**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For the fiscal year ended December 31,2008**

** **

**Commission file number: 000-28635**

 

**VirginiaCommerce Bancorp, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Virginia**  (State or other jurisdiction  of incorporation or organization)       |   | **54-1964895**  (I.R.S. Employer Identification No.) |
|-------------------------------------------------------------------------------------|--------|------------------------------------------------------|
|                                                                                |   |                                                 |
| **5350 Lee Highway, Arlington, Virginia**  (Address of principal executive offices) |   | **22207**  (Zip Code)                                |

 

Registrant’s telephone number: **703.534.0700**

 

Securities registered under Section 12(b) ofthe 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 under Section 12(g) of the Act:  **None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Section 405 of the Securities Act.  Yes  o  No  x

 

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

 

Indicate bycheck mark whether the registrant; (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports); and (2) has been subject tosuch filing requirements for the past 90 days.

Yes  x  No o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

 

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

 
| Large  accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |   | Smaller  reporting company o |
|----------------------------|--------|----------------------|--------|--------------------------|--------|------------------------------|

 

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

 

The registrant’sCommon Stock is traded on the Nasdaq Global Select Market under the symbolVCBI. The aggregate market value of the approximately 19,188,995 shares ofCommon Stock of the registrant issued and outstanding held by non-affiliates onJune 30, 2008 was approximately $99.6 million, based on the closing salesprice of $5.19 per share on that date. For purposes of this calculation, theterm “affiliate” refers to all directors, executive officers and 10%shareholders of the registrant.

 

As of theclose of business on March 1, 2009, 26,688,143 shares of the registrant’sCommon Stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for the AnnualMeeting of Shareholders, to be held on April 29, 2009, are incorporated byreference in part III hereof.

 

 

 

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# **Form 10-KCross Reference Sheet**

# ** **

The following shows thelocation in this Annual Report on Form 10-K or the Company’s ProxyStatement for the Annual Meeting of Stockholders to be held on April 29,2009, of the information required to be disclosed by the United StatesSecurities and Exchange Commission Form 10-K. References to pages onlyare to pages in this report.

 
| **PART I**   | ** ** | **Item  1.**  | ** ** | **Business.**See “Business” at  pages 61 through 71.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------|------------|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | **Item 1A.**  | ** ** | **Risk  Factors.** See “Risk Factors” at pages 22 through  26.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|              |       |          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **        | ** ** | **Item 1B.**  | ** ** | **Unresolved  Staff Comments.** None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|              |       |          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **        | ** ** | **Item  2.**  | ** ** | **Properties.**See “Properties” at  page 71.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | **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.**  | ** ** | **Submission  of Matters to a Vote of Security Holders.**No matter was submitted to a vote of the security  holders of the Company during the fourth quarter of 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **PART II**  | ** ** | **Item 5.**   | ** ** | **Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities.**See “Market Price of Stock and Dividends” at  page 72.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | **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 Operation.**See “Management’s Discussion and Analysis of Financial Condition and  Results of Operation” at pages 4 through 21.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | **Item  7A.** | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk.**See “Asset/Liability Management and Quantitative  and Qualitative Disclosures About Market Risk” at page 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | **Item  8.**  | ** ** | **Financial  Statements and Supplementary Data.**See Consolidated Financial Statements at pages 31 through 60.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** ** | **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 26 and “Management Report on Internal Control Over  Financial Reporting” at page 28.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|              |       |          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **        | ** ** | **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 “Compliance  with Section 16(a) of the Securities Exchange Act of 1934” 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 Lynda Cornell, Assistant to the Chief Executive Officer, Virginia  Commerce Bancorp, Inc., 5350 Lee Highway, Arlington, Virginia 22207. |
| ** **        | ** ** | ** **    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|              |       |          |       | There have been no  material changes in the procedures previously disclosed by which shareholders  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 Certain Transactions” and  “Election of Directors — Director Compensation” 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 Thereof” in the Proxy  Statement, and included under the caption “Securities Authorized for Issuance  Under Equity Compensation Plans” at page 72 hereof.                                                                                                                                                                                                                                                                        |
|              |       |          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **        | ** ** | **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  caption “Independent Registered Public Accounting Firm” in the Proxy  Statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|              |       |          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **PART IV**  | ** ** | **Item 15.**  | ** ** | **Exhibits  and Financial Statement Schedules.**See “Financial  Statements and Exhibits” at page 74.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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#### **FIVEYEAR FINANCIAL SUMMARY**

 
| ** **                                           | ** ** | **Year Ended December 31,**                                         | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected Year-End Balances**                       |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Total assets                                         |       | $                                                                                  | 2,715,922  |   | $ | 2,339,697 |   | $ | 1,949,082 |   | $ | 1,518,425 |   | $ | 1,139,353 |   |
| Total stockholders’ equity                      |       | 253,287                                                                            |       | 169,143 |   | 139,851 |   | 111,818 |   | 91,324 |   |
| Total loans (net)                                    |       | 2,273,086                                                                          |       | 1,924,741 |   | 1,629,827 |   | 1,270,255 |   | 925,782 |   |
| Total deposits                                       |       | 2,172,142                                                                          |       | 1,869,165 |   | 1,605,941 |   | 1,243,506 |   | 970,968 |   |
| **Summary Results of Operations**                    |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Interest income                                      |       | $                                                                                  | 160,468    |   | $ | 154,138 |   | $ | 125,292 |   | $ | 86,478 |   | $ | 57,998 |   |
| Interest expense                                     |       | 77,430                                                                             |       | 78,981 |   | 56,487 |   | 29,811 |   | 16,331 |   |
| Net interest income                                  |       | $                                                                                  | 83,038     |   | $ | 75,157 |   | $ | 68,805 |   | $ | 56,667 |   | $ | 41,667 |   |
| Provision for loan losses                            |       | 25,378                                                                             |       | 4,340 |   | 4,406 |   | 3,772 |   | 2,989 |   |
| Net interest income after provision for  loan losses |       | $                                                                                  | 57,660     |   | $ | 70,817 |   | $ | 64,399 |   | $ | 52,895 |   | $ | 38,678 |   |
| Non-interest income                                  |       | 6,431                                                                              |       | 7,883 |   | 7,323 |   | 6,676 |   | 5,759 |   |
| Non-interest expense                                 |       | 44,776                                                                             |       | 39,694 |   | 34,289 |   | 29,466 |   | 22,807 |   |
| Income before taxes                                  |       | $                                                                                  | 19,315     |   | $ | 39,006 |   | $ | 37,433 |   | $ | 30,105 |   | $ | 21,630 |   |
| Income tax expense                                   |       | 6,231                                                                              |       | 13,219 |   | 12,925 |   | 10,438 |   | 7,401 |   |
| Net income                                           |       | $                                                                                  | 13,084     |   | $ | 25,787 |   | $ | 24,508 |   | $ | 19,667 |   | $ | 14,229 |   |
| **Per Common Share Data (1)**                        |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net income per common share, basic                   |       | $                                                                                  | 0.48       |   | $ | 0.98 |   | $ | 0.95 |   | $ | 0.77 |   | $ | 0.59 |   |
| Net income per common share, diluted                 |       | $                                                                                  | 0.47       |   | $ | 0.95 |   | $ | 0.89 |   | $ | 0.72 |   | $ | 0.55 |   |
| Book value per common share                          |       | $                                                                                  | 6.86       |   | $ | 6.40 |   | $ | 5.36 |   | $ | 4.39 |   | $ | 3.65 |   |
| Average number of common shares  outstanding:        |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 26,555,484                                                                         |       | 26,323,242 |   | 25,960,838 |   | 25,429,399 |   | 23,980,908 |   |
| Diluted                                              |       | 27,249,839                                                                         |       | 27,379,204 |   | 27,449,754 |   | 27,205,294 |   | 26,009,257 |   |
| **Growth and Significant Ratios**                    |       |                                                                               |       |   |   |   |   |   |   |   |   |
| % Change in net income                               |       | -49.26                                                                             | %          | 5.22 | % | 24.61 | % | 38.22 | % | 23.24 | % |
| % Change in assets                                   |       | 16.08                                                                              | %          | 20.04 | % | 28.36 | % | 33.27 | % | 29.22 | % |
| % Change in loans (net)                              |       | 18.10                                                                              | %          | 18.09 | % | 28.31 | % | 37.21 | % | 41.37 | % |
| % Change in deposits                                 |       | 16.21                                                                              | %          | 16.39 | % | 29.15 | % | 28.07 | % | 25.53 | % |
| % Change in total stockholders’ equity          |       | 49.75                                                                              | %          | 20.95 | % | 25.07 | % | 22.44 | % | 65.77 | % |
| Equity to asset ratio                                |       | 9.33                                                                               | %          | 7.23 | % | 7.18 | % | 7.36 | % | 8.02 | % |
| Return on average assets                             |       | 0.51                                                                               | %          | 1.21 | % | 1.40 | % | 1.45 | % | 1.39 | % |
| Return on average equity                             |       | 7.18                                                                               | %          | 16.75 | % | 19.51 | % | 19.44 | % | 19.28 | % |
| Average equity to average assets                     |       | 7.06                                                                               | %          | 7.22 | % | 7.19 | % | 7.47 | % | 7.22 | % |
| Efficiency ratio (2)                                 |       | 50.05                                                                              | %          | 47.80 | % | 45.04 | % | 46.52 | % | 48.01 | % |

 

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(1)                       Adjusted for all years presentedgiving retroactive effect to five-for-four stock splits in the form of 25%stock dividends in 2004 and 2005, a three-for-two stock split in the form of a50% stock dividend in 2006, and a 10% stock dividend in 2007 and 2008.

(2)                       Computed by dividingnon-interest expense by the sum of net interest income on a tax equivalentbasis and non-interest income, net of securities gains or losses.  Thisis a non-GAAP financial measure, which we believe provides investors withimportant information regarding our operational efficiency.  Comparison of our efficiency ratio with thoseof other companies may not be possible, because other companies may calculatethe efficiency ratio differently.

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

This management’s discussion and analysis andother portions of this report, contain forward-looking statements within the meaningof the Securities and Exchange Act of 1934, as amended, including statements ofgoals, intentions, and expectations as to future trends, plans, events orresults of Company operations and policies and regarding general economicconditions. In some cases, forward-looking statements can be identified by useof words such as “may,” “will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,”“potential,” “continue,” “should,” and similar words or phrases. Thesestatements are based upon current and anticipated economic conditions,nationally and in the Company’s market, interest rates and interest ratepolicy, competitive factors, and other conditions which by their nature, arenot susceptible to accurate forecast, and are subject to significant uncertainty.Because of these uncertainties and the assumptions on which this discussion andthe forward-looking statements are based, actual future operations and resultsmay differ materially from those indicated herein. Readers are cautionedagainst placing undue reliance on any such forward-looking statements. TheCompany’s past results are not necessarily indicative of future performance.

 

**Non-GAAP Presentations**

 

This management’s discussion and analysisrefers to the efficiency ratio, which is computed by dividing non-interestexpense by the sum of net interest income on a tax equivalent basis andnon-interest income. This is a non-GAAP financial measure that we believeprovides investors with important information regarding our operationalefficiency. Comparison of our efficiency ratio with those of other companiesmay not be possible because other companies may calculate the efficiency ratiodifferently. The Company, in referring to its net income, is referring toincome under accounting principles generally accepted in the United States, or “GAAP.”

 

**General**

 

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

 

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

 

**Critical Accounting Policies**

 

During the year ended December 31, 2008,there were no changes in the Company’s critical accounting policies asreflected in the Company’s most recent annual or quarterly report.

 

The Company’sfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States (GAAP). The financial information contained within our statements is, to asignificant extent, financial information that is based on measures of thefinancial effects of transactions and events that have already occurred.  A variety of factors could affect theultimate value that is obtained either when earning income, recognizing anexpense, recovering an asset or relieving a liability.  We use historical loss factors as one factorin determining the inherent loss that may be present in our loanportfolio.  Actual losses could differsignificantly from the historical factors that we use. In addition, GAAP itselfmay change from one previously acceptable method to another method. Althoughthe economics of our transactions would be the same, the timing of events thatwould impact our transactions could change.

 

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Estimates, assumptions,and judgments are necessary when assets and liabilities are required to berecorded at fair value, when a decline in the value of an asset not carried onthe financial statements at fair value warrants an impairment write-down orvaluation reserve to be established, or when an asset or liability needs to berecorded contingent upon a future event. Carrying assets and liabilities atfair value inherently results in more financial statement volatility. The fairvalues and the information used to record valuation adjustments for certainassets and liabilities are based either on quoted market prices or are providedby other third-party sources, when available. The estimates used in management’sassessment of the adequacy of the allowance for loan losses require thatmanagement make assumptions about matters that are uncertain at the time ofestimation. Differences in these assumptions and differences between theestimated and actual losses could have a material effect.

 

The allowance for loanlosses is an estimate of the losses that are inherent in our loanportfolio.  The allowance is based on twobasic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses beaccrued when they are probable of occurring and estimable and (ii) SFAS114, Accounting by Creditors forImpairment of a Loan, which requires that losses be accrued based on thedifferences between the value of collateral, present value of future cash flowsor values that are observable in the secondary market and the loan balance.

 

Our allowance forloan losses has two basic components: the specific allowance and the unallocated allowance.  Each of these components is determined basedupon estimates that can and do change when the actual events occur.  The specific allowance is used toindividually allocate an allowance for impaired loans. Impairment testingincludes consideration of the borrower’s overall financial condition, resourcesand payment record, support available from financial guarantors and the fairmarket value of collateral.  Thesefactors are combined to estimate the probability and severity of inherentlosses based on the Company’s calculation of the loss embedded in theindividual loan. Large groups of smaller balance, homogeneous loans arecollectively evaluated for impairment. Impaired loans which meet the criteriafor substandard, doubtful and loss are segregated from performing loans withinthe portfolio.  Internally classifiedloans are then grouped by loan type (commercial, commercial real estate, commercialconstruction, residential real estate, residential construction orinstallment). The unallocated formula is used to estimate the loss ofnon-classified loans. These un-criticized loans are also segregated by loantype and allowance factors are assigned by management based on delinquencies,loss history, trends in volume and terms of loans, effects of changes inlending policy, the experience and depth of management, national and localeconomic trends, concentrations of credit, quality of the loan review systemand the effect of external factors (i.e. competition and regulatoryrequirements). The factors assigned differ by loan type.  The unallocated allowance recognizespotential losses whose impact on the portfolio has yet to be recognized by a specificallowance. Allowance factors and the overall size of the allowance may changefrom period to period based on management’s assessment of the above describedfactors and the relative weights given to each factor. For further informationregarding the allowance for loan losses see Notes 1 and 4 to the ConsolidatedFinancial Statements and the discussion under the caption “Asset Quality —Provision and Allowance for Loan Losses” at page 12.

 

The Company’s 1998Stock Option Plan (the “Plan”), which is shareholder-approved, permits thegrant of share options to its directors and officers for up to 2.4 millionshares of common stock, as adjusted for the ten percent stock dividend paid on May 1,2008.  Option awards are generallygranted with an exercise price equal to the market price of the Company’s stockat the date of grant, generally vest based on 5 years of continuous service andhave 10-year contractual terms. The fair value of each option award isestimated on the date of grant using a Black-Scholes option pricing model thatcurrently uses historical volatility of the Company’s stock based on a 7.2 yearexpected term, before exercise, for the options granted, and a risk-freeinterest rate based on the U.S. Treasury curve in effect at the time of the grantto estimate total stock-based compensation expense. This amount is thenamortized on a straight-line basis over the requisite service period, currently5 years, to salaries and benefits expense. See Notes 1 and 12 to theConsolidated Financial Statements for additional information regarding theStock Option Plan and related expense.

 

**Financial Performance Overview**

 

During 2008, thefinancial industry encountered significant volatility and stress as economicconditions worsened, unemployment increased and the effects of the “mortgagecrisis” became more widespread.  TheCompany did not have direct exposure to the subprime mortgage issues in that itdid not make subprime residential mortgage loans to retail customers, and didnot invest in private label mortgage backed securities or securities backed bysubprime or Alt A mortgages or the preferred stock of Freddie Mac and FannieMae.  However, the effects of the rapidlyslowing economy, and the precipitous and steep declines in housing starts andresidential real estate development and sales activity, adversely affected theCompany’s portfolio of loans to builders and developers of residential realestate in 

 

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the Company’smarkets, particularly in the outer suburbs, The Company’s loans to commercialcustomers in the building trades and allied industries have also been adverselyimpacted, as the effect of the housing slowdown spread. As a result, theCompany’s income was dramatically reduced in 2008, primarily due to increasedprovisions for loan losses.

 

For the year endedDecember 31, 2008, total assets increased $376.2 million, or 16.1%, from$2.34 billion at December 31, 2007, to $2.72 billion, with loans, net ofthe allowance for loan losses, increasing $348.3 million, or 18.1%, from $1.92billion at December 31, 2007, to $2.27 billion at December 31, 2008.This growth in loans and total assets was funded by an increase in totaldeposits of $303.0 million, or 16.2%, from $1.87 billion at December 31,2007, to $2.17 billion. Additional funding was provided by the sale of $25million in trust preferred securities to the Company’s directors and certain ofits executive officers and the issuance of $71 million in preferred stock tothe United States Department of the Treasury (the “Treasury”) under the CapitalPurchase Program. Please refer to “Capital Issuances”at page 20 for adiscussion of the issuance of securities under the Capital Purchase Program.Net income for the year ended December 31, 2008, was down $12.7 million,or 49.3%, from $25.8 million in 2007, to $13.1 million, due to a $21.0 millionincrease in loan loss provisions from $4.3 million in 2007 to $25.4 million.

 

In 2007, totalassets increased $390.6 million, or 20.0%, from $1.95 billion at December 31,2006, to $2.34 billion, with loans increasing $294.9 million, or 18.1%, from$1.63 billion at December 31, 2006, to $1.92 billion. As in 2008, themajority of the growth in loans and total assets was funded by increases indeposits, with total deposits rising $263.2 million, or 16.4%, from $1.61billion at December 31, 2006, to $1.87 billion at the end of 2007.Additional funding was provided by a $73.6 million increase in repurchaseagreements and federal funds purchased and $25 million in other borrowed funds.Net income in 2007 was up $1.3 million, or 5.2%, from $24.5 million in 2006, to$25.8 million with growth in net-interest income being the primary factor.

 

As noted, the Company achieved significantgrowth in loans in 2008. Loans are the Company’s principal asset class andprimary contributor to interest income. The majority of loan growth occurred innon-farm, non-residential real estate loans, which rose $175.8 million, or21.0%, from $835.5 million at December 31, 2007, to $1.01 billion at December 31,2008. One-to-four family residential real estate loans represented the secondlargest increase rising $90.9 million, or 34.1%, from $266.4 million at December 31,2007, to $357.3 million, while construction loans increased $40.8 million, or 7.5%,from $544.3 million at the end of 2007, to $585.1 million and commercial loansrose $40.8 million, or 17.1%, from $238.7 million at December 31, 2007 to$279.5 million. Increases in one-to-four family residential loans are due tothe Company holding more of its originations in portfolio rather than sellingthem, because of reduced demand and product availability in the secondarymarket, while the growth in construction loans was concentrated in commercialreal estate projects.****Year-over-year,residential construction loans are down $9.0 million and are expected todecline further as that lending focus has been significantly curtailed in lightof conditions in the housing market.  In2007, non-farm non-residential real estate loans rose $146.4 million, one-to-fourfamily residential loans were up $73.2 million, commercial loans increased by$48.1 million and construction loans grew $29.3 million.

 

While loans are the Company’s major asset,deposits are the Company’s major source of funding and as a result the majorcontributor to interest expense. In 2008, deposits increased by $303.3 million,or 16.2%, with non-interest-bearing demand deposits decreasing by $19.0million, or 8.9%, to $194.8 million, savings and interest-bearing demanddeposits mostly unchanged and time deposits growing $321.1 million, or 28.2%,from $1.14 billion at December 31, 2007, to $1.46 billion. For the yearended December 31, 2007, deposit growth included an increase innon-interest-bearing demand deposits by $26.9 million, a $57.7 million increasein savings and interest-bearing demand deposits, and a $178.7 million increasein time deposits. Repurchase agreements, the majority of which represent sweepfunds of significant commercial demand deposit customers, and Federal funds purchaseddecreased $34.5 million, or 15.5%, from $222.5 million at December 31,2007, to $188.0 million at December 31, 2008, and increased $73.6 million,or 49.5%, in 2007.

 

The Company’s investment securities portfoliorepresents its second largest asset class and contributor to interest income,and is generally maintained as a primary source of liquidity. In 2008, theportfolio increased by $10.6 million, or 3.2%, from $326.2 million at December 31,2007, to $336.8 million at December 31, 2008, with growth concentrated inobligations of states and political subdivisions. In 2007, the portfolioincreased $92.0 million, or 39.3%, from $234.2 million at December 31,2006, to $326.2 million, with growth concentrated in both U.S. GovernmentAgency obligations and obligations of states and political subdivisions.

 

For the year ended December 31, 2008,earnings were down $12.7 million, or 49.3% compared to earnings of $25.8million for the prior fiscal year as net interest income increased $7.8million, or 10.5%, from $75.2 million in 2007, 

 

6

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to $83.0 million in 2008, non-interest incomedecreased $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 $39.7million in 2007, to $44.8 million. As a result, the Company’s efficiency ratio,as defined, rose from 47.8% for the year ended December 31, 2007, to 50.1%in 2008. In 2007, earnings of $25.8 million increased $1.3 million, or 5.2%,compared to earnings of $24.5 million in 2006, with net interest incomeincreasing $6.4 million, or 9.2%, non-interest income rising $560 thousand, or7.6%, provisions for loan losses decreasing $66 thousand, while non-interest expenserose $5.4 million, or 15.8%. For the year ended December 31, 2006,earnings of $24.5 million represented an increase of 24.6% compared to earningsof $19.7 million in 2005. On a diluted per common share basis earnings were$0.47, $0.95, and $0.89 in 2008, 2007, and 2006, respectively, while theCompany’s return on average assets was 0.51% for 2008, as compared to 1.21% in2007 and 1.40% in 2006. Return on average equity was 7.18% in 2008, 16.75% in2007, and 19.51% in 2006.

 

Stockholders’ equity increased by $84.1million in 2008, or 49.8%, from $169.1 million at December 31, 2007, to$253.3 million, with earnings of $13.1 million, a $1.9 million decrease inother comprehensive income related to the investment securities portfolio, and$911 thousand in proceeds and tax benefits related to the exercise of optionsby Company directors, officers and employees and stock option expense credits.On September 24, 2008, the Company raised $25 million in qualifyingcapital through the sale of trust preferred securities to the Company’sdirectors and certain of its executive officers. In connection with theissuance of the trust preferred securities, the Company also issued warrants topurchase 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 PurchaseProgram. In connection with the issuance of the preferred stock, the Companyalso issued to the Treasury warrants to purchase approximately 2.7 millionshares of common stock. In 2007, stockholders’ equity increased $29.2 million,or 20.9%, from $139.9 million at December 31, 2006, to $169.1 million,with earnings of $25.8 million, a $1.9 million increase in other comprehensiveincome related to the investment securities portfolio, and $1.6 million inproceeds and tax benefits related to the exercise of options by Companydirectors, officers and employees and stock option expense credits. The totalnumber of common shares outstanding increased in 2008 by 2,552,719, with2,411,508 shares issued due to a ten percent stock dividend in May 2008,and 141,211 shares issued as a result of the exercise of options by Companydirectors, officers and employees.

 

**Net Interest Income**

 

Net interestincome is the excess of interest earned on loans and investments over theinterest paid on deposits and borrowings and is the Company’s primary revenuesource. Net interest income is thereby affected by overall balance sheetgrowth, changes in interest rates and changes in the mix of investments, loans,deposits and borrowings. In 2008, net interest income increased $7.8 million,or 10.5%, from $75.2 million in 2007, to $83.0 million due to the significantgrowth in loans as the net interest margin fell from 3.65% in 2007, to 3.30%.In 2007, net interest income increased $6.4 million, or 9.2%, from $68.8million in 2006, to $75.2 million due again to significant loan growth as thenet interest margin fell from 4.07% in 2006, to 3.65%. In 2006, net interestincome increased $12.1 million, or 21.2%, from $56.7 million in 2005, to $68.8million.

 

In 2006, theFederal Open Market Committee (the “FOMC”) continued a campaign of increasingits Fed funds target rate that began in 2004 by another 100 basis points to5.25%. As that increase also increased the prime lending rate to 8.25%, ofwhich many of the Company’s loan rates are tied to, the Company’s yield oninterest-earning assets rose from 6.57% in 2005 to 7.41% in 2006. However, asthe treasury yield curve eventually inverted with higher short-term thanlong-term rates, funds began shifting from lower rate to higher rate accounts,and as competition for deposits in the local market intensified, the cost ofinterest-bearing liabilities increased to a greater extent, from 2.79% in 2005to 4.00% in 2006. As a result, the net interest margin fell from 4.30% in 2005to 4.07% in 2006.

 

In 2007, as shortterm interest rates remained high for most of the year, and strong competitionfor deposits in the local market continued, the cost of interest-bearingliabilities rose from 4.00% in 2006 to 4.46%, while the yield oninterest-earning assets rose by only five basis points from 7.41% in 2006 to7.46%. The FOMC began easing rates in September 2007 and the prime lendingrate fell to 7.25% by year end. In 2008, as the prime lending rate fell to3.25% as the FOMC reduced the Federal funds target rate to 2.25% in September 2008and to a range of 0-0.25% in December 2008, and the Company experienced asignificant increase in non-performing loans, the yield on interest-earningassets fell 111 basis points from 7.46% to 6.35%, while the cost ofinterest-bearing liabilities fell 94 basis points to 3.52%. Tables 1, 2 and 3provide further information with regard to yields, costs, the changes in netinterest income and associated risk.

