VIRGINIA COMMERCE BANCORP INC - FORM 10-K

VIRGINIA COMMERCE BANCORP INC - FORM 10-K - March 16, 2011

Attached files

Attached files

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EX-23 - EXHIBIT 23 - VIRGINIA COMMERCE BANCORP INC	dex23.htm
EX-21 - EXHIBIT 21 - VIRGINIA COMMERCE BANCORP INC	dex21.htm
EX-31.2 - EXHIBIT 31.2 - VIRGINIA COMMERCE BANCORP INC	dex312.htm
EX-32.1 - EXHIBIT 32.1 - VIRGINIA COMMERCE BANCORP INC	dex321.htm
EX-31.1 - EXHIBIT 31.1 - VIRGINIA COMMERCE BANCORP INC	dex311.htm
EX-10.9 - EXHIBIT 10.9 - VIRGINIA COMMERCE BANCORP INC	dex109.htm
EX-99.2 - EXHIBIT 99.2 - VIRGINIA COMMERCE BANCORP INC	dex992.htm
EX-32.2 - EXHIBIT 32.2 - VIRGINIA COMMERCE BANCORP INC	dex322.htm
EX-99.1 - EXHIBIT 99.1 - VIRGINIA COMMERCE BANCORP INC	dex991.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2010

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

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)

Registrant’s telephone number: 703.534.0700

Securities registered pursuant to Section 12(b) of the Act


Title of Each Class		Name of Each Exchange on which Registered
Common Stock, $1.00 par value		The Nasdaq Stock Market (Global Select)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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). ¨ Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 Rule 12b-2 of the Act). Yes ¨ No x

The registrant’s Common Stock is traded on the Nasdaq Global Select Market under the symbol VCBI. The aggregate market value of the approximately 26,939,838 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on June 30, 2010 was approximately $125.9 million, based on the closing sales price of $6.25 per share on that date. For purposes of this calculation, the term “affiliate” refers to all directors, executive officers and 10% shareholders of the registrant.

As of the close of business on March 15, 2011, 29,087,989 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders, to be held on April 27, 2011, are incorporated by reference in Part III hereof.

Form 10-K Cross Reference Sheet

The following shows the location in this Annual Report on Form 10-K or the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 2011, of the information required to be disclosed by the United States Securities and Exchange Commission Form 10-K. References to pages only are to pages in this report.


PART I	Item 1.	Business. See “Business” at pages 75 through 86.

	Item 1A.	Risk Factors. See “Risk Factors” at pages 26 through 34.

	Item 1B.	Unresolved Staff Comments. Not required.

	Item 2.	Properties. See “Properties” at page 87.

	Item 3.	Legal Proceedings. From time to time the Company is a participant in various legal proceedings incidental to its business. In the opinion of management, the liabilities (if any) resulting from such legal proceedings will not have a material effect on the financial position of the Company.

	Item 4.	Removed and Reserved.

PART II	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. See “Market Price of Stock” at page 88 through 89.

	Item 6.	Selected Financial Data. See “Five Year Financial Summary” at page 3.

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” at pages 4 through 25.

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk. See “Asset/Liability Management and Quantitative and Qualitative Disclosures About Market Risk” at page 11 through 12.

	Item 8.	Financial Statements and Supplementary Data. See Consolidated Financial Statements at pages 39 through 75.

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.

	Item 9A.	Controls and Procedures. See “Disclosure Controls and Procedures” at page 34 and “Management Report on Internal Control Over Financial Reporting” at page 35.

	Item 9B.	Other Information. None

PART III	Item 10.	Directors, Executive Officers and Corporate Governance. The information required by Item 10 is incorporated by reference from the material under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The Company has adopted a code of ethics that applies to its Chief Executive Officer and Chief Financial Officer. A copy of the code of ethics will be provided to any person, without charge, upon written request directed to Krista DiVenere, Assistant Controller, Virginia Commerce Bank, 14201 Sullyfield Circle, Suite 500, Chantilly, Virginia 20151.

		There have been no material changes in the procedures previously disclosed by which stockholders may recommend nominees to the Company’s Board of Directors.

	Item 11.	Executive Compensation. The information required by Item 11 is incorporated by reference from the material under the captions “Executive Officer Compensation” and “Election of Directors – Director Compensation” and “- Personnel and Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by Item 12 is incorporated by reference from the material under the caption “Voting Securities and Principal Holders” in the Proxy Statement, and included under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” at page 88.

	Item 13.	Certain Relationships and Related Transactions, and Director Independence. The information required by Item 13 is incorporated by reference from the material under the captions “Election of Directors” and “Transactions with Management and Related Parties” in the Proxy Statement.

	Item 14.	Principal Accountant Fees and Services. The information required by Item 14 is incorporated by reference from the material under the captions “Principal Accountant Fees” and “Election of Directors – Committees, Meetings and Procedures of the Board of Directors” in the Proxy Statement.

PART IV	Item 15.	Exhibits, Financial Statement Schedules. See “Financial Statements and Exhibits” at page 90 through 91.

FIVE YEAR FINANCIAL SUMMARY


	Year Ended December 31,
	2010			2009			2008			2007			2006
	(Dollars in thousands, except per share amounts)
Selected Year-End Balances
Total assets	$	2,741,648		$	2,725,297		$	2,715,922		$	2,339,697		$	1,949,082
Total stockholders’ equity		245,594			218,868			253,287			169,143			139,851
Total loans (net)		2,149,591			2,210,064			2,273,086			1,924,741			1,629,827
Total deposits		2,247,201			2,229,327			2,172,142			1,869,165			1,605,941
Summary Results of Operations
Interest income	$	148,826		$	150,633		$	160,468		$	154,138		$	125,292
Interest expense		43,497			59,229			77,430			78,981			56,487
Net interest income	$	105,329		$	91,404		$	83,038		$	75,157		$	68,805
Provision for loan losses		20,594			81,913			25,378			4,340			4,406
Net interest income after provision for loan losses	$	84,735		$	9,491		$	57,660		$	70,817		$	64,399
Non-interest income (charges)		3,697			(4,352	)		6,431			7,883			7,323
Non-interest expense		57,186			56,868			44,776			39,694			34,289
Income (loss) before taxes	$	31,246		$	(51,729	)	$	19,315		$	39,006		$	37,433
Provision (benefit) for income tax		9,706			(18,404	)		6,231			13,219			12,925
Net income (loss)	$	21,540		$	(33,325	)	$	13,084		$	25,787		$	24,508
Effective dividend on preferred stock		5,002			4,539			258			—			—
Net income (loss) available to common stockholders	$	16,538		$	(37,864	)	$	12,826		$	25,787		$	24,508
Per Common Share Data (1)
Net income (loss) per common share, basic	$	0.60		$	(1.42	)	$	0.48		$	0.98		$	0.95
Net income (loss) per common share, diluted	$	0.57		$	(1.42	)	$	0.47		$	0.95		$	0.89
Book value per common share	$	6.03		$	5.53		$	6.86		$	6.40		$	5.36
Average number of common shares outstanding:
Basic		27,603,741			26,692,570			26,555,484			26,323,242			25,960,838
Diluted		28,875,993			26,692,570			27,249,839			27,379,204			27,449,754
Growth and Significant Ratios
% Change in net income		164.64	%		-354.70	%		-49.26	%		5.22	%		24.61	%
% Change in assets		0.60	%		0.35	%		16.08	%		20.04	%		28.36	%
% Change in loans (net)		-2.74	%		-2.77	%		18.10	%		18.09	%		28.31	%
% Change in deposits		0.80	%		2.63	%		16.21	%		16.39	%		29.15	%
% Change in total stockholders’ equity		12.21	%		-13.59	%		49.75	%		20.95	%		25.07	%
Equity to asset ratio		8.96	%		8.03	%		9.33	%		7.23	%		7.18	%
Return on average assets		0.77	%		-1.22	%		0.51	%		1.21	%		1.40	%
Return on average equity		9.22	%		-13.89	%		7.18	%		16.75	%		19.51	%
Average equity to average assets		8.33	%		8.77	%		7.06	%		7.22	%		7.19	%
Efficiency ratio, GAAP (2)		52.45	%		65.33	%		50.05	%		47.80	%		45.04	%
Efficiency ratio, as adjusted (3)		50.63	%		55.57	%		50.05	%		47.80	%		45.04	%

(1)	Adjusted for all years presented giving retroactive effect to a three-for-two stock split in the form of a 50% stock dividend in 2006, and a 10% stock dividend in 2007 and 2008.

(2)	Computed by dividing non-interest expense by the sum of net interest income and non-interest income.

(3)

Computed by dividing non-interest expense by the sum of net interest income and non-interest income, net of losses on other real estate owned. This is a non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may not be possible, because other companies may calculate the efficiency ratio differently.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, statements regarding asset quality, concentrations of credit risk, 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 and 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 this Annual Report on Form 10-K.

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

This management’s discussion and analysis refers to the efficiency ratio, as adjusted, which is computed by dividing non-interest expense by the sum of net interest income and non-interest income before losses on other real estate owned (“OREO”). This is a non-GAAP financial measure that we believe provides investors with important information regarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may not be possible because other companies may calculate the efficiency ratio, as adjusted, differently. The Company, in referring to its net income, is referring to income under accounting principles generally accepted in the United States, or “GAAP.”

Calculation of the adjusted efficiency ratio for the year ended December 31, 2010 and December 31, 2009 is as follows:


(in thousands)	Year Ended December 31,
	*		2010			2009
Summary Operating Results:
Non-interest expense			$	57,186		$	56,868
Provision for unfunded commitments				—			(2,960	)
Total		A	$	57,186		$	53,908
Net interest income (on a tax-equivalent basis)			$	105,329		$	91,404
Non-interest income				3,697			(4,352	)
		B		109,026			87,052
Losses on other real estate owned				3,924			9,952
Total		C	$	112,950		$	97,004
Efficiency Ratio		A/B		52.45	%		61.93	%
Efficiency Ratio, adjusted		A/C		50.63	%		55.57	%

*	The letters included in this column are provided to show how the ratios presented are calculated.

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 investment services 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

During the year ended December 31, 2010, there were no changes in the Company’s critical accounting policies as reflected in the Company’s most recent annual or quarterly 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. For further information regarding the allowance for loan losses see Notes 1 and 4 to the Consolidated Financial Statements and the discussion under the caption “Asset Quality – Provision and Allowance for Loan Losses” at page 13.

The Company’s 2010 Equity Plan (the “2010 Plan”), which is stockholder-approved, permits the grant of share–based awards in the form of stock options, stock appreciation rights, restricted and unrestricted stock, performance units and other awards to its directors 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 its 1998 Stock Option Plan (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 five years of continuous service and have ten-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 U.S. Treasury Department (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 five years, to salaries and benefits expense.

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.

See Note 12 to the Consolidated Financial Statements for additional information regarding the plans and related compensation expenses.

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 Statement of Operations in accordance with accounting guidance. See Note 2 to the Consolidated Financial Statements for additional information regarding security impairments deemed to be other-than temporary.

Financial Performance Overview

For the year ended December 31, 2010, the Company recorded net income of $21.5 million. After an effective dividend of $5.0 million to the Treasury on preferred stock, the Company recorded net income to common stockholders of $16.5 million, or $0.57 per diluted common share, with a return on average assets and return on average equity of 0.77% and 9.22%, respectively. The financial performance in 2010 represents a strong turn around from the year ending December 31, 2009 results as the Company reported a $54.8 million increase in income from the $33.3 million loss in 2009. The most significant factor contributing to this improvement was the Company’s management of its problem loans resulting in a charge of $20.6 million for its provision for loan losses in 2010 compared to a charge of $81.9 million in 2009. The Company also benefited from $6.0 million in reduced losses on OREO properties as those losses declined from $10.0 million in 2009 to $3.9 million in 2010.

