%, from $411.8 million to $602.6 million. At September 30, 2011, the investment securities portfolio consisted of $569.5 million of available-for-sale securities and $33.1 million of held-to-maturity securities. The investment securities portfolio grew significantly during the nine months ended September 30, 2011, as the Company purchased investment securities with excess liquidity that could not be used to originate new loans. The growth of the securities portfolio is primarily attributable to an increase of $180.7 million in U.S. Government Agency obligations in the Company’s available-for-sale securities portfolio. Loans, net of allowance for loan losses, decreased $52.5 million or 2.4% from $2.15 billion on December 31, 2010 to $2.10 billion on September 30, 2011. Year over year non-farm, non-residential real estate loans decreased $13.2 million, or 1.2%, one-to-four family real estate loans decreased $35.9 million, or 8.5%, acquisition, development and construction (“ADC”) loans fell by $51.8 million, or 13.8%, and commercial and industrial (“C&I”) loans were up $21.7 million, or 10.5%. Year-over-year loan production has been negatively impacted by a lower demand for credit in both the business and consumer sectors as cautious borrowers await clearer economic signs, run-off in both commercial and residential mortgage loans due to aggressive interest rate competition in our markets and a strategic decision to restrict ADC lending and focus on greater portfolio diversification as well as deposit generation and non-credit products. Lending efforts are being directed toward building greater market share in commercial lending, including non-farm, non-residential owner-occupied real estate loans, and particularly in sectors forecast for growth such as government contract lending, professional practices and associations and select service industries, with strategic hiring, marketing campaigns and call efforts. Year-over-year and sequential loan production reflect progress in executing this strategy.

For the nine months ended September 30, 2011, total deposits increased $121.7 million, or 5.4%, from $2.25 billion at December 31, 2010, to $2.37 billion at September 30, 2011. The Company’s deposit mix improved as demand deposits increased $124.8 million or 47.1%, savings and interest-bearing demand accounts decreased $14.0 million or 1.2% and time deposits increased $10.9 million or 1.4%. Sequentially, deposits rose $115.2 million, or 5.1%, with demand deposits increasing by $96.4 million, or 32.9%, savings and interest-bearing demand accounts growing $5.3 million, or 0.5%, and time deposits increasing by $13.4 million, or 1.7%. The annual and sequential increases are impacted by a temporary influx of approximately $71.0 million in demand deposits that are expected to flow back out in the fourth quarter of 2011. The vast majority of these demand deposits that are expected to flow out during the fourth quarter of 2011 are held by a longstanding client that invests and trades in U.S. markets. Demand deposit growth remains the top deposit priority, with the increase in demand deposits (other than the previously discussed demand deposits that are earmarked for auction) due to the successful efforts of the Company’s team of eight business development officers, who are focused on acquisition and retention of commercial operating funds, treasury management services and other related cross-sales. At September 30, 2011, the Bank had no brokered certificates of deposit, down from $30.0 million at September 30, 2010.

As noted, for the nine months ended September 30, 2011, the Company recorded net income available to common stockholders of $16.4 million compared to $13.2 million for the nine months ended September 30, 2010, as net

interest income and non-interest income increased while provisions for loan losses and non interest expense decreased compared to the same period in 2010. The Company’s return on average assets and return on average equity were 0.97% and 10.48%, respectively, for the nine months ended September 30, 2011, compared to 0.81% and 9.92%, respectively, for the same period in 2010.

For the three months ended September 30, 2011, the Company recorded net income to common stockholders of $5.2 million compared to net income $5.7 million for the same period in 2010 as net interest income fell $452 thousand, or 1.7%, non-interest income decreased $1.2 million, or 37.5%, non-interest expense decreased $418 thousand, or 2.7%, and provisions for loan losses were down $1.2 million, or 22.9%. The higher earnings reported for the three months ended September 30, 2010, were largely attributable to $1.0 million of death benefits received from bank-owned life insurance during that quarter. The return on average assets and return on average equity were 0.91% and 9.61% for the three months ended September 30, 2011, compared to 0.97% and 11.66% for the same period in 2010.

On March 31, 2011, the Company issued 426,000 shares of its common stock at a price of $5.87 per share in a registered direct placement with a Company director for total gross proceeds of approximately $2.5 million. In addition, the Company issued to the investor warrants exercisable for shares of common stock, which, if fully exercised, would provide an additional $4.8 million in gross proceeds to the Company. The warrants each have an exercise price of $5.62 per share. The Series A warrants, exercisable for a total of 426,000 shares of common stock, are exercisable for a period of seven months following the closing date. The Series B warrants, also exercisable for a total of 426,000 shares of common stock, are exercisable for a period of twelve months following the closing date.

On September 29, 2010, the Company issued 1,904,766 shares of its common stock at a price of $5.25 per share in a registered direct placement with several institutional investors for total gross proceeds of $10.0 million. In addition, the Company issued to the investors warrants exercisable for shares of common stock. The warrants each have an exercise price of $6.00 per share, which represents a 14.3% premium to the offering price of the shares of common stock sold in the registered direct placement. The Series A warrants were exercisable through April 30, 2011, and 130,851 were exercised as of that date. The 952,383 Series B warrants originally were to expire on September 29, 2011, but on September 27, 2011, the expiration date of 904,764 of the Series B Warrants was extended to January 27, 2012, with 47,619 warrants having been exercised prior to the warrant extension.

Stockholders’ equity increased $28.5 million, or 11.6%, from $247.0 million at September 30, 2010, to $275.5 million at September 30, 2011, with approximately $3.5 million in net proceeds from the above referenced stock issuances, net income to common stockholders of $19.6 million over the twelve-month period, a $2.5 million increase in other comprehensive income related to the investment securities portfolio, $1.7 million in the accretion of the discount on preferred stock and $1.1 million in proceeds and tax benefits related to the exercise of options by the Company’s directors and officers, and stock option expense credits. As a result of these changes, the Company’s Tier 1 capital ratio increased from 12.96% at September 30, 2010, to 14.46% at September 30, 2011, its total qualifying capital ratio increased from 14.21% to 15.71% and its tangible common equity ratio increased from 6.39% to 7.17%. Sequentially, the Company’s Tier 1 and total qualifying capital ratios are each up eleven basis points, and its tangible common equity ratio is down one basis point due to higher levels of tangible assets at September 30, 2011.

Net Interest Income

Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. Net interest income of $26.7 million for the third quarter of 2011 was down $452 thousand, or 1.7%, over the same quarter last year, due primarily to a decrease in the net interest margin from 3.96% in the third quarter of 2010 to 3.85% for the third quarter 2011. This decrease was primarily due to decreases in yields on the Company’s interest-earning assets, including a 93 basis point decrease in the yield on the Company’s investment securities portfolio. Interest expense decreased $2.0 million for the quarter ended September 30, 2011, from the same period in 2010 and decreased $6.6 million for the nine months ended September 30, 2011, compared to 2010. Reductions in interest expense partially offset the decrease in interest and fee income on loans of $2.5 million for the three-months ended September 30, 2011, as compared to the same period in 2010. Year-to-date net interest income of $79.7 million was up 1.9%, compared to $78.2 million in 2010. The increase in the net interest margin for the nine months ended September 30, 2011, compared to the same period in 2010, was primarily driven by lower deposit costs due to significant reductions in the level of time deposits, increased levels of demand deposits and lower rate interest-bearing transaction accounts. As a result, the average cost of interest-bearing deposits fell from 1.57% in the third

quarter of 2010, to 1.30% in the third quarter of 2011, while the yield on interest-earning assets declined from 5.50% to 5.08% for the same periods. Management anticipates the net interest margin will range between 3.70% and 3.85% for the remainder of 2011.