 

7

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

 

Thefollowing table shows the average balance sheets for each of the years ended December 31,2008, 2007, and 2006. In addition, the amounts of interest earned oninterest-earning assets, with related yields, and interest expense oninterest-bearing liabilities, with related rates, are shown.  Loans placed on a non-accrual status areincluded in the average balances. Net loan fees and late charges included ininterest income on loans totaled $5.0 million, $5.5 million and $5.4 millionfor 2008, 2007, and 2006, respectively.

 
| ** **                                                                 | ** ** | **2008**             | ** ** | **2007**                       | ** ** | **2006**                    | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|-----------------------------|------------|
| **(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)                                                             |       | $                    | 328,192    |                           | $          | 16,585                      |       | 5.17 | % | $ | 280,852 |   | $ | 13,948 |   | 5.04 | % | $ | 199,658 |   | $ | 8,746 |   | 4.42 | % |
| Loans, net of  unearned income                                             |       | 2,180,883            |       | 143,501                        |       | 6.57                        | %          | 1,766,501 |   | 138,919 |   | 7.87 | % | 1,470,264 |   | 115,405 |   | 7.85 | % |
| Interest-bearing  deposits in other banks                                  |       | 4,831                |       | 145                            |       | 2.99                        | %          | 2,802 |   | 140 |   | 5.01 | % | 1,055 |   | 55 |   | 5.21 | % |
| Federal funds  sold                                                        |       | 14,067               |       | 237                            |       | 1.66                        | %          | 22,372 |   | 1,131 |   | 4.98 | % | 21,972 |   | 1,086 |   | 4.94 | % |
| **Total  interest-earning assets**                                         |       | $                    | 2,527,973  |                           | $          | 160,468                     |       | 6.35 | % | $ | 2,072,527 |   | $ | 154,138 |   | 7.46 | % | $ | 1,692,949 |   | $ | 125,292 |   | 7.41 | % |
| Other assets                                                               |       | 54,611               |       |                           |       |                        |       | 61,415 |   |   |   |   |   | 54,029 |   |   |   |   |   |
| **Total  assets**                                                          |       | $                    | 2,582,584  |                           |       |                        |       |   | $ | 2,133,942 |   |   |   |   |   | $ | 1,746,978 |   |   |   |   |   |
| **Liabilities &  Stockholders’ Equity**                      |       |                 |       |                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                                                 |       |                 |       |                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                               |       | $                    | 165,374    |                           | $          | 2,655                       |       | 1.60 | % | $ | 155,047 |   | $ | 2,499 |   | 1.61 | % | $ | 174,853 |   | $ | 2,880 |   | 1.65 | % |
| Money market  accounts                                                     |       | 198,429              |       | 5,389                          |       | 2.71                        | %          | 224,524 |   | 8,806 |   | 3.92 | % | 195,482 |   | 6,879 |   | 3.52 | % |
| Savings accounts                                                           |       | 175,629              |       | 5,124                          |       | 2.91                        | %          | 120,061 |   | 5,148 |   | 4.29 | % | 26,934 |   | 608 |   | 2.26 | % |
| Time deposits                                                              |       | 1,349,116            |       | 54,093                         |       | 4.00                        | %          | 1,054,962 |   | 52,945 |   | 5.02 | % | 843,661 |   | 37,785 |   | 4.48 | % |
| Total  interest-bearing deposits                                           |       | $                    | 1,888,548  |                           | $          | 67,261                      |       | 3.55 | % | $ | 1,554,594 |   | $ | 69,398 |   | 4.46 | % | $ | 1,240,930 |   | $ | 48,152 |   | 3.88 | % |
| Securities sold  under agreement to repurchase and federal funds purchased |       | 223,114              |       | 5,534                          |       | 2.47                        | %          | 165,499 |   | 6,259 |   | 3.78 | % | 118,092 |   | 4,730 |   | 4.01 | % |
| Other borrowed  funds                                                      |       | 36,202               |       | 1,235                          |       | 3.36                        | %          | 6,986 |   | 225 |   | 3.18 | % | 9,726 |   | 506 |   | 5.20 | % |
| Trust preferred  capital notes                                             |       | 46,373               |       | 3,400                          |       | 7.21                        | %          | 42,614 |   | 3,099 |   | 7.17 | % | 43,000 |   | 3,099 |   | 7.21 | % |
| **Total  interest-bearing liabilities**                                    |       | $                    | 2,194,237  |                           | $          | 77,430                      |       | 3.52 | % | $ | 1,769,693 |   | $ | 78,981 |   | 4.46 | % | $ | 1,411,748 |   | $ | 56,487 |   | 4.00 | % |
| Demand deposits  and other liabilities                                     |       | 206,117              |       |                           |       |                        |       | 210,262 |   |   |   |   |   | 209,642 |   |   |   |   |   |
| **Total  liabilities**                                                     |       | $                    | 2,400,354  |                           |       |                        |       |   | $ | 1,979,955 |   |   |   |   |   | $ | 1,621,390 |   |   |   |   |   |
| Stockholders’  equity                                                 |       | 182,230              |       |                           |       |                        |       | 153,987 |   |   |   |   |   | 125,588 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity**                       |       | $                    | 2,582,584  |                           |       |                        |       |   | $ | 2,133,942 |   |   |   |   |   | $ | 1,746,978 |   |   |   |   |   |
| Interest rate  spread                                                      |       |                 |       |                           |       | 2.83                        | %          |   |   |   |   | 3.00 | % |   |   |   |   | 3.41 | % |
| **Net  interest income and margin**                                        |       |                 |       | $                              | 83,038     |                        | 3.30       | % |   |   | $ | 75,157 |   | 3.65 | % |   |   | $ | 68,805 |   | 4.07 | % |

 

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(1) Yields on securitiesavailable-for-sale have been calculated on the basis of historical cost and donot give effect to changes in the fair value of those securities, which arereflected as a component of stockholders’ equity. Average yields on tax-exemptsecurities are stated on a tax equivalent basis, using a 35% rate.

 

8

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**TABLE 2: RATE-VOLUME VARIANCE ANALYSIS**

 

Interest income and expense are affected bychanges in interest rates, by changes in the volumes of earning assets andinterest-bearing liabilities, and by changes in the mix of these assets andliabilities.  The following analysisshows the year-to-year changes in the components of net interest income.

 
| ** **                                                                 | ** ** | **2008 compared to 2007** | ** ** | **2007 compared to 2006** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **Increase/(Decrease)  Due to**     | ** ** | **Total  Increase/**                     | ** ** | **Increase/(Decrease)  Due to** | ** ** | **Total  Increase/** | ** ** |
| **(Dollars in thousands)**                                       | ** ** | **Volume**                               | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest Income**                                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans                                                                      |       | $                                        | 27,628     |                                     | $          | (23,046 | ) | $ | 4,582 |   | $ | 23,184 |   | $ | 330 |   | $ | 23,514 |   |
| Securities                                                                 |       | 2,288                                    |       | 349                                      |       | 2,637 |   | 3,953 |   | 1,249 |   | 5,202 |   |
| Interest bearing deposits in other banks                                   |       | 61                                       |       | (56                                      | )          | 5 |   | 87 |   | (2 | ) | 85 |   |
| Federal funds sold                                                         |       | (137                                     | )          | (757                                     | )          | (894 | ) | 35 |   | 10 |   | 45 |   |
| Total interest income                                                      |       | $                                        | 29,840     |                                     | $          | (23,510 | ) | $ | 6,330 |   | $ | 27,259 |   | $ | 1,587 |   | $ | 28,846 |   |
| **Interest Expense**                                                       |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits:                                                 |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                               |       | $                                        | 173        |                                     | $          | (17 | ) | $ | 156 |   | $ | (319 | ) | $ | (62 | ) | $ | (381 | ) |
| Money market accounts                                                      |       | (684                                     | )          | (2,733                                   | )          | (3,417 | ) | 1,139 |   | 788 |   | 1,927 |   |
| Savings accounts                                                           |       | 1,635                                    |       | (1,659                                   | )          | (24 | ) | 3,993 |   | 547 |   | 4,540 |   |
| Time deposits                                                              |       | 11,406                                   |       | (10,258                                  | )          | 1,148 |   | 10,605 |   | 4,555 |   | 15,160 |   |
| Total interest-bearing deposits                                            |       | $                                        | 12,530     |                                     | $          | (14,667 | ) | $ | (2,137 | ) | $ | 15,418 |   | $ | 5,828 |   | $ | 21,246 |   |
| Securities sold under agreement to  repurchase and federal funds purchased |       | 1,446                                    |       | (2,171                                   | )          | (725 | ) | 1,793 |   | (264 | ) | 1,529 |   |
| Other borrowed funds                                                       |       | 997                                      |       | 13                                       |       | 1,010 |   | (88 | ) | (193 | ) | (281 | ) |
| Trust preferred capital notes                                              |       | 284                                      |       | 17                                       |       | 301 |   | (28 | ) | 28 |   | — |   |
| Total interest expense                                                     |       | $                                        | 15,257     |                                     | $          | (16,808 | ) | $ | (1,551 | ) | $ | 17,095 |   | $ | 5,399 |   | $ | 22,494 |   |
| **Change in Net Interest Income**                                          | ** ** | **$**                                    | **14,583** | ** **                               | **$**      | **(6,702** | **)** | **$** | **7,881** | ** ** | **$** | **10,164** | ** ** | **$** | **(3,812** | **)** | **$** | **6,352** | ** ** |

 

**Asset/Liability Management and Quantitativeand Qualitative Disclosures about Market Risk**

 

In the normal course ofbusiness, the Company is exposed to market risk, or interest rate risk, as itsnet income is largely dependent on its net interest income. Market risk ismanaged by the Company’s Asset/Liability Management Committee that formulatesand monitors the performance of the Company based on established levels ofmarket risk as dictated by policy. In setting tolerance levels, or limits onmarket risk, the Committee considers the impact on earnings and capital, thelevel and general direction of interest rates, liquidity, local economic conditionsand other factors. Interest rate risk, or interest sensitivity, can be definedas the amount of forecasted net interest income that may be gained or lost dueto favorable or unfavorable movements in interest rates. Interest rate risk, orsensitivity, arises when the maturity or repricing of interest-earning assetsdiffers from the maturing or repricing of interest-bearing liabilities and as aresult of the difference between total interest-earning assets andinterest-bearing liabilities. The Company seeks to manage interest ratesensitivity while enhancing net interest income by periodically adjusting thisasset/liability position.

 

One of the tools used by the Company toassess interest sensitivity on a monthly basis is the static gap analysis thatmeasures the cumulative differences between the amounts of assets andliabilities maturing or repricing within various time periods. It is theCompany’s goal to limit the one-year cumulative difference, or gap, in anattempt to limit changes in future net interest income from changes in marketinterest rates. A static gap analysis is shown in Table 3 below, and reflectsthe earlier of the maturity or repricing dates for various assets, includingprepayment and amortization estimates, and liabilities as of December 31,2008. At that point in time, the Company had a cumulative net liabilitysensitive one-year gap position of $404.5 million, or a negative 15.2% of totalinterest-earning assets.

 

This position would generally indicate thatover a period of one-year net interest earnings should decrease in a risinginterest rate environment as more liabilities would reprice than assets andshould increase in a falling interest rate environment. However, thismeasurement of interest rate risk sensitivity represents a static position asof a single day and is not necessarily indicative of the Company’s position atany other point in time, does not take into account the differences insensitivity of yields and costs on specific assets and liabilities to changesin market rates, and it does not take into account the specific timing of whenchanges to a specific asset or liability will occur. More accurate measures ofinterest sensitivity are provided to the Company using earnings simulationmodels.

 

9

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# ** **

# **TABLE 3:  STATICGAP ANALYSIS**

 
| ** **                                                                  | ** ** | **Interest Sensitivity Periods** | ** **  |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| **At December 31, 2008  (Dollars in thousands)**                       | ** ** | **Within  90 Days**                        | ** **  | **91 to 365  Days** | ** ** | **Over 1 to 5  Years** | ** ** | **Over 5  Years** | ** ** | **Total** | ** ** |
| **Interest-earning Assets**                                                 |       |                                       |        |   |   |   |   |   |   |   |   |
| Securities, at amortized cost                                               |       | $                                          | 45,883      |   | $ | 67,339 |   | $ | 97,127 |   | $ | 127,584 |   | $ | 337,933 |   |
| Loans held-for-sale                                                         |       | 6,221                                      |        | — |   | — |   | — |   | 6,221 |   |
| Loans, net of unearned income                                               |       | 862,539                                    |        | 268,642 |   | 910,569 |   | 267,811 |   | 2,309,561 |   |
| Total interest-earning assets                                               |       | $                                          | 914,643     |   | $ | 335,981 |   | $ | 1,007,696 |   | $ | 395,395 |   | $ | 2,653,715 |   |
| **Interest-bearing Liabilities**                                            |       |                                       |        |   |   |   |   |   |   |   |   |
| NOW accounts                                                                |       | $                                          | 88,242      |   | — |   | $ | 88,242 |   | — |   | $ | 176,484 |   |
| Money market accounts                                                       |       | 70,573                                     |        | — |   | 70,573 |   | — |   | 141,146 |   |
| Savings accounts                                                            |       | 100,212                                    |        | — |   | 100,212 |   | — |   | 200,424 |   |
| Time deposits                                                               |       | 582,867                                    |        | 635,290 |   | 241,140 |   | — |   | 1,459,297 |   |
| Securities sold under agreements to  repurchase and federal funds purchased |       | 162,959                                    |        | — |   | — |   | 25,000 |   | 187,959 |   |
| Other borrowed funds                                                        |       | —                                     |        | — |   | 25,000 |   | — |   | 25,000 |   |
| Trust preferred capital notes                                               |       | —                                     |        | 15,000 |   | 25,000 |   | 25,000 |   | 65,000 |   |
| Total interest-bearing liabilities                                          |       | $                                          | 1,004,853   |   | $ | 650,290 |   | $ | 550,167 |   | $ | 50,000 |   | $ | 2,255,310 |   |
| **Cumulative maturity / interest sensitivity  gap**                         | ** ** | **$**                                      | **(90,210** | **)** | **$** | **(404,519** | **)** | **$** | **(53,010** | **)** | **$** | **398,405** | ** ** | **$** | **398,405** | ** ** |
| As % of total interest-earning assets                                       |       | (3.4                                       | )%          | (15.2 | )% | (2.0 | )% | 15.0 | % |   |   |

 

In order to more closely measure interestsensitivity, the Company uses earnings simulation models on a quarterly basis.These models utilize the Company’s financial data and various managementassumptions as to balance sheet growth, interest rates, operating expenses andother non-interest income sources to forecast a base level of earnings over aone-year period. This base level of earnings is then shocked assuming a 200basis points higher and lower level of interest rates (but not below zero) overthe forecasted period.  The most recentearnings simulation model was run based on data as December 31, 2008, andconsistent with the Company’s belief from its static gap analysis that its balancesheet structure was liability sensitive at that time, the model projected thatforecasted net-interest income over a one-year period would decrease by 2.50%if interest rates were to be 200 basis points higher than expected, andforecasted net-interest income would decrease by 0.10% if interest rates wereto be 100 basis points lower than expected. As noted above, normally theseearnings models are shocked downward 200 basis points; however, as the Federalfunds target rate dropped to a range of 0% to 0.25%, the prime lending rate to3.25%, and treasury yields to historically low levels, a downward shock inrates of that magnitude was not deemed practical, or likely to occur.

 

Management believes the modeled results areconsistent with the short duration of its balance sheet and given the manyvariables that affect the actual timing of when assets and liabilities willreprice.  Since the earnings model usesnumerous assumptions regarding the effect of changes in interest rates on thetiming and extent of repricing characteristics, future cash flows and customerbehavior, the model cannot precisely estimate net income and the effect on netincome from sudden changes in interest rates. Actual results will differ fromthe simulated results due to the timing, magnitude and frequency of interestrate changes and changes in market conditions and management strategies, amongother factors.

 

**Non-Interest Income**

 

The Company’s non-interest income sources include service charges andother fees on deposit accounts, fees and net gains from loans originated andsold through its mortgage lending division, commissions from non-depositinvestment sales and increases in the cash surrender value of Bank owned lifeinsurance policies. Non-interest income decreased $1.5 million in 2008, or18.4%, from $7.9 million in 2007 to $6.4 million, and increased $560 thousand,or 7.6%, from $7.3 million in 2006, to $7.9 million in 2007. In 2006,non-interest income increased $647 thousand, or 9.7%, from $6.7 million in2005, to $7.3 million. Of the total decline in non-interest income in 2008,$1.2 million was due to lower fees and net gains on mortgage loans originatedfor sale. Since 2005, the level of 

 

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mortgages originated for sale has declined from $202.3 million to$174.9 million in 2006, to $158.0 million in 2007, and to $80.6 million in 2008as the Bank began to hold more of its originations in portfolio rather thanselling them, due to a reduction in demand and available loan products in thesecondary market. As a result, fees and net gains on these sold loans fell from$3.3 million in 2005, to $3.1 million, $2.7 million, and $1.5 million in 2006,2007 and 2008, respectively.

 

Service charges and other fees, which include monthly deposit accountmaintenance charges, overdraft fees, ATM fees and charges, debit cardinterchange income, safe deposit box rents, merchant discount fee income, andlock-box service fees, increased $514 thousand, or 15.2%, from $3.4 million in2007, to $3.9 million in 2008. In 2007, service charges and other fees were up$162 thousand, or 5.0%, from $3.2 million to $3.4 million, while in 2006 theywere up $673 thousand, or 26.4%. The increase in 2008 was due to a new debitcard rewards program that increased debit card interchange income, while theincrease in 2006 was due to higher overdraft fees associated with a newoverdraft protection program implemented in September 2005.

 

Non-deposit investment services commissions, which the Bank offersthrough a third party arrangement, were down $68 thousand in 2008 from $770thousand in 2007, and were up $149 thousand in 2007 from $621 thousand in 2006.Other income decreased $439 thousand in 2008 to $329 thousand, increased $350thousand in 2007, and was up $57 thousand in 2006. The majority of this incomesource is related to $14.2 million in Bank owned life insurance policies, whichaccounted for most of the $439 thousand decrease in other income in 2008. Thesepolices, which are recorded on the Company’s balance sheets under other assets,also accounted for $608 thousand of the $768 thousand in other income in 2007,and $309 thousand of the $418 thousand in other income in 2006. The Companydoes not anticipate additional purchases of this insurance. Income from Bankowned life insurance is non-taxable.

 

In 2007, non-interest income results also include a gain on the sale ofOREO of $638 thousand and a loss of $387 thousand on the sale of securitiesrelated to a partial restructuring of the securities portfolio.

 

**Non-Interest Expense**

 

Non-interest expense increased $5.1 million,or 12.8%, from $39.7 million in 2007, to $44.8 million in 2008, increased $5.4million, or 15.8%, from $34.3 million in 2006 to $39.7 million in 2007, andincreased $4.8 million, or 16.4%, from $29.5 million in 2005 to $34.3 millionin 2006. Salaries and benefits accounted for $826 thousand, or 16.2%, of thetotal increase in non-interest expense in 2008, $2.6 million, or 48.6%, in2007, and $2.6 million, or 53.7% in 2006. Commissions and incentivecompensation associated with the significant increases in total loans and thehiring of additional loan officers, together with increased compensation andbenefits expense associated with additional employees added due to overallgrowth and branch expansion were the reasons for the increases in 2006 and2007, while the much lower increase in 2008 was due to lower commissions andincentive compensation due to lower Company earnings.

 

Occupancy expenses, which include rents,depreciation, maintenance on buildings, leaseholds and equipment, increased$1.8 million, or 26.0%, from $7.0 million in 2007, to $8.8 million in 2008, andincreased $1.6 million, or 29.1%, in 2007. In 2006, occupancy expense was up$969 thousand, or 21.6%. These increases over the three year period were due tothe opening of eight new branch locations and expanded office facilities forlending units and other back office support departments.

 

Other operating expenses, which includeadvertising and public relations expenses, bank franchise taxes, legal andprofessional fees, insurance, FDIC insurance, telecommunications, supplies andpostage, increased by $2.2 million, or 26.9%, from $8.2 million in 2007, to$10.4 million in 2008, and increased $1.2 million, or 17.4%, from $7.0 millionin 2006, to $8.2 million in 2007. In 2006, other operating expenses increased$863 thousand, or 14.1%. The increases over the years are generally due tobranch expansion and overall growth, with year-over-year increases inadvertising, public relations and bank franchise tax expenses, while in thesecond quarter of 2007 the Bank, along with all other depository institutionsinsured by the FDIC, began to pay deposit insurance premiums for the first timesince the mid 1990’s. Those premiums are expected to rise significantly in2009.  See “Regulation, Supervision andGovernmental Policy – Deposit Insurance Premiums” at page 70.

 

**Income Taxes**

 

The Company’s income tax provisions are adjusted for non-deductibleexpenses and non-taxable interest after applying the U.S. federal income taxrate of 35%. The provision for income taxes totaled $6.2 million, $13.2 million

 

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and $12.9 million, for the years ended December 31, 2008, 2007 and2006, respectively. The effects of non-deductible expenses and non-taxableinterest on the Company’s income tax provisions are minimal. For furtherinformation regarding the provisions for income taxes see Note 8 to the Consolidated Financial Statements.

 

### **Asset Quality - Provision and Allowance For Loan Losses**

### ** **

The provision for loan losses is based upon management’s estimate ofthe amount required to maintain an adequate allowance for loan lossesreflective of the risks in the loan portfolio. In 2008, net charge-offs totaled $11.2 million compared to $181 thousandand $126 thousand in 2007 and 2006, respectively.  The provision for loan loss expense in 2008was $25.4 million compared to $4.3 million in 2007, and $4.4 million in 2006.As a result, the total allowance for loan losses increased $14.2 million, or63.9%, from $22.3 million at December 31, 2007, to $36.5 million at December 31,2008, increased $4.2 million, or 23.0%, in 2007, and increased 31.0% in 2006.These increases in the total allowance for loan losses for 2006 and 2007 wereconsistent with an 18.1% increase in loans in 2007, and a 28.3% increasein  2006, as net-charge offs were minimaland the level of non-performing assets and loans 90 + days past due were verylow. In 2008, while some of the increase in the allowance was associated withoverall loan growth, the most significant factor was a $120.5 million increasein non-performing assets and loans 90 + days past due from $4.4 million at December 31,2007, to $124.9 million at December 31, 2008. In addition, otheridentified potential problem loans, which are classified as impaired loans,although well-secured and currently performing, but in some instances requiringhigher reserve levels, rose from $11.6 million at December 31, 2006, to$15.4 million at December 31, 2007, and to $49.3 million at December 31,2008. The allowance has also increased as a percent of total loans from 1.10%at December 31, 2006, to 1.14% as of December 31, 2007, and to 1.58%as of December 31, 2008. See “Risk Elements and Non-Performing Assets”later in this discussion for more information on non-performing assets andloans 90 + days past due and other impaired loans.

 

Management feels that the allowance for loanlosses is adequate at December 31, 2008. However, there can be no assurancethat additional provisions for loan losses will not be required in the future,including as a result of possible changes in the economic assumptionsunderlying management’s estimates and judgments, adverse developments in theeconomy, and the residential real estate market in particular, on a nationalbasis or in the Company’s market area, or changes in the circumstances ofparticular borrowers.  In 2009,Management intends to pursue more aggressive strategies for problem loanresolution and is committed to utilize earnings to the maximum extent necessaryto bolster loan loss reserves to levels sufficient to absorb losses recognizedin the pursuit of this strategy.  TheCompany’s increased capital level gives it the added safety cushion to do so.

 

The Company generates a quarterly analysis of the allowance for loanlosses, with the objective of quantifying portfolio risk into a dollar figureof inherent losses, thereby translating the subjective risk value into anobjective number. Emphasis is placed on semi-annual independent external loanreviews and monthly internal reviews. The determination of the allowance for loan losses is based on applyingand summing the results of eight qualitative factors and one quantitativefactor to each category of loans along with any specific allowance for impairedloans within the particular category. Each factor is assigned a percentageweight and that total weight is applied to each loan category. The resultingsum from each loan category is then combined to arrive at a total allowance forall categories. Factors are different for each loan category. Qualitativefactors include: levels and trends in delinquencies and non-accruals, trends involumes and terms of loans, effects of any changes in lending policies, the experience,ability and depth of management, national and local economic trends andconditions, concentrations of credit, quality of the Company’s loan reviewsystem, and regulatory requirements. The total allowance required thus changesas the percentage weight assigned to each factor is increased or decreased dueto its particular circumstance, as the various types and categories of loanschange as a percentage of total loans and as specific allowances are requireddue to an increase in impaired loans. Forfurther information regarding the allowance for loan losses see Notes 1 and 4to the Consolidated Financial Statements.

 

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**TABLE 4: PROVISION AND ALLOWANCE FOR LOAN LOSSES**

 
| **(Dollars in thousands)**                                        | ** ** | **2008**   | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Allowance, beginning of period                                              |       | $          | 22,260     |      | $          | 18,101    |       | $         | 13,821     |      | $          | 10,402 |   | $ | 7,457 |   |
| **Charge-Offs**                                                             |       |       |       |      |       |      |       |      |       |      |       |
| Real estate loans                                                           |       | $          | 7,493      |      | $          | —    |       | $         | —     |      | $          | — |   | $ | — |   |
| Commercial loans                                                            |       | 3,436      |       | —    |       | 112       |       | 341       |       | —    |       |
| Consumer loans                                                              |       | 392        |       | 212       |       | 77        |       | 21        |       | 62        |       |
| Total charge-offs                                                           |       | $          | 11,321     |      | $          | 212       |       | $         | 189        |      | $          | 362 |   | $ | 62 |   |
| **Recoveries**                                                              |       |       |       |      |       |      |       |      |       |      |       |
| Real estate loans                                                           |       | $          | 77         |      | $          | —    |       | $         | —     |      | $          | — |   | $ | — |   |
| Commercial loans                                                            |       | 16         |       | —    |       | —    |       | —    |       | 12        |       |
| Consumer loans                                                              |       | 65         |       | 31        |       | 63        |       | 9         |       | 6         |       |
| Total recoveries                                                            |       | $          | 158        |      | $          | 31        |       | $         | 63         |      | $          | 9 |   | $ | 18 |   |
| Net charge-offs                                                             |       | $          | 11,163     |      | $          | 181       |       | $         | 126        |      | $          | 353 |   | $ | 44 |   |
| **Provision for loan losses**                                               | ** ** | **25,378** | ** ** | **4,340** | ** ** | **4,406** | ** ** | **3,772** | ** ** | **2,989** | ** ** |
| Allowance, end of period                                                    |       | $          | 36,475     |      | $          | 22,260    |       | $         | 18,101     |      | $          | 13,821 |   | $ | 10,402 |   |
| Ratio of net charges-offs to average total  loans outstanding during period |       | 0.51       | %          | 0.01      | %          | 0.01      | %          | 0.03      | %          | 0.01      | %          |

 

# **TABLE 5: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES**

# ** **

The allowance for loan losses includesspecific allowances for impaired loans and a general allowance applicable toall loan categories; however, management has allocated the allowance to providean indication of the relative risk characteristics of the loan portfolio. Theallocation is an estimate and should not be interpreted as an indication thatcharge-offs will occur in these amounts, or that the allocation indicatesfuture trends.  The allocation of theallowance at December 31 for the years indicated and the ratio of relatedoutstanding loan balances to total loans are as follows:

** **
| **(Dollars in thousands)**         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **Allocation of allowance for loan losses:** |       |     |       |     |       |     |       |     |       |     |       |
| Real estate – mortgage                  |       | $        | 9,375      |     | $          | 9,226    |       | $        | 8,654      |     | $          | 7,298 |   | $ | 5,584 |   |
| Real estate – construction              |       | 18,485   |       | 6,612    |       | 4,939    |       | 3,599    |       | 2,328    |       |
| Commercial                                   |       | 8,489    |       | 6,304    |       | 4,449    |       | 2,865    |       | 2,422    |       |
| Consumer                                     |       | 126      |       | 118      |       | 59       |       | 59       |       | 68       |       |
| Balance, December 31,                   |       | $        | 36,475     |     | $          | 22,260   |       | $        | 18,101     |     | $          | 13,821 |   | $ | 10,402 |   |
| **Ratio of loans to total year-end loans:**  |       |     |       |     |       |     |       |     |       |     |       |
| Real estate – mortgage                  |       | 62       | %          | 59       | %          | 57       | %          | 60       | %          | 65       | %          |
| Real estate – construction              |       | 25       | %          | 28       | %          | 31       | %          | 30       | %          | 25       | %          |
| Commercial                                   |       | 12       | %          | 12       | %          | 11       | %          | 9        | %          | 9        | %          |
| Consumer                                     |       | 1        | %          | 1        | %          | 1        | %          | 1        | %          | 1        | %          |
|                                         |       | 100      | %          | 100      | %          | 100      | %          | 100      | %          | 100      | %          |

 

See Notes 1 and 4 to the ConsolidatedFinancial Statements for additional information regarding the provision andallowance for loan losses.