For the year ended December 31, 2009, the Company recorded a net operating loss of $33.3 million. After an effective dividend of $4.5 million to the Treasury on preferred stock, the Company recorded a net loss to common stockholders of $37.9 million, or $1.42 per diluted common share, with a return on average assets and return on average equity of a negative 1.22% and 13.89%, respectively. This loss in 2009, was primarily due to $81.9 million in loan loss provisions, taken in consideration of the level of non-performing loans and $53.2 million in net charge-offs. Earnings were also impacted by a $10.0 million loss on other real estate owned, a $1.8 million impairment loss on securities, and a $3.0 million provision for a contingent liability related to an off-balance sheet letter-of-credit commitment. For the year ended December 31, 2008, operating earnings of $13.1 million, were down $12.7 million, or 49.3% compared to earnings of $25.8 million for the prior fiscal year as net interest income increased $7.8 million, or 10.5%, from $75.2 million in 2007, to $83.0 million in 2008, non-interest income decreased $1.5 million, or 18.4%, from $7.9 million in 2007, to $6.4 million, while provisions for loan losses were up $21.0 million, and non-interest expense rose 12.8%, from $39.7 million in 2007, to $44.8 million. On a diluted per common share basis, earnings were $0.47 in 2008, while the Company’s return on average assets was 0.51% in 2008, and its return on average equity was 7.18% in 2008.

Total assets increased $16.4 million, or 0.6%, from $2.73 billion at December 31, 2009, to $2.74 billion at December 31, 2010, and increased $9.4 million, or 0.35%, from $2.72 billion at December 31, 2008, to $2.73 billion at December 31, 2009. Loans, net of the allowance for loan losses, decreased $60.5 million, or 2.7%, from $2.21 billion at December 31, 2009, to $2.15 billion at December 31, 2010, as non-farm, non-residential real estate loans increased $12.9 million, or 1.1%, while one-to-four family residential loans decreased $5.8 million, or 1.4%, real estate construction loans fell $63.6 million, or 14.9%, and commercial and industrial loans were down $19.7 million, or 8.3%. Loan production in 2010 was impacted by the confluence of several factors. First, lower economic activity in both the business and consumer sectors negatively impacted the demand for credit in the Company’s markets. Second, the Company made strategic decisions to restrict lending for new acquisition, development and construction loans, decreasing this component of the loan portfolio, and to focus on activities designed to build greater market share in commercial lending to select business sectors including government contract lending, professional practices and associations and certain service industries. These market share-building activities included placing an increased emphasis on deposit generation and non-credit products as well as strategic hiring and restructuring of sales management and calling efforts; all of these market share-building efforts typically result in a lag time before loan growth in these sectors will be evident. Lastly, the Company continued to prioritize problem loan identification and resolution, which continued to impact the staffing and time allocation of lending personnel. Loans continue to be the Company’s primary asset class and driver of interest income.

In 2009, loans, net of the allowance for loan losses, decreased $63.0 million, or 2.8%, from $2.27 billion at December 31, 2008, to $2.21 billion at December 31, 2009, as non-farm, non-residential real estate loans increased $114.6 million, or 11.3%, and one-to-four family residential loans increased $49.5 million, or 13.9%, while real estate construction loans fell $156.8 million, or 26.8%, and commercial and industrial loans were down 14.7%. Loan production in 2009 was negatively impacted by declining economic activity and demand in both the business and consumer sectors, a reallocation of lending personnel to problem loan identification and resolution and a strategic decision to moderate loan growth in the face of an uncertain economy and heightened risk factors. Loans are the Company’s principal asset class and primary contributor to interest income.

While loans are the Company’s major asset, deposits are the Company’s major source of funding and, as a result, the major contributor to interest expense. From year-end 2009 to year-end 2010, deposits increased $17.9 million, or 0.8%, to $2.2 billion, as demand deposits increased $25.1 million, or 10.5%, savings and interest-bearing demand deposits grew $216.1 million, or 21.9%, and time deposits declined $223.4 million, or 22.2%. The increase in demand deposits was primarily due to successful deposit gathering efforts led by the Company’s team of business development officers who are focused on acquisition and retention of commercial operating funds, treasury management services and other related cross-sales. The increase in savings and interest-bearing demand deposits was due primarily to success with the Company’s MEGA Savings and MEGA Checking account products as well as its Premier Interest Checking product for non-profit organizations. The decline in time deposits was largely due to reduced loan volume resulting in less reliance on certificates of deposit for funding as well as more strategic pricing of certificates of deposits relative to both the competitive market and the Company’s pricing on interest-bearing transaction accounts. The proportionate share of time deposits to total deposits has declined to 34.8% as of December 31, 2010, from a peak of 67.2% at year-end 2008 and 45.1% at year-end 2009. At December 31, 2010, the Bank had no brokered certificates of deposit, down from $50.1 million at the end of 2009.

In 2009, deposits increased $57.2 million, or 2.6%, with non-interest-bearing demand deposits increasing $44.8 million, or 23.0%, to $239.6 million, savings and interest-bearing demand deposits grew $467.1 million, or 90.2%, and time deposits declined by $454.7 million, or 31.2%.

The Company’s investment securities portfolio represents its second largest asset class and contributor to interest income, and is generally maintained as a primary source of liquidity. Investment securities increased $63.2 million, or 18.1%, from $348.6 million at December 31, 2009, to $411.8 million at December 31, 2010, and increased $22.9 million, or 7.0%, from $325.7 million at December 31, 2008, to $348.6 million at December 31, 2009. The majority of the year-over-year increase in securities was concentrated in U.S. government agency debt obligations and mortgage-backed securities, and bank-qualified municipal bonds.

Stockholders’ equity increased $26.7 million, or 12.2%, from $218.9 million at December 31, 2009 to $245.6 million at December 31, 2010, with net income to common stockholders of $16.5 million over the twelve-month period, $9.3 million in additional capital, a $1.9 million decrease in other comprehensive income related to the investment securities portfolio, and $1.4 million in proceeds, tax benefits and expense credits related to the exercise of options by company directors, officers and employees. As a result of these changes, the Company’s Tier 1 capital ratio increased from 11.48% at December 31, 2009, to 13.20% at December 31, 2010, and its total qualifying capital ratio increased from 12.73% to 14.45% for the same period. In 2009, stockholders equity decreased $34.4 million, or 13.6%, from $253.3 million at December 31, 2008, to $218.9 million at December 31, 2009, with a net loss to common stockholders of $37.9 million over the twelve-month period, a $1.1 million increase in other comprehensive income related to the investment securities portfolio, and $918 thousand in proceeds and tax benefits related to the exercise of options by company directors, officers and employees and stock option expense credits. As a result of these changes, the Company’s Tier 1 capital ratio decreased from 13.07% at December 31, 2008, to 11.48% at December 31, 2009, and its total qualifying capital ratio declined from 14.44% to 12.73% for the same period.

On September 24, 2008, the Company raised $25 million in qualifying capital through the sale of trust preferred securities to the Company’s directors and certain of its executive officers. 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. On December 12, 2008, the Company issued $71 million in preferred stock to the Treasury under the Capital Purchase Program. In connection with the issuance of the preferred stock, the Company also issued to the Treasury warrants to purchase approximately 2.7 million shares of common stock. Please refer to “Capital Issuances” at page 24 for a discussion of the issuance of securities under the Capital Purchase Program. 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, which, if fully exercised, would provide an additional $11.4 million in gross proceeds to the Company. Please refer to “Capital Issuances” at page 24 for a discussion of the issuance of securities in the registered direct placement.

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. For the year ending December 31, 2010, net interest income of $105.3 million was up 15.2%, compared to $91.4 million in 2009, as the net interest margin rose from 3.45% in 2009, to 3.90%. This year-over-year increase in the net interest margin was driven by lower deposit costs due to significant reductions in the level of time deposits and increased levels of demand deposits and lower rate interest-bearing transaction accounts. As a result, the average cost of interest-bearing deposits fell from 2.50% in 2009 to 1.64% in 2010. However, the increase in net interest margin was tempered by year-over-year reductions in yields on the Company’s interest earning assets, as the Company’s average loan balances decreased and the yield on the Company’s investment securities portfolio decreased 70 basis points. In 2009, net interest income increased $8.4 million, or 10.1%, from $83.0 million in 2008, to $91.4 million at December 31, 2009 and the average cost of interest-bearing deposits fell from 3.55% in 2008, to 2.50% in 2009, while yields on interest-earning assets fell to a lesser extent from an average of 6.35% in 2008 to 5.67% in 2009. As a result, the net interest margin rose from 3.30% in 2008, to 3.45% in 2009.

In 2008, net interest income increased $7.8 million, or 10.5%, from $75.2 million in 2007, to $83.0 million due to significant growth in loans, as the net interest margin fell from 3.65% in 2007, to 3.30%, with the yield on interest-earning assets falling 111 basis points from 7.46% to 6.35%, while the cost of interest-bearing liabilities fell 94 basis points to 3.52%. The declines in yields and the cost of funds in 2008 were highly affected by a Federal Open Market Committee campaign, beginning in September 2007, to lower the Federal funds target rate. That campaign ended in September 2008 with a target rate range of 0.00% to 0.25% and, as a result, the prime lending rate fell to 3.25%. These rates remained unchanged through 2010. Tables 1 and 2 provide further information with regard to yields, costs, the changes in net interest income and associated risk.

TABLE 1: AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES

The following table shows the average balance sheets for each of the years ended December 31, 2010, 2009, and 2008. In addition, the amounts of interest earned on interest-earning assets, with related yields, 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 $3.0 million, $3.3 million and $5.0 million for 2010, 2009, and 2008, respectively.


	2010							2009							2008
(Dollars in thousands)	Average Balance		Interest Income- Expense		Average Yields / Rates			Average Balance		Interest Income- Expense		Average Yields / Rates			Average Balance		Interest Income- Expense		Average Yields / Rates
Assets
Securities (1)	$	372,480	$	14,684		4.12	%	$	334,873	$	15,641		4.82	%	$	320,497	$	16,265		5.19	%
Restricted stock		11,752		356		3.03	%		11,589		355		3.06	%		7,695		320		4.15	%
Loans, net of unearned income		2,259,560		133,599		5.92	%		2,279,294		134,548		5.91	%		2,180,883		143,501		6.57	%
Interest-bearing deposits in other banks		249		—		0.09	%		91		—		0.09	%		4,831		145		2.99	%
Federal funds sold		79,882		187		0.23	%		42,718		89		0.20	%		14,067		237		1.66	%

Total interest-earning assets	$	2,723,923	$	148,826		5.50	%	$	2,668,565	$	150,633		5.67	%	$	2,527,973	$	160,468		6.35	%

Other assets		79,140							67,737							54,611

Total assets	$	2,803,063						$	2,736,302						$	2,582,584

Liabilities & Stockholders’ Equity
Interest-bearing deposits
NOW accounts	$	335,716	$	2,971		0.89	%	$	228,189	$	2,825		1.24	%	$	165,374	$	2,655		1.60	%
Money market accounts		157,071		1,872		1.19	%		157,216		2,302		1.46	%		198,429		5,389		2.71	%
Savings accounts		663,479		9,759		1.47	%		381,042		7,764		2.04	%		175,629		5,124		2.91	%
Time deposits		882,832		18,860		2.14	%		1,221,328		36,707		3.01	%		1,349,116		54,093		4.00	%

Total interest-bearing deposits	$	2,039,098	$	33,462		1.64	%	$	1,987,775	$	49,598		2.50	%	$	1,888,548	$	67,261		3.55	%

Securities sold under agreement to repurchase and federal funds purchased		183,338		4,012		2.19	%		186,106		3,475		1.87	%		223,114		5,534		2.47	%

Other borrowed funds		25,000		1,077		4.25	%		25,000		1,077		4.25	%		36,202		1,235		3.36	%

Trust preferred capital notes		66,186		4,946		7.37	%		65,930		5,079		7.60	%		46,373		3,400		7.21	%

Total interest-bearing liabilities	$	2,313,622	$	43,497		1.88	%	$	2,264,811	$	59,229		2.62	%	$	2,194,237	$	77,430		3.52	%

Demand deposits and other liabilities		255,871							231,554							206,117

Total liabilities	$	2,569,493						$	2,496,365						$	2,400,354

Stockholders’ equity		233,570							239,937							182,230

Total liabilities and stockholders’ equity	$	2,803,063						$	2,736,302						$	2,582,584

Interest rate spread						3.62	%						3.05	%						2.83	%
Net interest income and margin			$	105,329		3.90	%			$	91,404		3.45	%			$	83,038		3.30	%

(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 tax-exempt securities are stated on a tax equivalent basis, using a 35% rate.