The following tables show the average balance sheets for each of the three months and nine months ended September 30, 2011 and 2010. In addition, the amounts of interest earned on interest-earning assets, with related yields on a tax-equivalent basis, and interest expense on interest-bearing liabilities, with related rates, are shown. Loans placed on a non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $1.0 million and $672 million for the three months ended September 30, 2011 and 2010, respectively, and totaled $3.0 million and $2.0 million for the nine month periods ended September 30, 2011 and 2010, respectively.


	Three Months Ended September 30,
	2011							2010
(Dollars in thousands)	Average Balance		Interest Income- Expense		Average Yields /Rates			Average Balance		Interest Income- Expense		Average Yields /Rates
Assets

Securities (1)	$	524,271	$	3,778		3.11	%	$	382,399	$	3,685		4.04	%
Restricted stock		11,561		95		3.26	%		11,752		91		3.06	%
Loans, net of unearned income (2)		2,147,176		31,456		5.83	%		2,249,901		33,997		6.01	%
Interest-bearing deposits in other banks		34,887		21		0.23	%		379		—		0.11	%
Federal funds sold		75,900		53		0.27	%		103,072		59		0.23	%

Total interest-earning assets	$	2,793,795	$	35,403		5.08	%	$	2,747,503	$	37,832		5.50	%
Other assets		82,006							87,488

Total Assets	$	2,875,801						$	2,834,991


Liabilities and Stockholders’ Equity
Interest-bearing deposits:
NOW accounts	$	317,245	$	527		0.66	%	$	350,711	$	749		0.85	%
Money market accounts		221,202		559		1.00	%		157,157		447		1.13	%
Savings accounts		655,941		1,452		0.88	%		696,270		2,499		1.42	%
Time deposits		779,997		3,947		2.01	%		851,433		4,418		2.06	%

Total interest-bearing deposits	$	1,974,385	$	6,485		1.30	%	$	2,055,571	$	8,113		1.57	%
Securities sold under agreement to repurchase and federal funds purchased		192,823		965		1.99	%		183,564		1,023		2.21	%
Other borrowed funds		25,000		272		4.25	%		25,000		272		4.25	%
Trust preferred capital notes		66,471		952		5.60	%		66,217		1,243		7.35	%

Total interest-bearing liabilities	$	2,258,679	$	8,674		1.52	%	$	2,330,352	$	10,651		1.81	%
Demand deposits and other liabilities		346,155							267,952

Total liabilities	$	2,604,834						$	2,598,304
Stockholders’ equity		270,967							236,687

Total liabilities and stockholders’ equity	$	2,875,801						$	2,834,991

Interest rate spread						3.56	%						3.69	%
Net interest income and margin			$	26,729		3.85	%			$	27,181		3.96	%

(1)

Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which are reflected as a component of stockholders’ equity. Average yields on securities are stated on a tax equivalent basis, using a 35% rate.

(2)	Loans placed on non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $1.0 million and $672 thousand for the three months ended September 30, 2011 and 2010, respectively.


	Nine Months Ended September 30,
	2011							2010
(Dollars in thousands)	Average Balance		Interest Income- Expense		Average Yields /Rates			Average Balance		Interest Income- Expense		Average Yields /Rates
Assets

Securities (1)	$	458,694	$	10,954		3.41	%	$	361,101	$	11,178		4.25	%
Restricted stock		11,616		287		3.30	%		11,752		267		3.03	%
Loans, net of unearned income (2)		2,176,604		95,144		5.86	%		2,265,573		100,138		5.92	%
Interest-bearing deposits in other banks		12,125		21		0.23	%		204		—		0.09	%
Federal funds sold		74,906		152		0.27	%		79,399		137		0.23	%

Total interest-earning assets	$	2,733,945	$	106,558		5.27	%	$	2,718,029	$	111,720		5.53	%
Other assets		87,199							87,186

Total Assets	$	2,821,144						$	2,805,215


Liabilities and Stockholders’ Equity
Interest-bearing deposits:
NOW accounts	$	320,380	$	1,775		0.74	%	$	333,984	$	2,378		0.95	%
Money market accounts		198,605		1,543		1.04	%		153,121		1,418		1.24	%
Savings accounts		672,553		4,965		0.99	%		646,466		7,477		1.55	%
Time deposits		780,310		11,895		2.04	%		912,538		14,699		2.15	%

Total interest-bearing deposits	$	1,971,848	$	20,178		1.37	%	$	2,046,109	$	25,972		1.70	%
Securities sold under agreement to repurchase and federal funds purchased		181,226		2,859		2.11	%		183,627		3,022		2.20	%
Other borrowed funds		25,000		806		4.25	%		25,000		806		4.25	%
Trust preferred capital notes		66,409		3,015		5.99	%		66,154		3,702		7.38	%

Total interest-bearing liabilities	$	2,244,483	$	26,858		1.60	%	$	2,320,890	$	33,502		1.93	%
Demand deposits and other liabilities		316,829							255,109

Total liabilities	$	2,561,312						$	2,575,999
Stockholders’ equity		259,832							229,216

Total liabilities and stockholders’ equity	$	2,821,144						$	2,805,215

Interest rate spread						3.67	%						3.60	%
Net interest income and margin			$	79,700		3.95	%			$	78,218		3.88	%

(1)

(2)	Loans placed on non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $3.0 million and $2.0 million for the nine months ended September 30, 2011 and 2010, respectively.

Allowance for Loan Losses / Provision for Loan Loss Expense

Provisions for loan losses were $3.9 million for the quarter ended September 30, 2011, compared to $5.1 million in the same period in 2010, with total net charge-offs of $7.7 million in the third quarter of 2011 versus $4.7 million for the same period a year ago. For the nine months ended September 30, 2011, provisions for loan losses totaled $11.2 million, compared to $13.5 million for the prior year period, with 2011 year-to-date net charge-offs of $24.2 million, up $8.3 million, from $15.9 million in the nine months ended September 30, 2010. Charge-offs during the quarter included $4.0 million in partial write-downs of five residential acquisition and development loans to reduce the book balance to estimated liquidation value, a $900 thousand write-down to facilitate the sale of a commercial acquisition and development loan, charge-offs of $1.9 million for three non-farm, non-residential loans prior to implementing a deed in lieu of foreclosure and foreclosing after a bankruptcy stay was lifted, a $340 thousand short-sale of a one-to-four family residential mortgage and an $840 thousand write-down of commercial and industrial loans pursuant to a forbearance and settlement agreement. Management continues to emphasize improvement in asset quality and reduction in non-performing assets through its lending, credit and special assets officers. In addition, the Company hired a new Manager of Special Assets in the third quarter to facilitate further reduction in non-performing assets.