 

**Risk Elements and Non-Performing Assets**

 

Non-performing assets consist of non-accrual loans, restructured loans,and other real estate owned (foreclosed properties). The total non-performingassets and loans that are 90 + days past due and still accruing interestincreased by $120.5 million, or 2,738.6%, from $4.4 million at year-end 2007 to$124.9 million at year-end 2008, 

 

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and increased by $485 thousand, or 12.4%, from $3.9 million at year-end2006. As a result, the level of non-performing assets and loans 90 + days pastdue to total assets was down slightly from .20% at December 31, 2006, to..19% at December 31, 2007, and rose significantly to 4.60% at December 31,2008.

 

Non-performingloans continue to be concentrated in residential and commercial constructionand land development loans in the Company’s outer sub-markets hardest hit bythe residential downturn and commercial and consumer credits experiencing theafter shocks in sub-contracting businesses and workforce employment. Overall,as of December 31, 2008, $105.7 million or 66% of non-performing loans andother impaired loans represented construction and land development and another$18.2 million, or 11.4%, represented commercial or other loans which are alsohousing related. Other sectors, including non-farm, non-residential real estateand inner sub-markets of the broader loan portfolio, continue to perform well,with low levels of delinquencies at the present time. Management is focused onrisk identification and mitigation activities within the impacted portfoliosegments and sub-markets and is prudently establishing specific reserves wherewarranted, based upon a current market value analysis of the underlyingcollateral. The market decline remains dynamic. As non-performing loans are addressed, charge-offs for 2009 areanticipated to be at least 0.50% of average loans outstanding.  With problem loan trends in the residentialand commercial construction portfolio, non-performing assets couldprospectively rise above 5.0% of total assets by year-end. See Notes 1and 4 to the Consolidated Financial Statements for additional informationregarding the Company’s non-performing assets. Tables 6 and 7 provide a breakdown of the construction loan portfolio bylocation including loans on non-accrual status and percentage of net-chargeoffs in 2008.

 

**TABLE6:  RESIDENTIAL, ACQUISITION, DEVELOPMENTAND CONSTRUCTION LOANS**

 
| ** **                                                                          | ** ** | **As of December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(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                                                                |       | $                                               | 23,722     |   | 7.5 | % | $ | 233 |   | 0.1 | % | 0.4 | % |
| Montgomery. MD                                                                      |       | 20,689                                          |       | 6.5 | % | 6,367 |   | 2.0 | % | 0.3 | % |
| Prince Georges, MD                                                                  |       | 36,676                                          |       | 11.6 | % | — |   | — |   | — |   |
| Other Counties in MD                                                                |       | 9,999                                           |       | 3.2 | % | — |   | — |   | — |   |
| Arlington/Alexandria, VA                                                            |       | 39,115                                          |       | 12.3 | % | — |   | — |   | — |   |
| Fairfax, VA                                                                         |       | 77,299                                          |       | 24.4 | % | 15,792 |   | 5.0 | % | 0.4 | % |
| Culpeper/Fauquier, VA                                                               |       | 9,477                                           |       | 3.0 | % | 6,577 |   | 2.1 | % | 0.7 | % |
| Frederick, VA                                                                       |       | 13,022                                          |       | 4.1 | % | 8,933 |   | 2.8 | % | — |   |
| Loudoun, VA                                                                         |       | 42,070                                          |       | 13.3 | % | 10,841 |   | 3.4 | % | 0.1 | % |
| Prince William, VA                                                                  |       | 17,587                                          |       | 5.5 | % | 3,656 |   | 1.2 | % | 0.1 | % |
| Stafford, VA                                                                        |       | 22,683                                          |       | 7.2 | % | — |   | — |   | — |   |
| Other Counties in VA                                                                |       | 4,505                                           |       | 1.4 | % | 322 |   | 0.1 | % | — |   |
| Outside VA, D.C. & MD                                                      |       | 113                                             |       | 0.04 | % | — |   | — |   | — |   |
| **Totals**                                                                          |       | $                                               | 316,957    |   | 100.0 | % | $ | 52,721 |   | 16.6 | % | 2.0 | % |

 

**TABLE 7:  COMMERCIAL,ACQUISITION, DEVELOPMENT AND CONSTRUCTION LOANS**

 
| ** **                                                                                | ** ** | **As of December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(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                                                                      |       | $                                               | 10,680     |   | 4.0 | % | $ | — |   | — |   | — |   |
| Montgomery. MD                                                                            |       | 1,440                                           |       | 0.5 | % | — |   | — |   | — |   |
| Prince Georges, MD                                                                        |       | 9,952                                           |       | 3.7 | % | — |   | — |   | — |   |
| Other Counties in MD                                                                      |       | 1,108                                           |       | 0.4 | % | — |   | — |   | — |   |
| Arlington/Alexandria, VA                                                                  |       | 3,227                                           |       | 1.2 | % | — |   | — |   | — |   |
| Fairfax, VA                                                                               |       | 30,348                                          |       | 11.3 | % | 1,513 |   | 0.6 | % | — |   |
| Culpeper/Fauquier, VA                                                                     |       | 3,748                                           |       | 1.4 | % | — |   | — |   | — |   |
| Frederick, VA                                                                             |       | —                                          |       | 0.0 | % | — |   | — |   | — |   |
| Loudoun, VA                                                                               |       | 67,767                                          |       | 25.3 | % | 23,046 |   | 8.6 | % | — |   |
| Prince William, VA                                                                        |       | 73,849                                          |       | 27.5 | % | 15,260 |   | 5.7 | % | — |   |
| Stafford, VA                                                                              |       | 35,135                                          |       | 13.1 | % | — |   | — |   | — |   |
| Other Counties in VA                                                                      |       | 30,865                                          |       | 11.5 | % | — |   | — |   | — |   |
| Outside VA, D.C. & MD                                                            |       | —                                          |       | 0.00 | % | — |   | — |   | — |   |
| **Totals**                                                                                |       | $                                               | 268,119    |   | 100.0 | % | $ | 39,819 |   | 14.9 | % | — |   |

 

Loans are placed in non-accrual status when in the opinion ofmanagement the collection of additional interest is unlikely or a specific loanmeets the criteria for non-accrual status established by regulatoryauthorities.  No interest 

 

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is taken into income on non-accrual loans.  A loan remains on non-accrual status untilthe loan is current as to both principal and interest or the borrowerdemonstrates the ability to pay and remain current, or both.

 

Foreclosed real properties include properties that have beensubstantively repossessed or acquired in complete or partial satisfaction ofdebt.  Such properties, which are heldfor resale, are carried at the lower of cost or fair value, including areduction for the estimated selling expenses, or principal balance of therelated loan. In July 2007, the Company foreclosed on a $1.8 millionnon-performing loan and subsequently sold the collateral property in September 2007for a pre-tax gain of $638 thousand. As of December 31, 2008, the Companyheld $7.6 million in foreclosed real properties.

 

**TABLE 8: NON-PERFORMING ASSETS**

 
| ** **                                                    | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------|------------|-----------------------|-------------|
| **(Dollars in thousands)**                          | ** ** | **2008**              | ** **  | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Non-accrual loans                                             |       | $                     | 111,234     |   | $ | 3,826 |   | $ | 3,920 |   | $ | 1,994 |   | $ | 1,210 |   |
| OREO                                                          |       | 7,569                 |        | — |   | — |   | — |   | — |   |
| Total non-performing assets                                   |       | $                     | 118,803     |   | $ | 3,826 |   | $ | 3,920 |   | $ | 1,994 |   | $ | 1,210 |   |
| Loans past due 90 days and still accruing                     |       | 6,118                 |        | 579 |   | — |   | 7 |   | — |   |
| **Total non-performing assets and past due  loans**           | ** ** | **$**                 | **124,921** | ** ** | **$** | **4,405** | ** ** | **$** | **3,920** | ** ** | **$** | **2,001** | ** ** | **$** | **1,210** | ** ** |
| Allowance for loan losses to total loans                      |       | 1.58                  | %           | 1.14 | % | 1.10 | % | 1.07 | % | 1.11 | % |
| Allowance for loan losses to non-performing  loans            |       | 31.08                 | %           | 505.33 | % | 461.76 | % | 693.1 | % | 859.7 | % |
| Non-performing assets and past due loans to  total loans      |       | 5.40                  | %           | 0.23 | % | 0.24 | % | 0.15 | % | 0.13 | % |
| **Non-performing assets and past due loans to  total assets** | ** ** | **4.60**              | **%**       | **0.19** | **%** | **0.20** | **%** | **0.13** | **%** | **0.11** | **%** |

 

**Loan Portfolio**

 

The Bank’s lending activities are its principal source of income. Realestate loans, including residential permanents and construction, and commercialpermanents, represent the major portion of the Bank’s loan portfolio. Loans,net of unearned income and the allowance for loan losses, increased $348.3million, or 18.1%, from $1.92 billion at December 31, 2007, to $2.27billion at December 31, 2008, and increased $294.9 million, or 18.1%, from$1.63 billion at December 31, 2006, to $1.92 billion at year-end 2007. Theincrease in loans in 2008 included an increase in real estate mortgage loans of$276.4 million, or 23.9%, an increase in commercial loans of $40.8 million, or17.1%, and an increase in real estate construction loans of $40.8 million, or7.5%. In 2007, real estate mortgage loans increased $218.6 million, or 23.2%,while commercial loans represented the second largest increase rising $48.2million, or 25.3%, and real estate construction loans increased $29.3 million,or 5.7%. The majority of the increase in real estate mortgage loans isconcentrated in non-farm non-residential properties, which has been a primaryfocus of the Bank since its organization, while the increase in real estateconstruction loans in 2007 and 2008 was attributable to commercial properties.At December 31, 2008, $296.3 million of total real estate constructionloans were to commercial builders of single-family housing, $20.7 million wereto individuals on single-family properties and $268.1 million were related tocommercial properties. At December 31, 2007, $302.4 million of real estateconstruction loans were to commercial builders of single-family housing, $23.6million were to individuals on single-family properties and $218.3 million wererelated to commercial properties. The Bank expects that its real estateconstruction loan portfolio will begin to decline as that lending focus issignificantly curtailed.

 

As noted above, the majority of the Bank’s loan portfolio consists ofconstruction and commercial real estate loans. At December 31, 2008, the Bank had $296.3 million of constructionloans to commercial builders of single family housing in the Northern Virginiamarket, representing 9.2% of total loans. These loans are made to a number ofunrelated entities and generally have a term of twelve to eighteen months.  Adverse developments in the Northern Virginiareal estate market and economy have adversely impacted this portfolio of loansand the Company’s income and financial position.  In addition, the Bank had $1.01 billion, or43.7% of the loan portfolio at December 31, 2008, secured by non-farmnon-residential properties with $418.4 million of these loans representingowner-occupied properties. All these non-farm non-residential loans representobligations of a diversified pool of borrowers across numerous businesses andindustries in the Northern Virginia market and include some loans that,although secured by commercial real estate, are commercial purpose loans madebased on the financial condition of the underlying 

 

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business. At December 31, 2008, the Company had no otherconcentrations of loans in any one industry exceeding 10% of its total loanportfolio.  An industry for this purposeis defined as a group of counterparties that are engaged in similar activitiesand have similar economic characteristics that would cause their ability tomeet contractual obligations to be similarly affected by changes in economic orother conditions. The Bank seeks to manage its concentrations of loans throughthe establishment of limits on the level of its various loan types to totalloans and to total capital. For further information regarding concentrations ofloans see Note 17 to the Consolidated Financial Statements.

 

Under guidance from the federal bankingregulators, banks which have concentrations in construction, land developmentor commercial real estate loans would be expected to maintain higher levels ofrisk management and, potentially, higher levels of capital. It is possible thatwe may be required to maintain higher levels of capital than we would otherwisebe expected to maintain as a result of our levels of construction,development and commercial real estate loans, which may require us to obtainadditional capital.  Excluded from thescope of this guidance are loans secured by non-farm nonresidential propertieswhere the primary source of repayment is the cash flow from the ongoingoperations and activities conducted by the party, or affiliate of the party, whoowns the property

 

Tables 9 and 10 present information pertaining to the composition ofthe loan portfolio including unearned income, the allowance for loan losses,and the maturity and repricing characteristics of selected loans.

 

# **TABLE 9: SUMMARY OF TOTAL LOANS**

 
| ** **                           | ** ** | **December 31,** | ** **    |
|--------------------------------------|------------|-----------------------|---------------|
| **(Dollars in thousands)** | ** ** | **2008**              | ** **    | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Real estate - mortgage               |       | $                     | 1,435,189     |   | $ | 1,158,820 |   | $ | 940,270 |   | $ | 778,788 |   | $ | 605,420 |   |
| Real estate - construction           |       | 585,076               |          | 544,290 |   | 515,040 |   | 380,997 |   | 240,469 |   |
| Commercial                           |       | 279,470               |          | 238,670 |   | 190,527 |   | 122,243 |   | 88,725 |   |
| Consumer                             |       | 11,698                |          | 8,714 |   | 6,997 |   | 7,386 |   | 5,879 |   |
| Farmland                             |       | 2,498                 |          | 1,468 |   | — |   | — |   | — |   |
| Total loans                          |       | $                     | 2,313,931     |   | $ | 1,951,962 |   | $ | 1,652,834 |   | $ | 1,289,414 |   | $ | 940,493 |   |
| Less unearned income                 |       | 4,370                 |          | 4,961 |   | 4,906 |   | 5,338 |   | 4,309 |   |
| Less allowance for loan losses       |       | 36,475                |          | 22,260 |   | 18,101 |   | 13,821 |   | 10,402 |   |
| **Loans, net**                       | ** ** | **$**                 | **2,273,086** | ** ** | **$** | **1,924,741** | ** ** | **$** | **1,629,827** | ** ** | **$** | **1,270,255** | ** ** | **$** | **925,782** | ** ** |

 

**TABLE 10: MATURITY/REPRICING SCHEDULE OF TOTAL LOANS**

 
| **At December 31, 2008** | ** ** | **Real estate-** | ** **    | **Real estate-** | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** ** |       |
|-----------------------------------------|------------|-----------------------|---------------|-----------------------|------------|----------------|------------|--------------|-------------|--------------|------------|------------|------------|
| **(Dollars in thousands)**    | ** ** | **mortgage**          | ** **    | **construction**      | ** ** | **Commercial** | ** ** | **Consumer** | ** **  | **Farmland** | ** ** | **Total**  |       |
| **Variable:**                           |       |                  |          |                  |       |           |       |         |        |         |       |       |       |
| Within 1 year                           |       | $                     | 195,995       |                  | $          | 219,351        |       | $            | 67,795      |         | $          | 3,577      |       | $ | 2,498 |   | $ | 489,216 |   |
| 1-to-5 years                            |       | 410,106               |          | 35,071                |       | 2,652          |       | —       |        | —       |       | 447,829    |       |
| After 5 years                           |       | 65,094                |          | 8,886                 |       | —         |       | —       |        | —       |       | 73,980     |       |
| Total                                   |       | $                     | 671,195       |                  | $          | 263,308        |       | $            | 70,447      |         | $          | 3,577      |       | $ | 2,498 |   | $ | 1,011,025 |   |
| **Fixed Rate:**                         | ** ** | ** **            | ** **    | ** **            | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** ** | ** ** |
| Within 1 year                           |       | $                     | 77,962        |                  | $          | 186,527        |       | $            | 80,068      |         | 4,140      |       | —     |   | $ | 348,697 |   |
| 1-to-5 years                            |       | 247,427               |          | 118,122               |       | 75,469         |       | 3,207        |        | —       |       | 444,225    |       |
| After 5 years                           |       | 438,605               |          | 17,119                |       | 53,486         |       | 774          |        | —       |       | 509,984    |       |
| Total                                   |       | $                     | 763,994       |                  | $          | 321,768        |       | $            | 209,023     |         | $          | 8,121      |       | $ | 0 |   | $ | 1,302,906 |   |
| **Total Loans**                         | ** ** | **$**                 | **1,435,189** | ** **            | **$**      | **585,076**    | ** ** | **$**        | **279,470** | ** **   | **$**      | **11,698** | ** ** | **$** | **2,498** | ** ** | **$** | **2,313,931** | ** ** |

#### ** **

**Investment Securities**

 

The securities portfolio serves as a primary source of liquidity, isused as needed to meet certain collateral requirements, helps in the managementof interest rate risk, and provides additional interest income. The securitiesportfolio consists of two components, securities held-to-maturity andsecurities available-for-sale. Securities are classified as held-to-maturitybased on management’s intent and the Company’s ability, at the time ofpurchase, to 

 

16

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hold such securities to maturity. These securities are carried at amortized cost. Securities which may besold in response to changes in market interest rates, changes in the securities’prepayment risk, increased loan demand, general liquidity needs, and othersimilar factors are classified as available-for-sale and are carried atestimated fair value.

 

Total securities increased $10.8 million, or 3.2%, from $326.2 millionat December 31, 2007, to $336.8 million at December 31, 2008, andincreased $92.0 million, or 39.3%, from $234.2 million at December 31,2006, to $326.2 million at December 31, 2007. The increase in 2008 wasconcentrated in obligations of states and political subdivisions as the levelof U.S. Government Agencies declined. However, securities of U.S. GovernmentAgencies still represent the majority of the portfolio, with $174.0 millioninvested in mortgage-backed securities at December 31, 2008, versus $115.1million at December 31, 2007. Table 11 provides information regarding thecomposition of the securities portfolio and Table 12 details the maturities andweighted 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 obligationsissued 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 additionalinformation regarding the securities portfolio.

 

At December 31, 2008, there were nosingle issuers, other than issuers who are U.S. Government Agencies, whosesecurities owned by the Company had an aggregate book value of more than 10% oftotal stockholder’s equity of the Company.

 

**TABLE 11: SECURITIESPORTFOLIO**

 
| ** **                                    | ** ** | **December 31,** | ** **  |
|-----------------------------------------------|------------|-----------------------|-------------|
| ** **                                    | ** ** | **2008**              | ** **  | **2007** | ** ** | **2006** | ** ** |
| **(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            |       | $                     | 235,434     |   | 69.90 | % | $ | 242,965 |   | 74.47 | % | $ | 174,074 |   | 74.33 | % |
| Obligations of states/political  subdivisions |       | 29,454                |        | 8.74 | % | 23,001 |   | 7.05 | % | 3,659 |   | 1.56 | % |
| Domestic corporate debt obligations           |       | 3,948                 |        | 1.17 | % | 8,544 |   | 2.62 | % | 6,055 |   | 2.59 | % |
| Federal Reserve Bank stock                    |       | 5,597                 |        | 1.66 | % | 1,442 |   | 0.44 | % | 1,442 |   | 0.62 | % |
| Federal Home Loan Bank stock                  |       | 5,334                 |        | 1.58 | % | 4,631 |   | 1.42 | % | 3,034 |   | 1.30 | % |
| Community Bankers’ Bank stock            |       | 145                   |        | 0.04 | % | 55 |   | 0.02 | % | 55 |   | 0.02 | % |
| ** **                                    | ** ** | **$**                 | **279,912** | ** ** | **83.10** | **%** | **$** | **280,638** | ** ** | **86.02** | **%** | **$** | **188,319** | ** ** | **80.41** | **%** |
| ** **                                    | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Held-to-maturity:**                         |       |                  |        |   |   |   |   |   |   |   |   |   |   |
| U.S. Government Agency obligations            |       | $                     | 18,764      |   | 5.58 | % | $ | 33,725 |   | 10.34 | % | $ | 35,520 |   | 15.17 | % |
| Obligations of states/political  subdivisions |       | 38,143                |        | 11.32 | % | 11,874 |   | 3.64 | % | 10,364 |   | 4.43 | % |
| ** **                                    | ** ** | **$**                 | **56,907**  | ** ** | **16.90** | **%** | **$** | **45,599** | ** ** | **13.98** | **%** | **$** | **45,884** | ** ** | **19.59** | **%** |
|                                          |       | $                     | 336,819     |   | 100.00 | % | $ | 326,237 |   | 100.00 | % | $ | 234,203 |   | 100.00 | % |

 

**TABLE 12: MATURITY OF SECURITIES**

 
| ** **                                                      | ** ** | **2008**            | ** **  | **2007**                     | ** ** | **2006**            | ** ** |
|-----------------------------------------------------------------|------------|---------------------|-------------|------------------------------|------------|---------------------|------------|
| **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                                        |       | $                   | 1,869       |                         | 4.11       | %                   | $          | 8,269 |   | 5.02 | % | $ | 36,246 |   | 3.49 | % |
| Maturing after one through five years                           |       | 73,457              |        | 4.78                         | %          | 165,110             |       | 5.26 | % | 132,512 |   | 4.75 | % |
| Maturing after five through ten years                           |       | 65,058              |        | 5.06                         | %          | 49,555              |       | 5.19 | % | 40,328 |   | 4.95 | % |
| Maturing after ten years                                        |       | 196,435             |        | 5.34                         | %          | 103,303             |       | 5.67 | % | 25,117 |   | 5.62 | % |
| ** **                                                      | ** ** | **$**               | **336,819** | ** **                   | **5.17**   | **%**               | **$**      | **326,237** | ** ** | **5.37** | **%** | **$** | **234,203** | ** ** | **4.67** | **%** |

 

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**Deposits**

 

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

 

Total deposits increased $303.0 million, or16.2%, from $1.87 billion at December 31, 2007, to $2.17 billion at December 31,2008, and increased $263.2 million, or 16.4%, from $1.61 billion at December 31,2006, to $1.87 billion at December 31, 2007. In 2008, growth by depositcategory included an 8.9% decrease in demand deposits (though average demanddeposits for the year increased slightly), a 12.4% increase in NOW deposits,only a slight change in savings and interest-bearing demand deposits and a$321.1 million, or 28.2%, increase in time deposits. Time deposit growth wasconcentrated in CDARS, Certificate of Deposit Account RegistryService, as depositors sought to maximize FDIC insurance coverage. CDARSallows depositors to access up to $50 million in FDIC insurance coverage.Through the program, a customer’s deposit is divided into sub-$100,000increments and placed at other banks that participate in the program. Thoseparticipating banks, in turn, place deposits in the same amount at the Bank. In2007, growth included a 14.4% increase in demand deposits, a 12.6% increase insavings and interest-bearing demand deposits and an 18.6% increase in timedeposits. The Company attributes its growth in deposits to a strong andaffluent local economy, the payment of interest rates at or near the highest inits market, and a strong emphasis on customer service.

 

In 2007, growth by deposit category was well balanced, with growth intime deposits supported by special advertised rates for maturities ranging fromsix to thirteen months, while the growth in savings and interest-bearing demanddeposits were the result of new product offerings that were also supported byspecial advertised rates, as strong regional competition for depositsnecessitated “paying up” for deposit growth to help fund strong loan demand. In2008, growth was concentrated in time deposits due to very strong localcompetition, very high short-term interest rates for a significant part of theyear and the aforementioned flight to safety of FDIC insurance coverage in ourCDARS program. NOW deposits increased as a result of a new product offering.Brokered deposits represented $168.3 million, or 7.8%, of total deposits at December 31,2008, and $49.4 million, or 2.6%, of total deposits as of December 31,2007.  The increase in brokered depositsis reflective of their lower pricing relative to time deposit rates in ourhighly competitive local market, thus making such wholesale funding anattractive complement to our generation of deposits from local residents and businesses.

 

Table 13 details maturities of time deposits with balances of $100,000or more, which represent 37.5% of total time deposits as of December 31,2008, compared to 50.3% at December 31, 2007. The major reason for thedecline was the shift of funds from certificates of deposit of $100,000 or moreinto our CDARS program. Because deposits in that program are divided intosub-$100,000 increments, CDARS balances are reflected in the category for timedeposits with balances less than $100,000. In many cases, depositors who madesuch shifts also concentrated deposits from other banks, thus fueling ouroverall growth in time deposits. Total time deposits represent 67.2% of totaldeposits as of December 31, 2008, compared to 60.9% at December 31,2007. See Note 6 to the Consolidated Financial Statements and Tables 1 and 3 tothis Management’s Discussion and Analysis for additional information regardingthe maturities of time deposits and average rates paid on all interest-bearingdeposits.