TABLE 2: RATE-VOLUME VARIANCE ANALYSIS

Interest income and expense are affected by changes in interest rates, by changes in the volumes of earning assets and interest-bearing liabilities, and by changes in the mix of these assets and liabilities. Changes attributable to both volume and rate have been allocated proportionately. The following analysis shows the year-to-year changes in the components of net interest income.


	2010 compared to 2009									2009 compared to 2008
	Increase/(Decrease) Due to						Total Increase/ (Decrease)			Increase/(Decrease) Due to						Total Increase/ (Decrease)
(Dollars in thousands)	Volume			Rate			Total Increase/ (Decrease)			Volume			Rate			Total Increase/ (Decrease)
Interest Income
Loans	$	(1,170	)	$	221		$	(949	)	$	5,425		$	(14,378	)	$	(8,953	)
Securities		1,386			(2,343	)		(957	)		566			(1,190	)		(624	)
Restricted Stock		5			(4	)		1			120			(85	)		35
Interest bearing deposits in other banks		—			—			—			(4	)		(141	)		(145	)
Federal funds sold		87			11			98			58			(206	)		(148	)

Total interest income	$	308		$	(2,115	)	$	(1,807	)	$	6,165		$	(16,000	)	$	(9,835	)

Interest Expense
Interest-bearing deposits:
NOW accounts	$	951		$	(805	)	$	146		$	770		$	(600	)	$	170
Money market accounts		(2	)		(428	)		(430	)		(618	)		(2,469	)		(3,087	)
Savings accounts		4,154			(2,159	)		1,995			4,171			(1,531	)		2,640
Time deposits		(6,608	)		(11,239	)		(17,847	)		(4,496	)		(12,890	)		(17,386	)

Total interest-bearing deposits	$	(1,505	)	$	(14,631	)	$	(16,136	)	$	(173	)	$	(17,490	)	$	(17,663	)
Securities sold under agreement to repurchase and federal funds purchased		(60	)		597			537			(706	)		(1,353	)		(2,059	)
Other borrowed funds		—			—			—			(486	)		328			(158	)
Trust preferred capital notes		19			(152	)		(133	)		1,497			182			1,679

Total interest expense	$	(1,546	)	$	(14,186	)	$	(15,732	)	$	132		$	(18,333	)	$	(18,201	)

Change in Net Interest Income	$	1,854		$	12,071		$	13,925		$	6,033		$	2,333		$	8,366

Asset/Liability Management and 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 which formulates and monitors the performance of the Company based on acceptable 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 interest 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 interest 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 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 December 31, 2010, remains constant over a one-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 December 31, 2010 (in thousands):


	Sensitivity of Market Value of Portfolio Equity December 31, 2010											Sensitivity of Net Interest Income December 31, 2010
	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	$	168,850	$	(96,646	)		-36.4	%		6.12	%	$	103,457	$	(2,653	)		3.88	%		-2.46	%
Up 200 bps		199,280		(66,216	)		-24.94	%		7.22	%		104,011		(2,099	)		3.90	%		-1.94	%
Base Case		265,496		—			0.00	%		9.63	%		106,110		—			3.98	%		0.00	%
Down 100 bps		287,045		21,549			8.12	%		10.41	%		105,393		(717	)		3.95	%		-0.68	%

Management believes the modeled results are consistent with the short duration of its balance sheet, given the many variables that affect the actual timing of when assets and liabilities will reprice. 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.

Non-Interest Income (Charges)

The Company’s non-interest income sources include service charges and other fees on deposit accounts, fees and net gains from loans originated and sold through its mortgage lending division, commissions from non-deposit investment sales and increases in the cash surrender value of bank-owned life insurance policies. For the year ended December 31, 2010, non-interest income of $3.7 million, was up 184.9%, compared to a loss of $4.4 million in 2009. Excluding $3.9 million in losses on other real estate owned and a $1.6 million impairment loss on securities during 2010 and corresponding amounts in 2009, other sources of non-interest-income rose $1.8 million from 2009 to 2010 with lower deposit account service charges offset by a $525 thousand increase in fees and net gains on mortgage loans originated and sold and an $860 thousand increase in income on bank-owned life insurance included in the other category within non-interest income. Losses on OREO decreased from $10.0 million for the year ended December 31, 2009 to $3.9 million for the same period in 2010, a decrease of 60.6%, while impairment loss on securities decreased 9.6% to $1.6 million for 2010. The losses on OREO are consistent with management’s commitment to aggressive disposition of these assets, and result from the sale of $14.8 million in properties in 2010 compared to $9.7 million in 2009, with a lower valuation loss due to more favorable market conditions. The impairment loss on securities was due to deferrals and defaults by the underlying issuers of the Bank’s investment in pooled trust preferred securities. In 2009, non-interest income (charges) reflected a loss of $4.4 million compared to $6.4 million of income in 2008, due to $10.0 million in losses on other real estate owned and a $1.8 million impairment loss on securities.

Service charges and other fees, which include monthly deposit account maintenance charges, overdraft fees, ATM fees and charges, debit card interchange income, safe deposit box rents, merchant discount fee income, and lock-box service fees, decreased $230 thousand, or 6.4%, from $3.6 million in 2009, to $3.4 million in 2010, and decreased $296 thousand, or 7.6%, from $3.9 million in 2008, to $3.6 million in 2009. The declines in 2010 and 2009 were due to lower levels of overdraft fees, while the increase in 2008 was the result of a new debit card rewards program that increased debit card interchange income.

Commissions on non-deposit investment services, which the Bank offers through a third party arrangement, were up $231 thousand in 2010, from $600 thousand for the year ended December 31, 2009 to $831 thousand for the same period in 2010, were down $102 thousand in 2009, from $702 thousand for the year ended December 31, 2008 to $600 thousand, for the same period in 2009, and were down $68 thousand in 2008 from $770 thousand for the year ended December 31, 2007.

Non-Interest Expense

Non-interest expense increased $318 thousand, or 0.6%, from $56.9 million in 2009, to $57.2 million in 2010, increased $12.1 million, or 27.0%, from $44.8 million in 2008, to $56.9 million in 2009, and increased $5.1 million, or 12.8%, from $39.7 million in 2007, to $44.8 million in 2008. In 2009, non-interest expense included a $3.0 million contingent liability provision related to an off-balance sheet letter-of-credit commitment. Excluding that expense item, non-interest expense increased $9.1 million, or 20.4%.

In 2010, salaries and benefits increased $2.0 million, or 8.5%, to $25.0 million from $23.0 million in 2009. The significant increase in 2010 was due to higher commissions associated with an increase in mortgage loan production and hiring of additional personnel to implement the Company’s strategic initiative to build greater commercial lending market share for select segments of that market. In 2009, salaries and benefits decreased $322 thousand, or 1.4%, while they accounted for $826 thousand, or 16.2%, of the total increase in non-interest expense in 2008. The declines in 2008 and 2009 were due to lower mortgage related commissions and reduced incentive compensation due to lower Company earnings.

Occupancy expenses, which include rents, depreciation, maintenance on buildings, leaseholds and equipment, decreased $302 thousand, or 2.9%, from $10.3 million in 2009 to $10.0 million in 2010, increased $1.4 million, or 15.8%, from $8.9 million in 2008, to $10.3 million in 2009, and increased $1.9 million, or 26.0%, from $7.0 million in 2007, to $8.9 million in 2008. The increases from 2007 to 2009 were due to the opening of nine new branch locations and expanded office facilities for lending units and other back office support departments.

Other operating expenses, which include advertising and public relations expenses, legal and professional fees, insurance, OREO expense, telecommunications and supplies, increased $2.0 million, or 20.4%, from $9.7 million in 2009, to $11.6 million in 2010 and increased $2.3 million, or 31.3%, from $7.4 million in 2008, to $9.7 million in 2009. The increase in 2010 was primarily due to higher legal and professional fees, in connection with capital raising activities and problem asset resolution, and OREO expenses. Prior to 2010, the increases over the years are generally due to branch expansion and overall growth.

Income Taxes

The Company’s income tax provisions are adjusted for non-deductible expenses and non-taxable interest after applying the U.S. federal income tax rate of 35%. The provision for income taxes totaled $9.7 million for the year ended December 31, 2010, while the Company recorded a carry-back benefit of $18.4 million in 2009. Provisions for income taxes totaled $6.2 million for the year ended December 31, 2008. The effects of non-deductible expenses and non-taxable interest on the Company’s income tax provisions are minimal. For further information regarding the provisions for income taxes see Note 8 to the Consolidated Financial Statements.

Asset Quality - Provision and Allowance For Loan Losses

For the year ended December 31, 2010, provisions for loan losses were $20.6 million compared to $81.9 million in 2009, with total net charge-offs in 2010 of $23.3 million versus $53.2 million for the year ended December 31, 2009. In 2008, provisions totaled $25.4 million with net charge-offs of $11.2 million.

As a result of these provisions and charge-offs, the total allowance for loan losses decreased $2.7 million, or 4.2%, from $65.2 million at December 31, 2009 to $62.4 million at December 31, 2010, increased $28.7 million, or 78.6%, from $36.5 million at December 31, 2008, to $65.2 million at December 31, 2009, and increased from $22.3 million at December 31, 2007, to $36.5 million at December 31, 2008.

Non-performing assets and loans 90+ days past due declined in 2010, from $98.1 million as of December 31, 2009 to $74.6 million at December 31, 2010. As a percent of total loans, the allowance has decreased from 2.86% as of December 31, 2009, to 2.82% as of December 31, 2010, and as a percent of non-performing loans it has increased from 93.6% as of December 31, 2009, to 108.8% at December 31, 2010. The Company’s allowance at December 31, 2010 remained roughly equivalent to the allowance at December 31, 2009. Although the Company made significant progress in reducing non-performing assets and loans 90+ days past due, as the balance of non-performing assets and loans 90+ days past due remains elevated as compared to the Company’s historical levels, and the Company believes the allowance at December 31, 2010 was appropriate for the level of portfolio rish measured.

While non-performing assets and loans 90+ days past due declined in 2009, from $124.9 at December 31, 2008 to $98.1 million at December 31, 2009, the allowance increased as other identified potential problem loans, which are classified as impaired loans, although well-secured and currently performing, but in some instances requiring higher reserve levels, rose from $49.3 million at December 31, 2008, to $171.8 million at December 31, 2009. As a percent of total loans, the allowance has increased from 1.58% as of December 31, 2008, to 2.86% as of December 31, 2009, and as a percent of non-performing loans it has increased from 31.1% as of December 31, 2008, to 93.6% at December 31, 2009. 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.

Management feels that the allowance for loan losses is adequate at December 31, 2010. 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 and commercial real estate markets 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 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 Notes 1 and 4 to the Consolidated Financial Statements.