Total non-performing assets and loans 90+ days past due declined from $82.4 million at September 30, 2010, to $55.9 million at September 30, 2011, and decreased $18.9 million sequentially, from $74.7 million at June 30, 2011. The Company’s sequential improvement in non-performing assets and loans 90+ days past due was facilitated by $7.9 million in charge-offs, a $660 thousand write-down upon the sale of other real estate owned, $8.6 million in proceeds from the sale of non-performing loans or other real estate owned, $1.2 million in net upgrades of loans to performing status and $515 thousand in recoveries of loans previously charged-off. As of September 30, 2011, the allowance for loan losses represented 2.30% of total loans, down from 2.47% at June 30, 2011, with such allowance covering 108.6% of total non-performing loans. See “Risk Elements and Non-Performing Assets” later in this discussion for more information on non-performing assets and loans 90+ days past due and other impaired loans. Although the allowance for loan losses as of September 30, 2011 represents a slightly lower percentage of total loans when compared to June 30, 2011, as discussed in more detail below management has concluded that the allowance is appropriate in light of the credit quality and anticipated risk of loss in the loan portfolio.

Management believes that the allowance for loan losses is adequate at September 30, 2011. However, there can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, and the residential real estate market in particular, on a national basis or in the Company’s market area, or changes in the circumstances of particular borrowers.

The Company generates a quarterly analysis of the allowance for loan losses, with the objective of quantifying portfolio risk into a dollar figure of inherent losses, thereby translating the subjective risk value into an objective number. Emphasis is placed on at least semi-annual independent external loan reviews and monthly internal reviews. The determination of the allowance for loan losses is based on applying and summing the results of eight qualitative factors and a historical loss factor to each category of loans along with any specific allowance for impaired and adversely classified loans within the particular category. Each factor is assigned a percentage weight and that total weight is applied to each loan category. The resulting sum from each loan category is then combined to arrive at a total allowance for all categories. Factors are different for each loan category. Qualitative factors include: levels and trends in delinquencies and non-accruals, trends in volumes and terms of loans, effects of any changes in lending policies, the experience, ability and depth of management, national and local economic trends and conditions, concentrations of credit, quality of the Company’s loan review system, and regulatory requirements. The total allowance required thus changes as the percentage weight assigned to each factor is increased or decreased due to its particular circumstance, as historical loss factors are updated, as the various types and categories of loans change as a percentage of total loans and as specific allowances are required on impaired loans and charge-offs occur. The decision to specifically reserve for or to charge-off or partially charge-off an impaired loan balance is based upon an evaluation of that loan’s potential to improve, based upon near term change in financial or market conditions, which would enable collection of the portion of the loan determined to be impaired. If these conditions are determined to be favorable, a specific reserve would be established as opposed to a charge-off. For further information regarding the allowance for loan losses see Note 4 to the Consolidated Financial Statements.

The following schedule summarizes the changes in the allowance for loan losses:


	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010			Twelve Months Ended December 31, 2010
(Dollars in thousands)

Allowance, at beginning of period	$	62,442		$	65,152		$	65,152
Provision charged against income		11,210			13,538			20,594
Recoveries:
Consumer loans		13			14			20
Commercial		497			2,469			2,858
Real estate one-to-four family residential:
Permanent first and second		122			23			42
Home equity loans and lines		19			288			289
Real estate-multi-family residential		—			—			—
Real estate-nonfarm, nonresidential		36			54			58
Real estate-construction		117			863			907
Losses charged to reserve:
Consumer loans		(103	)		(239	)		(345	)
Commercial loans		(2,056	)		(6,388	)		(7,761	)
Real Estate one-to-four family residential:
Permanent first and second		(2,223	)		(2,391	)		(3,445	)
Home equity loans and liens		(788	)		(365	)		(543	)
Real estate-multi-family residential		—			—			(1,050	)
Real estate-nonfarm, nonresidential		(6,474	)		(2,883	)		(5,260	)
Real estate-construction		(13,407	)		(7,359	)		(9,075	)

Net charge-offs		(24,247	)		(15,914	)		(23,304	)

Allowance, at end of period	$	49,405		$	62,776		$	62,442


Ratio of net charge-offs to average total loans outstanding during period		1.11	%		0.70	%		1.03	%
Allowance for loan losses to total loans		2.30	%		2.80	%		2.82	%

The following schedule provides a breakdown of general reserves and specific reserves by loan type:


	September 30, 2011		September 30, 2010		December 31, 2010
(Dollars in thousands)
Allocation of the allowance for loan losses:
Real estate – mortgage-general	$	15,122	$	11,414	$	12,296
Real estate – mortgage-specific		10,021		16,098		13,112
Real estate – construction-general (1)		8,796		12,409		11,648
Real estate – construction-specific		6,721		12,877		15,000
Commercial-general		4,238		6,092		5,963
Commercial-specific		4,170		3,509		4,009
Consumer-general		250		223		313
Consumer-specific		83		154		60
Unallocated		4		—		41

Total	$	49,405	$	62,776	$	62,442

(1)	Includes Farmland.

Risk Elements and Non-Performing Assets

Non-performing assets consist of non-accrual loans and OREO (foreclosed properties). For the nine months ended September 30, 2011, total non-performing assets and loans 90+ days past due and still accruing interest decreased by $18.7 million, from $74.6 million at December 31, 2010, to $55.9 million at September 30, 2011, and have declined $26.5 million from $82.4 million at September 30, 2010. As a result, the ratio of non-performing assets and loans 90+ days past due and still accruing to total assets decreased from 2.90% at September 30, 2010, to 1.90% at September 30, 2011, and decreased from 2.72% of total assets at December 31, 2010. Reductions in non-performing assets are being sought through a combination of activities, including loan restructuring for borrowers capable of payment under modified terms, liquidation of collateral for borrowers incapable of payment and note sales to third-party purchasers. Loans are placed in non-accrual status when in the opinion of management the collection of additional interest is unlikely or a specific loan meets the criteria for non-accrual status established by regulatory authorities. No interest is taken into income on non-accrual loans. A loan remains on non-accrual status until the loan is current as to both principal and interest or the borrower demonstrates the ability to pay and remain current, or both.

Our underwriting for new acquisition, development, and construction loans always includes the interest cost for the loan whether an interest reserve is approved or not. In other words, the equity requirement in the new loan is established reflecting the amount of interest required to serve the project. We continually monitor the adequacy of reserve requirements, including interest reserves, during the draw process to ensure the project is being completed on time and within budget. We have restructured loans due to the slow market, re-underwriting each loan based on time and cost to complete. We do not continue funding interest reserves just to keep the loan from becoming non-performing. We consider whether the loan to value ratio will support current and future advances and whether the project is meeting certain completion criteria necessary to successfully complete the project. Once a loan becomes non-performing, we do not allow draws on interest reserves.