 

TABLE 13: MATURITIES OF TIME DEPOSITS WITH BALANCES OF $100,000 OR MORE

 
| ** **                           | ** ** | **December 31,** | ** **  |
|--------------------------------------|------------|-----------------------|-------------|
| **(Dollars in thousands)** | ** ** | **2008**              | ** **  | **2007** | ** ** | **2006** | ** ** |
| 3 months or less                     |       | $                     | 215,378     |   | $ | 209,165 |   | $ | 151,876 |   |
| 3-6 months                           |       | 108,592               |        | 243,880 |   | 127,637 |   |
| 6-12 months                          |       | 132,668               |        | 99,465 |   | 182,081 |   |
| Over 12 months                       |       | 91,058                |        | 19,975 |   | 29,123 |   |
| **Total**                            | ** ** | **$**                 | **547,696** | ** ** | **$** | **572,485** | ** ** | **$** | **490,717** | ** ** |

 

**Short-Term Borrowings**

 

Short-term borrowings consist of securities sold under agreements torepurchase, of which, as of December 31, 2008, $100.9 million are securedtransactions with customers that mature the business day following the datesold, and the other $75 million are secured transactions with other banks. Thesecured transactions with customers are

 

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provided to significant commercial demand deposit customers and areconsidered a core funding source of the Bank. Short-term borrowings alsoinclude Federal funds purchased, which are unsecured overnight borrowings fromother banks and are generally used to accommodate short-term liquidityneeds.  Table 14 provides information onthe balances and interest rates on short-term borrowings for the years ended December 31,2008, 2007 and 2006 (dollars in thousands):

 

**TABLE 14:SHORT-TERM BORROWINGS**

** **
| **At December 31,**                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Securities sold under agreement to repurchase |       | $        | 175,959    |     | $          | 200,534  |       | $ | 108,370 |   |
| Federal funds purchased                       |       | 12,000   |       | 22,000   |       | 40,501   |       |
| Total                                         |       | $        | 187,959    |     | $          | 222,534  |       | $ | 148,871 |   |
| Weighted interest rate at year end            |       | 1.58     | %          | 3.36     | %          | 4.29     | %          |
|                                          |       |     |       |     |       |     |       |
| Averages for the year ended December 31, |       |     |       |     |       |     |       |
| Outstanding                                   |       | $        | 223,114    |     | $          | 165,499  |       | $ | 118,092 |   |
| Interest rate                                 |       | 2.47     | %          | 3.78     | %          | 4.01     | %          |
|                                          |       |     |       |     |       |     |       |
| Maximum month-end outstanding                 |       | $        | 187,959    |     | $          | 222,534  |       | $ | 148,871 |   |

### ** **

### **Liquidity**

### ** **

The Company’s principal sources of liquidityand funding are its deposit base. The level of deposits necessary to supportthe Company’s lending and investment activities is determined throughmonitoring loan demand. Considerations in managing the Company’s liquidityposition include, but are not limited to, scheduled cash flows from existingloans and investment securities, anticipated deposit activity including thematurity of time deposits, and projected needs from anticipated extensions ofcredit. The Company’s liquidity position is monitored daily by management tomaintain a level of liquidity conducive to efficiently meet current needs andis evaluated for both current and longer term needs as part of theasset/liability management process.

 

The Company measures total liquidity through cash and cash equivalents,securities available-for-sale, mortgage loans held-for-sale, other loans andinvestment securities maturing within one year, less securities pledged ascollateral for repurchase agreements, public deposits and other purposes, andless any outstanding Federal funds purchased. These liquidity sources increased $60.2 million, or 10.4%, from $577.5million at December 31, 2007, to $637.7 million at December 31, 2008,and increased $33.2 million, or 6.1%, from $544.3 million at December 31,2006, to $577.5 million at December 31, 2007. The increases in both yearswere generally due to higher levels of loans maturing within one-year.Additional sources of liquidity available to the Bank include the capacity toborrow funds through established short-term lines of credit with variouscorrespondent banks and the Federal Home Loan Bank of Atlanta. See Note 14 tothe Consolidated Financial Statements for further information regarding theseadditional liquidity sources.

 

**Capital**

 

The assessment of capital adequacy depends on a number of factors suchas asset quality, liquidity, earnings performance, changing competitiveconditions and economic forces, and the overall level of growth. The adequacyof the Company’s current and future capital is monitored by management on anongoing basis. Management seeks to maintain a capital structure that willassure an adequate level of capital to support anticipated asset growth and toabsorb potential losses.

 

Both the Company’s and the Bank’s capital levels continue to meetregulatory requirements.  The primaryindicators relied on by bank regulators in measuring the capital position arethe Tier 1 risk-based capital, total risk-based capital, and leverageratios.  Tier 1 capital consists ofcommon and qualifying preferred stockholders’ equity, less goodwill, and forthe Company includes certain minority interests relating to bank subsidiaryissued shares, and a limited amount of restricted core capital elements.  Restricted core capital elements includequalifying cumulative preferred stock interests, certain minority interests insubsidiaries and qualifying trust preferred securities. All of the $71 millionin preferred stock interests issued to the Treasury under the Capital PurchaseProgram qualify as Tier 1 capital. Total risk-based capital consists of Tier 1capital, qualifying subordinated debt, and a portion of the 

 

19

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allowance for loan losses, and for the Company, a limited amount ofexcess restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weightedassets.  The leverage ratio compares Tier1 capital to total average assets.  TheBank’s Tier 1 risk-based capital ratio was 13.16% at December 31, 2008,compared to 7.77% at December 31, 2007, and its total risk-based capitalratio was 14.41% at December 31, 2008, compared to 10.73% at December 31,2007. These ratios are in excess of the mandated minimum requirement of 4.00%and 8.00%, respectively. The Bank’s leverage ratio was 11.81% at December 31,2008, compared to 7.12% at December 31, 2007. The Company’s Tier 1risk-based capital ratio, total risk-based capital ratio, and leverage ratiowas 13.07%, 14.44%, and 11.76%, respectively, at December 31, 2007,compared to 9.90%, 10.96%, and 9.09% at December 31, 2007. The increase inthese capital ratios in 2008, were due to the issuance of $25 million in trustpreferred securities in September 2008 and the issuance of $71 million inpreferred stock in December 2008. Both the Company’s and Bank’s capitalpositions reflect proceeds from the issuance of a total of $65 million in trustpreferred securities.

 

The ability of the Company to continue to grow is dependent on itsearnings and the ability to obtain additional funds for contribution to theBank’s capital, through borrowing, the sale of additional common stock, orthrough the issuance of additional trust preferred securities or otherqualifying securities. In the event that the Company is unable to obtainadditional capital for the Bank on a timely basis, the growth of the Companyand the Bank may be curtailed, and the Company and the Bank may be required toreduce their level of assets in order to maintain compliance with regulatorycapital requirements. Under those circumstances net income and the rate ofgrowth of net income may be adversely affected.

 

Guidanceby the federal banking regulators provides that banks which have concentrationsin construction, land development or commercial real estate loans (other thanloans for majority owner occupied properties) would be expected to maintainhigher levels of risk management and, potentially, higher levels of capital. Itis possible that we may be required to maintain higher levels of capital thanwe would otherwise be expected to maintain as a result of our levels ofconstruction, development and commercial real estate loans, which may requireus to obtain additional capital.

 

The Federal Reserve has revised the capital treatment of trustpreferred securities. As a result, the capital treatment of trust preferredsecurities has been revised to provide that beginning in 2009, such securitiescan be counted as Tier 1 capital at the holding company level, together withother restricted core capital elements, up to 25% of total capital (net ofgoodwill), and any excess as Tier 2 capital up to 50% of Tier 1 capital.  At December 31, 2008, trust preferredsecurities represented 19.4% of the Company’s Tier 1 capital and 18.3% of itstotal risk-based capital. See Note 15 to the Consolidated Financial Statementsfor further information regarding trust preferred securities.

 

*Capital Issuances. *As noted above, during 2008, theCompany accepted an investment by Treasury under the Capital Purchase Program.In connection with that investment, the Company entered into and consummated aSecurities Purchase Agreement with the Treasury, pursuant to which the Companyissued 71,000 shares of the Company’s Fixed Rate Cumulative Perpetual PreferredStock, Series A (“Series A Preferred Stock”), having a liquidationamount 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% peryear for the first five years and thereafter at a rate of 9% per year.  As a result of legislative changes during2009, and subject to the issuance of implementing regulations and consultationwith the Company’s and Bank’s federal regulators, the Company may, at itsoption, redeem the Series A Preferred Stock at the liquidation amount plusaccrued and unpaid dividends.  The Series APreferred 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 theTreasury has transferred all of the Series A Preferred Stock to a thirdparty, the consent of the Treasury will be required for the Company to increaseits common stock dividend or repurchase its common stock or other equity orcapital securities, other than in connection with benefit plans consistent withpast practice and certain other circumstances specified in the PurchaseAgreement.

 

Inconnection with the purchase of the Series A Preferred Stock, the Treasurywas issued a warrant (the “Warrant”) to purchase 2,696,203 shares of theCompany’s common stock at an initial exercise price of $3.95 per share.  The Warrant provides for the adjustment ofthe exercise price and the number of shares of the common stock issuable uponexercise pursuant to customary anti-dilution provisions, such as upon stocksplits or distributions of securities or other assets to holders of the commonstock, and upon certain issuances of the common stock (or securitiesexercisable or exchangeable for, or convertible into, common stock) at or below90% of the market price of the common stock on the trading day prior to thedate of the agreement on pricing such securities.  The Warrants expire ten years from the dateof issuance.  The number of shares ofcommon stock issuable pursuant to the Warrant will be 

 

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reducedby one-half if, on or prior to December 31, 2009, the Company receivesaggregate gross cash proceeds of not less than $71 million from “qualifiedequity offerings” announced after October 13, 2008.  If the Company redeems the Series APreferred Stock in full prior to exercise of the Warrant, the Warrant will beliquidated based upon the then current fair market value of the commonstock.  The Treasury has agreed not toexercise voting power with respect to any shares of common stock issued uponexercise of the Warrant.

 

Pleaserefer to Note 15 to the Consolidated Financial Statements for additionalinformation regarding the issuance of $25 million of trust preferred securitiesand warrants to purchase 1.5 million shares to certain directors and executiveofficers of the Company.

 

**Contractual Obligations**

 

The Company has entered into certain contractual obligations includinglong term debt, operating leases and obligations under service contracts. Thefollowing table summarizes the Company’s contractual cash obligations as of December 31,2008.

 

**TABLE 15: CONTRACTUAL OBLIGATIONS**

** **
| ** **                                                                  | ** ** | **Payments Due-By Period** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(Dollars in thousands)**                                        | ** ** | **Total**                            | ** ** | **Within One  Year** | ** ** | **Two To  Three  Years** | ** ** | **Three To  Five Years** | ** ** | **After Five  Years** | ** ** |
| Securities sold under agreements to repurchase and Federal funds  purchased |       | $                                    | 187,959    |   | $ | 112,959 |   | $ | — |   | $ | — |   | $ | 75,000 |   |
| Other borrowed funds                                                        |       | 25,000                               |       | — |   | — |   | 25,000 |   | — |   |
| Trust preferred securities and related capital notes                        |       | 65,000                               |       | — |   | — |   | — |   | 65,000 |   |
| Operating leases                                                            |       | 36,012                               |       | 3,960 |   | 7,607 |   | 7,148 |   | 17,297 |   |
| Data processing services                                                    |       | 2,837                                |       | 2,837 |   | — |   | — |   | — |   |
| Total contractual cash obligations                                          |       | $                                    | 316,808    |   | $ | 119,756 |   | $ | 7,607 |   | $ | 32,148 |   | $ | 157,297 |   |

 

The obligation for data processing services represents estimates ofearly termination charges.  Of the $65.0million of trust preferred securities and related capital notes shown as dueafter 5 years, $15.0 million is subject to redemption, at par, at the Company’soption, on any semi-annual distribution payment date, the next one being June 30,2009.  The table does not reflect depositliabilities entered into in the ordinary course of the Company’s bankingbusiness.  At December 31, 2008, theCompany had approximately $713.0 million of demand and savings deposits,exclusive of interest, which have no stated maturity or payment date.  The Company also had approximately $1.46billion of time deposits, exclusive of interest, the maturity distribution ofwhich is set forth in Note 6 to the Consolidated Financial Statements. Foradditional information about the Company’s deposit obligations, see “NetInterest Income” and “Deposits” above. The trust preferred securities exclude $2.0 million of capital notesheld 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 additionalinformation regarding the trust preferred capital notes.

 

**Off-BalanceSheet Arrangements**

 

The Company enters into certain off-balance sheet arrangements in thenormal course of business to meet the financing needs of its customers.  These off-balance sheet arrangements includecommitments to extend credit, standby letters of credit and financialguarantees which would impact the Company’s liquidity and capital resources tothe extent customer’s accept and or use these commitments. These instrumentsinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the balance sheet.  See Note 16 to the Consolidated FinancialStatements for further discussion of the nature, business purpose and elementsof risk involved with these off-balance sheet arrangements.  With the exception of these off-balance sheetarrangements, and the Company’s obligations in connection with its trustpreferred securities, the Company has no off-balance sheet arrangements thathave or are reasonably likely to have a current or future effect on the Company’sfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures, or capital resources,that is material to investors.  Forfurther information, see Notes 15 and 16 to the Consolidated FinancialStatements.

 

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**RISK FACTORS**

 

*An investment in our common stock involves various risks. The followingis a summary of certain risks identified by us as affecting our business. Youshould carefully consider the risk factors listed below, as well as othercautionary statements made in this Annual Report, and risks and uncertaintieswhich we may identify in our other reports and documents filed with theSecurities and Exchange Commission or other public announcements. These riskfactors may cause our future earnings to be lower or our financial condition tobe less favorable than we expect. In addition, other risks of which we are notaware, which relate to the banking and financial services industries ingeneral, or which we do not believe are material, may cause earnings to belower, or hurt our future financial condition. You should read this sectiontogether with the other information in this Annual Report.*

 

**We maynot be able to maintain our historical growth rate, which may adversely impactour results of operations and financial condition.**

 

Over the last fiveyears our asset level has increased rapidly, including a 16.1% increase in2008.  We may not be able to sustain ourhistorical rate of growth, or grow at all. Various factors, such as economicconditions, regulatory considerations and competition, may impede our rate ofgrowth and our branch expansion, or may make future growth or branching lessprofitable or more expensive. If we experience a significant decrease in ourrate of growth as compared to our historic rate of growth, our income, or ourrate of income growth, may decline, our capacity to absorb any additionallosses resulting from, or loan loss provisions related to, declining loanquality maybe diminished, and we may not be able to maintain or reduce ourexpense levels and efficiency ratio, which will adversely affect our results ofoperations and financial condition.

 

**Ourconcentrations of loans could result in higher than normal risk of loandefaults and losses.**

 

We have a substantialamount of loans secured by real estate in the Northern Virginia/Washington,D.C. metropolitan area, and substantially all of our loans are to borrowers inthat area.  We also have a significant amountof real estate construction loans and land related loans for residential andcommercial developments. At December 31, 2008, 87.4% of our total loanswere secured by real estate, primarily commercial real estate. Of these loans,$585 million, or 25.3% of total loans, were construction and land loans.  An additional 12.1% of total loans werecommercial and industrial loans which are not secured by real estate. Theseloans have a higher risk of default than other types of loans, such as wellunderwritten conforming single family residential mortgage loans. In addition,the repayments of these loans, often depends on the successful operation of abusiness or the sale or development of the underlying property, and as a resultare more likely to be adversely affected by adverse conditions in the realestate market or the economy in general. These concentrations expose us to therisk that adverse developments in the real estate market, or in the generaleconomic conditions in the Northern Virginia/Washington, D.C. metropolitanarea, could increase the levels of non-performing loans and charge-offs, andreduce loan demand. In that event, we would likely experience lower earnings orlosses. Additionally, if, for any reason, economic conditions in the areadeteriorate, or there is significant volatility or weakness in the economy orany significant sector of the area’s economy, our ability to develop ourbusiness relationships may be diminished, the quality and collectibility of ourloans may be adversely affected, the value of collateral may decline and loandemand may be reduced.  Additionally,under guidance from the banking agencies, we may be required to maintain higherlevels of capital than we would otherwise be expected to maintain, and toemploy greater risk management efforts, as a result of our real estateconcentrations.

 

Commercial and commercialreal estate and construction loans also generally have larger balances thansingle family mortgages loans and other consumer loans. Because the loanportfolio contains a significant number of commercial and commercial realestate and construction loans with relatively large balances, the deteriorationof one or a few of these loans may cause a significant increase innonperforming assets. An increase in nonperforming loans could result in: aloss of earnings from these loans, an increase in the provision for loanlosses, or an increase in loan charge-offs, which could have an adverse impacton our results of operations and financial condition.

 

**Lack ofseasoning of our loan portfolio could increase the risk of credit defaults inthe future.**

 

Due to the rapidgrowth of the Bank, a large portion of the loans in our loan portfolio and ofour lending relationships is of relatively recent origin. In general, loans donot begin to show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process referred to as “seasoning.” As aresult, a portfolio of older loans will usually behave more predictably than anewer portfolio. Because a large portion of our loan portfolio is relativelynew, the current level of delinquencies and defaults may not be representativeof the level that will prevail when the 

 

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portfolio becomesmore seasoned, which may be higher than current levels. If delinquencies anddefaults increase, we may be required to increase our provision for loanlosses, which would adversely affect our results of operations and financialcondition.

 

**Ourfinancial condition and results of operations would be adversely affected ifour allowance for loan losses is not sufficient to absorb actual losses or ifwe are required to increase our allowance for loan losses.**

 

Experience in thebanking 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 andwe may experience other losses for reasons beyond our control. Further, despiteour underwriting criteria and historical experience, we may be particularlysusceptible to losses due to: (1) the geographic concentration of ourloans, (2) the concentration of higher risk loans, such as commercial realestate, construction and commercial and industrial loans, and (3) therelative lack of seasoning of certain of our loans.  At December 31, 2008, we had elevatedlevels of nonperforming assets and other impaired loans, $118.8 million and$49.3 million, respectively, aggregating 6.2% of assets.  This level, which is significantly in excessof our historical level, is primarily a result of  high level of nonperforming residential andcommercial real estate construction and land loans.  As a result, our provision and allowance forloan losses, as well as our level of charge-offs, have significantly increased overprior years. Although we believe that our allowance for loan losses ismaintained at a level adequate to absorb any inherent losses in our loanportfolio, these estimates of loan losses are necessarily subjective and theiraccuracy depends on the outcome of future events. If we need to makesignificant and unanticipated increases in our loss allowance in the future,our results of operations and financial condition would be materially adverselyaffected at that time.

 

While we strive tocarefully monitor credit quality and to identify loans that may becomenonperforming, at any time there are loans included in the portfolio that willresult in losses, but that have not been identified as nonperforming orpotential problem loans. We cannot be sure that we will be able to identifydeteriorating loans before they become nonperforming assets, or that we will beable to limit losses on those loans that are identified. As a result, futureadditions to the allowance may be necessary.

 

**We maynot be able to successfully manage continued growth.**

 

We intend to seek furthergrowth in the level of our assets and deposits and, to a limited extent,  the number of our branches. Our plans for2009 involve opening one new branch. In the future, we may seek further branch expansion,both within our existing footprint and to expand our footprint in NorthernVirginia.  We cannot be certain as to ourability to manage increased levels of assets and liabilities, and an expandedbranch system, without increased expenses and higher levels of non-performingassets.  We may be required to makeadditional investments in equipment and personnel to manage higher asset levelsand loan balances and a larger branch network, which may adversely impactearnings, shareholder returns and our efficiency ratio.  Increases in operating expenses ornon-performing assets may have an adverse impact on the value of our commonstock.

 

**Ourability to pay cash dividends on the common stock and to repurchase any sharesof common stock, is highly restricted.**

 

The Company has norecent history of paying cash dividends, and other than repurchases offractional shares issued in connection with stock splits or stock dividends,the Company has minimal history of share repurchases.  Our ability to pay dividends on the commonstock, or repurchase shares, is limited by state and federal law andregulation, and by the terms of the Series A Preferred Stock issued to theTreasury.  Under the terms of the Series APreferred Stock, the Company may not increase its dividend, in our case, pay adividend, or subject to limited exceptions, repurchase or acquire any commonstock, without the prior approval of the Treasury, until December 12,2011, or the earlier redemption or transfer of all securities issued toTreasury. Additionally, we may not pay any dividends on the common stock, orsubject to limited exceptions, repurchase or acquire any common stock, withoutprior Treasury approval, when any dividend on the Series A Preferred Stockis in arrears.  Further, we cannot payany dividends on the common stock, or acquire any shares of common stock, ifany distribution on our trust preferred securities are in arrears.  In light of the foregoing restrictions, it isunlikely that the Company will pay any dividends on the common stock orrepurchase any shares of common stock in the near future.

 

**Ourcontinued growth depends on our ability to meet minimum regulatory capitallevels. Growth and shareholder returns may be adversely affected if sources ofcapital are not available to help us meet them.**

 

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Since we became theholding company for the Bank, we have sought to maximize shareholder returns byleveraging our capital.  If earnings donot meet our current estimates, if we incur unanticipated losses or expenses,or if we grow faster than expected, we may need to obtain additional capitalsooner than expected, through borrowing, additional issuances of debt or equitysecurities, or otherwise.  If we do nothave continued access to sufficient capital, we may be required to reduce ourlevel of assets or reduce our rate of growth in order to maintain regulatorycompliance. Under those circumstances net income and the rate of growth of netincome may be adversely affected. Additional issuances of equity securitiescould have a dilutive effect on existing shareholders.

 

**There isno assurance that we will be able to successfully compete with others forbusiness.**

 

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

 

**Turmoilin the financial markets may make it more difficult for the Bank to meet itsliquidity needs.**

 

During2008 and continuing in to 2009, financial markets have experiencedunprecedented pressure associated with the declining value of residential realestate, and deleveraging by investors in mortgage related securities.  This has resulted in a sharp decline in thevalue of home mortgage loans and securities that derive their value from suchloans.  Many commercial banks have facedlarge write-downs of their loan and investment portfolios, resulting in largelosses, repeated over a number of quarters, declining stock prices, significantcapital issuances, bank failures, and loss of confidence in the safety of thebanking system.  In severalwell-publicized cases, this loss of confidence has led to large rapidwithdrawals and the failure, or federally assisted mergers, of prominent financialinstitutions.

 

TheBank positions itself in the marketplace as a business bank.  It does not (and did not) originate lowquality home loans for sale, and invests only in high quality mortgage-backedsecurities and as such has not experienced many of the issues facing otherinstitutions. Nevertheless, the turmoil in the financial markets has causedmany depositors to seek safety in government securities, resulting in liquiditychallenges for all banks. The Bank has responded to these challenges by promotingparticipation in the CDARS program and by participating in the increaseddeposit insurance programs provided by the FDIC.  However, should turmoil in the marketscontinue, the Bank may be forced to pay higher interest rates to obtaindeposits and meet the needs of its depositors and borrowers, resulting inreduced net interest income.  Ifconditions worsen significantly, it is possible that banks such as the Bank maybe unable to meet the needs of their depositors and borrowers, which could, inthe worst case, result in the Bank being placed into receivership.

 

**Tradingin our common stock has been relatively light. As a result, shareholders maynot be able to quickly and easily sell their common stock.**

 

Although our common stockis listed on the Nasdaq Global Select Market, and a number of brokers offer tomake a market in the common stock on a regular basis, trading volume to datehas been relatively light, averaging approximately 126,671 shares per day overthe year ended December 31, 2008. There can be no assurance that an activeand liquid market for the common stock can be maintained.  Accordingly, shareholders may find itdifficult to sell a significant number of shares at the prevailing marketprice.

 

**Thenumber of shares owned by****our directors and executive officers could make itmore difficult to obtain approval for some matters submitted to shareholdervote, including mergers and acquisitions.**

 

Our directors and executive officers and theiraffiliates own approximately 26.6% of the outstanding common stock. By votingagainst a proposal submitted to shareholders, the directors and officers, as agroup, may be able to make approval more difficult for proposals requiring thevote of shareholders, such as some mergers, share exchanges, asset sales, andamendments to the Articles of Incorporation. The results of the vote may be contrary to the desires or interests ofthe public shareholders.

 

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# **Changes in interest rates and other factors beyond our control couldhave an adverse impact on our earnings.**

# ** **

Our operating income andnet income depend to a great extent on our net interest margin, i.e., thedifference between the interest yields we receive on loans, securities andother interest earning assets and the interest rates we pay on interest-bearingdeposits and other liabilities. The net interest margin is affected by changesin market interest rates, because different types of assets and liabilities mayreact differently, and at different times, to market interest rate changes.When interest-bearing liabilities mature or reprice more quickly thaninterest-earning assets in a period, an increase in market rates of interestcould reduce net interest income. Similarly, when interest-earning assets matureor reprice more quickly than interest-bearing liabilities, falling interestrates could reduce net interest income These rates are highly sensitive to manyfactors beyond our control, including competition, general economic conditionsand monetary and fiscal policies of various governmental and regulatoryauthorities, including the Board of Governors of the Federal Reserve System.

 

We attempt to manage ourrisk from changes in market interest rates by adjusting the rates, maturity,repricing, and balances of the different types of interest-earning assets andinterest-bearing liabilities, but interest rate risk management techniques arenot exact. As a result, a rapid increase or decrease in interest rates couldhave an adverse effect on our net interest margin and results of operations.The results of our interest rate sensitivity simulation models depend upon anumber of assumptions which may not prove to be accurate. There can be noassurance that we will be able to successfully manage our interest rate risk.  Increases in market rates and adverse changesin the local residential real estate market, the general economy or consumerconfidence would likely have a significant adverse impact on our non-interestincome, as a result of reduced demand for residential mortgage loans, that wemake on a pre-sold basis.

 

Adverse changes in thereal estate market in our market area could also have an adverse affect on ourcost of funds and net interest margin, as we have a large amount ofnon-interest bearing deposits related to real estate sales anddevelopment.  While we expect that wewould be able to replace the liquidity provided by these deposits, thereplacement funds would likely be more costly, negatively impacting earnings.

 

Additionally, changes inapplicable law, if enacted, including those that would permit banks to payinterest on checking and demand deposit accounts established by businesses,could have a significant negative effect on net interest income, net income,the net interest margin, and our return on assets and return on equity. At December 31,2008, 9.0% of our deposits were non-interest bearing demand deposits.

 

**Government regulation will significantly affect the Bank’s business,and may result in higher costs and lower shareholder returns.**

 

The banking industry is heavily regulated.Banking regulations are primarily intended to protect the federal depositinsurance funds and depositors, not shareholders. The Company and Bank areregulated and supervised by the Board of Governors of the Federal ReserveSystem, the Virginia Bureau of Financial Institutions and the Federal DepositInsurance Corporation.  The burdenimposed by federal and state regulations puts banks at a competitivedisadvantage compared to less regulated competitors such as finance companies,mortgage banking companies and leasing companies. Changes in the laws,regulations and regulatory practices affecting the banking industry mayincrease our costs of doing business or otherwise adversely affect us andcreate competitive advantages for others. Regulations affecting banks and financial services companies undergocontinuous change, and we cannot predict the ultimate effect of these changes,which could have a material adverse effect on our profitability or financialcondition. Federal economic and monetary policy may also affect our ability toattract deposits and other funding sources, make loans and investments, andachieve satisfactory interest spreads.