TABLE 3: PROVISION AND ALLOWANCE FOR LOAN LOSSES


(Dollars in thousands)	2010			2009			2008			2007			2006
Allowance, beginning of period	$	65,152		$	36,475		$	22,260		$	18,101		$	13,821

Charge-Offs
Commercial loans		7,761			16,317			3,436			—			112
Real estate loans		19,372		$	37,879		$	7,493		$	—		$	—
Consumer loans		345			417			392			212			77

Total charge-offs	$	27,478		$	54,613		$	11,321		$	212		$	189

Recoveries
Commercial loans		2,858			739			16			—			—
Real estate loans	$	1,296		$	571		$	77		$	—		$	—
Consumer loans		20			67			65			31			63

Total recoveries	$	4,174		$	1,377		$	158		$	31		$	63

Net charge-offs	$	23,304		$	53,236		$	11,163		$	181		$	126

Provision for loan losses		20,594			81,913			25,378			4,340			4,406

Allowance, end of period	$	62,442		$	65,152		$	36,475		$	22,260		$	18,101

Ratio of net charges-offs to average total loans outstanding during period		1.03	%		2.34	%		0.51	%		0.01	%		0.01	%

TABLE 4: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses includes specific allowances for impaired loans and a general allowance applicable to all loan categories; however, management has allocated the allowance to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts, or that the allocation indicates future trends. The allocation of the allowance at December 31 for the years indicated and the ratio of related outstanding loan balances to total loans are as follows:


(Dollars in thousands)	2010			2009			2008			2007			2006
Allocation of allowance for loan losses:
Commercial		9,972			11,241			8,489			6,304			4,449
Real estate – mortgage	$	25,409		$	26,514		$	9,375		$	9,226		$	8,654
Real estate – construction		26,584			26,862			18,460			6,598			4,939
Consumer		373			440			126			118			59
Farmland		63			84			25			14			—
Unallocated		41			11			—			—			—

Balance, December 31,	$	62,442		$	65,152		$	36,475		$	22,260		$	18,101

Ratio of loans to total year-end loans:
Commercial		9	%		10	%		12	%		12	%		11	%
Real estate – mortgage		73	%		70	%		62	%		59	%		57	%
Real estate – construction		17	%		19	%		25	%		28	%		31	%
Consumer		1	%		1	%		1	%		1	%		1	%

		100	%		100	%		100	%		100	%		100	%

See Notes 1 and 4 to the Consolidated Financial Statements for additional information regarding the provision and allowance for loan losses.

Risk Elements and Non-Performing Assets

Non-performing assets consist of non-accrual loans and other real estate owned (foreclosed properties). For the year ended December 31, 2010, the total non-performing assets and loans 90+ days past due and still accruing interest decreased by $23.6 million, or 24.0%, from $98.1 million at December 31, 2009, to $74.6 million at December 31, 2010, and decreased by $26.8 million, or 21.4%, from $124.9 million at December 31, 2008, to $98.1 million at year-end 2009. As a result, the ratio of non-performing assets and loans 90+ days past due and still accruing to total assets decreased from 3.60% at December 31, 2009, to 2.72% at December 31, 2010, and decreased from 4.60% at December 31, 2008, to 3.60% at December 31, 2009.

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, increased from $171.8 million at December 31, 2009, to $177.6 million at December 31, 2010. 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 represented $103.0 million of total impaired loans as of December 31, 2010 and $71.9 million of total impaired loans as of December 31, 2009. There were no troubled debt restructurings as of December 31, 2008. 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. All loans reported as troubled debt restructurings accrue 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. Troubled debt restructurings continue to be individually tested for impairment for a period of one year from their modification date.

Total non-performing assets consist of the following:

TABLE 5: NON-PERFORMING ASSETS


	December 31,
(Dollars in thousands)	2010			2009			2008			2007			2006
Non-accrual loans	$	57,158		$	65,809		$	111,234		$	3,826		$	3,920
Other real estate owned		17,165			28,499			7,569			—			—

Total non-performing assets	$	74,323		$	94,308		$	118,803		$	3,826		$	3,920

Loans past due 90 days and still accruing		242			3,826			6,118			579			—

Total non-performing assets and past due loans	$	74,565		$	98,134		$	124,921		$	4,405		$	3,920

Allowance for loan losses to total loans		2.82	%		2.86	%		1.58	%		1.14	%		1.10	%
Allowance for loan losses to non-performing loans		108.79	%		93.56	%		31.08	%		505.33	%		461.76	%
Non-performing assets and past due loans to total loans		3.37	%		4.31	%		5.40	%		0.23	%		0.24	%
Non-performing assets and past due loans to total assets		2.72	%		3.60	%		4.60	%		0.19	%		0.20	%

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. As of December 31, 2010, $33.6 million, or 58.7%, of non-performing loans represented acquisition, development and construction (“ADC”) loans, $13.1 million, or 22.8%, represented non-farm, non-residential loans, $7.1 million, or 12.3%, represented loans on one-to-four family residential properties and $3.7 million, or 6.5%, represented commercial and industrial loans. The Company would have recorded additional gross interest income of approximately $3.4 million for 2010, $5.2 million for 2009 and $3.8 million for 2008, if non-accrual loans had been current throughout these periods. Interest actually received on non-accrual loans was $158 thousand in 2010, $979 thousand in 2009 and $174 thousand in 2008. See Notes 1 and 4 to the Consolidated Financial Statements for additional information regarding the Company’s non-performing assets. Tables 6 and 7 provide a breakdown of the construction loan portfolio by location including loans on non-accrual status and percentage of net-charge offs in 2010. Table 8 provides a breakdown of the non-farm/non-residential portfolio by location including loans on non-accrual status and percentage of net charge-offs in 2010.

TABLE 6: RESIDENTIAL, ACQUISITION, DEVELOPMENT AND CONSTRUCTION LOANS


	As of December 31, 2010
(Dollars in thousands) 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	$	3,971		2.2	%	$	—		—			0.3	%
Montgomery, MD		2,336		1.3	%		1,894		1.1	%		2.0	%
Prince Georges, MD		18,594		10.5	%		2,953		1.6	%		0.2	%
Other Counties in MD		5,416		3.1	%		1,077		0.6	%		0.9	%
Arlington/Alexandria, VA		23,935		13.5	%		2,848		1.6	%		—
Fairfax, VA		40,586		22.9	%		2,284		1.3	%		0.2	%
Culpeper/Fauquier, VA		4,447		2.5	%		3,695		2.1	%		0.9	%
Fredericksburg, VA		6,281		3.5	%		6,250		3.5	%		—
Henrico, VA		—		0.0	%		—		—			—
Loudoun, VA		32,846		18.5	%		770		0.4	%		—
Prince William, VA		7,867		4.4	%		1,054		0.6	%		—
Spotsylvania, VA		296		0.2	%		—		—			—
Stafford, VA		20,421		11.5	%		4,364		2.5	%		0.2	%
Other Counties in VA		8,987		5.1	%		—		—			0.1	%
Outside VA, MD & DC		1,599		0.9	%		—		—			—

Totals	$	177,582		100.0	%	$	27,189		15.3	%		4.7	%

TABLE 7: COMMERCIAL, ACQUISITION, DEVELOPMENT AND CONSTRUCTION LOANS


	As of December 31, 2010
(Dollars in thousands) 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	$	10,214		5.5	%	$	—		—			—
Montgomery, MD		1,366		0.7	%		—		—			—
Prince Georges, MD		12,492		6.7	%		—		—			—
Other Counties in MD		3,396		1.8	%		—		—			—
Arlington/Alexandria, VA		9,312		5.0	%		—		—			—
Fairfax, VA		28,390		15.2	%		2,800		1.5	%		-0.1	%
Culpeper/Fauquier		3,020		1.6	%		—		—			—
Henrico, VA		849		0.5	%		—		—			—
Loudoun, VA		24,790		13.3	%		1,497		0.8	%		—
Prince William, VA		58,198		31.1	%		2,064		1.1	%		—
Spotsylvania, VA		2,715		1.5	%		—		—			—
Stafford, VA		29,801		15.9	%		—		—			—
Other Counties in VA		2,486		1.3	%		—		—			—
Outside VA, MD & DC		—		0	%		—		—			—

Totals	$	187,029		100.0	%	$	6,361		3.4	%		-0.1	%

TABLE 8: NON-FARM/NON-RESIDENTIAL LOANS


	As of December 31, 2010
(Dollars in thousands) 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	$	79,822		7.0	%	$	—		—			—
Montgomery, MD		35,477		3.1	%		—		—			0.1	%
Prince Georges, MD		47,455		4.2	%		720		0.1	%		—
Other Counties in MD		53,048		4.7	%		—		—			—
Arlington/Alexandria, VA		180,863		15.9	%		2,341		0.2	%		—
Fairfax, VA		262,366		23.0	%		3,699		0.3	%		—
Culpeper/Fauquier, VA		5,728		0.5	%		—		—			—
Fredericksburg, VA		7,289		0.6	%		—		—			—
Henrico, VA		29,365		2.6	%		—		—			—
Loudoun, VA		117,906		10.4	%		2,102		0.2	%		0.2	%
Prince William, VA		206,443		18.1	%		909		0.1	%		0.0	%
Spotsylvania, VA		20,102		1.8	%		—		—			—
Stafford, VA		21,382		1.9	%		—		—			—
Other Counties in VA		63,889		5.6	%		3,286		0.3	%		0.1	%
Outside VA, MD & DC		7,681		0.7	%		—		—			—

Totals	$	1,138,816		100.0	%	$	13,057		1.2	%		0.46	%

Foreclosed real properties (or other real estate owned, or OREO) 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 Assets 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 recorded $3.9 million in losses on foreclosed real properties in 2010 and $10.0 million for the year ended December 31, 2009. The following tables provide a breakdown of foreclosed real properties by type and a roll-forward of activity for the years ended December 31, 2009 and 2010:

TABLE 9: OTHER REAL ESTATE OWNED BY TYPE


	Year-end December 31,
(Dollars in thousands)	2010		2009
Residential Land	$	10,996	$	15,081
Residential Building		908		2,649
Commercial Land		1,230		1,430
Commercial Building		4,031		9,339
Total other real estate owned	$	17,165	$	28,499

TABLE 10: OTHER REAL ESTATE OWNED ACTIVITY


	Year-ended December 31,
(Dollars in thousands)	2010			2009
Beginning Balance	$	28,499		$	7,569
Additions		7,449			40,229
Capital improvements		0			372
Valuation adjustments		(3,313	)		(9,067	)
Dispositions		(14,859	)		(9,719	)
(Loss) on disposition		(611	)		(885	)
Ending Balance	$	17,165		$	28,499

Other real estate owned decreased $11.3 million, or 39.8% during 2010, from $28.5 million at December 31, 2009 to $17.2 million at December 31, 2010. This decrease was principally due to lower additions to other real estate owned of $7.4 million during 2010, as compared to $40.2 million during 2009, and $14.6 million of other real estate owned dispositions during 2010.

Loan Portfolio

The Bank’s lending activities are its principal source of income. Real estate loans, including residential permanents and construction, and commercial permanents, represent the major portion of the Bank’s loan portfolio. Loans, net of unearned income and the allowance for loan losses, decreased $60.5 million, or 2.7% from $2.21 billion at December 31, 2009, to $2.15 billion at December 31, 2010, as non-farm, non-residential real estate loans increased $12.9 million, or 1.1%, and one-to-four family residential loans decreased $5.8 million, or 1.4%, while real estate construction loans fell by $63.7 million, or 14.9%, and commercial and industrial loans were down $19.7 million, or 8.3%. In 2009, net loans decreased $63.0 million, or 2.8%, from $2.27 billion at December 31, 2008, to $2.21 billion at December 31, 2009, as non-farm, non-residential real estate loans increased $114.6 million, or 11.3%, and one-to-four family residential loans increased $49.5 million, or 13.9%, while real estate construction loans fell by $156.8 million, or 26.8%, and commercial and industrial loans were down 14.7%. In 2008, net loans increased $348.3 million, or 18.1%, from $1.92 billion at December 31, 2007, to $2.27 billion at year-end 2008, and included an increase in real estate mortgage loans of $276.4 million, or 23.9%, an increase in commercial loans of $40.8 million, or 17.1%, and an increase in real estate construction loans of $40.8 million, or 7.5%. At December 31, 2010, $160.8 million of real estate construction loans were to commercial builders of single-family housing, $16.8 million were to individuals on single-family properties and $187.0 million were related to commercial properties. At December 31, 2009, $224.9

million of total real estate construction loans were to commercial builders of single-family housing, $15.2 million were to individuals on single-family properties and $188.3 million were related to commercial properties. The Company will continue to manage a reduction in the real estate construction loan portfolio as part of the Company’s strategic decision to restrict lending for new acquisition, development and construction loans and maintain this portfolio segment within a range specified by management.