Other impaired loans, that are currently performing, and troubled debt restructurings, performing in accordance with their modified terms, decreased from $297.3 million at December 31, 2010, to $174.2 million at September 30, 2011. These loans have been identified by the Company as having certain weaknesses as a result of the Company’s specific knowledge about the customer or recent credit events, and are classified as substandard and subject to impairment testing at each balance sheet date.

Troubled debt restructurings which represented $71.7 million of other impaired loans as of September 30, 2011, were down from $103.0 million at December 31, 2010. These loans, which have been provided concessions such as rate reductions, payment deferrals, and in some cases forgiveness of principal, are all on accrual status. If the loan was on non-accrual at the time of the concession it is the Company’s policy that it remain on non-accrual status and perform in accordance with the modified terms for a period of six months. As of September 30, 2011, all troubled debt restructurings were accruing interest. If a troubled debt restructuring is on non-accrual status, it is reported as a non-accrual asset and not as a troubled debt restructuring.

Foreclosed real properties include properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt. Such properties, which are held for resale, are carried at the lower of book value or fair value, including a reduction for the estimated selling expenses, or principal balance of the related loan. Reviews and discussions with regard to value and disposition of each foreclosed property are conducted monthly by the Company’s Special Asset Committee. The carrying value of a foreclosed asset is immediately adjusted down when new information is obtained, including a potentially acceptable offer, the sale of a similar property in the vicinity of one of the Company’s assets, and/or a change in the price the property is being listed for. The Company also uses the advice of outside consultants and real estate agents with knowledge of the markets the properties are located in. Appraisals are ordered when the property is foreclosed on, but are not routinely updated at each balance sheet date. The Company confirms that it performed the above noted procedures and made the proper impairment adjustments, if any, at the balance sheet date.

Total non-performing assets as of the dates indicated consisted of the following:


(Dollars in thousands)
	September 30, 2011		September 30, 2010		December 31, 2010

Non-accrual loans:
Commercial	$	5,486	$	5,176	$	3,719
Real estate-one-to-four family residential:
Permanent first and second		1,960		6,554		5,285
Home equity loans and lines		3,051		724		1,529

Total real estate-one-to-four family residential	$	5,011	$	7,278	$	6,814
Real estate-multi-family residential		486		—		—
Real estate-non-farm, non-residential:
Owner-occupied		3,689		5,251		8,942
Non-owner-occupied		3,878		1,204		4,114

Total real estate-non-farm, non-residential	$	7,567	$	6,455	$	13,056
Real estate-construction:
Residential-builder		20,181		31,138		27,189
Commercial		6,083		6,861		6,361

Total real estate-construction	$	26,264	$	37,999	$	33,550
Consumer		22		110		19

Total non-accrual loans		44,836		57,018		57,158
OREO		10,377		24,395		17,165

Total non-performing assets	$	55,213	$	81,413	$	74,323

Loans 90+ days past due and still accruing:
Commercial	$	89	$	149	$	—
Real estate-one-to-four family residential:
Permanent first and second		—		—		—
Home equity loans and lines		—		369		242

Total real estate-one-to-four family residential	$	—	$	369	$	242
Real estate-multi-family residential		—		—		—
Real estate-non-farm, non-residential:
Owner-occupied		—		361		—
Non-owner-occupied		—		—		—

Total real estate-non-farm, non-residential	$	—	$	361	$	—
Real estate-construction:
Residential-owner-occupied		—		—		—
Residential-builder		574		—		—
Commercial		—		—		—

Total real estate-construction	$	574	$	—	$	—
Consumer		—		100		—

Total Loans past due 90 days and still accruing	$	663	$	979	$	242

Total non-performing assets and past due loans	$	55,876	$	82,392	$	74,565


	September 30, 2011			September 30, 2010			December 31, 2010
(Dollars in thousands)

Non-performing assets
to total loans:		2.57	%		3.63	%		3.36	%
to total assets:		1.88	%		2.86	%		2.71	%
Non-performing assets and 90+ days past due loans
to total loans:		2.60	%		3.67	%		3.37	%
to total assets:		1.90	%		2.90	%		2.72	%
Allowance for loan losses to total loans		2.30	%		2.80	%		2.82	%
Allowance for loan losses to non-performing loans		108.58	%		108.24	%		108.79	%

Troubled debt restructurings:
Commercial	$	9,496		$	11,754		$	12,175
Real estate-one-to-four family residential:
Permanent first and second		4,199			4,704			5,437
Home equity loans and lines		—			—			—

Total real estate-one-to-four family residential	$	4,199		$	4,704		$	5,437
Real estate multi-family residential		—			—			—
Real estate-non-farm, non-residential:
Owner occupied		4,372			23,498			14,667
Non-owner occupied		30,679			36,443			35,001

Total Real estate-non-farm, non-residential	$	35,051		$	59,941		$	49,668
Real estate-construction:
Residential-owner occupied		—			—			—
Residential-builder		7,027			9,094			9,760
Commercial		15,881			20,074			25,908

Total Real estate-construction	$	22,908		$	29,168		$	35,668
Consumer		32			50			48

Total troubled debt restructurings	$	71,686		$	105,617		$	102,996

Included in the loan portfolio at September 30, 2011, are loans classified as troubled debt restructurings (“TDRs”) totaling $71.7 million, a sequential reduction of 11.6%, or $9.4 million, from $81.1 million at June 30, 2011. The sequential reduction in TDRs was attributable to payoffs and principal curtailments of $5.1 million, upgrades to performing status of $4.3 million and transfers to non-accrual of $1.0 million offset by $1.0 million of new TDR additions. At September 30, 2011, the Company had $22.9 million in real estate construction, $35.1 million in non-farm/non-residential, $9.5 million in commercial and $4.2 million in real estate permanent one-to-four- family that were modified in troubled debt restructurings and considered impaired. Included in this amount of $71.7 million, the Bank had troubled debt restructurings that were performing in accordance with their modified terms of $68.1 million at September 30, 2011. At September 30, 2011, 47.0% of the Company’s TDRs were reviewable TDRs and 53.0% were permanent TDRs.

Reviewable TDRs are loans that have been restructured at or will return to a market rate of interest and can include a temporary interest rate modification, partial deferral of interest or principal or an extension of term. They can return to performing status upon six months of on-time payments following the return to a market rate of interest, but only in the fiscal year following the year of restructure. Permanent TDRs are loans that have been restructured and include a permanent interest rate reduction. They remain in a TDR status until the loan is paid off.