 

**The Company is subject to additional uncertainties, and potentialadditional regulatory or compliance burdens, as a result of its participationit the Capital Purchase Program.**

 

The Company accepted an investment of $71 million from the Treasuryunder the Capital Purchase Program.  TheSecurities Purchase Agreement executed by the Company (and all otherparticipating institutions) and Treasury, provides that Treasury mayunilaterally amend the agreement to the extent required to comply with anychanges after the execution in applicable federal statutes.  As a result of this provision, the Treasuryand Congress may impose additional requirements or restrictions on the Companyand the Bank in respect of reporting, compliance, corporate governance,executive or employee compensation, dividend payments, stock repurchases,lending or other business 

 

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practices, capital requirements or other matters.  As a result, the Company and Bank may berequired to expend additional resources in order to comply with theserequirements.  Such additionalrequirements could impair the Company’s ability to compete with institutionsthat are not subject to the restrictions because they did not accept aninvestment from the Treasury.  To theextent that additional restrictions or limitations on employee compensation areimposed, such as those contained in the American Recovery and Reinvestment Actof 2009 (the “ARRA”), the Company and Bank may be less competitive inattracting successful incentive compensation based lenders and customerrelations personnel.  Additionally, theability of Congress to utilize the amendment provisions to effect political orpublic relations goals, could result in the Company and Bank being subjected toadditional burdens as a result of public perceptions of issues relating to thelargest banks, and which are not applicable to community oriented institutionssuch as the Company.  There can be noassurance that the Company will not be disadvantaged as a result of theseuncertainties.

 

**Substantialregulatory limitations on changes of control and anti-takeover provisions ofVirginia law may make it more difficult for you to receive a change in controlpremium.**

 

With certain limited exceptions, federal regulations prohibit a personor company or a group of persons deemed to be “acting in concert” from,directly or indirectly, acquiring more than 10% (5% if the acquiror is a bankholding company) of any class of our voting stock or obtaining the ability tocontrol in any manner the election of a majority of our directors or otherwisedirect the management or policies of our company without prior notice orapplication to and the approval of the Federal Reserve. There are comparableprior approval requirements for changes in control under Virginia law. Also,Virginia corporate law contains several provisions that may make it moredifficult for a third party to acquire control of us without the approval ofour Board of Directors, and may make it more difficult or expensive for a thirdparty to acquire a majority of our outstanding common stock.

 

**DISCLOSURE CONTROLS AND PROCEDURES**

 

#### **The Company’s management, under the supervision andwith the participation of the Chief Executive Officer and Chief FinancialOfficer, evaluated, as of the last day of the period covered by this report,the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures, as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934. Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective.**

 

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#### ** **

#### **MANAGEMENT REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTING**

#### ** **

Themanagement of Virginia Commerce Bancorp, Inc. (the “Company”) isresponsible for the preparation, integrity and fair presentation of theconsolidated financial statements included in this Annual Report. The financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America and reflect management’sjudgments and estimates concerning the effects of events and transactions that areaccounted for or disclosed.

 

Managementis also responsible for establishing and maintaining an effective internalcontrol over financial reporting.  TheCompany’s internal control over financial reporting includes those policies andprocedures that pertain to the Company’s ability to record, process, summarizeand report reliable financial data. The internal control system containsmonitoring mechanisms, and appropriate actions are taken to correct identifieddeficiencies. Management believes that internal controls over financialreporting, which are subject to scrutiny by management and the Company’sinternal auditors, support the integrity and reliability of the financialstatements. Management recognizes that there are inherent limitations in theeffectiveness of any internal control system, including the possibility ofhuman error and the circumvention or overriding of internal controls.Accordingly, even effective internal control over financial reporting canprovide only reasonable assurance with respect to financial statementpreparation. In addition, because of changes in conditions and circumstances,the effectiveness of internal control over financial reporting may vary overtime.

 

Managementassessed the Company’s system of internal control over financial reporting asof December 31, 2008. This assessment was conducted based on the Committeeof Sponsoring Organizations (“COSO”) of the Treadway Commission “InternalControl - Integrated Framework”. Based on this assessment, management believesthat the Company maintained effective internal control over financial reportingas of December 31, 2008. Management’s assessment concluded that there wereno material weaknesses within the Company’s internal control structure.

 

The2008 consolidated financial statements have been audited by the independentaccounting firm of Yount, Hyde & Barbour, P.C. (“YHB”). Personnel fromYHB were given unrestricted access to all financial records and related data,including minutes of all meetings of the Board of Directors and Committeesthereof.  Management believes that allrepresentations made to the independent auditors were valid and appropriate.The resulting report from YHB accompanies the financial statements. Included ina separate report is YHB’s report on the Firm’s opinion on the Company’seffectiveness of internal control over financial reporting.

 

TheBoard of Directors of the Company, acting through its Audit Committee (the “Committee”),is responsible for the oversight of the Company’s accounting policies, financialreporting and internal control. The Audit Committee of the Board of Directorsis comprised entirely of outside directors who are independent of management.The Audit Committee is responsible for the appointment and compensation of theindependent auditors and approves decisions regarding the appointment orremoval of members of the internal audit function. The Committee meetsperiodically with management, the independent auditors, and the internalauditors to insure that they are carrying out their responsibilities. TheCommittee is also responsible for performing an oversight role by reviewing andmonitoring the financial, accounting, and auditing procedures of the Company inaddition to reviewing the Company’s financial reports. The independent auditorsand the internal auditors have full and unlimited access to the AuditCommittee, with or without the presence of the management of the Company, todiscuss the adequacy of internal control over financial reporting, and anyother matters which they believe should be brought to the attention of theAudit Committee.

 

Therewere no changes in the Company’s internal control over financial reporting (asdefined in Rule 13a-15 under the Securities Act of 1934) during thequarter ended December 31, 2008 that has materially affected, or isreasonably likely to materially affect, the company’s internal control overfinancial reporting.

 
| /s/  Peter A. Converse   |   | /s/  William K. Beauchesne |
|--------------------------|--------|----------------------------|
| Chief  Executive Officer |   | Chief  Financial Officer   |

 

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****

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To theStockholders and Board of Directors

Virginia CommerceBancorp, Inc.

Arlington,Virginia

 

We have auditedthe accompanying consolidated balance sheets of Virginia Commerce Bancorp, Inc.and subsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of income, changes in stockholders’ equity, and cashflows for the years ended December 31, 2008, 2007 and 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Virginia Commerce Bancorp, Inc.and subsidiaries as of December 31, 2008 and 2007, and the results oftheir operations and their cash flows for the years ended December 31,2008, 2007 and 2006, in conformity with U.S. generally accepted accountingprinciples.

 

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Virginia Commerce Bancorp, Inc. andsubsidiaries’ internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated March 11,2009 expressed an unqualified opinion on the effectiveness of Virginia CommerceBancorp, Inc. and subsidiaries’ internal control over financial reporting.

 

 

Winchester,Virginia

March 11,2009

 

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****

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To theStockholders and Board of Directors

Virginia CommerceBancorp, Inc.

Arlington,Virginia

 

We have auditedVirginia Commerce Bancorp, Inc. and subsidiaries’ internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Virginia Commerce Bancorp, Inc.and subsidiaries’ management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying *Management’s Report on Internal Control overFinancial Reporting*.  Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk.  Our audit alsoincluded performing such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that *(a) *pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; *(b) *provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and *(c) *provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion,Virginia Commerce Bancorp, Inc. and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

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We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets as of December 31,2008 and 2007, and the related consolidated statements of income, changes instockholders’ equity and cash flows for the years ended December 31, 2008,2007 and 2006 of Virginia Commerce Bancorp, Inc. and subsidiaries and ourreport dated March 11, 2009 expressed an unqualified opinion.

 

 

Winchester,Virginia

March 11,2009

 

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# **CONSOLIDATED BALANCE SHEETS**

# **(Dollars in thousands except share data)**

 
| ** **                                                                                                                                                         | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Assets**                                                                                                                                                         |       |                  |       |   |   |
| Cash and due from banks                                                                                                                                            |       | $                     | 33,515     |   | $ | 34,201 |   |
| Interest-bearing deposits with other banks                                                                                                                         |       | —                |       | 1,140 |   |
| Securities (fair value: 2008, $337,771;  2007, $326,314)                                                                                                           |       | 336,819               |       | 326,237 |   |
| Loans held-for-sale                                                                                                                                                |       | 6,221                 |       | 4,339 |   |
| Loans, net of allowance for loan losses of  $36,475 in 2008 and $22,260 in 2007                                                                                    |       | 2,273,086             |       | 1,924,741 |   |
| Bank premises and equipment, net                                                                                                                                   |       | 14,740                |       | 12,705 |   |
| Accrued interest receivable                                                                                                                                        |       | 10,593                |       | 11,451 |   |
| Other assets                                                                                                                                                       |       | 40,948                |       | 24,883 |   |
| Total assets                                                                                                                                                       |       | $                     | 2,715,922  |   | $ | 2,339,697 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                      |       |                  |       |   |   |
| **Deposits**                                                                                                                                                       |       |                  |       |   |   |
| Demand deposits                                                                                                                                                    |       | $                     | 194,791    |   | $ | 213,820 |   |
| Savings and interest-bearing demand  deposits                                                                                                                      |       | 518,054               |       | 517,165 |   |
| Time deposits                                                                                                                                                      |       | 1,459,297             |       | 1,138,180 |   |
| Total deposits                                                                                                                                                     |       | $                     | 2,172,142  |   | $ | 1,869,165 |   |
| Securities sold under agreement to  repurchase and federal funds purchased                                                                                         |       | 187,959               |       | 222,534 |   |
| Other borrowed funds                                                                                                                                               |       | 25,000                |       | 25,000 |   |
| Trust preferred capital notes                                                                                                                                      |       | 65,800                |       | 41,244 |   |
| Accrued interest payable                                                                                                                                           |       | 8,160                 |       | 8,942 |   |
| Other liabilities                                                                                                                                                  |       | 3,574                 |       | 3,669 |   |
| Commitments and contingent liabilities                                                                                                                             |       | —                |       | — |   |
| Total liabilities                                                                                                                                                  |       | $                     | 2,462,635  |   | $ | 2,170,554 |   |
| **Stockholders’ Equity**                                                                                                                                      |       |                  |       |   |   |
| Preferred stock, net of discount, $1.00  par, 1,000,000 shares authorized, Series A; $1,000.00 stated value;  issued and outstanding 2008, 71,000; 2007, none |       | $                     | 62,541     |   | $ | — |   |
| Common stock, $1.00 par, 50,000,000 shares  authorized, issued and outstanding 2008, 26,575,569; 2007, 24,022,850                                                  |       | 26,575                |       | 24,023 |   |
| Surplus                                                                                                                                                            |       | 95,840                |       | 73,672 |   |
| Warrants                                                                                                                                                           |       | 8,520                 |       | — |   |
| Retained earnings                                                                                                                                                  |       | 60,535                |       | 70,239 |   |
| Accumulated other comprehensive income  (loss), net                                                                                                                |       | (724                  | )          | 1,209 |   |
| Total stockholders’ equity                                                                                                                                    |       | $                     | 253,287    |   | $ | 169,143 |   |
| Total liabilities and stockholders’ equity                                                                                                                    |       | $                     | 2,715,922  |   | $ | 2,339,697 |   |

 

See Notes to Consolidated Financial Statements.

 

31

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**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Dollars in thousands except per share data)**

 
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Interest and dividend income:**                                          |       |                                       |       |   |   |   |   |
| Interest and fees on loans                                                 |       | $                                          | 143,501    |   | $ | 138,919 |   | $ | 115,405 |   |
| Interest and dividends on investment  securities:                          |       |                                       |       |   |   |   |   |
| Taxable                                                                    |       | 15,017                                     |       | 12,888 |   | 8,225 |   |
| Tax-exempt                                                                 |       | 1,248                                      |       | 752 |   | 245 |   |
| Dividends                                                                  |       | 320                                        |       | 308 |   | 276 |   |
| Interest on deposits with other banks                                      |       | 145                                        |       | 140 |   | 55 |   |
| Interest on federal funds sold                                             |       | 237                                        |       | 1,131 |   | 1,086 |   |
| Total interest and dividend income                                         |       | $                                          | 160,468    |   | $ | 154,138 |   | $ | 125,292 |   |
| **Interest expense:**                                                      |       |                                       |       |   |   |   |   |
| Deposits                                                                   |       | $                                          | 67,261     |   | $ | 69,398 |   | $ | 48,152 |   |
| Securities sold under agreement to repurchase  and federal funds purchased |       | 5,534                                      |       | 6,259 |   | 4,730 |   |
| Other borrowed funds                                                       |       | 1,235                                      |       | 225 |   | 506 |   |
| Trust preferred capital notes                                              |       | 3,400                                      |       | 3,099 |   | 3,099 |   |
| Total interest expense                                                     |       | $                                          | 77,430     |   | $ | 78,981 |   | $ | 56,487 |   |
| **Net interest income**                                                    |       | $                                          | 83,038     |   | $ | 75,157 |   | $ | 68,805 |   |
| Provision for loan losses                                                  |       | 25,378                                     |       | 4,340 |   | 4,406 |   |
| Net interest income after provision for  loan losses                       |       | $                                          | 57,660     |   | $ | 70,817 |   | $ | 64,399 |   |
| **Non-interest income:**                                                   |       |                                       |       |   |   |   |   |
| Service charges and other fees                                             |       | $                                          | 3,902      |   | $ | 3,388 |   | $ | 3,226 |   |
| Non-deposit investment services commissions                                |       | 702                                        |       | 770 |   | 621 |   |
| Fees and net gains on loans held-for-sale                                  |       | 1,498                                      |       | 2,706 |   | 3,058 |   |
| Gain on sale of OREO                                                       |       | —                                     |       | 638 |   | — |   |
| Loss on sale of securities                                                 |       | —                                     |       | (387 | ) | — |   |
| Other                                                                      |       | 329                                        |       | 768 |   | 418 |   |
| Total non-interest income                                                  |       | $                                          | 6,431      |   | $ | 7,883 |   | $ | 7,323 |   |
| **Non-interest expense:**                                                  |       |                                       |       |   |   |   |   |
| Salaries and employee benefits                                             |       | $                                          | 23,362     |   | $ | 22,536 |   | $ | 19,911 |   |
| Occupancy expense                                                          |       | 8,857                                      |       | 7,031 |   | 5,448 |   |
| Data processing                                                            |       | 2,166                                      |       | 1,940 |   | 1,954 |   |
| Other operating expense                                                    |       | 10,391                                     |       | 8,187 |   | 6,976 |   |
| Total non-interest expense                                                 |       | $                                          | 44,776     |   | $ | 39,694 |   | $ | 34,289 |   |
| Income before taxes on income                                              |       | $                                          | 19,315     |   | $ | 39,006 |   | $ | 37,433 |   |
| Provision for income taxes                                                 |       | 6,231                                      |       | 13,219 |   | 12,925 |   |
| **Net income**                                                             |       | $                                          | 13,084     |   | $ | 25,787 |   | $ | 24,508 |   |
| Effective dividend on preferred stock                                      |       | 258                                        |       | — |   | — |   |
| **Net income available to common stockholders**                            |       | $                                          | 12,826     |   | $ | 25,787 |   | $ | 24,508 |   |
| Earnings per common share, basic                                           |       | $                                          | 0.48       |   | $ | 0.98 |   | $ | 0.95 |   |
| Earnings per common share, diluted                                         |       | $                                          | 0.47       |   | $ | 0.95 |   | $ | 0.89 |   |

 

See Notes to Consolidated Financial Statements.

 

32

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## **CONSOLIDATED STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY**

## **(Dollars in thousands)**

 
| ** **                                                                                              | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Surplus** | ** ** | **Warrants** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|------------|--------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
| **Balance,  December 31, 2005**                                                                         | ** ** | **$**                | **—** | ** **        | **$**      | **14,050**  | ** ** | **$**        | **36,066** | ** **             | **$**      | **—**                                                | ** ** | **$**                     | **63,239** | ** **                            | **$**      | **(1,537** | **)** | ** ** | ** ** | **$** | **111,818** | ** ** |
| Comprehensive  Income:                                                                                  |       |                 | ** ** | ** **        | ** ** | ** **  |       |         |       |                   |       |                                                      |       |                      |       |                                  |       |
| Net Income 2006                                                                                         |       |                 | ** ** | ** **        | ** ** | ** **  |       |         |       | 24,508                 |       |                                                      |       | $                         | 24,508     |                                  | 24,508     |   |
| Other  comprehensive income, unrealized holding gains arising during the period (net  of tax of $459)   |       |                 |       |              |       |        |       |         |       |                   |       | 853                                                       |       | 853                       |       | 853                                   |       |
| Total  comprehensive income                                                                             |       |                 |       |              |       |        |       |         |       |                   |       |                                                      |       | $                         | 25,361     |                                  |       |   |
| Three-for-two  stock split in form of a 50% stock dividend                                              |       | —               |       | 7,146             |       | (7,146      | )          | —       |       | —                 |       | —                                                    |       |                      |       | —                                |       |
| Cash paid in lieu  of fractional shares                                                                 |       | —               |       | —            |       | —      |       | —       |       | (3                     | )          | —                                                    |       |                      |       | (3                                    | )          |
| Stock options  exercised                                                                                |       | —               |       | 351               |       | 1,823       |       | —       |       | —                 |       | —                                                    |       |                      |       | 2,174                                 |       |
| Employee stock  purchase plan                                                                           |       | —               |       | 13                |       | 231         |       | —       |       | —                 |       | —                                                    |       |                      |       | 244                                   |       |
| Stock option  expense                                                                                   |       | —               |       | —            |       | 257         |       | —       |       | —                 |       | —                                                    |       |                      |       | 257                                   |       |
| **Balance,  December 31, 2006**                                                                         | ** ** | **$**                | **—** | ** **        | **$**      | **21,560**  | ** ** | **$**        | **31,231** | ** **             | **$**      | **—**                                                | ** ** | **$**                     | **87,744** | ** **                            | **$**      | **(684** | **)** | ** ** | ** ** | **$** | **139,851** | ** ** |
| Comprehensive  Income:                                                                                  |       |                 | ** ** | ** **        | ** ** | ** **  |       |         |       |                   |       |                                                      |       |                      |       |                                  |       |
| Net Income 2007                                                                                         |       |                 | ** ** | ** **        | ** ** | ** **  |       |         |       | 25,787                 |       |                                                      |       | $                         | 25,787     |                                  | 25,787     |   |
| Other  comprehensive income, unrealized holding gains arising during the period (net  of tax of $1,019) |       |                 |       |              |       |        |       |         |       |                   |       | 1,893                                                     |       | 1,893                     |       | 1,893                                 |       |
| Total  comprehensive income                                                                             |       |                 |       |              |       |        |       |         |       |                   |       |                                                      |       | $                         | 27,680     |                                  |       |   |
| 10% stock  dividend                                                                                     |       | —               |       | 2,172             |       | 41,108      |       | —       |       | (43,280                | )          | —                                                    |       |                      |       | —                                |       |
| Cash paid in lieu  of fractional shares                                                                 |       | —               |       | —            |       | —      |       | —       |       | (12                    | )          | —                                                    |       |                      |       | (12                                   | )          |
| Stock options  exercised                                                                                |       | —               |       | 289               |       | 876         |       | —       |       | —                 |       | —                                                    |       |                      |       | 1,165                                 |       |
| Employee stock purchase  plan                                                                           |       | —               |       | 2                 |       | 30          |       | —       |       | —                 |       | —                                                    |       |                      |       | 32                                    |       |
| Stock option  expense                                                                                   |       | —               |       | —            |       | 427         |       | —       |       | —                 |       | —                                                    |       |                      |       | 427                                   |       |
| **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** | ** ** |

 

See Notes to Consolidated Financial Statements.

 

33

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin thousands)**

 
| ** **                                                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash Flows from Operating Activities:**                                                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest received                                                                                     |       | $                                          | 161,235    |   | $ | 151,608 |   | $ | 122,132 |   |
| Other income received                                                                                 |       | 6,431                                      |       | 7,246 |   | 7,324 |   |
| Net change in loans held-for-sale                                                                     |       | (1,882                                     | )          | 3,456 |   | 4,753 |   |
| Interest paid                                                                                         |       | (78,211                                    | )          | (75,962 | ) | (53,567 | ) |
| Cash paid to suppliers and employees                                                                  |       | (50,903                                    | )          | (37,784 | ) | (39,195 | ) |
| Income tax benefit of stock  options/warrants exercised                                               |       | (45                                        | )          | (440 | ) | (812 | ) |
| Income taxes paid                                                                                     |       | (12,150                                    | )          | (16,055 | ) | (13,531 | ) |
| Net cash provided by operating activities                                                             |       | $                                          | 24,475     |   | $ | 32,069 |   | $ | 27,104 |   |
| **Cash Flows from Investing Activities:**                                                             |       |                                       |       |   |   |   |   |
| Proceeds from maturities and principal  payments on securities held-to-maturity                       |       | $                                          | 15,516     |   | $ | 4,765 |   | $ | 7,541 |   |
| Proceeds from maturities and principal  payments on securities available-for-sale                     |       | 139,733                                    |       | 51,794 |   | 32,456 |   |
| Purchases of securities held-to-maturity                                                              |       | (26,799                                    | )          | (4,441 | ) | (8,100 | ) |
| Purchases of securities available-for-sale                                                            |       | (141,916                                   | )          | (175,844 | ) | (91,341 | ) |
| Sales of securities available-for-sale                                                                |       | —                                     |       | 35,000 |   | — |   |
| Net increase in loans                                                                                 |       | (373,723                                   | )          | (298,615 | ) | (363,978 | ) |
| Purchase of bank premises and equipment                                                               |       | (4,599                                     | )          | (5,427 | ) | (3,182 | ) |
| Net cash used in investing activities                                                                 |       | $                                          | (391,788   | ) | $ | (392,768 | ) | $ | (426,604 | ) |
| **Cash Flows from Financing Activities:**                                                             |       |                                       |       |   |   |   |   |
| Net (decrease) increase in demand, NOW,  money market and savings accounts                            |       | $                                          | (18,140    | ) | $ | 84,551 |   | $ | 108,314 |   |
| Net increase in time deposits                                                                         |       | 321,117                                    |       | 178,673 |   | 254,120 |   |
| Net (decrease) increase in securities sold  under agreement to repurchase and federal funds purchased |       | (34,575                                    | )          | 73,663 |   | 37,077 |   |
| Net increase in other borrowed funds                                                                  |       | —                                     |       | 25,000 |   | — |   |
| Increase (decrease) in trust preferred  capital notes                                                 |       | 25,775                                     |       | (3,100 | ) | — |   |
| Proceeds from issuance of preferred stock                                                             |       | 71,000                                     |       | — |   | — |   |
| Proceeds from exercise of stock options and  warrants                                                 |       | 317                                        |       | 1,197 |   | 2,418 |   |
| Cash paid in lieu of fractional shares                                                                |       | (7                                         | )          | (12 | ) | (3 | ) |
| Net cash provided by financing activities                                                             |       | $                                          | 365,487    |   | $ | 359,972 |   | $ | 401,926 |   |
| (Decrease) increase in cash and cash  equivalents                                                     |       | $                                          | (1,826     | ) | $ | (727 | ) | $ | 2,426 |   |
| **Cash and Cash Equivalents:**                                                                        |       |                                       |       |   |   |   |   |
| Beginning                                                                                             |       | 35,341                                     |       | 36,068 |   | 33,642 |   |
| Ending                                                                                                |       | $                                          | 33,515     |   | $ | 35,341 |   | $ | 36,068 |   |

 

See Notes to Consolidated Financial Statements.

 

34

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Reconciliation of net income to net cash  provided by operating activities:**    |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 13,084     |   | $ | 25,787 |   | $ | 24,508 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 2,565                                      |       | 1,995 |   | 1,443 |   |
| Provision for loan losses                                                          |       | 25,378                                     |       | 4,340 |   | 4,406 |   |
| Stock based compensation expense                                                   |       | 597                                        |       | 427 |   | 257 |   |
| Deferred tax benefit                                                               |       | (5,353                                     | )          | (2,087 | ) | (1,580 | ) |
| Accretion of trust preferred securities  discount                                  |       | 64                                         |       | — |   | — |   |
| Amortization of security premiums and  accretion of discounts, net                 |       | (90                                        | )          | (394 | ) | (395 | ) |
| Origination of loans held-for-sale                                                 |       | (80,622                                    | )          | (158,026 | ) | (174,856 | ) |
| Sale of loans                                                                      |       | 77,920                                     |       | 160,246 |   | 176,551 |   |
| Gain on sale of loans                                                              |       | 820                                        |       | 1,236 |   | 3,058 |   |
| Gain on the sale of OREO                                                           |       | —                                     |       | (638 | ) | — |   |
| Increase in other assets                                                           |       | (9,655                                     | )          | (1,216 | ) | (6,636 | ) |
| (Decrease) increase in other liabilities                                           |       | (308                                       | )          | (483 | ) | 193 |   |
| Decrease (increase) in accrued interest  receivable                                |       | 857                                        |       | (2,136 | ) | (2,765 | ) |
| (Decrease) increase in accrued interest  payable                                   |       | (782                                       | )          | 3,018 |   | 2,920 |   |
| **Net cash provided by operating activities**                                      |       | $                                          | 24,475     |   | $ | 32,069 |   | $ | 27,104 |   |
| **Supplemental Schedule of Noncash Investing  Activities:**                        |       |                                       |       |   |   |   |   |
| Unrealized (loss) gain on securities                                               |       | $                                          | (2,974     | ) | $ | 2,912 |   | $ | 1,312 |   |
| OREO transferred from loans                                                        |       | $                                          | 7,569      |   | $ | 1,862 |   | $ | — |   |
| Loans made on the disposition of OREO                                              |       | $                                          | —     |   | $ | 2,500 |   | $ | — |   |

 

See Notes to Consolidated FinancialStatements.

 

35

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**Notes to Consolidated Financial Statements**

 

**Note 1.Nature of Banking Activities and Significant Accounting Policies**

 

**Business**

 

On December 22, 1999, Virginia CommerceBancorp, Inc. (the “Company”) became the holding company for VirginiaCommerce Bank (the “Bank”). The Company acquired the Bank through a shareexchange in which the stockholders of the Bank received one share of theCompany for each share of the Bank. The exchange was a tax-free transaction forfederal income tax purposes. The merger was accounted for on the same basis asa pooling-of-interests.

 

The Company provides loan and depositproducts to commercial and retail customers in the Washington MetropolitanArea, with the primary emphasis on Northern Virginia. The loan portfolio isgenerally collateralized by assets of the customers and is expected to bere-paid from cash flows or proceeds from the sale of selected assets of theborrowers.