As noted above, the majority of the Bank’s loan portfolio consists of construction and commercial real estate loans. At December 31, 2010, the Bank had $160.8 million of construction loans to commercial builders of single family housing in the Northern Virginia market, representing 7.3% 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 Bank had $1.14 billion, or 51.4% of the loan portfolio at December 31, 2010, secured by non-farm non-residential properties with $464.4 million of these loans representing owner-occupied properties. These non-farm, non-residential loans represent obligations of a diversified pool of borrowers across numerous businesses and industries, primarily in the Northern Virginia market and include some loans that, although secured by commercial real estate, are commercial purpose loans made based on the financial condition of the underlying business. At December 31, 2010, 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. For further information regarding concentrations of loans see Note 17 to the Consolidated Financial Statements.

Under guidance from the federal banking regulators, 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 acquisition, development and construction loans and commercial real estate loans, which may require us to obtain additional capital. The Bank seeks to manage its concentrations of loans through the establishment of limits on the level of its various loan types to total loans and to total capital. Excluded from the scope of this guidance are loans secured by non-farm nonresidential properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

Tables 11 and 12 present information pertaining to the composition of the loan portfolio including unearned income, the allowance for loan losses, and the maturity and repricing characteristics of selected loans.

TABLE 11: SUMMARY OF TOTAL LOANS


	December 31,
(Dollars in thousands)	2010		2009		2008		2007		2006
Real estate - mortgage	$	1,617,043	$	1,599,478	$	1,435,189	$	1,158,820	$	940,270
Real estate - construction		364,610		428,292		585,076		544,290		515,040
Commercial		218,600		238,327		279,470		238,670		190,527
Consumer		12,557		10,368		11,698		8,714		6,997
Farmland		2,418		2,675		2,498		1,468		—

Total loans	$	2,215,228	$	2,279,140	$	2,313,931	$	1,951,962	$	1,652,834
Less unearned income		3,195		3,924		4,370		4,961		4,906
Less allowance for loan losses		62,442		65,152		36,475		22,260		18,101

Loans, net	$	2,149,591	$	2,210,064	$	2,273,086	$	1,924,741	$	1,629,827

TABLE 12: MATURITY/REPRICING SCHEDULE OF TOTAL LOANS


At December 31, 2010 (Dollars in thousands)	Real estate- mortgage		Real estate- construction		Commercial		Consumer		Farmland		Total
Variable:
Within 1 year	$	61,805	$	133,858	$	79,044	$	3,312	$	—	$	278,019
1-to-5 years		262,848		56,393		20,368		743		2,249		342,601
After 5 years		526,197		22,111		6,694		2,368		—		557,370

Total	$	850,850	$	212,362	$	106,106	$	6,423	$	2,249	$	1,177,990

Fixed Rate:
Within 1 year	$	82,877	$	86,748	$	14,257		2,803	$	—	$	186,685
1-to-5 years		334,156		52,952		72,278		1,818		169		461,373
After 5 years		349,160		12,548		25,959		1,513		—		389,180

Total	$	766,193	$	152,248	$	112,494	$	6,134	$	169	$	1,037,238

Total Loans	$	1,617,043	$	364,610	$	218,600	$	12,557	$	2,418	$	2,215,228

Investment Securities

The securities portfolio serves as a primary source of liquidity, is used as needed to meet certain collateral requirements, helps in the management of interest rate risk, and provides additional interest income. The securities portfolio consists of two components, securities held-to-maturity and securities available-for-sale. Securities are classified as held-to-maturity based on management’s intent and the Company’s ability, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities which may be sold in response to changes in market interest rates, changes in the securities’ prepayment risk, increased loan demand, general liquidity needs, and other similar factors are classified as available-for-sale and are carried at estimated fair value.

Total securities increased $63.2 million, or 18.1%, year-over-year from $348.6 million at December 31, 2009 to $411.8 million at December 31, 2010 and increased $22.9 million, or 7.0%, from $325.7 million at December 31, 2008, to $348.6 million at December 31, 2009. Increases in the investment securities portfolio in both years were funded by reductions in the loan portfolio and increases in deposits. Available-for-sale (AFS) securities increased as a percent of the total securities portfolio in 2010 to 90.9% versus 83.6% in 2009, as new funds to acquire AFS securities were provided by the previously noted sources and from maturing held-to-maturity (HTM) securities. HTM securities declined as a percent of the total securities portfolio from 16.4% to 9.1% during 2010. The portfolio also contains four pooled trust preferred securities with an amortized cost basis of $5.9 million and a book value of $430 thousand. The Bank performs a quarterly analysis of these securities for other than temporary impairment due to significantly depressed current market value indications. The analysis includes stress tests on the underlying collateral and cash flow estimates based on the current and projected future levels of deferrals and defaults within each pool. In 2010, the Bank recorded an impairment loss of an aggregate of $1.6 million on three of the four pools. In 2009, the Bank recorded an impairment loss of an aggregate of $1.8 million on the same three pools.

Table 13 provides information regarding the composition of the securities portfolio and Table 14 details the maturities and weighted average yields (on a tax equivalent basis) at the dates indicated. U.S. Government Agency obligations include senior debt issuances, mortgage-backed pass-through securities and collateralized mortgage obligations issued by the Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. See Note 2 to the Consolidated Financial Statements for additional information regarding the securities portfolio.

TABLE 13: SECURITIES PORTFOLIO


	December 31,
	2010					2009					2008
(Dollars in thousands)	Book Value		Percent of total			Book Value		Percent of total			Book Value		Percent of total
Available-for-sale:
U.S. Government Agency obligations	$	310,610		75.43	%	$	247,134		70.90	%	$	235,434		72.28	%
Obligations of states/political subdivisions		63,463		15.41	%		42,357		12.15	%		29,454		9.04	%
Pooled trust preferred securities		430		0.10	%		2,030		0.58	%		3,948		1.21	%

	$	374,503		90.95	%	$	291,521		83.63	%	$	268,836		82.53	%

Held-to-maturity:
U.S. Government Agency obligations	$	6,113		1.48	%	$	12,323		3.53	%	$	18,764		5.76	%
Obligations of states/political subdivisions		31,145		7.56	%		44,741		12.84	%		38,143		11.71	%

	$	37,258		9.05	%	$	57,064		16.37	%	$	56,907		17.47	%

	$	411,761		100.00	%	$	348,585		100.00	%	$	325,743		100.00	%

TABLE 14: MATURITY OF SECURITIES



	2010					2009					2008
At December 31, (Dollars in thousands)	Book Value		Weighted Average Yield			Book Value		Weighted Average Yield			Book Value		Weighted Average Yield
Maturing within one year	$	1,642		4.59	%	$	4,541		4.57	%	$	1,869		4.11	%
Maturing after one through five years		21,090		3.67	%		28,013		4.19	%		73,457		4.78	%
Maturing after five through ten years		138,171		3.33	%		110,745		4.16	%		65,058		5.06	%
Maturing after ten years		250,858		4.00	%		205,286		5.07	%		185,359		5.39	%

	$	411,761		3.76	%	$	348,585		4.71	%	$	325,743		5.18	%

Deposits

The Company’s principal source of funds is deposit accounts comprised of demand deposits, savings and money market accounts, and time deposits. The majority of the Bank’s deposits are attracted from individuals and businesses in the Northern Virginia and the metropolitan Washington, D.C. area, and the interest rates the Bank pays are generally near the top of the local market.

Total deposits increased $17.9 million, or 0.8% from $2.23 billion at December 31, 2009, to $2.25 billion at December 31, 2010, and increased $57.2 million, or 2.6%, from $2.17 billion at December 31, 2008, to $2.23 billion at December 31, 2009. In 2010, growth by deposit category included an increase in demand deposits of $25.1 million, or 10.5%, savings and interest-bearing demand deposits increasing by $216.1 million, or 21.9%, and time deposits declining $223.4 million, or 22.2%. The year-over-year increase in demand deposits is primarily due to successful deposit gathering efforts led by the Company’s team of eight business development officers who are focused on acquisition and retention of commercial operating funds, cash management services and other related cross-sales. The year-over-year increase in savings and interest-bearing demand deposits was due primarily to success with the Company’s MEGA Savings and MEGA Checking account products as well as its Premier Interest Checking product for non-profit organizations, with the sequential decline in demand deposits from $269.7 million at September 30, 2010 due primarily to a strategic reduction in balances held by one depositor. The declines in time deposits are reflective of strategic pricing of certificates of deposits relative to both the competitive market and the Company’s pricing on interest-bearing transaction accounts. The proportionate share of time deposits to total deposits has declined from a peak of 67.2% at year-end 2008 to 34.8% as of December 31, 2010.

In 2009, growth by deposit category included an increase in demand deposits of $44.8 million, or 23.0%, an increase in savings and interest-bearing demand deposits of $467.1 million, or 90.2%, and a decrease of $454.7 million, or 31.2%, in time deposits. The increases in savings and interest-bearing demand deposits were due primarily to success with the Company’s MEGA Savings and MEGA Checking accounts. The declines in time deposits are reflective of lower loan volume, requiring lower levels of funding, and a strategy to reduce the Bank’s historically heavy reliance on certificates of deposit as a funding source with deposit gathering efforts and cross-selling activities focused on demand deposits, savings and interest-bearing demand accounts.

Table 15 details maturities of time deposits with balances of $100,000 or more, which represent 38.4% of total time deposits as of December 31, 2010, compared to 29.7% at December 31, 2009. Total time deposits represent 34.8% of total deposits as of December 31, 2010, compared to 45.1% at December 31, 2009. At December 31, 2010, the Bank had no brokered time deposits. Brokered time deposits represented $50.1 million, or 2.3%, of total deposits at December 31, 2009, and $168.3 million, or 7.6%, of total deposits as of December 31, 2008. See Note 6 to the Consolidated Financial Statements and Table 1 to this Management’s Discussion and Analysis for additional information regarding the maturities of time deposits and average rates paid on all interest-bearing deposits.

TABLE 15: MATURITIES OF TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE


	December 31,
(Dollars in thousands)	2010		2009		2008
3 months or less	$	52,047	$	88,680	$	215,378
3-6 months		38,555		65,809		108,592
6-12 months		69,760		77,956		132,668
Over 12 months		139,809		66,122		91,058

Total	$	300,171	$	298,567	$	547,696

Short-Term Borrowings

Short-term borrowings consist of securities sold under agreements to repurchase, of which, as of December 31, 2010, $77.7 million are secured transactions with customers that mature the business day following the date sold, and the other $75.0 million are secured transactions with other banks. The secured transactions with customers are provided to significant commercial demand deposit customers and are considered a core funding source of the Bank. Short-term borrowings also include Federal funds purchased, which are unsecured overnight borrowings from other banks and are generally used to accommodate short-term liquidity needs. Table 16 provides information on the balances and interest rates on short-term borrowings for the years ended December 31, 2010, 2009 and 2008 (dollars in thousands):

TABLE 16: SHORT-TERM BORROWINGS


At December 31,	2010			2009			2008
Securities sold under agreement to repurchase	$	152,726		$	176,728		$	175,959
Federal funds purchased		—			—			12,000

Total	$	152,726		$	176,728		$	187,959
Weighted interest rate at year end		2.43	%		2.24	%		1.58	%
Averages for the year ended December 31,
Outstanding	$	183,338		$	186,106		$	223,114
Interest rate		2.19	%		1.87	%		2.47	%
Maximum month-end outstanding	$	210,208		$	198,774		$	187,959

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 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 decreased $30.1 million, or 4.9% from $615.2 million at December 31, 2009, to $585.1 at December 31, 2010, and decreased $22.5 million, or 3.5%, from $637.7 million at December 31, 2008, to $615.2 million at December 31, 2009. 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 Federal Home Loan Bank of Atlanta. See Note 14 to the Consolidated Financial Statements for further information regarding these additional liquidity sources.