Troubled Debt Restructurings (TDRs) –

By Loan Type


As of September 30, 2011	Reviewable TDRs							Permanent TDRs							Total TDRs
(Dollars in thousands)	# of Loans		Balance		As % of Balance			# of Loans		Balance		As % of Balance			# of Loans		Balance		As % of Balance
Loan Type:
Commercial		2	$	3,125		9.3	%		4	$	6,371		16.8	%		6	$	9,496		13.2	%
Real estate-one-to-four family residential:
Permanent first and second		10		2,699		8.0	%		3		1,500		3.9	%		13		4,199		5.9	%
Home equity loans and lines		—		—		0.0	%		—		—		0.0	%		—		—		0.0	%

Total real estate-one-to-four family residential:		10	$	2,699		8.0	%		3	$	1,500		3.9	%		13	$	4,199		5.9	%
Real estate-multifamily residential		—		—		0.0	%		—		—		0.0	%		0	$	0		0.0	%
Real estate-non-farm, non-residential
Owner-occupied		3		1,620		4.8	%		1		2,752		7.2	%		4		4,372		6.1	%
Non-owner-occupied		7		25,730		76.4	%		2		4,949		13.0	%		9		30,679		42.8	%

Total real estate-non-farm, non-residential:		10	$	27,350		81.2	%		3	$	7,701		20.3	%		13	$	35,051		48.9	%
Real estate-construction:
Residential-owner-occupied		—		—		0.0	%		—		—		0.0	%		—		—		0.0	%
Residential-builder		—		—		0.0	%		4		7,027		18.5	%		4		7,027		9.8	%
Commercial		1		465		1.4	%		4		15,416		40.6	%		5		15,881		22.2	%

Total real estate-construction:		1	$	465		1.4	%		8	$	22,443		59.0	%		9	$	22,908		32.0	%
Consumer		2		32		0.1	%		—		—		0.0	%		2		32		0.0	%
Farmland		—		—		0.0	%		—		—		0.0	%		—		—		0.0	%

Total		25	$	33,671		100.0	%		18	$	38,015		100.0	%		43	$	71,686		100.0	%

Troubled Debt Restructurings (TDRs) –

By Quarterly Review / Maturity Date


As of September 30, 2011	Reviewable TDRs							Permanent TDRs							Total TDRs
(Dollars in thousands)	# of Loans		Balance		As % of Balance			# of Loans		Balance		As % of Balance			# of Loans		Balance		As % of Balance
Review / Maturity by Quarter:
2011
4 ^th Quarter		10		12,151		36.1	%		5		11,065		29.1	%		15		23,216		32.4	%
2012
1 ^st Quarter		7		4,670		13.9	%		—		—		0.0	%		7		4,670		6.5	%
2 ^nd Quarter		2		1,595		4.7	%		1		1,826		4.8	%		3		3,421		4.8	%
3 ^rd Quarter		4		14,540		43.2	%		—		—		0.0	%		4		14,540		20.3	%
4 ^th Quarter		—		—		0.0	%		4		11,450		30.1	%		4		11,450		16.0	%

Total 2012:		13	$	20,805		61.8	%		5	$	13,276		34.9	%		18	$	34,081		47.5	%
2013 & beyond		2		715		2.1	%		8		13,674		36.0	%		10		14,389		20.1	%

Total		25	$	33,671		100.0	%		18	$	38,015		100.0	%		43	$	71,686		100.0	%

Troubled Debt Restructurings (TDRs)

Migration by Quarter


As of September 30, 2011 (Dollars in thousands)	4/1/09 to 6/30/09		7/1/09 to 9/30/09			10/1/09 to 12/31/09			1/1/10 to 3/31/10			4/1/10 to 6/30/10			7/1/10 to 9/30/10			10/1/10 to 12/31/10
Period Beginning Balance		—	$	33,309		$	37,425		$	71,885		$	80,993		$	96,976		$	105,617

*Additions:*
New Loans Added	$	33,309	$	5,226		$	37,663		$	23,477		$	21,720		$	12,698		$	12,377
Loan Advances		—		974			348			219			472			220			531

Subtotal Additions:	$	33,309	$	6,200		$	38,011		$	23,696		$	22,192		$	12,918		$	12,908

*Deductions:*
Sales Proceeds		—	$	944		$	1,530		$	1,218		$	761			—		$	125
Payments		—		317			174			50			1,202			1,138			433
Reviews		—		—			229			75			3,714			2,468			—
Upgrades		—		—			—			—			—			—			11,000
Partial TDR Charge-Offs		—		—			—			—			—			—			—
Transfers to NPA		—		823			1,618			13,245			532			671			3,971

Subtotal Deductions:		—	$	2,084		$	3,551		$	14,588		$	6,209		$	4,277		$	15,529

Net Increase / (Decrease)	$	33,309	$	4,116		$	34,460		$	9,108		$	15,983		$	8,641		($	2,621	)

% Increase / (Decrease) from Preceding Period				12.4	%		92.1	%		12.7	%		19.7	%		8.9	%		(2.5	%)

Period Ended Balance	$	33,309	$	37,425		$	71,885		$	80,993		$	96,976		$	105,617		$	102,996


	1/1/11 to 3/31/11			4/1/11 to 6/30/11			7/1/11 to 9/30/11			TOTAL
Period Beginning Balance	$	102,996		$	91,876		$	81,070

*Additions:*
New Loans Added	$	3,188		$	116		$	984		$	150,758
Loan Advances		486			197			53			3,500

Subtotal Additions:	$	3,674		$	313		$	1,037		$	154,258

*Deductions:*
Sales Proceeds	$	367		$	126		$	4,597		$	9,668
Payments		1,989			1,715			532			7,550
Reviews		5,731			640			4,292			17,149
Upgrades		—			—			—			11,000
Partial TDR Charge-Offs		5,656			3,000			—			8,656
Transfers to NPA		1,051			5,638			1,000			28,549

Subtotal Deductions:	$	14,794		$	11,119		$	10,421		$	82,572

Net Increase / (Decrease)	($	11,120	)	($	10,806	)	($	9,384	)	$	71,686

% Increase / (Decrease) from Preceding Period		(10.8	%)		(11.8	%)		(11.6	%)

Period Ended Balance	$	91,876		$	81,070		$	71,686		$	71,686

Non-performing loans continue to be concentrated in residential and commercial construction and land development loans in outer sub-markets hardest hit by the residential downturn and commercial and consumer credits experiencing the after shocks in sub-contracting businesses and workforce employment. Overall, as of September 30, 2011, $26.3 million, or 58.6%, of non-performing loans represented acquisition, development and construction (“ADC”) loans, $5.0 million, or 11.2%, represented loans on one-to-four family residential properties, $7.6 million, or 16.9%, represented non-farm, non-residential loans, and $5.5 million, or 12.2%, represented commercial and industrial (“C&I”) loans. There was no interest actually received on non-accrual loans in 2011 and $489 thousand in 2010. See Note 4 to the Consolidated Financial Statements for additional information regarding the Company’s non-performing loans.