 

**Principles of Consolidation**

 

The consolidated financial statements includethe accounts of the Company and its wholly owned subsidiaries, the Bank, VCBICapital Trust II, VCBI Capital Trust III, VCBI Capital Trust IV and NortheastLand and Investment Company.  Inconsolidation, all significant intercompany accounts and transactions have beeneliminated. FASB Interpretation No. 46(R) requires that the Companyno longer eliminate through consolidation the equity investments in VCBICapital Trust II, III and IV, by the parent company, Virginia CommerceBancorp, Inc, which approximated $2.0 million at December 31, 2008. Thesubordinated debt of the trusts is reflected as a liability of the Company, andthe common securities of the trusts as an other asset.

 

**Risks and Uncertainties**

 

In its normal course of business, the Companyencounters two significant types of risk: economic and regulatory.  There are three main components of economicrisk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate riskto the degree that its interest-bearing liabilities mature or reprice more rapidlyor on a different basis than its interest-earning assets.  Credit risk is the risk of default on theCompany’s loan portfolio that results from the borrowers’ inability orunwillingness to make contractually required payments.  Market risk reflects changes in the value ofcollateral underlying loans receivable and the valuation of real estate held bythe Company.

 

The determination of the allowance for loanlosses is based on estimates that are particularly susceptible to significantchanges in the economic environment and market conditions.  Management believes that, as of December 31,2008, the allowance for loan losses is adequate based on information currentlyavailable.  A worsening or protractedeconomic decline or substantial increase in interest rates, would increase thelikelihood of losses due to credit and market risks and could create the needfor substantial increases to the allowance for loan losses.  The Company is subject to the regulations ofvarious regulatory agencies, which can change significantly from year toyear.  In addition, the Company undergoesperiodic examinations by regulatory agencies, which may subject it to furtherchanges based on the regulators’ judgments about information available to themat the time of their examination.

 

**Securities**

 

Debt securities that management has thepositive intent and ability to hold to maturity are classified asheld-to-maturity and recorded at amortized cost.  Securities not classified asheld-to-maturity, including equity securities with readily determinable fairvalues, are classified as available-for-sale and recorded at fair value, withunrealized gains and losses excluded from earnings and reported in othercomprehensive income.  The Company has nosecurities classified as trading. Restricted stocks, such as Federal ReserveBank stock, Federal Home Loan Bank stock, and Community Bankers Bank stock, arecarried at cost.

 

Purchased premiums and discounts arerecognized in interest income using the interest method over the terms of thesecurities.  Declines in the fair valueof held-to-maturity and available-for-sale securities below their cost that aredeemed to be other than temporary are reflected in earnings as realized losses.  Gains and losses on the sale of securitiesare recorded on the trade date and are determined using the specificidentification method. In estimating other-than-temporary impairment losses,management considers (1) the length of time and the extent to which the 

 

36

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fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in fair value.

 

**Loans Held-for-Sale**

 

Loans held-for-sale are carried at the lowerof cost or market, determined in the aggregate. Market value considers commitment agreements with investors andprevailing market prices.  Loansoriginated by the Company’s mortgage banking unit and held-for-sale to outsideinvestors, are done on a pre-sold basis and servicing released. Gains andlosses on sales of mortgage loans are recognized based on the differencebetween the selling price and the carrying value of the related mortgage loanssold.

 

**Loans**

 

The Company grants mortgage, commercial andconsumer loans to customers.  Asubstantial portion of the loan portfolio is represented by real estateloans.  The ability of the Company’sdebtors to honor their contracts is dependent upon the general economicconditions and real estate climate of the Company’s market area.

 

Loans that management has the intent andability to hold for the foreseeable future or until maturity or pay-off arereported at their outstanding unpaid principal balances adjusted for theallowance for loan losses and any deferred fees or costs on originatedloans.  Interest income is accrued on theunpaid principal balance.  Loanorigination fees, net of certain origination costs, are deferred and recognizedas an adjustment of the related loan yield using the interest method.

 

The accrual of interest on real estate andcommercial loans is discontinued at the time the loan is 90 days delinquentunless the credit is well-secured and in the process of collection.  Installment loans are typically charged-offno later than 180 days past due.  In allcases, loans are placed on nonaccrual or charged-off at an earlier date ifcollection of principal or interest is considered doubtful.

 

All interest accrued but not collected forloans that are placed on nonaccrual or charged off is reversed against interestincome.  The interest on these loans isaccounted for on the cash-basis or cost-recovery method, until qualifying forreturn to accrual.  Loans are returned toaccrual status when all principal and interest amounts contractually due arebrought current and future payments are reasonably assured.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is establishedto address potential losses that could occur through a provision for loanlosses charged to earnings.  Loan lossesare charged against the allowance when management believes the uncollectibilityof a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated ona regular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available.

 

Our allowance for loan losses hastwo basic components:  the specificallowance and the unallocated allowance. Each of these components is determined based upon estimates that can anddo change when the actual events occur. The specific allowance is used to individually allocate an allowance forloans identified as impaired. Impairment testing includes consideration of theborrower’s overall financial condition, resources and payment record, supportavailable from financial guarantors and the fair market value of collateral.

 

A loan is considered impairedwhen, based on current information and events, it is probable that the Companywill be unable to collect the scheduled payments of principal or interest whendue according to the contractual terms of the loan agreement. Factorsconsidered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal andinterest payments when due.  Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, 

 

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the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial andconstruction loans by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.These factors are combined to estimatethe probability and severity of inherent losses.  When impairment is identified, then aspecific reserve may be established based on the Company’s calculation of theloss embedded in the individual loan. Large groups of smaller balance,homogeneous loans are collectively evaluated for impairment. Impaired loanswhich meet the criteria for substandard, doubtful and loss are segregated fromperforming 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 unallocated formula is used toestimate the loss of non-classified loans. These un-criticized loans are alsosegregated by loan type and allowance factors are assigned by management basedon delinquencies, loss history, trends in volume and terms of loans, effects ofchanges in lending policy, the experience and depth of management, national andlocal economic trends, concentrations of credit, quality of the loan reviewsystem and the effect of external factors (i.e. competition and regulatoryrequirements). The factors assigned differ by loan type.  The unallocated allowance recognizespotential losses whose impact on the portfolio has yet to be recognized by aspecific allowance. Allowance factors and the overall size of the allowance maychange from period to period based on management’s assessment of the above describedfactors and the relative weights given to each factor. See Note 4 forinformation regarding the allowance for loan losses.

 

**Bank Premises and Equipment**

 

Premises and equipment are stated at costless accumulated depreciation and amortization. Land is carried at cost. Furniture, fixtures, equipment and computersoftware are depreciated over their estimated useful lives, generally fromthree to seven years; leasehold improvements are depreciated over the term ofthe respective leases or the estimated useful life of the leaseholdimprovement.  Depreciation andamortization are recorded on the straight-line method.

 

Costs of maintenance and repairs are chargedto expense as incurred.  The costs ofreplacing structural parts of major units are considered individually and areexpensed or capitalized as the facts dictate.

 

**Income Taxes**

 

Deferred income tax assets and liabilitiesare determined using the liability (or balance sheet) method. Under thismethod, the net deferred tax asset or liability is determined based on the taxeffects of the temporary differences between book and tax bases of the variousbalance sheet assets and liabilities and gives current recognition to changesin tax rates and laws.

 

When tax returns are filed, it is highly certain that some positionstaken would be sustained upon examination by the taxing authorities, whileothers are subject to uncertainty about the merits of the position taken or theamount of the position that would be ultimately sustained.  The benefit of a tax position is recognizedin the financial statements in the period during which, based on all availableevidence, management believes it is more likely than not that the position willbe sustained upon examination, including the resolution of appeals or litigationprocesses, if any.  Tax positions takenare not offset or aggregated with other positions.  Tax positions that meet themore-likely-than-not recognition threshold are measured as the largest amountof tax benefit that is more than 50 percent likely of being realized uponsettlement with the applicable taxing authority.  The portion of the benefits associated withtax positions taken that exceeds the amount measured as described above isreflected as a liability for unrecognized tax benefits in the accompanyingbalance sheet along with any associated interest and penalties that would bepayable to the taxing authorities upon examination.

 

Interest and penalties associated withunrecognized tax benefits are classified as additional income taxes in the statementof income.

 

**Advertising Cost**

 

The Company follows the policy of chargingthe production costs of advertising to expense as incurred. Total advertisingexpense was $437 thousand, $500 thousand and $596 thousand in 2008, 2007 and2006, respectively.

 

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**Use of Estimates**

 

In preparing consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thebalance sheet and the reported amounts of revenues and expenses during thereported period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses, the valuation of deferred tax assets andOREO.

 

**Rate Lock Commitments**

 

The Company enters into commitments tooriginate mortgage loans whereby the interest rate on the loans is determinedprior to funding (rate lock commitments). Rate lock commitments on mortgageloans that are intended to be sold are considered to be derivatives. The periodof time between issuance of a loan commitment and closing and the sale of theloan generally ranges from thirty to ninety days. The Company protects itselffrom changes in interest rates through the use of best efforts forward deliverycommitments, whereby the Company commits to sell a loan at the time theborrower commits to an interest rate with the intent that the buyer has assumedinterest rate risk on the loan. As a result, the Company is not exposed tolosses nor will it realize significant gains related to its rate lockcommitments due to changes in interest rates. The correlation between the ratelock commitments and the best efforts contracts is very high due to theirsimilarity. Because of this high correlation, no gain or loss occurs on therate lock commitments.

 

**Cash and Cash Equivalents**

 

For purposes of reporting cash flows, cashand cash equivalents include cash on hand, amounts due from banks, and Federalfunds sold.  Generally, Federal funds aresold and purchased for one-day periods.

 

**Earnings Per Share**

 

Basic earnings per share represent income available to commonstockholders divided by the weighted-average number of common sharesoutstanding during the period.  Dilutedearnings per share reflect additional common shares that would have beenoutstanding if dilutive potential common shares had been issued, as well as anyadjustment to income that would result from the assumed issuance.  Potential common shares that may be issued bythe Company relate solely to outstanding stock options and warrants, and aredetermined using the treasury method.

 

**Comprehensive Income**

 

Accounting principles generally require thatrecognized revenue, expenses, gains and losses be included in net income.Although certain changes in assets and liabilities, such as unrealized gainsand losses on available-for-sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.

 

#### **RecentAccounting Pronouncements**

#### ** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) reacheda consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting forDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007,the FASB reached a consensus on EITF Issue 06-10, “Accounting for CollateralAssignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”).Both of these standards require a company to recognize an obligation over anemployee’s service period based upon the substantive agreement with theemployee such as the promise to maintain a life insurance policy or provide adeath benefit postretirement. The Company adopted the provisions of thesestandards effective January 1, 2008. The adoption of these standards wasnot material to the Company’s consolidated financial statements.

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements, but rather, provides enhanced guidance to other pronouncementsthat require or permit assets or liabilities to be measured at fair value.  This Statement is effective for financial 

 

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statementsissued for fiscal years beginning after November 15, 2007 and interimperiods within those years.  The FASB hasapproved a one-year deferral for the implementation of the Statement fornonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis*.*The Company adopted SFAS 157 effective January 1,2008. The adoption of SFAS 157 was not material to the Company’s consolidatedfinancial statements.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”).  ThisStatement permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective of this Statement is toimprove financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The fair value option established by this Statement permits allentities to choose to measure eligible items at fair value at specifiedelection dates. A business entity shall report unrealized gains and losses onitems for which the fair value option has been elected in earnings at eachsubsequent reporting date. The fair value option may be applied instrument byinstrument and is irrevocable. SFAS 159 is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007, with earlyadoption available in certain circumstances. The Company adopted SFAS 159effective January 1, 2008. The Company decided not to report any existingfinancial assets or liabilities at fair value that are not already reported,thus the adoption of this statement did not have a material impact on theCompany’s consolidated financial statements.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141(R), “Business Combinations” (“SFAS 141(R)”). The Standard willsignificantly change the financial accounting and reporting of businesscombination transactions.  SFAS 141(R) establishesprinciples for how an acquirer recognizes and measures the identifiable assetsacquired, liabilities assumed, and any noncontrolling interest in the acquiree;recognizes and measures the goodwill acquired in the business combination or again from a bargain purchase; and determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination. SFAS 141(R) is effective for acquisition dates on or after thebeginning of an entity’s first year that begins after December 15,2008.  The Company does not expect theimplementation of SFAS 141(R) to have a material impact on itsconsolidated financial statements.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, “Noncontrolling Interests in Consolidated Financial Statements anAmendment of ARB No. 51” (“SFAS 160”). The Standard will significantly change the financial accounting andreporting of noncontrolling (or minority) interests in consolidated financialstatements.  SFAS 160 is effective as ofthe beginning of an entity’s first fiscal year that begins after December 15,2008, with early adoption prohibited.  TheCompany does not expect the implementation of SFAS 160 to have a materialimpact on its consolidated financial statements.

 

InNovember 2007, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 109, “Written Loan Commitments Recorded at FairValue Through Earnings” (“SAB 109”). SAB 109 expresses the current view of thestaff that the expected net future cash flows related to the associatedservicing of the loan should be included in the measurement of all written loancommitments that are accounted for at fair value through earnings. SECregistrants are expected to apply the views in Question 1 of SAB 109 on aprospective basis to derivative loan commitments issued or modified in fiscalquarters beginning after December 15, 2007.  Implementation of SAB 109 did not have amaterial impact on the Company’s consolidated financial statements.

 

InDecember 2007, the SEC issued Staff Accounting Bulletin No. 110, “Useof a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”).   SAB 110 expresses the current view of thestaff that it will accept a company’s election to use the simplified methoddiscussed in SAB 107 for estimating the expected term of “plain vanilla” shareoptions regardless of whether the company has sufficient information to makemore refined estimates.  The staff notedthat it understands that detailed information about employee exercise patternsmay not be widely available by December 31, 2007.  Accordingly, the staff will continue toaccept, under certain circumstances, the use of the simplified method beyond December 31,2007.  Implementation of SAB 110 did nothave a material impact on the Company’s consolidated financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities – an amendment of SFAS No. 133,”(“SFAS 161”). SFAS 161 requires that an entity provide enhanced disclosuresrelated to derivative and hedging activities. SFAS 161 is effective for theCompany on January 1, 2009.

 

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InApril 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP. 142-3”). FSP 142-3 amends thefactors an entity should consider in developing renewal or extensionassumptions used in determining the useful life of recognized intangible assetsunder SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intentof FSP 142-3 is to improve the consistency between the useful life of arecognized intangible asset under SFAS 142 and the period of expected cashflows used to measure the fair value of the assets under SFAS 141(R). FSP 142-3is effective for the Company on January 1, 2009, and applies prospectivelyto intangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions.**Theadoption of FSP 142-3 is not expected to have a material impact on the Company’sconsolidated financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles,” (“SFAS 162”). SFAS 162 identifies the sourcesof accounting principles and the framework for selecting the principles to beused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principles.SFAS 162 is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.” Management does not expect the adoption of the provision of SFAS162 to have any impact on the Company’s consolidated financial statements*.*

 

InSeptember 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures aboutCredit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133and FASB Interpretation No. 45; and Clarification of the Effective Date ofFASB Statement No. 161,” (“FSP 133-1” and “FIN 45-4”). FSP 133-1 and FIN45-4 require a seller of credit derivatives to disclose information about itscredit derivatives and hybrid instruments that have embedded credit derivativesto enable users of financial statements to assess their potential effect on itsfinancial position, financial performance and cash flows. The disclosuresrequired by FSP 133-1 and FIN 45-4 will be effective for the Company on December 31,2008 and are not expected to have a material impact on the Company’s  consolidated financial statements.

 

InOctober 2008, the FASB issued FSP 157-3, “Determining the Fair Value of aFinancial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”).FSP 157-3 clarifies the application of SFAS 157 in determining the fair valueof a financial asset during periods of inactive markets. FSP 157-3 waseffective as of September 30, 2008 and did not have a material impact onthe Company’s consolidated financial statements.

 

InDecember 2008, the FASB issued FSP No.140-4 and FIN 46(R)-8, “Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities.” FSP No. 140-4 and FIN 46(R)-8requires enhanced disclosures about transfers of financial assets and interestsin variable interest entities. The FSP is effective for interim and annualperiods ending after December 15, 2008. Since the FSP requires onlyadditional disclosures concerning transfers of financial assets and interest invariable interest entities, adoption of the FSP will not affect the Company’sconsolidated financial condition, results of operations or cash flows.

 

InJanuary 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSPamends the impairment guidance in EITF Issue No. 99-20, “Recognition ofInterest Income and Impairment on Purchased Beneficial Interests and BeneficialInterests That Continue to Be Held by a Transferor in Securitized FinancialAssets,” to achieve more consistent determination of whether another-than-temporary impairment has occurred. The FSP also retains andemphasizes the objective of an other-than-temporary impairment assessment andthe related disclosure requirements in SFAS 115, “Accounting for CertainInvestments in Debt and Equity Securities,” and other related guidance. The FSPis effective for interim and annual reporting periods ending after December 15,2008 and shall be applied prospectively. The FSP was effective as of December 31,2008 and did not have a material impact on the Company’s consolidated financialstatements.

 

**Stockholders’ Equity**

 

A 10% stock dividend wasdeclared on March 26, 2008.  Thistransaction was recorded by increasing common stock by $2.4 million, increasingsurplus by $20.1 million and decreasing retained earnings by $22.5 million.

 

A 10% stock dividend wasdeclared on March 28, 2007. This transaction was recorded by increasingcommon stock by $2.2 million, increasing surplus by $41.1 million anddecreasing retained earnings by $43.3 million.

 

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A three-for-two stock split inthe form of a 50% stock dividend was declared on March 16, 2006.  This transaction was recorded by increasingcommon stock by $7.1 million and decreasing surplus by $7.1 million.

 

**Note2.  Securities**

 

Amortized cost and fair valueof the securities available-for-sale and held-to-maturity as of December 31,2008 and 2007, are as follows (dollars in thousands):

##### ** **

| **December 31, 2008**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|------------------------------|------------|---------------------------------|------------|---------------------|------------|
| **Available–for-sale:**                      |       |                |       |                         |       |                            |       |                |       |
| U.S. Government Agency obligations                |       | $                   | 230,497    |                         | $          | 4,951                           |       | $                   | (14        | ) | $ | 235,434 |   |
| Domestic corporate debt obligations               |       | 8,817               |       | —                       |       | (4,869                          | )          | 3,948               |       |
| Obligations of states and political  subdivisions |       | 30,637              |       | 49                           |       | (1,232                          | )          | 29,454              |       |
| Restricted stock:                                 |       |                |       |                         |       |                            |       |                |       |
| Federal Reserve Bank                              |       | 5,597               |       | —                       |       | —                          |       | 5,597               |       |
| Federal Home Loan Bank                            |       | 5,334               |       | —                       |       | —                          |       | 5,334               |       |
| Community Bankers’ Bank                      |       | 145                 |       | —                       |       | —                          |       | 145                 |       |
|                                              |       | $                   | 281,027    |                         | $          | 5,000                           |       | $                   | (6,115     | ) | $ | 279,912 |   |
| ** **                                        |       |                |       |                         |       |                            |       |                |       |
| **Held-to-maturity:**                             |       |                |       |                         |       |                            |       |                |       |
| U.S. Government Agency obligations                |       | $                   | 18,764     |                         | $          | 347                             |       | $                   | —     |   | $ | 19,111 |   |
| Obligations of state and political  subdivisions  |       | 38,143              |       | 614                          |       | (9                              | )          | 38,748              |       |
|                                              |       | $                   | 56,907     |                         | $          | 961                             |       | $                   | (9         | ) | $ | 57,859 |   |

 
| **December 31, 2007**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|------------------------------|------------|---------------------------------|------------|---------------------|------------|
| **Available–for-sale:**                      |       |                |       |                         |       |                            |       |                |       |
| U.S. Government Agency obligations                |       | $                   | 240,329    |                         | $          | 2,737                           |       | $                   | (101       | ) | $ | 242,965 |   |
| Domestic corporate debt obligations               |       | 9,241               |       | —                       |       | (697                            | )          | 8,544               |       |
| Obligations of states and political  subdivisions |       | 23,079              |       | 137                          |       | (215                            | )          | 23,001              |       |
| Restricted stock:                                 |       |                |       |                         |       |                            |       |                |       |
| Federal Reserve Bank                              |       | 1,442               |       | —                       |       | —                          |       | 1,442               |       |
| Federal Home Loan Bank                            |       | 4,631               |       | —                       |       | —                          |       | 4,631               |       |
| Community Bankers’ Bank                      |       | 55                  |       | —                       |       | —                          |       | 55                  |       |
|                                              |       | $                   | 278,777    |                         | $          | 2,874                           |       | $                   | (1,013     | ) | $ | 280,638 |   |
| ** **                                        |       |                |       |                         |       |                            |       |                |       |
| **Held-to-maturity:**                             |       |                |       |                         |       |                            |       |                |       |
| U.S. Government Agency obligations                |       | $                   | 33,725     |                         | $          | 100                             |       | $                   | (124       | ) | $ | 33,701 |   |
| Obligations of state and political  subdivisions  |       | 11,874              |       | 111                          |       | (10                             | )          | 11,975              |       |
|                                              |       | $                   | 45,599     |                         | $          | 211                             |       | $                   | (134       | ) | $ | 45,676 |   |

 

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The amortized cost and fair value of the securities, includingrestricted stock, as of December 31, 2008 by contractual maturity, areshown below (dollars in thousands):

 
| **December 31, 2008**        | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------|------------|
| **Available-for-sale:**                |       |                    |       |                |       |
| Due within one year                    |       | $                       | 862        |                | $          | 861 |   |
| Due after one year through five years  |       | 56,739                  |       | 57,811              |       |
| Due after five years through ten years |       | 57,976                  |       | 59,052              |       |
| Due after ten years                    |       | 154,374                 |       | 151,112             |       |
| Restricted stock                       |       | 11,076                  |       | 11,076              |       |
|                                   |       | $                       | 281,027    |                | $          | 279,912 |   |
| **Held-to-maturity:**                  |       |                    |       |                |       |
| Due within one year                    |       | $                       | 1,008      |                | $          | 1,015 |   |
| Due after one year through five years  |       | 15,646                  |       | 15,868              |       |
| Due after five years through ten years |       | 6,006                   |       | 6,133               |       |
| Due after ten years                    |       | 34,247                  |       | 34,843              |       |
|                                   |       | $                       | 56,907     |                | $          | 57,859 |   |

 

The amortized cost ofsecurities pledged as collateral for repurchase agreements, certain publicdeposits, and other purposes were $280.0 million and $274.0 million at December 31,2008 and 2007, respectively.

 

Management evaluates securitiesfor other-than-temporary impairment at least on a quarterly basis, and morefrequently when economic or market concerns warrant such evaluation.Consideration is given to (1) the length of time and the extent to whichthe fair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.

 

Provided below is a summary ofsecurities which were in an unrealized loss position at December 31, 2008and 2007. Of the total securities in an unrealized loss position at December 31,2008, the majority of the unrealized losses are concentrated in four long termcollateralized debt obligations representing pooled trust preferred securitieswhere current market quotes are significantly depressed. However, based on areview of the underlying issuers, the current level of payment deferrals and ordefaults, an analysis of expected future cash flows, the amount of additionaldeferrals and or defaults that would be required before the Company wouldexperience a break in yield, and the Company’s ability and intent to hold thesesecurities until maturity, or until such time as the value recovers, nodeclines are deemed to be other-than-temporary.

 
| ** **                                                                | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Longer** | ** ** | **Total**       | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------|------------|
| **At December 31, 2008  (Dollars in thousands)** | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**                 | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| **Available-for-sale:**                                                   |       |                                   |       |                                   |       |            |       |   |   |   |   |   |   |
| U.S. Government Agency obligations                                        |       | $                                      | 5,947      |                                   | $          | (14             | )          | $ | — |   | $ | — |   | $ | 5,947 |   | $ | (14 | ) |
| Domestic corporate debt obligations                                       |       | —                                 |       | —                                 |       | 3,948           |       | (4,869 | ) | 3,948 |   | (4,869 | ) |
| Obligations of states/political subdivisions                              |       | 26,471                                 |       | (1,232                                 | )          | —          |       | — |   | 26,471 |   | (1,232 | ) |
| ** **                                                                |       | $                                      | 32,418     |                                   | $          | (1,246          | )          | $ | 3,948 |   | $ | (4,869 | ) | $ | 36,366 |   | $ | (6,115 | ) |
| **Held-to-maturity:**                                                     |       |                                   |       |                                   |       |            |       |   |   |   |   |   |   |
| Obligations of states/political  subdivisions                             |       | $                                      | 2,134      |                                   | $          | (9              | )          | $ | — |   | $ | — |   | $ | 2,134 |   | $ | (9 | ) |

 

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| ** **                                                                | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Longer** | ** ** | **Total**       | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------|------------|
| **At December 31, 2007  (Dollars in thousands)** | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**                 | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| **Available-for-sale:**                                                   |       |                                   |       |                                   |       |            |       |   |   |   |   |   |   |
| U.S. Government Agency obligations                                        |       | $                                      | —     |                                   | $          | —          |       | $ | 10,682 |   | $ | (101 | ) | $ | 10,682 |   | $ | (101 | ) |
| Domestic corporate debt obligations                                       |       | 8,544                                  |       | (697                                   | )          | —          |       | — |   | 8,544 |   | (697 | ) |
| Obligations of states/political  subdivisions                             |       | 12,886                                 |       | (212                                   | )          | 569             |       | (3 | ) | 13,455 |   | (215 | ) |
|                                                                      |       | $                                      | 21,430     |                                   | $          | (909            | )          | $ | 11,251 |   | $ | (104 | ) | $ | 32,681 |   | $ | (1,013 | ) |
| **Held-to-maturity:**                                                     |       |                                   |       |                                   |       |            |       |   |   |   |   |   |   |
| U.S. Government Agency obligations                                        |       | $                                      | —     |                                   | $          | —          |       | $ | 16,611 |   | $ | (124 | ) | $ | 16,611 |   | $ | (124 | ) |
| Obligations of states/political  subdivisions                             |       | —                                 |       | —                                 |       | 1,994           |       | (10 | ) | 1,994 |   | (10 | ) |
|                                                                      |       | $                                      | —     |                                   | $          | —          |       | $ | 18,605 |   | $ | (134 | ) | $ | 18,605 |   | $ | (134 | ) |

 

**Note 3.Loans**

 

Major classifications of loans,excluding loans held-for-sale, are summarized as follows (dollars inthousands):

 
| ** **                             | ** ** | **2008**  | ** **    | **2007**   | ** ** |
|----------------------------------------|------------|-----------|---------------|------------|------------|
| Commercial                             |       | $         | 279,470       |       | $          | 238,670 |   |
| Real estate - 1-4 family residential   |       | 357,253   |          | 266,365    |       |
| Real estate - multifamily residential  |       | 66,611    |          | 56,952     |       |
| Real estate - non-farm, nonresidential |       | 1,011,325 |          | 835,503    |       |
| Real estate - construction             |       | 585,076   |          | 544,290    |       |
| Consumer                               |       | 11,698    |          | 8,714      |       |
| Farmland                               |       | 2,498     |          | 1,468      |       |
| **Total Loans**                        | ** ** | **$**     | **2,313,931** | ** ** | **$**      | **1,951,962** | ** ** |
| Less unearned income                   |       | 4,370     |          | 4,961      |       |
| Less allowance for loan losses         |       | 36,475    |          | 22,260     |       |
| **Loans, net**                         | ** ** | **$**     | **2,273,086** | ** ** | **$**      | **1,924,741** | ** ** |

 

As of December 31,2008 and 2007, there were $2.4 million and $1.4 million, respectively, inchecking account overdrafts that were reclassified on the consolidated balancesheets as loans.