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 12.87% at December 31, 2010, compared to 11.41% at December 31, 2009, and its total risk-based capital ratio was 14.12% at December 31, 2010, compared to 12.66% at December 31, 2009. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank’s leverage ratio was 10.76% at December 31, 2010, compared to 10.23% at December 31, 2009. The Company’s Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 13.20%, 14.45%, and 11.07%, respectively, at December 31, 2010, compared to 11.48%, 12.73%, and 10.29%, respectively, at December 31, 2009. The increases in these capital ratios in 2010, are due to net operating income generated during 2010 and $9.2 million of additional capital raised by the Company during 2010, including through the Company’s registered direct placement. Both the Company’s and Bank’s capital positions reflect proceeds from the issuance of a total of $65 million in trust preferred 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 through the issuance of additional trust preferred securities or 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 acquisition, development and construction loans and commercial real estate loans, which may require us to obtain additional capital.

Trust preferred 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 may be counted as Tier 2 capital, subject to limitation. At December 31, 2010, trust preferred securities represented 20.6% of the Company’s Tier 1 capital and 18.9% of its total risk-based capital. See Note 15 to the Consolidated Financial Statements and the “Regulation, Supervision and Governmental Policy” section beginning on page 64 for further information regarding trust preferred securities.

Capital Issuances. 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, which, if fully exercised, would provide an additional $11.4 million in gross proceeds to the Company. 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, exercisable for a total of 952,383 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 952,383 shares of common stock, are exercisable for a period of twelve months following the closing date.

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 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 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 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 Warrants expire 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 15 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 to certain directors and executive officers of the Company.

Contractual Obligations

The Company has entered into certain contractual obligations including long term debt, operating leases and obligations under service contracts. The following table summarizes the Company’s contractual cash obligations as of December 31, 2010:

TABLE 17: CONTRACTUAL OBLIGATIONS


	Payments Due-By Period
(Dollars in thousands)	Total		Within One Year		Years Two and Three		Years Four and Five		After Five Years
Securities sold under agreements to repurchase and Federal funds purchased	$	152,726	$	77,726	$	—	$	25,000	$	50,000
Other borrowed funds		25,000		—		25,000		—		—
Trust preferred securities		65,000		—		—		—		65,000
Operating leases		32,150		4,130		8,431		6,834		12,755
Data processing services		4,826		1,132		2,315		1,379		—

Total contractual cash obligations	$	279,702	$	82,988	$	35,746	$	33,213	$	127,755

The obligation for data processing services represents estimates of minimum required payments for the periods. Of the $50.0 million of trust preferred securities shown as due after 5 years, $15.0 million is subject to redemption, at par, at the Company’s option, on any semi-annual distribution payment date, the next one being June 30, 2011. The table does not reflect deposit liabilities entered into in the ordinary course of the Company’s banking business. At December 31, 2010, the Company had approximately $1.5 billion of demand and savings deposits, exclusive of interest, which have no stated maturity or payment date. The Company also had approximately $781.2 million of time deposits, exclusive of interest, the maturity distribution of which is set forth in Note 6 to the Consolidated Financial Statements. For additional information about the Company’s deposit obligations, see “Net Interest Income” and “Deposits” above. The trust preferred securities exclude $2.0 million of capital notes held by the trusts that relate to the common securities of the issuing trusts, all of which are owned by the Company. See Note 15 to the Consolidated Financial Statements for additional information regarding the trust preferred capital notes.

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. See Note 16 to the Consolidated Financial Statements for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements. 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. For further information, see Notes 15 and 16 to the Consolidated Financial Statements.

RISK FACTORS

An investment in our common stock involves various risks. The following is a summary of certain risks identified by us as affecting our business. You should carefully consider the risk factors listed below, as well as other cautionary statements made in this Annual Report, and risks and uncertainties which we may identify in our other reports and documents filed with the Securities and Exchange Commission or other public announcements. These risk factors may cause our future earnings to be lower or our financial condition to be less favorable than we expect. In addition, other risks of which we are not aware, which relate to the banking and financial services industries in general, or which we do not believe are material, may cause earnings to be lower, or hurt our future financial condition. You should read this section together with the other information in this Annual Report.

The current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations.

We currently are operating in a challenging and uncertain economic environment, both nationally and in the local markets that we serve. Financial institutions continue to be affected by sharp declines in the value of financial instruments and real estate values, and while we are taking steps to reduce our market and credit risk exposure, we nonetheless are affected by these issues in view of our retaining a securities portfolio, and portfolios of multi-family loans, commercial real estate loans, acquisition, development and construction loans, and commercial and industrial loans. Continued declines in the value of our investment securities could result in our recording additional losses on the other-than-temporary impairment (“OTTI”) of securities, which would reduce our earnings and, therefore, our capital. Continued declines in real estate values and home sales, and an increase in the financial stress on borrowers stemming from an uncertain economic environment, including rising unemployment, could have an adverse effect on our borrowers or their customers, which could adversely impact the repayment of the loans we have made. The overall deterioration in economic conditions also could subject us, and the financial services industry, to increased regulatory scrutiny. In addition, a prolonged recession, or further deterioration in local economic conditions, could result in an increase in loan delinquencies, an increase in problem assets and foreclosures, and a decline in the value of the collateral for our loans, which could reduce our customers’ borrowing power. Furthermore, a prolonged recession or further deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our allowance for loan losses, which could necessitate an increase in our provision for loans losses, which, in turn, would reduce our earnings and capital. Additionally, the demand for our products and services could be reduced, which would adversely impact our liquidity and the level of revenues we generate.

Our concentration of real estate related loans in our market area could result in higher than normal risk of loan defaults and losses.

We have a substantial amount of loans secured by real estate in the Northern Virginia/Washington, D.C. metropolitan area, and substantially all of our loans are to borrowers in that area. We also have a significant amount of acquisition, development and construction loans. At December 31, 2010, 89.5% of our total loans were secured by real estate, primarily commercial real estate. Of these loans, $364.6 million, or 16.5% of total loans, were acquisition, development and construction loans. An additional 9.9% of total loans were commercial and industrial loans which are not secured by real estate. These loans have a higher risk of default than other types of loans, such as well underwritten conforming single family residential mortgage loans. In addition, the repayments of these loans often depend on the successful operation of a business or the sale or development of the underlying property, and as a result are more likely to be adversely affected by adverse conditions in the real estate market or the economy in general. These concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in the Northern Virginia/Washington, D.C. metropolitan area, could increase the levels of nonperforming loans and charge-offs, and reduce loan demand. In that event, we would likely experience lower earnings or losses. Additionally, if, for any reason, economic conditions in our market area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’s economy, our ability to develop our business relationships may be diminished, the quality and collectibility of our loans may be adversely affected, the value of collateral may decline and loan demand may be reduced. Additionally, under guidance from the banking agencies, we may be required to maintain higher levels of capital than we would otherwise be expected to maintain, and to employ greater risk management efforts, as a result of our real estate concentrations.

Commercial real estate loans and acquisition, development and construction loans also generally have larger balances than single family mortgage loans and other consumer loans. Because our loan portfolio contains a significant number of commercial real estate loans and acquisition, development and construction loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in our provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

Further increases to our nonperforming assets, troubled debt restructurings and other impaired loans that are performing will have an adverse effect on our earnings.

Our nonperforming assets (which consist of nonaccrual loans and other real estate owned (“OREO”)) and our troubled debt restructurings and other impaired loans, which are currently performing, totaled $241.9 million at December 31, 2010. Our nonperforming assets, troubled debt restructurings and other impaired loans adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO. We must establish an allowance for loan losses that reserves for losses inherent in the loan portfolio that are both probable and reasonably estimable through current period provisions for loan losses. From time to time, we also write down the value of properties in our OREO portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to OREO. Further, while troubled debt restructurings return to non-impaired status in the next fiscal year if they are performing for at least six months, in the event that payments on troubled debt restructurings are not made on a current basis, the troubled debt restructurings become nonaccrual loans. If any of our current or future troubled debt restructurings become nonperforming, we will not record interest income on such loans and, as a result, our earnings will be adversely affected. The resolution of nonperforming assets, troubled debt restructurings and other impaired loans requires the active involvement of management, which can distract management from its overall supervision of operations and other income producing activities. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance for loan losses accordingly, which will have an adverse effect on our earnings.

Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance for loan losses.

Experience in the banking industry indicates that a portion of our loans will become delinquent, that some of our loans may only be partially repaid or may never be repaid and that we may experience other losses for reasons beyond our control. Further, despite our underwriting criteria and historical experience, we may be particularly susceptible to losses due to: (1) the geographic concentration of our loans, (2) the concentration of higher risk loans, such as commercial real estate and acquisition, development and construction loans, and (3) the relative lack of seasoning of certain of our loans.

While our level of nonperforming assets have decreased since December 31, 2009, we are currently experiencing elevated levels of troubled debt restructurings and other impaired loans that are performing. The combined levels are significantly in excess of our historical levels and are concentrated in ADC, commercial real estate and commercial and industrial loans. As a result, our provision and allowance for loan losses, as well as our level of charge-offs, have significantly increased over prior years. For the year ended December 31, 2010, our provision for loan losses was $20.6 million compared to $81.9 million in 2009, with total net charge-offs in 2010 of $23.3 million versus $53.2 million for the year ended December 31, 2009. As a result of these provisions, the total allowance for loan losses decreased $2.8 million, or 4.2%, from $65.2 million at December 31, 2009 to $62.4 million at December 31, 2010. As a percent of total loans, the allowance has decreased from 2.86% as of December 30, 2009 to 2.82% as of December 31, 2010. Although we believe that our allowance for loan losses is maintained at a level adequate to absorb any inherent losses in our loan portfolio, these estimates of loan losses are necessarily subjective and their accuracy depends on the outcome of future events. If we need to make significant and unanticipated increases in our loss allowance in the future, our results of operations and financial condition would be materially adversely affected at that time.

While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that are identified. Furthermore, bank regulators may require us to make a provision for loan losses or otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures and our allowance for loan losses. As a result, future additions to the allowance may be necessary, which could adversely affect our results of operations.

Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.

Our operating income and net income depend to a great extent on our net interest margin, which is the difference between the interest yields we receive on loans, securities and other interest-earning assets and the interest rates we pay on interest-bearing deposits and other liabilities. The net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory agencies, including the Board of Governors of the Federal Reserve System (“Federal Reserve Board”).

We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. The results of our interest rate sensitivity simulation models depend upon a number of assumptions which may prove to be not accurate. There can be no assurance that we will be able to successfully manage our interest rate risk. Increases in market rates and adverse changes in the local residential real estate market, the general economy or consumer confidence would likely have a significant adverse impact on our non-interest income, as a result of reduced demand for residential mortgage loans that we make on a pre-sold basis.

Adverse changes in the real estate market in our market area could also have an adverse affect on our cost of funds and net interest margin, as we have a large amount of non-interest bearing demand deposits related to real estate sales and development. While we expect that we would be able to replace the liquidity provided by these deposits, the replacement funds would likely be more costly, which would negatively impact our earnings. Additionally, changes in applicable law, if enacted, could have a significant negative effect on our net interest income, net income, net interest margin, and our return on assets and return on equity.

Lack of seasoning of our loan portfolio could increase the risk of credit defaults in the future.

Due to the rapid growth of our bank preceding the recession, a large portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

We may not be able to maintain our historical growth rate, which may adversely impact our results of operations and financial condition.