The following provides a breakdown of the construction and non-farm/non-residential loan portfolios by location, including loans on non-accrual status, with dollars in thousands:

		Net charge-offs		Net charge-offs			Net charge-offs		Net charge-offs			Net charge-offs
	As of September 30, 2011
Residential, Acquisition, Development and Construction By County/Jurisdiction of Origination:	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge- offs as a % of Outstandings
District of Columbia	$	5,648		3.7	%	$	—		—			—
Montgomery, MD		—		—			—		—			—
Prince Georges, MD		16,615		11.0	%		11,325		7.5	%		0.7	%
Other Counties in MD		6,348		4.2	%		—		—			—
Arlington/Alexandria, VA		28,734		18.9	%		—		—			0.3	%
Fairfax, VA		37,204		24.5	%		826		0.5	%		0.1	%
Culpeper/Fauquier, VA		1,108		0.7	%		362		0.2	%		0.3	%
Fredericksburg, VA		3,730		2.5	%		3,730		2.5	%		1.7	%
Loudoun, VA		16,080		10.6	%		248		0.2	%		—
Prince William, VA		9,873		6.5	%		1,026		0.7	%		0.8	%
Spotsylvania, VA		353		0.2	%		—		—			—
Stafford, VA		20,698		13.6	%		2,664		1.8	%		—
Other Counties in VA		2,051		1.4	%		—		—			—
Outside VA, D.C. & MD		3,279		2.2	%		—		—			—

	$	151,721		100.0	%	$	20,181		13.4	%		3.9	%

		Net charge-offs		Net charge-offs			Net charge-offs		Net charge-offs			Net charge-offs
	As of September 30, 2011
Commercial, Acquisition, Development and Construction By County/Jurisdiction of Origination:	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge-offs (recoveries) as a % of Outstandings
District of Columbia	$	3,074		1.8	%	$	—		—			—
Montgomery, MD		1,809		1.1	%		—		—			—
Prince Georges, MD		12,490		7.3	%		—		—			—
Other Counties in MD		2,213		1.3	%		—		—			—
Arlington/Alexandria, VA		6,799		4.0	%		640		0.4	%		0.5	%
Fairfax, VA		27,355		15.9	%		2,800		1.6	%		—
Culpeper/Fauquier, VA		3,020		1.8	%		—		—			—
Frederick, VA		5,767		3.4	%		—		—			—
Henrico, VA		891		0.5	%		—		—			—
Loudoun, VA		20,936		12.2	%		579		0.3	%		2.6	%
Prince William, VA		51,926		30.2	%		2,064		1.2	%		1.2	%
Spotsylvania, VA		1,740		1.0	%		—		—			—
Stafford, VA		28,439		16.5	%		—		—			—
Other Counties in VA		5,463		3.2	%		—		—			—
Outside VA, D.C. & MD		—		—			—		—			—

	$	171,922		100.0	%	$	6,083		3.5	%		4.3	%


	As of September 30, 2011
Non-Farm/Non-Residential By County/Jurisdiction of Origination:	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge- offs as a % of Outstandings
District of Columbia	$	86,196		7.7	%	$	—		—			—
Montgomery, MD		27,494		2.4	%		—		—			—
Prince Georges, MD		50,975		4.5	%		—		—			—
Other Counties in MD		56,745		5.0	%		—		—			—
Arlington/Alexandria, VA		186,366		16.5	%		1,258		0.1	%		—
Fairfax, VA		277,009		24.6	%		1,150		0.1	%		—
Culpeper/Fauquier, VA		3,377		0.3	%		—		—			—
Frederick, VA		4,323		0.4	%		—		—			—
Henrico, VA		25,765		2.3	%		—		—			0.3	%
Loudoun, VA		106,135		9.4	%		1,425		0.1	%		0.2	%
Prince William, VA		203,050		18.0	%		909		0.1	%		—
Spotsylvania, VA		16,691		1.5	%		—		—			—
Stafford, VA		19,761		1.8	%		—		—			—
Other Counties in VA		54,216		4.8	%		2,825		0.3	%		0.1	%
Outside VA, D.C. & MD		8,199		0.7	%		—		—			—

	$	1,126,303		100.0	%	$	7,567		0.7	%		0.6	%

Concentrations of Credit Risk

The Bank does a general banking business, serving the commercial and personal banking needs of its customers. The Bank’s market area consists of the Northern Virginia suburbs of Washington, D.C., including Arlington, Fairfax, Fauquier, Loudoun, Prince William, Spotsylvania and Stafford Counties, the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park, and, to a lesser extent, certain Maryland suburbs and the city of Washington, D.C. Substantially all of the Company’s loans are made within its market area.

The ultimate collectibility of the Bank’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, are influenced by the economic conditions of the market area. The Company’s operating results are therefore closely related to the economic conditions and trends in the Metropolitan Washington, D.C. area.

At September 30, 2011, the Company had $1.52 billion, or 70.8%, of total loans concentrated in commercial real estate. Commercial real estate for purposes of this discussion includes all construction loans, loans secured by multi-family residential properties and loans secured by non-farm, non-residential properties. At December 31, 2010, commercial real estate loans were $1.58 billion, or 71.4%, of total loans. Total construction loans of $323.6 million at September 30, 2011, represented 15.0% of total loans, loans secured by multi-family residential properties of $72.5 million represented 3.4% of total loans, and loans secured by non-farm, non-residential properties of $1.13 billion represented 52.4%.

Construction loans at September 30, 2011, included $138.9 million in loans to commercial builders of single family residential property and $12.8 million to individuals on single family residential property, together representing 7.1% of total loans. These loans are made to a number of unrelated entities and generally have a term of twelve to eighteen months. In addition, the Company had $171.9 million of construction loans on non-residential commercial property at September 30, 2011, representing 8.0% of total loans. Total construction loans of $323.6 million include $108.4 million in land acquisition and/or development loans on residential property and $84.0 million in land acquisition and/or development loans on commercial property, together totaling $192.4 million, or 9.0% of total loans. Potential adverse developments in the Northern Virginia real estate market or economy, including substantial increases in mortgage interest rates, slower housing sales, and increased commercial property vacancy rates, could have an adverse impact on these groups of loans and the Bank’s income and financial position. At September 30, 2011, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio. An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

The Bank has established formal policies relating to the credit and collateral requirements in loan originations including policies that establish limits on various loan types as a percentage of total loans and total capital. Loans to purchase real property are generally collateralized by the related property with limitations based on the property’s

appraised value. Credit approval is primarily a function of collateral and the evaluation of the creditworthiness of the individual borrower and guarantors and/or the individual project, to include an analysis of cash flows and secondary repayment sources.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land which represent in total 100% or more of an institutions total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institutions total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened portfolio monitoring and reporting, and strong underwriting criteria with respect to its commercial real estate portfolio. The Company is well-capitalized. Nevertheless, it is possible that the Company could be required to maintain higher levels of capital as a result of our commercial real estate concentration, which could require us to obtain additional capital, and may adversely affect stockholder returns.