 

**Note 4.  Allowance for LoanLosses**

 

An analysis of the allowancefor loan losses for the years ended December 31, 2008, 2007 and 2006 isshown below (dollars in thousands):

 
| ** **                        | ** ** | **2008** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Allowance, at beginning of period |       | $        | 22,260     |       | $          | 18,101     |       | $ | 13,821 |   |
| Provision charged against income  |       | 25,378   |       | 4,340      |       | 4,406      |       |
| Recoveries added to reserve       |       | 158      |       | 31         |       | 63         |       |
| Losses charged to reserve         |       | (11,321  | )          | (212       | )          | (189       | )          |
| **Allowance, at end of period**   | ** ** | **$**    | **36,475** | ** ** | **$**      | **22,260** | ** ** | **$** | **18,101** | ** ** |

 

44

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Information about impairedloans as of and for the years ended December 31, 2008, 2007 and 2006, isas follows (dollars in thousands):

 
| ** **                                                                        | ** ** | **2008** | ** **  | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|-------------|------------|------------|------------|------------|
| Non-accrual loans for which a specific  allowance has been provided               |       | $        | 74,843      |       | $          | 3,826      |       | $ | 1,944 |   |
| Non-accrual loans for which no specific  allowance has been provided              |       | 36,391   |        | —     |       | 1,976      |       |
| Other impaired loans for which a specific  allowance has been provided            |       | 14,515   |        | 15,232     |       | 11,465     |       |
| Other impaired loans for which no specific  allowance has been provided           |       | 34,794   |        | 212        |       | 154        |       |
| **Total impaired loans**                                                          | ** ** | **$**    | **160,543** | ** ** | **$**      | **19,270** | ** ** | **$** | **15,539** | ** ** |
| Allowance provided for impaired loans,  included in the allowance for loan losses |       | 17,614   |        | 1,228      |       | 507        |       |
| Average balance in impaired loans                                                 |       | $        | 92,062      |       | $          | 17,404     |       | $ | 11,090 |   |
| Interest income recognized                                                        |       | $        | 2,932       |       | $          | 934        |       | $ | 871 |   |

 

There were $6.1 million and$579 thousand in loans past due 90 days or more, and still accruing interest atDecember 31, 2008 and 2007, respectively, not classified as impairedloans. There were no loans past due 90 days or more and still accruing interestat December 31, 2006.

 

**Note 5.Bank Premises and Equipment, Net**

 

Premises and equipment arestated at cost less accumulated depreciation at December 31, 2008 and2007, as follows (dollars in thousands):

 
| ** **                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                            |       | $        | 1,839      |     | $          | 1,839 |   |
| Buildings                                       |       | 2,316    |       | 2,300    |       |
| Furniture, fixtures and equipment               |       | 14,814   |       | 13,118   |       |
| Leasehold improvements                          |       | 7,985    |       | 6,344    |       |
| Construction in progress                        |       | 2,110    |       | 875      |       |
| Total cost                                      |       | $        | 29,064     |     | $          | 24,476 |   |
| Less accumulated depreciation and  amortization |       | 14,324   |       | 11,771   |       |
| Net premises and equipment                      |       | $        | 14,740     |     | $          | 12,705 |   |

 

Depreciation andamortization expense on premises and equipment amounted to $2.6 million, $2.0million and $1.4 million in 2008, 2007 and 2006, respectively.

 

**Note 6.Time Deposits**

 

The aggregate amount of timedeposits with a minimum denomination of $100 thousand each was approximately$547.7 million and $572.5 million at December 31, 2008 and 2007,respectively. The Bank obtains certain deposits through the efforts ofthird-party brokers.  At December 31,2008 and 2008, brokered deposits totaled $168.3 million and $49.3 million,respectively and were included in time deposits on the Bank’s balancesheets.  Scheduled maturities of all timedeposits at December 31, 2008, are as follows (dollars in thousands):

 
|   | 2009   |   |       |   | $       | 1,218,157     |       |
|--------|--------|--------|------------|--------|---------|---------------|------------|
|   | 2010   |   |       |   | 162,228 |          |
|   | 2011   |   |       |   | 38,374  |          |
|   | 2012   |   |       |   | 27,535  |          |
|   | 2013   |   |       |   | 13,003  |          |
|   |   |   | ** ** |   | **$**   | **1,459,297** | ** ** |

 

45

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**Note 7.Securities Sold Under Agreements To Repurchase and Federal Funds Purchased**

 

Securitiessold under agreements to repurchase, which are classified as securedborrowings, represent both funds of significant commercial demand depositcustomers, which mature one day from the transaction date, and securedtransactions with other banks. As of December 31, 2008, the Company had$101 million in funds from customers and $75 million in funds from other banks.Of this $75 million, $25 million matures on March 22, 2014, and $50million matures on May 2, 2018. Both of these transactions are callable bythe other bank on any quarterly interest payment date.  At December 31, 2007, customers fundswere $125 million and the same $75 million in funds from other banks wereoutstanding. Securities sold under agreements to repurchase are reflected atthe amount of cash received and are collateralized by securities in the Company’sinvestment securities portfolio.  As of December 31,2008 and 2007 there were $12 million and $22 million in Federal fundspurchased, respectively.

 

**Note 8.Income Taxes**

 

The Company files income tax returns in the U.S. federal jurisdictionand the state of Virginia.  With fewexceptions, the Company is no longer subject to U.S. federal and state incometax examinations by tax authorities for years prior to 2005.

 

The Company adopted the provisions of FIN 48, “Accounting forUncertainty in Income Taxes”, on January 1, 2007 with no impact on thefinancial statements.

 

Net deferred tax assetsconsist of the following components at December 31, 2008 and 2007 (dollarsin thousands):

 
| ** **                            | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|
| **Deferred tax assets:**              |       |     |       |       |       |
| Allowance for loan losses             |       | $        | 12,766     |       | $          | 7,918 |   |
| Bank premises and equipment           |       | 648      |       | 454        |       |
| Securities available-for-sale         |       | 390      |       | —     |       |
| Accrued rents                         |       | 283      |       | 171        |       |
| Deferred compensation                 |       | 223      |       | 183        |       |
| Non-accrual loans                     |       | 109      |       | 49         |       |
| OREO                                  |       | 65       |       | —     |       |
| Non-qualified incentive stock options |       | 55       |       | 21         |       |
|                                  |       | $        | 14,539     |       | $          | 8,796 |   |
| **Deferred tax liabilities:**         |       |     |       |       |       |
| Securities available-for-sale         |       | —   |       | 651        |       |
| Federal Home Loan Bank stock          |       | 2        |       | 2          |       |
| ** **                            |       | $        | 2          |       | $          | 653 |   |
| **Net deferred tax assets**           | ** ** | **$**    | **14,537** | ** ** | **$**      | **8,143** | ** ** |

 

The provision for income taxand its components for the years ending December 31, 2008, 2007, and 2006are as follows (dollars in thousands):

 
| **December 31,** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Current tax expense   |       | $        | 11,584     |     | $          | 15,306   |       | $ | 14,505 |   |
| Deferred tax benefit  |       | (5,353   | )          | (2,087   | )          | (1,580   | )          |
|                  |       | $        | 6,231      |     | $          | 13,219   |       | $ | 12,925 |   |

 

The income tax provisiondiffers from the amount of income tax determined by applying the U.S. Federalincome tax rate to pretax income from continuing operations for the years endedDecember 31, 2008, 2007 and 2006, due to the following (dollars inthousands):

 

46

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| **December 31,**                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed “expected” tax expense at 35%     |       | $        | 6,760      |     | $          | 13,652   |       | $ | 13,101 |   |
| Increase (decrease) in income taxes  resulting from: |       |     |       |     |       |     |       |
| Nondeductible expense                                |       | 337      |       | 274      |       | 53       |       |
| Nontaxable income                                    |       | (866     | )          | (707     | )          | (229     | )          |
|                                                 |       | $        | 6,231      |     | $          | 13,219   |       | $ | 12,925 |   |

 

**Note 9.Earnings Per Common Share**

 

The following shows theweighted average number of shares used in computing earnings per share and theeffect on the weighted average number of shares of diluted potential commonstock. For the years reported, the weighted average number of shares have beenadjusted to give effect to stock dividends and splits.  Potential dilutive common stock had no effecton income available to common stockholders.

 
| ** **                            | ** ** | **2008**   | ** ** | **2007**                       | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **                            | ** ** | **Shares** | ** ** | **Per  Common  Share  Amount** | ** ** | **Shares** | ** ** | **Per  Common  Share  Amount** | ** ** | **Shares** | ** ** | **Per  Common  Share  Amount** | ** ** |
| **Basic earnings per common share**   |       | 26,555,484 |       | $                              | 0.48       |       | 26,323,242 |   | $ | 0.98 |   | 25,960,838 |   | $ | 0.95 |   |
| Effect of dilutive securities:        |       |       |       |                           |       |       |       |   |   |   |   |   |   |
| Stock options and warrants            |       | 694,355    |       |                           |       | 1,055,962  |       |   |   | 1,488,916 |   |   |   |
| **Diluted earnings per common share** |       | 27,249,839 |       | $                              | 0.47       |       | 27,379,204 |   | $ | 0.95 |   | 27,449,754 |   | $ | 0.89 |   |

 

Stock options for 1,034,458, 588,049 and 189,244 shares of common stockwere not included in computing diluted earnings per share in 2008, 2007 and2006, respectively, because their effects were anti-dilutive. Warrants for1,500,000 shares of common stock were not included in computing earnings pershare in 2008 because their effects were also anti-dilutive.

 

#### **Note 10. Commitments and Contingencies**

 

The Companyleases office space for twenty-four of its branch locations, its operations,mortgage lending, and construction lending departments and has entered into alease for one additional branch location to be opened in January 2010.These non-cancellable agreements, which expire through December 2032, insome instances require payment of certain operating charges. Generally, allleases contain renewal options of one to three additional five-year terms.  The total minimum lease commitment, adjustedfor the effect of annual fixed increases or the Consumer Price Index, at December 31,2008, is $36.0 million, due as follows (dollars in thousands):

 
| **Due in the year ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                  |       | 2009       |       | $          | 3,960      |   |
|                                                                  |       | 2010       |       | 4,101      |       |
|                                                                  |       | 2011       |       | 3,506      |       |
|                                                                  |       | 2012       |       | 3,676      |       |
|                                                                  |       | 2013       |       | 3,472      |       |
|                                                                  |       | Thereafter |       | 17,297     |       |
|                                                                       |            |            |            |            |            |  |

 

The total lease expense was $4.2 million, $3.1 millionand $2.5 million in 2008, 2007 and 2006, respectively. In the normal course ofbusiness, the Company makes various commitments and incurs certain contingentliabilities that are not presented in the accompanying financialstatements.  The Company does notanticipate any material losses as a result of the commitments and contingentliabilities.

 

47

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#### **Note 11. Loans to Officers and Directors**

#### ** **

Officers,directors and/or their related business interests are loan customers in theordinary course of business.  Inmanagement’s opinion, these loans are made on substantially the same terms as thoseprevailing at the time for comparable loans with other persons and do notinvolve more than normal risk of collectibility or present other unfavorablefeatures.  The aggregate amountoutstanding on such loans at December 31, 2008 and 2007, was $22.8 millionand $20.2 million, respectively. During 2008, new loans and advances amountedto $11.1 million and repayments of $8.5 million were made.

 

**Note 12.Stock Option Plan**

 

The Company’s current plan,adopted May 29, 1998, and amended and restated in April 2007, is aqualified Incentive Stock Option Plan, that is shareholder approved, andprovides for the granting of options to purchase up to 2,377,158 shares ofcommon stock at a price to be determined by the Board of Directors at the dateof grant, but in any event no less than 100% of the fair market value. Optionsoutstanding prior to May 29, 1998 were granted under the Company’s planadopted in 1988 which was replaced by the current plan. Options are awarded toemployees and the Board of Directors of the Company at the discretion of theBoard of Directors, and expire no more than ten years from the grant date.Options granted under the current plan, through December 31, 2002, vestedover three years, while options granted since December 31, 2002, vested overfive years.

 

Included in salaries and employee benefits expense for the twelvemonths ended December 31, 2008, is $597 thousand of stock-basedcompensation expense which is based on the estimated fair value of 528,115options granted between January 2006 and December 2008, amortized ona straight-line basis over a five year requisite service period. As of December 31,2008, there was $1.8 million remaining of total unrecognized compensationexpense related to these option awards which will be recognized over theremaining requisite service period. There was $427 thousand and $257 thousandin stock option expense in 2007 and 2006, respectively.

 

The fair value of each grant is estimated at the grant date using theBlack-Scholes option-pricing model and using the assumptions noted in thefollowing table. Expected volatility is based on the historical volatility ofthe Company’s stock and the risk-free rate is based on the U.S. Treasury yieldcurve in effect at the time of grant. During 2006, the Company took intoconsideration guidance under SFAS 123(R) and SEC Staff Accounting BulletinNo. 107 (“SAB 107”) when reviewing and updating assumptions.  The weighted average expected option term for2006 and 2007 reflects the application of the simplified method set out in SAB107, which defines the life as the average of the contractual term of theoptions and the weighted average vesting period for all option tranches.  For 2008, the Company used a 7.2 yearexpected term based on analysis of past exercise behaviors.

 
| ** **               | ** ** | **2008**       | ** ** | **2007**       | ** ** | **2006**       | ** ** |
|--------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Expected volatility      |       | 23.14%         |       | 23.59%         |       | 21.91%         |       |
| Expected dividends       |       | .00%           |       | .00%           |       | .00%           |       |
| Expected term (in years) |       | 7.2            |       | 7.5            |       | 7.5            |       |
| Risk-free rate           |       | 2.53% to 3.80% |       | 3.70% to 4.93% |       | 4.42% to 4.75% |       |

 

A summary of option activityunder the plan as of December 31, 2008, and changes during the year thenended is presented below:

 
| **Options**                           | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at December 31, 2007 |       | 2,000,505                  |       | $                                       | 7.13       |                                                 |       |                                    |       |   |
| Granted                               |       | 233,031                    |       | 10.37                                   |       |                                                 |       |                                    |       |
| Exercised                             |       | (150,719                   | )          | 1.78                                    |       |                                                 |       |                                    |       |
| Forfeited                             |       | (47,359                    | )          | 14.24                                   |       |                                                 |       |                                    |       |
| Outstanding at December 31, 2008 |       | 2,035,458                  |       | 7.73                                    |       | 4.7 years                                            |       | $                                       | —     |   |
| Exercisable at December 31, 2008 |       | 1,577,821                  |       | 6.13                                    |       | 3.6 years                                            |       | $                                       | —     |   |
|                                       |            |                            |            |                                         |            |                                                      |            |                                         |            |  |  |

 

48

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The weighted-average grant date fair value of options granted duringthe years 2008, 2007 and 2006 was $3.78, $6.74 and $7.70, respectively. Thetotal intrinsic value of options exercised during the years ended December 31,2008, 2007 and 2006, was $927 thousand, $4.3 million and $8.8 million,respectively.

 

A furthersummary about the options outstanding and exercisable at December 31, 2008is provided in the following table:

 
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**     | ** ** |
|-----------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number  Outstanding**      | ** ** | **Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $1.00 to $2.31                          |       | 551,325                      |       | 1.2 years                        |       | $ | 1.47 |   | 551,325 |   | 1.3 years |   | $ | 1.47 |   |
| $2.80 to $5.46                          |       | 461,175                      |       | 3.7 years                        |       | 3.69 |   | 449,675 |   | 3.6 years |   | 3.66 |   |
| $5.47 to $7.82                          |       | 6,670                        |       | 5.2 years                        |       | 6.90 |   | 5,670 |   | 4.4 years |   | 6.83 |   |
| $7.83 to $21.59                         |       | 1,016,288                    |       | 7.0 years                        |       | 12.96 |   | 571,151 |   | 6.0 years |   | 12.55 |   |
| **$1.00 to $21.59**                     | ** ** | **2,035,458**                | ** ** | **4.7 years**                    | ** ** | **$** | **7.73** | ** ** | **1,577,821** | ** ** | **3.6 years** | ** ** | **$** | **6.13** | ** ** |

 

All options granted, availableunder the current Plan, and exercisable have been adjusted for givingretroactive effect to a 10% stock dividend in May 2008. In January 2009,a total of 136,709 options were granted to sixty-four officers and six outsidedirectors of the Company at an exercise price of $4.31 per share and with afive year vesting period.

 

In September 2003, theCompany adopted an Employee Stock Purchase Plan. Under the plan a total of387,400 shares of common stock, as adjusted for stock dividends and splits,were reserved for issuance to eligible employees at a price equal to at least85% of the fair market value of the shares of common stock on the date ofgrant. Grants each year expire at the end of that fiscal year if not exercisedby the employee. On January 11, 2006, rights to purchase 39,906 shares ofcommon stock were granted at a price of $15.67, as adjusted, which was equal to85% of the fair market value of the shares at that time.  Of the total grant, 14,591 shares werepurchased. On January 16, 2007, rights to purchase 59,456 shares of commonstock were granted at a price of $13.59, as adjusted, which was equal to 85% ofthe fair market value of the shares at that time.  Of the total grant, 2,219 shares werepurchased.  On February 27, 2008,rights to purchase 115,498 shares of common stock were granted at a price of$8.70, as adjusted, which was equal to 85% of the fair market value of theshares at that time.  Of the total grant,399 shares were purchased.

 

Included in salaries andemployee benefits expense for the twelve months ended December 31, 2008,2007 and 2006, is $1 thousand, $6 thousand and $40 thousand, respectively ofstock-based compensation expense related to the 15% discount on the 399 sharespurchased by Company employees in 2008, the 2,219 shares purchased in 2007, andthe 14,591 shares purchased in 2006.  On January 28,2009, rights to purchase 339,881 shares of common stock were granted at a priceof $3.45, which was equal to 85% of the fair market value of the shares at thattime.

 

**Note 13.Director Compensation Plan**

 

The outside Directors, havebeen awarded a total of 21,780, 17,820 and 39,600 options under the Company’s1998 Incentive Option Plan in 2006, 2007 and 2008 respectively, as adjusted forall stock splits and or stock dividends through 2008. In January 2009,each of the outside Directors were awarded an additional 3,000 options. Alldirector options are included in the tables under Note 12.

 

**Note 14.Other Borrowed Funds and Lines of Credit**

 

The Bank maintains a $398.9million line of credit with the Federal Home Loan Bank of Atlanta.  The interest rate and term of each advancefrom the line is dependent upon the advance and commitment type.  Advances on the line are secured by all ofthe Bank’s qualifying first liens and home equity lines-of-credit, onone-to-four unit single-family dwellings. As of December 31, 2008, the book value of these qualifying loanstotaled approximately $191.1 million and the amount of available credit usingthis collateral was $117.6 million. Advances on the line of credit in excess ofthis amount require pledging of additional assets, including other types of loansand investment securities. As of December 31, 2008 and 2007, the Bank had$25 million in advances outstanding that mature on September 21, 2012, butare callable by the Federal Home Loan Bank on any quarterly interest paymentdate. The Bank has 

 

49

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additional short-term lines of credit totaling $97million with nonaffiliated banks at December 31, 2008, on which $12million was outstanding at that date.

 

**Note 15. Trust Preferred Capital Notes**

 

On November 13, 2002, the Companycompleted a private placement issuance of $3.0 million of trust preferredsecurities through a newly formed, wholly-owned, subsidiary trust (VCBI CapitalTrust I) which issued $100 thousand in common equity to the Company.  The securities were redeemed in November 2007.  On December 19, 2002, the Companycompleted a private placement issuance of $15.0 million of trust preferredsecurities through a newly formed, wholly-owned, subsidiary trust (VCBI CapitalTrust II) which issued $470 thousand in common equity to the Company. Thesesecurities bear a floating rate of interest, adjusted semi-annually, of 330basis points over six month Libor, currently 5.13%. These securities arecallable at par beginning December 30, 2007, on any semi-annual interestpayment date, but have not been redeemed to date. On December 20, 2005,the Company completed a private placement of $25.0 million of trust preferredsecurities through a newly formed, wholly-owned, subsidiary trust (VCBI CapitalTrust III) which issued $774 thousand in common equity to the Company. Thesesecurities bear a fixed rate of interest of 6.19% until February 23, 2011,at which time they convert to a floating rate, adjusted quarterly, of 142 basispoints over three month Libor. These securities are callable at par beginning February 23,2011.

 

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

 

The principal asset of each trust is a similar amount of the Company’sjunior subordinated debt securities with an approximately 30 year term fromissuance and like interest rates to the trust preferred securities. Theobligations of the Company with respect to the trust preferred securitiesconstitute a full and unconditional guarantee by the Company of each Trust’sobligations with respect to the trust preferred securities to the extent setforth in the related guarantees. Subject to certain exceptions and limitations,the Company may elect from time to time to defer interest payments on thejunior subordinated debt securities, resulting in a deferral of distributionpayments on the related trust preferred securities. If the Company defersinterest payments on the junior subordinated debt securities, or otherwise isin default of the obligations in respect to the trust preferred securities, theCompany would be prohibited from making dividend payments to its shareholders,and from most purchases, redemptions or acquisitions of the Company’s commonstock.

 

The Trust Preferred Securities may be included in Tier 1 capital forregulatory capital adequacy purposes up to 25.0% of Tier 1 capital after itsinclusion. The portion of the trust preferred securities not qualifying as Tier1 capital may be included as part of total qualifying capital in Tier 2capital.  Commencing March 31, 2009,the aggregate amount of qualifying trust preferred securities which may beincluded in Tier 2 capital, along with other restricted core capital elements,is limited to 50% of Tier 1 capital, net of goodwill and certain otherintangible assets.

 

50

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**Note 16. Financial Instruments WithOff-Balance-Sheet Risk**

 

The Company isparty to financial instruments with off-balance-sheet risk in the normal courseof business to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit, standby letters of credit and financialguarantees.  These instruments involve,to varying degrees, elements of credit and interest rate risk in excess of theamount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extentof involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit and standby letters of credit andfinancial guarantees written is represented by the contractual or notionalamount of those instruments.  The Companyuses the same credit policies in making commitments and conditional obligationsas it does for on-balance-sheet instruments.

 

A summary of the contract or notional amount of theCompany’s exposure to off-balance-sheet risk as of December 31, 2008 and2007, is as follows:

 
| **(Dollars in thousands)**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Financial instruments whose contract  amounts represent credit risk: |       |     |       |     |       |
| Commitments to extend credit                                         |       | $        | 13,083     |     | $          | 104,480 |   |
| Standby letters of credit and financial  guarantees written          |       | $        | 68,060     |     | $          | 53,734 |   |
| Unfunded lines of credit                                             |       | $        | 489,307    |     | $          | 543,714 |   |

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.  The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Companyupon extension of credit, is based on management’s credit evaluation of thecustomer.  Collateral held varies but mayinclude cash, marketable securities, accounts receivable, inventory, propertyand equipment, residential real estate, and income-producing commercialproperties.

 

Standby letters of credit andfinancial guarantees written are conditional commitments issued by the Companyto guarantee the performance of a customer to a third party.  Those guarantees are primarily issued tosupport public and private borrowing arrangements, including commercial paper,bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan facilities to customers.  The Company holds certificates of deposit,marketable securities, and business assets as collateral supporting thosecommitments for which collateral is deemed necessary.

 

The Company originates mortgageloans for sale to secondary market investors subject to contractually specifiedand limited recourse provisions. In 2008, the Company originated $80.6 millionand sold $79.6 million to investors, compared to $158.0 million originated and$160.2 million sold in 2007. Most contracts with investors contain certainrecourse language that may vary from 90 days up to one year. In general, thecompany may be required to repurchase a previously sold mortgage loan orindemnify the investor if there is major non-compliance with defined loanorigination or documentation standards, including fraud, negligence or materialmisstatement in the loan documents. Repurchase may also be required ifnecessary governmental loan guarantees are canceled or never issued, or if aninvestor is forced to buy back a loan after it has been re-sold as part of aloan pool. In addition, the Company may have an obligation to repurchase a loanif the mortgagor has defaulted early in the loan term. The potential defaultperiod is approximately twelve months after sale of the loan to the investor.Mortgages subject to recourse are collateralized by single-family residentialproperties, have loan-to-value ratios of 80% or less, or have private mortgageinsurance or are insured or guaranteed by an agency of the United Statesgovernment.

 

At December 31, 2008, theBank had rate lock commitments to originate and sell mortgage loans amountingto $11.3 million. Risks arise from the possible inability of counterparties tomeet the terms of their contracts. The Bank does not expect any counterparty tofail to meet its obligation.

 

51

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**Note 17.Concentrations of Credit Risk**

 

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

 

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

 

At December 31, 2008 and2007, there were $1.66 billion and $1.44 billion, or 71.9% and 73.7%,respectively of total loans concentrated in commercial real estate. Commercialreal estate for purposes of this note includes all construction loans, loanssecured by 5+ family residential properties and loans secured by non-farm,non-residential properties. At December 31, 2008 and 2007, constructionloans represented 25.3% and 27.9% of total loans, loans secured by 5+ familyresidential properties represented 2.9%, and loans secured by non-farm,non-residential properties represented 43.7% and 42.8%, respectively.  Construction loans at December 31, 2008and 2007 included $296.3 million and $302.4 million in loans to commercialbuilders of single family housing in the Northern Virginia market, representing12.8% and 15.5% of total loans, respectively.