We may not be able to sustain our historical rate of growth, or grow at all. Various factors, such as economic conditions, regulatory considerations and competition, may impede our rate of growth and our ability to expand, or may make future growth or expansion less profitable or more expensive. If we experience a significant decrease in our rate of growth as compared to our historic rate of growth, our income, or our rate of income growth, may decline, our capacity to absorb any additional losses resulting from, or loan loss provisions related to, declining loan quality may be diminished, and we may not be able to maintain or reduce our expense levels and efficiency ratio, which would adversely affect our results of operations and financial condition.

Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ significantly from our OREO fair value appraisals.

At December 31, 2010, our OREO portfolio totaled $17.2 million. Our OREO portfolio consists of properties that we obtained through foreclosure or through an in-substance foreclosure in satisfaction of loans. Properties in our OREO portfolio are recorded at the lower of the recorded investment in the loans for which the properties previously served as collateral or the “fair value,” which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Generally, in determining fair value an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO property.

In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of our OREO disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of our OREO properties.

Changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings or regulatory capital ratios.

At December 31, 2010, $374.5 million of our securities were classified as available-for-sale. The estimated fair value of our available-for-sale securities portfolio may increase or decrease depending on market conditions. Our securities portfolio is comprised primarily of fixed rate securities. We increase or decrease stockholders’ equity by the amount of the change in the unrealized gain or loss (difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio, net of the related tax benefit, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold, the decrease may be recovered over the life of the securities.

We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. Factors that we consider in our analysis include, but are not limited to, the severity and duration of the decline in fair value of the security, the financial condition and near-term prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, our intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value and the likelihood of any near-term fair value recovery. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary related to credit losses, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income.

We have in recent financial periods recorded OTTI charges. We continue to monitor our securities portfolio as part of our ongoing OTTI evaluation process. No assurance can be given that we will not need to recognize additional OTTI charges related to securities in the future.

The capital that we are required to hold for regulatory purposes is impacted by, among other things, the securities ratings. Therefore, ratings downgrades on our securities may have a material adverse effect on our risk-based regulatory capital.

Turmoil in the financial markets may make it more difficult for the bank to meet its liquidity needs.

During 2008 and 2009, financial markets experienced unprecedented pressure associated with the declining value of residential real estate, and deleveraging by investors in mortgage related securities. The turmoil in the financial markets has also caused many depositors to seek safety in government securities, resulting in liquidity challenges for all banks. Our bank responded to these challenges by promoting participation in the Certificate of Deposit Account Registry Service program and by participating in the increased deposit insurance programs provided by the FDIC. However, should turmoil in the markets return, the bank may be forced to pay higher interest rates to obtain deposits and meet the needs of its depositors and borrowers, resulting in reduced net interest income. If conditions worsen significantly, it is possible that financial institutions such as the Bank may be unable to meet the needs of their depositors and borrowers, which could result in the Bank being placed into receivership.

Loss of key employees may disrupt relationships with certain customers.

Our business is primarily relationship-driven in that many of our key employees have extensive customer relationships. Loss of a key employee with such customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor. While we believe our relationships with our key employees are good, we cannot guarantee that all of our key personnel will remain with our organization. Loss of such key personnel, should they enter into employment relationships with our competitors, could result in the loss of some of our customers.

We may not be able to successfully manage continued growth.

We intend to seek further growth in the level of our assets and deposits and, to a limited extent, the number of our branches. In the future, we may seek further branch expansion, both within our existing footprint and to expand our footprint in Northern Virginia. We cannot be certain as to our ability to manage increased levels of assets and liabilities, and an expanded branch system, without increased expenses and higher levels of nonperforming assets. We may be required to make additional investments in equipment and personnel to manage higher asset levels and loan balances and a larger branch network, which may adversely impact earnings, stockholder returns and our efficiency ratio. Increases in operating expenses or nonperforming assets may have an adverse impact on the value of our common stock.

Our continued growth depends on our ability to meet minimum regulatory capital levels. Growth and stockholder returns may be adversely affected if sources of capital are not available to help us meet those minimum levels.

Since we became the holding company for the Bank, we have sought to maximize stockholder returns by leveraging our capital. If earnings do not meet our current estimates, if we incur unanticipated losses or expenses, or if we grow faster than expected, we may need to obtain additional capital sooner than expected, through borrowing, additional issuances of debt or equity securities, or otherwise. We may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we do not have continued access to sufficient capital, we may be required to reduce our level of assets or reduce our rate of growth in order to maintain regulatory compliance. Under those circumstances net income and the rate of growth of net income may be adversely affected. Additional issuances of equity securities could have a dilutive effect on existing stockholders.

There is no assurance that we will be able to successfully compete with others for business.

The Northern Virginia/Washington, D.C. metropolitan area in which we operate is considered highly attractive from an economic and demographic viewpoint, and is a highly competitive banking market. We compete for loans, deposits, and investment dollars with numerous regional and national banks, online divisions of out-of-market banks, and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders. Many competitors have substantially greater resources than we do, and operate under less stringent regulatory environments. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.

System failures, interruptions or breaches of security could adversely impact our business operations and financial condition.

Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, general ledger, deposits and loans. While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any compromise of our security systems could deter customers from using our website and our online banking service, both of which involve the transmission of confidential information. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security, which would adversely affect our results of operations and financial condition.

In addition, we outsource certain of our data processing to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any systems failure, interruption or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny or could expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

We may not be able to respond to rapidly changing technology or meet the needs of our customers.

The provision of financial products and services has become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so on our part could have a material adverse impact on our business and therefore on our financial condition and results of operations.

We are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations.

In recent years, regulators have intensified their focus on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in this area, we have been required to revise policies and procedures and install new systems. We cannot be certain that the policies, procedures and systems we have in place are flawless. Therefore, there is no assurance that in every instance we are in full compliance with these requirements. Our inability to comply with these requirements may adversely affect our financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Changes in government regulation will significantly affect our business and may result in higher costs and lower profitability.

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not stockholders. The holding company and the Bank are regulated and supervised by the Federal Reserve Board, the Virginia State Corporation Commission Bureau of Financial Institutions and the FDIC. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies and leasing companies. Changes in the laws, regulations and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal economic and monetary policy may also affect our ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest rate spreads.

Substantial regulatory limitations on changes of control and anti-takeover provisions of Virginia law may make it more difficult for you to receive a change in control premium.

With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of

our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve Board. There are comparable prior approval requirements for changes in control under Virginia law. Also, Virginia corporate law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock.

The number of shares owned by our directors and executive officers could make it more difficult to obtain approval for some matters submitted to stockholder vote, including mergers and acquisitions.

Our directors and executive officers and their affiliates own approximately 25.8% of the outstanding common stock as of December 31, 2010. By voting against a proposal submitted to stockholders, the directors and executive officers, as a group, may be able to make approval more difficult for proposals requiring the vote of stockholders, such as some mergers, share exchanges, asset sales, and amendments to our Articles of Incorporation. The results of any such vote may be contrary to the desires or interests of the public stockholders.

The Dodd-Frank Act could increase the Company’s regulatory compliance burden and associated costs, place restrictions on certain products and services, and limit its future capital raising strategies.

A wide range of regulatory initiatives directed at the financial services industry have been proposed. One of those initiatives, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was signed into law on July 21, 2010. The Dodd-Frank Act represents a sweeping overhaul of the financial services industry within the United States and mandates significant changes in the financial regulatory landscape that will impact all financial institutions, including the Company and the Bank. The Dodd-Frank Act will likely increase the Company’s regulatory compliance burden and may have a material adverse effect on the Company by increasing the costs associated with regulatory examinations and compliance measures. However, it is too early to fully assess the impact of the Dodd-Frank Act and subsequent regulatory rulemaking processes on the Company’s and the Bank’s business, financial condition or results of operations.

Among the Dodd Frank Act’s significant regulatory changes, the Act creates a new financial consumer protection agency that could impose new regulations and include its examiners in routine regulatory examinations conducted by the Federal Reserve. This agency, named the Consumer Financial Protection Bureau, may reshape the consumer financial laws through rulemaking and enforcement of the Dodd-Frank Act’s prohibitions against unfair, deceptive and abusive business practices, which may directly impact the business operations of financial institutions offering consumer financial products or services, including the Company and the Bank. This agency’s broad rulemaking authority includes identifying practices or acts that are unfair, deceptive or abusive in connection with any consumer financial transaction or consumer financial product or service. Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to the Company or the Bank by virtue of the adoption of such policies and best practices by the Federal Reserve, FDIC or Virginia State Corporation Commission Bureau of Financial Institutions. The costs and limitations related to this additional regulatory agency and the limitations and restrictions that will be placed upon the Company with respect to its consumer product and service offerings have yet to be determined. However, these costs, limitations and restrictions may produce significant, material effects on the Company’s business, financial condition and results of operations.

The Dodd-Frank Act also increases regulatory supervision and examination of bank holding companies and their banking and non-banking subsidiaries. These and other regulations included in the Dodd-Frank Act could increase the Company’s regulatory compliance burden and costs, restrict the financial products and services the Bank can offer to its customers and restrict the Company’s ability to generate revenues from non-banking operations. The Dodd-Frank Act imposes more stringent capital requirements on bank holding companies, which could limit the Company’s future capital strategies.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase interest expense.

As part of the Dodd-Frank Act, the prohibition on the ability of financial institutions to pay interest on demand deposit accounts was repealed. As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits. The Company does not yet know what interest rates other institutions may offer. If the Company begins to offer interest on demand deposit accounts the Company’s interest expense may increase and the net interest margin may decline, which could have a material adverse effect on the Company’s and the Bank’s business, financial condition and results of operations.

Our deposit insurance premiums could increase in the future, which may adversely affect our future financial performance.

The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund (the “DIF”) at a certain level. Economic conditions since 2008 have increased the rate of bank failures and expectations for further bank failures, requiring the FDIC to make payments for insured deposits from the DIF and prepare for future payments from the DIF.

During 2009, the FDIC imposed a special deposit insurance assessment on all institutions which it regulates, including the Bank. This special assessment was imposed due to the need to replenish the DIF, as a result of increased bank failures and expected future bank failures. In addition, the FDIC required regulated institutions to prepay their fourth quarter 2009, and full year 2010, 2011 and 2012 assessments in December 2009. Any similar, additional measures taken by the FDIC to maintain or replenish the DIF may have an adverse effect on our financial condition and results of operations.

On February 7, 2011, the FDIC adopted final rules to implement changes required by the Dodd-Frank Act with respect to the FDIC assessment rules that will be effective April 1, 2011. Once these changes are effective, a depository institution’s deposit insurance assessment will be calculated based on the institution’s total assets less tangible equity, rather than the previous base of total deposits. The Company expects that these changes will not increase the Company’s FDIC insurance assessments for comparable asset and deposit levels. However, if the Bank’s asset size increases or the FDIC takes other actions to replenish the DIF, the Bank’s FDIC insurance premiums could increase.

We are subject to additional uncertainties, and potential additional regulatory or compliance burdens, as a result of our participation in the Treasury’s Capital Purchase Program.

The holding company accepted an investment of $71.0 million from the Treasury under the Treasury’s Capital Purchase Program. The Purchase Agreement, executed by the holding company (and all other participating institutions) and the Treasury, provides that the Treasury may unilaterally amend the agreement to the extent required to comply with any subsequent changes in applicable federal statutes. As a result of this provision, the Treasury and Congress may impose additional requirements or restrictions on us in respect of reporting, compliance, corporate governance, executive or employee compensation, dividend payments, stock repurchases, lending or other business practices, capital requirements or other matters. As a result, we may be required to expend additional resources in order to comply with these requirements. Such additional requirements could impair our ability to compete with institutions that are not subject to the restrictions because they did not accept an investment from the Treasury. To the extent that additional restrictions or limitations on employee compensation are imposed, such as those contained in the American Recovery and Reinvestment Act of 2009, we may be less competitive in attracting successful incentive compensation based lenders and customer relations personnel. Additionally, the ability of Congress to utilize the amendment provisions to effect political or public relations goals could result in us being subjected to additional burdens as a result of public perceptions of issues relating to larger banks, and which are not applicable to community oriented institutions such as our institution. There can be no assurance that we will not be disadvantaged as a result of these uncertainties.