Non-Interest Income

For the three months ended September 30, 2011, the Company recognized $1.9 million in non-interest income, compared to $3.1 million for the three months ended September 30, 2010. For the nine months ended September 30, 2011, the Company recognized non-interest income of $5.7 million compared to $4.8 million for the same period in 2010. Non-interest income for the third quarter of 2010 included $1.0 million in bank-owned life insurance death benefits. Fees and net gains on loans held for sale increased $210 thousand during the third quarter of 2011 from the second quarter of 2011, and increased by $62 thousand for the nine months ended September 30, 2011, from the same period last year, although fees and net gains on loans held for sale decreased $164 thousand from the three months ended September 30, 2010 to the same period in 2011. Non-deposit investment services commissions increased $198 thousand during the third quarter of 2011 from the same period a year ago and increased $524 thousand, or 99.1%, for the nine months ended September 301, 2011, from September 30, 2010. The linked quarter and year-over-year improvements are the result of the addition of two financial consultants to the Wealth Management Services team in the first half of 2010. For the nine months ended September 30, 2011, non-interest income included an impairment loss on securities of $732 thousand, which was partially offset by a gain on sale of securities of $503 thousand and $361 thousand from a bank-owned life insurance death benefit, while non-interest income for the nine months ended September 30, 2010, included a $1.5 million impairment loss on securities as well as the aforementioned bank-owned life insurance death benefit of $1.0 million. Management is carefully monitoring its holdings of the securities which caused the impairment losses and at this time cannot be assured that there will not be additional losses in the future. Management, except for the possibility of future impairment losses, expects non-interest income to generally remain at levels realized in the third quarter.

Non-Interest Expense

Non-interest expense decreased $418 thousand, or 2.7%, from $15.3 million in the third quarter of 2010, to $14.9 million in the third quarter of 2011, and was down $943 thousand, or 2.1%, from $44.8 million for the nine months ended September 30, 2010, to $43.9 million year-to-date 2011. Compared to the second quarter of 2011, non-interest expense increased $373 thousand during the third quarter of 2011. The majority of the year-over-year decreases in non-interest expense were due to lower FDIC insurance premiums and lower losses on other real estate owned, although salaries and employee benefits expense increased for both the three and nine months ended September 30, 2011 over the same periods in 2010. The operating efficiency declined slightly as the adjusted efficiency ratio was 49.3% in the third quarter of 2010 versus 49.4% in the third quarter of 2011.

Provision for Income Taxes

The Company’s income tax provisions are adjusted for non-deductible expenses and non-taxable income after applying the U.S. federal income tax rate of 35%. For the nine months ended September 30, 2011, the Company recorded an income tax provision of $9.9 million compared to $7.7 million for the same period in 2010. For the three

months ended September 30, 2011, the Company recorded an income tax provision of $3.3 million compared to $2.9 million for the same period in 2010. The effects of non-deductible expenses and non-taxable income on the Company’s income tax provisions are minimal.

Liquidity

The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Considerations in managing the Company’s liquidity position include, but are not limited to, scheduled cash flows from existing loans and investment securities, anticipated deposit activity including the maturity of time deposits, and projected needs from anticipated extensions of credit. The Company’s liquidity position is monitored daily by management to maintain a level of liquidity that can efficiently meet current needs and is evaluated for both current and longer term needs as part of the asset/liability management process. The growth of the Company’s AFS investment securities of $227 million, or 66.5%, from the third quarter of 2010 through the third quarter of 2011, has significantly increased the liquidity of the Company. Investments have been made primarily in short team mortgage backed pass through securities providing the Company a strong source of liquidity from the monthly pass through of principal and interest payments. These securities can be pledged for borrowing purposes or can be sold to accommodate liquidity needs.

The Company measures total liquidity through cash and cash equivalents, securities available-for-sale, mortgage loans held-for-sale, other loans and investment securities maturing within one year, less securities pledged as collateral for repurchase agreements, public deposits and other purposes, and less any outstanding Federal funds purchased. These liquidity sources increased $288.3 million, or 49.2%, from $585.1 million at December 31, 2010, to $873.4 million at September 30, 2011, due to a $88.5 million increase in overnight funds, a $195.0 million increase in unpledged available-for-sale securities and increase in other liquidity components. Additional sources of liquidity available to the Bank include the capacity to borrow funds through established short-term lines of credit with various correspondent banks and the FHLB of Atlanta. See Note 8 to the Consolidated Financial Statements for further information regarding these additional liquidity sources.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, and the Company’s obligations in connection with its trust preferred securities, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

Commitments to extend credit, which amounted to $530.5 million at September 30, 2011, and $436.3 million at December 31, 2010, represent legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates 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.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. At September 30, 2011, and December 31, 2010, the Company had $36.0 million and $28.8 million, respectively, in outstanding standby letters of credit.

Contractual Obligations

Since December 31, 2010, there have been no significant changes in the Company’s contractual obligations.

Capital

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces, and the overall level of growth. The adequacy of the Company’s current and future capital is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

Both the Company’s and the Bank’s capital levels continue to meet regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier 1 risk-based capital, total risk-based capital, and leverage ratios. Tier 1 capital consists of common and qualifying preferred stockholders’ equity, less goodwill, and for the Company includes certain minority interests relating to bank subsidiary issued shares, and a limited amount of restricted core capital elements. Restricted core capital elements include qualifying cumulative preferred stock interests, certain minority interests in subsidiaries and qualifying trust preferred securities. All of the $71 million in preferred stock interests issued to the Treasury under the Capital Purchase Program qualify as Tier 1 capital. Total risk-based capital consists of Tier 1 capital, qualifying subordinated debt, and a portion of the allowance for loan losses, and for the Company, a limited amount of excess restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weighted assets. The leverage ratio compares Tier 1 capital to total average assets. The Bank’s Tier 1 risk-based capital ratio was 14.17% at September 30, 2011, compared to 12.87% at December 31, 2010, and its total risk-based capital ratio was 15.42% at September 30, 2011, compared to 14.12% at December 31, 2010. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank’s leverage ratio was 11.39% at September 30, 2011, compared to 10.76% at December 31, 2010, and in excess of the mandated minimum requirement of 4.00%. The Company’s Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 14.46%, 15.71% and 11.60%, respectively, at September 30, 2011, compared to 13.20%, 14.45%, and 11.07% at December 31, 2010. The increases in these capital ratios in 2011 are due to additional capital, improved financial performance and lower levels of higher weight risk assets (loans) and higher levels of lower weighted risk assets (investment securities).

The ability of the Company to continue to maintain its overall asset size, or to grow, is dependent on its earnings and the ability to obtain additional funds for contribution to the Bank’s capital, through earnings, borrowing, the sale of additional common stock, or the issuance of additional other qualifying securities. In the event that the Company is unable to obtain additional capital for the Bank on a timely basis, the growth of the Company and the Bank may be curtailed, and the Company and the Bank may be required to reduce their level of assets in order to maintain compliance with regulatory capital requirements. Under those circumstances net income and the stockholders’ equity may be adversely affected.

Guidance by the federal banking regulators provides that banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that we may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans, which may require us to obtain additional capital.

The Federal Reserve has revised the capital treatment of trust preferred securities. As a result, the capital treatment of trust preferred securities has been revised to provide that beginning in 2011, such securities can be counted as Tier 1 capital at the holding company level, together with other restricted core capital elements, up to 25% of total capital (net of goodwill), and any excess as Tier 2 capital, subject to limitation. At September 30, 2010, trust preferred securities represented 19.3% of the Company’s Tier 1 capital and 17.8% of its total risk-based capital. See Note 9 to the Consolidated Financial Statements for further information regarding trust preferred securities.