The fiscal, monetary and regulatory policies of the federal government and its agencies could have a material adverse effect on our results of operations.

The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. It also can materially decrease the value of financial assets we hold, such as debt securities. Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies and our regulatory environment generally are beyond our control, and we are unable to predict what changes may occur or the manner in which any future changes may affect our business, financial condition and results of operations.

Trading in our common stock has been relatively inactive. As a result, stockholders may not be able to quickly and easily sell their common stock.

Although our common stock is listed on Nasdaq, and a number of brokers offer to make a market in our common stock on a regular basis, trading volume to date has been relatively inactive, averaging approximately 80,101 shares per day during the year ended December 31, 2010 There can be no assurance that an active and liquid market for the common stock will develop. Accordingly, you may find it difficult to sell a significant number of shares at the prevailing market price.

We may need to raise additional capital which could result in a decline in the price of our common stock or at terms that are materially adverse to our stockholders, if additional capital is available at all.

We face significant business, regulatory and other governmental risk as a financial institution, and it is possible that capital requirements and directives could in the future require us to change the amount or composition of our current capital, including common equity. As a result of regulatory changes, we could determine or, our regulators could require us, to raise additional capital. There could also be market perceptions regarding the need to raise additional capital, whether as a result of public disclosures or otherwise, and, regardless of the outcome, such perceptions could have an adverse effect on the price of our common stock. Such capital raising could be at terms that are dilutive to existing stockholders and there can be no assurance that any capital raising we undertake would be successful given the current level of disruption in the financial markets.

Our ability to pay cash dividends on our common stock and to repurchase any shares of our common stock is highly restricted.

We have no recent history of paying cash dividends, other than repurchases of fractional shares issued in connection with stock splits or stock dividends. Our ability to pay dividends on our common stock, or repurchase shares, is limited by state and federal law and regulation, and by the terms of the Series A Preferred Stock issued to the Treasury in connection with our participation in the Treasury’s Capital Purchase Program. Under the terms of the Treasury’s Capital Purchase Program, we may not, subject to limited exceptions, pay a dividend or repurchase or acquire any common stock, without the prior approval of the Treasury, until December 12, 2011, or the earlier redemption or transfer of all securities issued to the Treasury. Additionally, under the terms of the Series A Preferred Stock, we may not, subject to limited exceptions, pay any dividends on our common stock, or repurchase or acquire any shares of our common stock when any dividend on the Series A Preferred Stock is in arrears. Further, we cannot pay any dividends on our common stock, or acquire any shares of our common stock, if any distribution on our trust preferred securities is in arrears. In light of the foregoing restrictions, it is unlikely that we will pay any dividends on our common stock or repurchase any shares of our common stock in the near future.

DISCLOSURE 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 Securities Exchange Act of 1934, as amended (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 December 31, 2010, 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.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management believes that internal controls over financial reporting, which are subject to scrutiny by management and the Company’s internal auditors, support the integrity and reliability of the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, because of changes in conditions and circumstances, the effectiveness of internal control over financial reporting may vary over time.

Management assessed the effectiveness of Company’s system of internal control over financial reporting as of December 31, 2010. This assessment was conducted based on the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in “Internal Control—Integrated Framework”. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2010. Management’s assessment concluded that there were no material weaknesses within the Company’s internal control structure.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, has been audited by Yount, Hyde & Barbour, P.C., the independent registered public accounting firm who also audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. Yount, Hyde & Barbour, P.C.’s attestation report on the Company’s internal control over financial reporting appears on pages 37 and 38 hereof.

There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2010, that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Virginia Commerce Bancorp, Inc.

Arlington, Virginia

We have audited the accompanying consolidated balance sheets of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years ended December 31, 2010, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010, 2009 and 2008, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Virginia Commerce Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2011 expressed an unqualified opinion on the effectiveness of Virginia Commerce Bancorp, Inc. and subsidiaries’ internal control over financial reporting.

LOGO

Winchester, Virginia

March 16, 2011

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Virginia Commerce Bancorp, Inc.

Arlington, Virginia

We have audited Virginia Commerce Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Virginia Commerce Bancorp, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Virginia Commerce Bancorp, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows of Virginia Commerce Bancorp, Inc. and subsidiaries and our report dated March 16, 2011 expressed an unqualified opinion.

LOGO

Winchester, Virginia

March 16, 2011

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share data)


	December 31,
	2010			2009
Assets
Cash and due from banks	$	36,932		$	25,211
Federal funds sold		10,455			—
Investment securities (fair value: 2010, $412,653; 2009, $349,836)		411,761			348,585
Restricted stocks, at cost		11,751			11,751
Loans held-for-sale		10,049			6,492
Loans, net of allowance for loan losses of $62,442 in 2010 and $65,152 in 2009		2,149,591			2,210,064
Bank premises and equipment, net		12,000			13,794
Accrued interest receivable		10,003			10,537
Other real estate owned, net of valuation allowance of $6,782 in 2010 and $9,067 in 2009		17,165			28,499
Other assets		71,941			70,364

Total assets	$	2,741,648		$	2,725,297

Liabilities and Stockholders’ Equity
Deposits
Demand deposits	$	264,744		$	239,604
Savings and interest-bearing demand deposits		1,201,288			985,152
Time deposits		781,169			1,004,571

Total deposits	$	2,247,201		$	2,229,327
Securities sold under agreement to repurchase and federal funds purchased		152,726			176,729
Other borrowed funds		25,000			25,000
Trust preferred capital notes		66,314			66,057
Accrued interest payable		2,751			4,014
Other liabilities		2,062			5,302
Commitments and contingent liabilities		—			—

Total liabilities	$	2,496,054		$	2,506,429

Stockholders’ Equity
Preferred stock, net of discount, $1.00 par, 1,000,000 shares authorized, Series A; $1,000.00 liquidation value; 71,000 issued and outstanding in 2010 and 2009	$	65,445		$	63,993
Common stock, $1.00 par, 50,000,000 shares authorized, issued and outstanding 2010, 28,962,935; 2009, 26,744,545		28,954			26,745
Surplus		105,056			96,588
Warrants		8,520			8,520
Retained earnings		39,208			22,671
Accumulated other comprehensive income (loss), net		(1,589	)		351

Total stockholders’ equity	$	245,594		$	218,868

Total liabilities and stockholders’ equity	$	2,741,648		$	2,725,297

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)


	Year Ended December 31,
	2010			2009			2008
Interest and dividend income:
Interest and fees on loans	$	133,599		$	134,548		$	143,501
Interest and dividends on investment securities:
Taxable		12,641			14,050			15,017
Tax-exempt		2,043			1,591			1,248
Dividends		356			355			320
Interest on deposits with other banks		—			—			145
Interest on federal funds sold		187			89			237

Total interest and dividend income	$	148,826		$	150,633		$	160,468

Interest expense:
Deposits	$	33,462		$	49,598		$	67,261
Securities sold under agreement to repurchase and federal funds purchased		4,012			3,475			5,534
Other borrowed funds		1,077			1,077			1,235
Trust preferred capital notes		4,946			5,079			3,400

Total interest expense	$	43,497		$	59,229		$	77,430

Net interest income	$	105,329		$	91,404		$	83,038
Provision for loan losses		20,594			81,913			25,378

Net interest income after provision for loan losses	$	84,735		$	9,491		$	57,660

Non-interest income (charges):
Service charges and other fees	$	3,376		$	3,606		$	3,902
Non-deposit investment services commissions		831			600			702
Fees and net gains on loans held-for-sale		3,437			2,912			1,498
(Loss) on other real estate owned		(3,924	)		(9,952	)		—
Gain on sale of securities		139			—			—
Total other-than-temporary impairment losses		(4,525	)		(5,136	)		—
Portion of loss recognized in other comprehensive income		2,878			3,315			—
Net impairment losses		(1,647	)		(1,821	)		—
Other		1,485			303			329

Total non-interest income (charges)	$	3,697		$	(4,352	)	$	6,431

Non-interest expense:
Salaries and employee benefits	$	24,990		$	23,040		$	23,362
Occupancy expense		9,951			10,253			8,857
FDIC insurance expense		5,277			5,411			1,500
Franchise tax		2,875			3,100			1,528
Data processing		2,450			2,436			2,166
Legal fees		2,075			1,216			597
Professional fees		1,295			970			558
Provision for unfunded commitments		—			2,960			—
Other operating expense		8,273			7,482			6,208

Total non-interest expense	$	57,186		$	56,868		$	44,776

Income (loss) before taxes	$	31,246		$	(51,729	)	$	19,315
Provision (benefit) for income taxes		9,706			(18,404	)		6,231

Net income (loss)	$	21,540		$	(33,325	)	$	13,084
Effective dividend on preferred stock		5,003			4,539			258

Net income (loss) available to common stockholders	$	16,537		$	(37,864	)	$	12,826

Earnings (Loss) per common share, basic	$	0.60		$	(1.42	)	$	0.48
Earnings (Loss) per common share, diluted	$	0.57		$	(1.42	)	$	0.47

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)


	Preferred Stock			Common Stock		Surplus		Warrants		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2007	$	—		$	24,023	$	73,672	$	—	$	70,239		$	1,209					$	169,143

Comprehensive Income:
Net income 2008											13,084					$	13,084			13,084
Other comprehensive loss, unrealized holding losses arising during the period (net of tax of $1,043)														(1,933	)		(1,933	)		(1,933	)

Total comprehensive income																$	11,151

10% stock dividend		—			2,411		20,112		—		(22,523	)		—						—
Cash paid in lieu of fractional shares		—			—		—		—		(7	)		—						(7	)
Stock options exercised		—			141		173		—		—			—						314
Stock option expense		—			—		597		—		—			—						597
Warrant expense in regards to trust preferred securities		—			—		1,283		—		—			—						1,283
Preferred stock issued		71,000			—		—		—		—			—						71,000
Discount on preferred stock		(8,459	)		—		—		—		—			—						(8,459	)
Warrants issued in regard to preferred stock		—			—		—		8,520		—			—						8,520
Effective dividend on preferred stock		—			—		—		—		(258	)		—						(258	)
Employee stock purchase plan		—			—		3		—		—			—						3

Balance, December 31, 2008	$	62,541		$	26,575	$	95,840	$	8,520	$	60,535		$	(724	)				$	253,287

Comprehensive Loss:
Net loss 2009											(33,325	)				$	(33,325	)		(33,325	)
Other comprehensive loss:
reclassification adjustment for impairment loss on securities (net of tax $637)														1,184			1,184			1,184
unrealized holding losses arising during the period (net of tax of $59)														(109	)		(109	)		(109	)

Total comprehensive loss																$	(32,250	)

Stock options exercised		—			170		118		—		—			—						288
Stock option expense		—			—		630		—		—			—						630
Discount on preferred stock		1,452			—		—		—		(1,452	)		—						—
Dividend on preferred stock		—			—		—		—		(3,087	)		—						(3,087	)

Balance, December 31, 2009	$	63,993		$	26,745	$	96,588	$	8,520	$	22,671		$	351					$	218,868

Comprehensive Income:
Net income 2010											21,540					$	21,540			21,540
Other comprehensive loss:
reclassification adjustment for impairment loss on securities (net of tax $576)														1,071			1,071			1,071
unrealized holding losses arising during the period (net of tax of $1,617)														(3,011	)		(3,011	)		(3,011	)

Total comprehensive income																$	19,600

Capital common stock issued					1,905		7,370													9,275
Stock options exercised		—			304		398

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company