Capital Issuances. As noted above, during 2008, the Company accepted an investment by Treasury under the Capital Purchase Program. In connection with that investment, the Company entered into and consummated a Securities Purchase Agreement with the Treasury, pursuant to which the Company issued 71,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $71.0 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Subject to approval by the Treasury after consultation with the Company’s and Bank’s federal regulators, the Company may, at its option, redeem the Series A Preferred Stock at the liquidation amount plus accrued and unpaid dividends. The Series A Preferred Stock is non-voting, except in limited circumstances. Prior to the third

anniversary of issuance, unless the Company has redeemed all of the Series A Preferred Stock or the Treasury has transferred all of the Series A Preferred Stock to a third party, the consent of the Treasury will be required for the Company to commence paying a cash common stock dividend or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement.

In connection with the purchase of the Series A Preferred Stock, the Treasury was issued a warrant (the “Warrant”) to purchase 2,696,203 shares of the Company’s common stock at an initial exercise price of $3.95 per share. The Warrant provides for the adjustment of the exercise price and the number of shares of the common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the common stock, and upon certain issuances of the common stock (or securities exercisable or exchangeable for, or convertible into, common stock) at or below 90% of the market price of the common stock on the trading day prior to the date of the agreement on pricing such securities. The Warrant expires ten years from the date of issuance. If the Company redeems the Series A Preferred Stock in full prior to exercise of the Warrant, the Warrant will be liquidated based upon the then current fair market value of the common stock. The Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

Please refer to Note 9 to the Consolidated Financial Statements for additional information regarding the issuance of $25 million of trust preferred securities and warrants to purchase 1.5 million shares of the Company’s common stock to certain directors and executive officers of the Company in 2008.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, were required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (“SEC”) issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (“XBRL”) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company complied with this Rule beginning with the filing of the June 30, 2011 Form 10-Q.

In March 2011, the SEC issued Staff Accounting Bulletin (“SAB”) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 will have on its consolidated financial statements.

Internet Access To Company Documents

The Company provides access to its SEC filings through the Bank’s web site at www.vcbonline.com. After accessing the web site, the filings are available upon selecting “About VCB/Investor Relations/SEC Filings.” Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed or furnished to the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, the Company is exposed to market risk, or interest rate risk, as its net income is largely dependent on its net interest income. Market risk is managed by the Company’s Asset/Liability Management Committee that formulates and monitors the performance of the Company based on established levels of market risk as dictated by policy. In setting tolerance levels, or limits on market risk, the Committee considers the impact on earnings and capital, the level and general direction of interest rates, liquidity, local economic conditions and other factors. Interest rate risk, or sensitivity, can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing of interest-earning assets differs from the maturing or repricing of interest-bearing liabilities and as a result of the difference between total interest-earning assets and interest-bearing liabilities. The Company seeks to manage interest rate sensitivity while enhancing net interest income by periodically adjusting this asset/liability position. In order to closely monitor and measure interest rate sensitivity, the Company uses earnings simulation models on a quarterly basis.

We use a duration gap of equity approach to manage our long term interest rate risk. This approach uses a model which generates estimates of the change in our market value of portfolio equity (“MVPE”) over a range of interest rate scenarios. MVPE is the present value of expected cash flows from assets and liabilities using various assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

Our short term interest rate sensitivity is managed through the use of a model that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The model assumes that the composition of interest sensitive assets and liabilities existing at September 30, 2011, remains constant over a two year period (base case) and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.

The following table provides an analysis of our interest rate risk as measured by the estimated change in MVPE and net interest income from the base case, resulting from instantaneous and sustained parallel shifts in interest rates as of September 30, 2011 (in thousands):


	Sensitivity of Market Value of Portfolio Equity September 30, 2011											Sensitivity of Net Interest Income September 30, 2011
	Market Value of Portfolio Equity											Net Interest Income					Net Interest Margin
Interest Rate Scenario	Amount		$ Change from Base			Percent			% of Total Assets			Amount		$ Change from Base			Percent			% Change from Base
Up 300 bps	$	331,057	$	(89,661	)		-21.31	%		10.80	%	$	216,866	$	13,508			3.73	%		6.57	%
Up 200 bps		362,031		(58,687	)		-13.95	%		11.81	%		212,856		9,498			3.66	%		4.63	%
Base Case		420,718		—			0.00	%		13.72	%		203,358		—			3.50	%		0.00	%
Down 100 bps		420,137		(581	)		-0.14	%		13.71	%		191,977		(11,380	)		3.31	%		-5.51	%

Management believes the modeled results are consistent with the short duration of the Company’s balance sheet and given the many variables that affect the actual timing of when assets and liabilities will reprice and the extent of that repricing. In shocking the current two year projection upward, interest-bearing liabilities are repricing slightly higher than interest-earning assets; however, that decline in interest income is being offset by a higher level of interest-earning assets relative to interest-bearing liabilities. Since the earnings model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior, the model cannot precisely estimate net income and the effect on net income from sudden changes in interest rates. Actual results will differ from the simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and the Interim Chief Financial Officer, has evaluated the effectiveness of the Company’s 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. Based on that evaluation, the Chief Executive Officer and the Interim Chief Financial Officer have concluded that the Company’s disclosure

controls and procedures were effective as of September 30, 2011, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Company’s periodic reports.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There was no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS - None

Item 1A. RISK FACTORS

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

Sales of Unregistered Securities. - None

(b)

Use of Proceeds.- Not Applicable.

(c)

Issuer Purchases of Securities. - None

Item 3. DEFAULTS UPON SENIOR SECURITIES - None

Item 4. (REMOVED AND RESERVED)

Item 5. OTHER INFORMATION

(a)

Required 8-K Disclosures. None

(b)

Changes in Procedures for Director Nominations by Securityholders. None

Item 6. EXHIBITS


Exhibit No.		Description

3.1		Articles of Incorporation of Virginia Commerce Bancorp, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006)

3.2		Articles of Amendment to the Articles of Incorporation relating to the Series A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 15, 2008)

3.3		Amended and Restated Bylaws of Virginia Commerce Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on July 27, 2007)

3.4		Amendment to the Amended and Restated By-laws of Virginia Commerce Bancorp, Inc. (incorporated by reference to exhibit 3.4 to the Company’s Current Report on Form 8-K filed on January 28, 2011)

4.12.1		Form of Amendment to Series B Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.12.1 to the Company’s Current Report on Form 8-K filed on September 29, 2011)

31.1		Certification of Peter A. Converse, President and Chief Executive Officer

31.2		Certification of Wilmer L. Tinley, Jr., Interim Chief Financial Officer

32.1		Certification of Peter A. Converse, President and Chief Executive Officer

32.2		Certification of Wilmer L. Tinley, Jr., Interim Chief Financial Officer

101		The following materials from Virginia Commerce Bancorp, Inc.’s quarterly report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited)

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.


	Virginia Commerce Bancorp, Inc.
	(Registrant)

Date: November 4, 2011	BY	/s/ Peter A. Converse
	Peter A. Converse, President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 4, 2011	BY	/s/ Wilmer L. Tinley, Jr.
	Wilmer L. Tinley, Jr., Interim Chief Financial Officer
	(Principal Financial Officer)