 

The Bank has established formalpolicies relating to the credit and collateral requirements in loanoriginations including policies that establish limits on various loan types asa percentage of total loans and total capital. Loans to purchase real property are generally collateralized by therelated property with limitations based on the property’s appraised value.Credit approval is primarily a function of collateral and the evaluation of thecreditworthiness of the individual borrower, guarantors and or the individualproject. Management considers the concentration of credit risk to be minimaldue to the diversification of borrowers over numerous business and industries.

 

**Note 18.Fund Restrictions and Reserve Balance**

 

The transfer of funds from theBank to the Company in the form of loans, advances, and cash dividends arerestricted by Federal and State regulatory authorities. As of December 31,2008, the aggregate amount of unrestricted funds that could be transferred inthe form of a cash dividend totaled approximately $63.4 million, or 25.0%, ofthe consolidated net assets of the Company.

 

As members ofthe Federal Reserve System, the Company is required to maintain certain averagereserve balances.  For the final weeklyreporting period in the years ended December 31, 2008 and 2007, theaggregate amounts of daily average required balances were approximately****$4.0 million and $3.5 million,****respectively.

 

**Note19.  Employee Benefits**

 

The Company has a 401(k) definedcontribution plan covering substantially all full-time employees and providesthat an employee becomes eligible to participate at the date he or she hasreached the age of 21 and has completed three months of service, whicheveroccurs last.  Under the plan, aparticipant may contribute up to 15% of his or her covered compensation for theyear, subject to certain limitations. The Company may also make, but is not required to make, a discretionarycontribution for each participant out of its current or accumulated netprofits.  The amount of contribution, ifany, is determined on an annual basis by the Board of Directors.  Contributions made by the Company totaled$737 thousand, $526 thousand and $347 thousand for the years ended December 31,2008, 2007 and 2006, respectively.

 

**Note20.  Fair Value Measurements**

 

The Company**adopted SFAS No. 157,“Fair Value Measurements” (“SFAS 157”), on January 1, 2008, to record fairvalue adjustments to certain assets and liabilities and to determine fair valuedisclosures. SFAS 157 clarifies that fair value of certain assets andliabilities is an exit price, representing the amount that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants.

 

In February of 2008, the FASB issued Staff Position No. 157-2(“FSP 157-2”) which delayed the effective date of SFAS 157 for certainnonfinancial assets and nonfinancial liabilities except for those items thatare recognized or 

 

52

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disclosed at fair value in the financial statements on a recurringbasis. FSP 157-2 defers the effective date of SFAS 157 for such nonfinancialassets and nonfinancial liabilities to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. Thus, the Company has onlypartially applied SFAS 157. Those items affected by FSP 157-2 include otherreal estate owned (“OREO”), goodwill and core deposit intangibles.

 

In October of 2008, the FASB issued Staff Position No. 157-3(“FSP 157-3”) to clarify the application of SFAS 157 in a market that is notactive and to provide key considerations in determining the fair value of afinancial asset when the market for that financial asset is not active. FSP157-3 was effective upon issuance, including prior periods for which financialsstatements were not issued.

 

SFAS 157 specifies a hierarchy of valuation techniques based on whetherthe inputs to those valuation techniques are observable or unobservable.Observable inputs reflect market data obtained from independent sources, whileunobservable inputs reflect the Company’s market assumptions. The three levelsof the fair value hierarchy under SFAS 157 based on these two types of inputsare as follows:

 
| Level 1 — | Valuation is based on quoted prices in active markets for identical  assets and liabilities.                                                                                                                                                                                                                                                                           |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                                   |
| Level 2 — | Valuation is based on observable inputs including quoted prices in  active markets for similar assets and liabilities, quoted prices for  identical or similar assets and liabilities in less active markets, and  model-based valuation techniques for which significant assumptions can be  derived primarily from or corroborated by observable data in the market. |
|           |                                                                                                                                                                                                                                                                                                                                                                   |
| Level 3 — | Valuation is based on model-based techniques that use one or more  significant inputs or assumptions that are unobservable in the market.                                                                                                                                                                                                                              |

 

The following describes the valuation techniques used by the Company tomeasure certain financial assets and liabilities recorded at fair value on arecurring basis in the financial statements:

 

Securities available for sale: Securities availablefor sale are recorded at fair value on a recurring basis. Fair valuemeasurement is based upon quoted market prices, when available (Level 1). Ifquoted market prices are not available, fair values are measured utilizingindependent valuation techniques of identical or similar securities for whichsignificant assumptions are derived primarily from or corroborated byobservable market data. Third party vendors compile prices from various sourcesand may determine the fair value of identical or similar securities by usingpricing models that considers observable market data (Level 2).

 

The following table presents the balances of financial assets andliabilities measured at fair value on a recurring basis as of December 31,2008.  Securities identified in Note 2 asrestricted securities including stock in the Federal Reserve Bank (“FRB”),Federal Home Loan Bank of Atlanta (“FHLB”) and Community Bankers Bank (“CBB”)are excluded from the table below since there is no ability to sell thesesecurities except when the FRB, FHLB  orCBB require redemptions based on certain portions of our capital.

 
| ** **                    | ** ** | ** **                  | ** ** | **Fair Value Measurements at December 31, 2008 Using** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | ** **                  | ** ** | **Quoted Prices**                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                  | ** ** | **in Active**                                                                        | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                  | ** ** | **Markets for**                                                                      | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                    | ** ** | **Balance as of** | ** ** | **Identical**                                                                             | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                    | ** ** | **December 31,**       | ** ** | **Assets**                                                                                | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**               | ** ** | **2008**                    | ** ** | **(Level 1)**                                                                        | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Assets:                       |       |                        |       |                                                                                      |       |   |   |   |   |
| Available-for-sale securities |       | $                           | 268,836    |                                                                                      | $          | — |   | $ | 268,836 |   | $ | — |   |
|                               |            |                             |            |                                                                                           |            |  |  |  |  |  |  |  |  |

 

Certain financial assets are measured at fair value on a nonrecurringbasis in accordance with GAAP. Adjustments to the fair value of these assetsusually result from the application of lower-of-cost-or-market accounting orwrite-downs of individual assets.

 

53

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The following describes the valuation techniques used by the Company tomeasure certain financial assets recorded at fair value on a nonrecurring basisin the financial statements:

 

Loans held for sale: Loans held for sale arecarried at the lower of cost or market value. These loans currently consist ofone-to-four family residential loans originated for sale in the secondarymarket. Fair value is based on the price secondary markets are currentlyoffering for similar loans using observable market data which is not materiallydifferent than cost due to the short duration between origination and sale(Level 2). As such, the Company records any fair value adjustments on anonrecurring basis. No nonrecurring fair value adjustments were recorded onloans held for sale during the year ended December 31, 2008. Gains andlosses on the sale of loans are recorded within income from mortgage banking onthe Consolidated Statements of Income.

 

Impaired Loans: Loans are designated asimpaired when, in the judgment of management based on current information andevents, it is probable that all amounts due according to the contractual termsof the loan agreement will not be collected. The measurement of loss associatedwith impaired loans can be based on either the observable market price of theloan or the fair value of the collateral. Fair value is measured based on thevalue of the collateral securing the loans. Collateral may be in the form ofreal estate or business assets including equipment, inventory, and accountsreceivable. The vast majority of the collateral is real estate. The value ofreal estate collateral is determined utilizing an income or market valuationapproach based on an appraisal conducted by an independent, licensed appraiseroutside of the Company using observable market data (Level 2). However, if thecollateral is a house or building in the process of construction or if anappraisal of the real estate property is over two years old, then the fairvalue is considered Level 3. The value of business equipment is based upon anoutside appraisal if deemed significant, or the net book value on theapplicable business’ financial statements if not considered significant usingobservable market data. Likewise, values for inventory and accounts receivablescollateral are based on financial statement balances or aging reports (Level3). Impaired loans are measured at fair value on a nonrecurring basis throughthe allowance for loan losses.  Any fairvalue adjustments are recorded in the period incurred as provision for loanlosses on the Consolidated Statements of Income.

 

The following table summarizes the**Company’sfinancial assets that were measured at fair value on a nonrecurring basisduring the period.

 
| ** **      | ** ** | ** **                  | ** ** | ** **                                                       | ** ** | ** **      | ** ** | ** **       | ** ** |
|-----------------|------------|-----------------------------|------------|------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **      | ** ** | ** **                  | ** ** | **Carrying value at December 31, 2008** | ** ** |
| ** **      | ** ** | ** **                  | ** ** | **Quoted Prices**                                           | ** ** | ** **      | ** ** | ** **       | ** ** |
| ** **      | ** ** | ** **                  | ** ** | **in Active**                                               | ** ** | **Significant** | ** ** | ** **       | ** ** |
| ** **      | ** ** | ** **                  | ** ** | **Markets for**                                             | ** ** | **Other**       | ** ** | **Significant**  | ** ** |
| ** **      | ** ** | **Balance as of** | ** ** | **Identical**                                                    | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** |
| ** **      | ** ** | **December 31,**       | ** ** | **Assets**                                                       | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** |
| **Description** | ** ** | **2008**                    | ** ** | **(Level 1)**                                                    | ** ** | **(Level 2)**   | ** ** | **(Level 3)**    | ** ** |
|            |       |                        |       |                                                             |       |            |       |             |       |
| Assets:         |       |                        |       |                                                             |       |            |       |             |       |
| Impaired Loans  |       | $                           | 71,744     |                                                             | $          | —          |       | $                | 63,615     |   | $ | 8,129 |   |
|                 |            |                             |            |                                                                  |            |                 |            |                  |            |  |  |  |  |

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate that value:

 

**Cash andShort-Term Investments**

 

For those short-terminstruments, the carrying amount is a reasonable estimate of fair value.

 

**Securities**

 

For securities held forinvestment purposes, fair values are based upon quoted market prices, whenavailable. If quoted market prices are not available, fair values are measuredutilizing independent valuation techniques of identical or similar securitiesfor which significant assumptions are derived primarily from or corroborated byobservable market data. Third party vendors compile prices from various sourcesand may determine the fair value 

 

54

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of identical or similarsecurities by using pricing models that considers observable market data. Thecarrying value of restricted stock approximates fair value based on theredemption provisions of the issuers.

 

**LoansHeld-for-Sale**

 

Fair value is based on theprice secondary markets are currently offering for similar loans usingobservable market data which is not materially different than cost due to theshort duration between origination and sale.

 

**LoanReceivables**

 

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

 

**Depositsand Borrowings**

 

The fair value of demanddeposits, savings accounts, and certain money market deposits is the amountpayable on demand at the reporting date. For all other deposits and borrowings, the fair value is determinedusing the discounted cash flow method. The discount rate was equal to the rate currently offered on similarproducts.

 

**AccruedInterest**

 

The carrying amounts of accruedinterest approximate fair value.

 

**Off-BalanceSheet Financial Instruments**

 

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

 

At December 31, 2008 and2007, the fair value of loan commitments and stand-by letters of credit weredeemed immaterial, and therefore, are not included in the table below.

 

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

 
| ** **                           | ** ** | **2008**             | ** ** | **2007**                       | ** ** |
|--------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| **Financial assets:**                |       |                 |       |                           |       |   |   |   |   |
| Cash and short-term investments      |       | $                    | 33,515     |                           | $          | 33,515 |   | $ | 35,341 |   | $ | 35,341 |   |
| Securities                           |       | 336,819              |       | 337,771                        |       | 326,237 |   | 326,314 |   |
| Loans held-for-sale                  |       | 6,221                |       | 6,221                          |       | 4,339 |   | 4,339 |   |
| Loans                                |       | 2,273,086            |       | 2,313,567                      |       | 1,924,741 |   | 2,015,487 |   |
| Accrued interest receivable          |       | 10,593               |       | 10,593                         |       | 11,451 |   | 11,451 |   |
|                                      |            |                      |            |                                |            |  |  |  |  |  |  |  |  |

 

55

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| ** **                                                                  | ** ** | **2008**             | ** ** | **2007**                       | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)**                                        | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| **Financial liabilities:**                                                  |       |                 |       |                           |       |   |   |   |   |
| Deposits                                                                    |       | $                    | 2,172,142  |                           | $          | 2,144,292 |   | $ | 1,869,165 |   | $ | 1,885,014 |   |
| Securities sold under agreements to  repurchase and federal funds purchased |       | 187,959              |       | 206,124                        |       | 222,534 |   | 225,530 |   |
| Other borrowed funds                                                        |       | 25,000               |       | 25,207                         |       | 25,000 |   | 24,977 |   |
| Trust preferred capital notes                                               |       | 65,800               |       | 95,016                         |       | 41,244 |   | 46,321 |   |
| Accrued interest payable                                                    |       | 8,160                |       | 8,160                          |       | 8,942 |   | 8,942 |   |
|                                                                             |            |                      |            |                                |            |  |  |  |  |  |  |  |  |

 

In the normal course ofbusiness, the Company is subject to market risk which includes interest raterisk (the risk that general interest rate levels will change).  As a result, the fair values of the Company’sfinancial instruments will change when interest rate levels change and thatchange may be either favorable or unfavorable to the Company. Managementattempts to match maturities of assets and liabilities to the extent believednecessary to minimize this risk.

 

**Note21.  Capital Requirements**

 

The Company(on a consolidated basis) and the Bank are subject to various regulatorycapital requirements administered by the Federal banking agencies. Failure tomeet minimum capital requirements can initiate certain mandatory, possiblyadditional discretionary, actions by regulators that, if undertaken, could havea direct material effect on the Company’s and Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet specific capital guidelines that involve quantitative measures oftheir assets, liabilities, and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors. Prompt corrective action provisions are not applicable to bank holdingcompanies.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in thetable below) of Total Capital, Tier 1 Capital and Tier 1 Leverage Capital.Total Capital and Tier 1 Capital ratios are in reference to risk-weightedassets (as defined), and the Tier 1 Leverage Capital ratio is in reference toaverage assets.  Management believes, asof December 31, 2008 and 2007, that the Company and Bank met all capitaladequacy requirements to which they are subject.

 

Asof December 31, 2008, the Bank is categorized as “well-capitalized” underthe regulatory framework for prompt corrective action.  To be categorized as “well-capitalized,” theBank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1leverage ratios as set forth in the table. There are no conditions or events since December 31, 2008 thatmanagement believes changed the Bank’s category. The Company’s and the Bank’sactual capital amounts and ratios are also presented in the table.

 
| **(Dollars in thousands)**             | ** ** | **Actual Capital** | ** ** | **Minimum Capital  Requirement*** | ** ** | **Minimum To Be Well-  Capitalized Under Prompt  Corrective Action Provisions** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **As of December 31, 2008:** | ** ** | **Amount**              | ** ** | **Ratio**                              | ** ** | **Amount**                                                                                                         | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Total Capital:**                               |       |                    |       |                                   |       |                                                                                                               |       |   |   |   |   |   |   |
| Company                                          |       | $                       | 347,910    |                                   | 14.44      | %                                                                                                                  | $          | 192,761 |   | 8.00 | % | $ | N/A |   | N/A |   |
| Bank                                             |       | 346,983                 |       | 14.41                                  | %          | 192,583                                                                                                            |       | 8.00 | % | 240,728 |   | 10.00 | % |
| **Tier 1 Capital:**                              |       |                    |       |                                   |       |                                                                                                               |       |   |   |   |   |   |   |
| Company                                          |       | $                       | 315,013    |                                   | 13.07      | %                                                                                                                  | $          | 96,380 |   | 4.00 | % | $ | N/A |   | N/A |   |
| Bank                                             |       | 316,892                 |       | 13.16                                  | %          | 96,291                                                                                                             |       | 4.00 | % | 144,437 |   | 6.00 | % |
| **Tier 1 Leverage Capital:**                     |       |                    |       |                                   |       |                                                                                                               |       |   |   |   |   |   |   |
| Company                                          |       | $                       | 315,013    |                                   | 11.76      | %                                                                                                                  | $          | 107,127 |   | 4.00 | % | $ | N/A |   | N/A |   |
| Bank                                             |       | 316,892                 |       | 11.81                                  | %          | 107,299                                                                                                            |       | 4.00 | % | 134,123 |   | 5.00 | % |

 

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| **(Dollars in thousands)**             | ** ** | **Actual Capital** | ** ** | **Minimum Capital  Requirement*** | ** ** | **Minimum To Be Well-  Capitalized Under Prompt  Corrective Action Provisions** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **As of December 31, 2007:** | ** ** | **Amount**              | ** ** | **Ratio**                              | ** ** | **Amount**                                                                                                         | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **Total Capital:**                               |       |                    |       |                                   |       |                                                                                                               |       |   |   |   |   |   |   |
| Company                                          |       | $                       | 230,194    |                                   | 10.96      | %                                                                                                                  | $          | 167,977 |   | 8.00 | % | $ | N/A |   | N/A |   |
| Bank                                             |       | 225,211                 |       | 10.73                                  | %          | 167,876                                                                                                            |       | 8.00 | % | 209,845 |   | 10.00 | % |
| **Tier 1 Capital:**                              |       |                    |       |                                   |       |                                                                                                               |       |   |   |   |   |   |   |
| Company                                          |       | $                       | 207,934    |                                   | 9.90       | %                                                                                                                  | $          | 83,989 |   | 4.00 | % | $ | N/A |   | N/A |   |
| Bank                                             |       | 162,951                 |       | 7.77                                   | %          | 83,938                                                                                                             |       | 4.00 | % | 125,907 |   | 6.00 | % |
| **Tier 1 Leverage Capital**                      |       |                    |       |                                   |       |                                                                                                               |       |   |   |   |   |   |   |
| Company                                          |       | $                       | 207,934    |                                   | 9.09       | %                                                                                                                  | $          | 91,504 |   | 4.00 | % | $ | N/A |   | N/A |   |
| Bank                                             |       | 162,951                 |       | 7.12                                   | %          | 91,489                                                                                                             |       | 4.00 | % | 114,432 |   | 5.00 | % |

 

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* The minimum capital requirement for the Company is a guideline.

 

**Note 22:Preferred Stock and Warrant**

 

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

 

The preferredstock pays dividends quarterly, beginning February 2009, at a rate of 5%per year for the first five years, then increases to 9% thereafter.  The Company may redeem the preferred stock atany time, subject to consultation with the Federal Reserve, at the liquidationamount of $1,000 per share plus any accrued and unpaid dividends.  Approval from the Treasury is required toincrease common stock dividends or to repurchase shares of the Company’s commonstock prior to December 12, 2011, unless the preferred stock has beenfully redeemed.

 

The warranthas a ten year term and is immediately exercisable.  However, the Treasury may only exercise ortransfer one-half of the warrant prior to the earlier of the date on which theCompany receives gross proceeds of not less than $71.0 million from qualifiedequity offerings on December 31, 2009. If gross proceeds of not less than $71.0 million are received fromqualified equity offerings prior to December 31, 2009, the number ofshares issuable upon exercise of the warrant will be reduced by one-half.  Pursuant to the terms of the Agreement, theTreasury will not exercise voting rights with respect to any shares of commonstock it acquires upon exercise of the warrant; voting rights may be exercisedby any other holder.

 

57

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**Note 23.Condensed Financial Statements of Parent Company**

 

**Balance Sheets** (in thousands)

 
| ** **                                          | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Assets:                                             |       |                            |       |                            |       |
| Cash and due from banks                             |       | $                               | 557        |                            | $          | 4,826 |   |
| Investment in subsidiaries                          |       | 318,187                         |       | 165,405                         |       |
| Subordinated debt of subsidiary                     |       | —                          |       | 40,000                          |       |
| Other assets                                        |       | 726                             |       | 336                             |       |
| **Total Assets**                                    |       | $                               | 319,470    |                            | $          | 210,567 |   |
| ** **                                          | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Liabilities and Stockholders’ Equity:          | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Trust preferred capital notes                       |       | $                               | 65,800     |                            | $          | 41,244 |   |
| Other liabilities                                   |       | 383                             |       | 180                             |       |
| Total Liabilities                                   |       | $                               | 66,183     |                            | $          | 41,424 |   |
| Stockholders’ Equity                           |       | $                               | 253,287    |                            | $          | 169,143 |   |
| **Total Liabilities and Stockholders’ Equity** |       | $                               | 319,470    |                            | $          | 210,567 |   |

 

**Statements Of Income** (in thousands)

 
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income,                                                                              |       |                                       |       |   |   |   |   |
| Interest on subordinated debt                                                        |       | $                                          | 1,441      |   | $ | 3,165 |   | $ | 3,097 |   |
| Expenses:                                                                            |       |                                       |       |   |   |   |   |
| Interest on trust preferred capital notes                                            |       | $                                          | 3,400      |   | $ | 3,099 |   | $ | 3,099 |   |
| Other operating expense                                                              |       | 1,364                                      |       | 1,086 |   | 888 |   |
| Total Expenses                                                                       |       | $                                          | 4,764      |   | $ | 4,185 |   | $ | 3,987 |   |
| Loss before income tax (benefit) and equity  in undistributed earnings of subsidiary |       | $                                          | (3,323     | ) | $ | (1,020 | ) | $ | (890 | ) |
| Income tax (benefit)                                                                 |       | (966                                       | )          | (186 | ) | (221 | ) |
|                                                                                 |       | $                                          | (2,357     | ) | $ | (834 | ) | $ | (669 | ) |
| Equity in undistributed earnings of  subsidiary                                      |       | 15,441                                     |       | 26,621 |   | 25,177 |   |
| Net Income                                                                           |       | $                                          | 13,084     |   | $ | 25,787 |   | $ | 24,508 |   |

 

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**Statements Of Cash Flows **(in thousands)

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash Flows from Operating Activities:                                          |       |                                       |       |   |   |   |   |
| Net Income                                                                     |       | $                                          | 13,084     |   | $ | 25,787 |   | $ | 24,508 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                                       |       |   |   |   |   |
| Equity in undistributed earnings of  subsidiary                                |       | (15,441                                    | )          | (26,621 | ) | (25,177 | ) |
| Stock option expense                                                           |       | 597                                        |       | 427 |   | 257 |   |
| (Increase) decrease in other assets                                            |       | (390                                       | )          | (226 | ) | 191 |   |
| Increase (decrease) increase in other  liabilities                             |       | 71                                         |       | (37 | ) | 133 |   |
| Net cash used in operating activities                                          |       | $                                          | (2,079     | ) | $ | (670 | ) | $ | (88 | ) |
| Cash Flows from Investing Activities:                                          |       |                                       |       |   |   |   |   |
| (Purchase) retirement of equity interest in  subsidiary                        |       | (74,275                                    | )          | 100 |   | — |   |
| (Purchase) retirement of debt securities                                       |       | (25,000                                    | )          | 3,000 |   | — |   |
| Net cash provided by (used in) investing  activities                           |       | $                                          | (99,275    | ) | $ | 3,100 |   | $ | — |   |
| Cash Flows from Financing Activities:                                          |       |                                       |       |   |   |   |   |
| Net increase (decrease) in junior  subordinated capital notes                  |       | 25,775                                     |       | (3,100 | ) | — |   |
| Preferred stock issued                                                         |       | 71,000                                     |       | — |   | — |   |
| Common stock issued                                                            |       | 317                                        |       | 1,197 |   | 2,418 |   |
| Cash paid in lieu of fractional shares                                         |       | (7                                         | )          | (12 | ) | (3 | ) |
| Net cash provided (used in) by financing  activities                           |       | $                                          | 97,085     |   | $ | (1,915 | ) | $ | 2,415 |   |
| Change in cash and cash equivalents                                            |       | $                                          | (4,269     | ) | $ | 515 |   | $ | 2,327 |   |
| Beginning                                                                      |       | 4,826                                      |       | 4,311 |   | 1,984 |   |
| Ending                                                                         |       | $                                          | 557        |   | $ | 4,826 |   | $ | 4,311 |   |

 

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**Note24. Quarterly Financial Information (Unaudited)**

 

Selected financial information for thequarterly periods of 2008 and 2007 is presented below (dollars in thousands exceptper share data):

 
| ** **                                           | ** ** | **2008 Quarters** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **First**              | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Interest income                                      |       | $                      | 40,063     |   | $ | 40,400 |   | $ | 40,567 |   | $ | 39,438 |   |
| Interest expense                                     |       | 20,598                 |       | 19,686 |   | 18,658 |   | 18,488 |   |
| Net interest income                                  |       | $                      | 19,465     |   | $ | 20,714 |   | $ | 21,909 |   | $ | 20,950 |   |
| Provision for loan losses                            |       | 4,112                  |       | 3,656 |   | 8,300 |   | 9,310 |   |
| Net interest income after provision for  loan losses |       | $                      | 15,353     |   | $ | 17,058 |   | $ | 13,609 |   | $ | 11,640 |   |
| Non-interest income                                  |       | 1,631                  |       | 1,729 |   | 1,597 |   | 1,474 |   |
| Non-interest expense                                 |       | 10,792                 |       | 11,206 |   | 11,258 |   | 11,520 |   |
| Income before taxes                                  |       | $                      | 6,192      |   | $ | 7,581 |   | $ | 3,948 |   | $ | 1,594 |   |
| Income tax expense                                   |       | 2,044                  |       | 2,660 |   | 1,275 |   | 252 |   |
| Net income                                           |       | $                      | 4,148      |   | $ | 4,921 |   | $ | 2,673 |   | $ | 1,342 |   |
| Dividend on preferred stock                          |       | —                 |       | — |   | — |   | 258 |   |
| Net income available to common stockholders          |       | $                      | 4,148      |   | $ | 4,921 |   | $ | 2,673 |   | $ | 1,084 |   |
| Net income per common share:                         |       |                   |       |   |   |   |   |   |   |
| Basic                                                |       | $                      | 0.16       |   | $ | 0.18 |   | $ | 0.10 |   | $ | 0.04 |   |
| Diluted                                              |       | $                      | 0.15       |   | $ | 0.18 |   | $ | 0.10 |   | $ | 0.04 |   |

 
| ** **                                           | ** ** | **2007 Quarters** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **First**              | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Interest income                                      |       | $                      | 36,107     |   | $ | 37,779 |   | $ | 39,477 |   | $ | 40,775 |   |
| Interest expense                                     |       | 18,218                 |       | 19,123 |   | 20,602 |   | 21,038 |   |
| Net interest income                                  |       | $                      | 17,889     |   | $ | 18,656 |   | $ | 18,875 |   | $ | 19,737 |   |
| Provision for loan losses                            |       | 360                    |       | 300 |   | 910 |   | 2,770 |   |
| Net interest income after provision for  loan losses |       | $                      | 17,529     |   | $ | 18,356 |   | $ | 17,965 |   | $ | 16,967 |   |
| Non-interest income                                  |       | 1,862                  |       | 1,975 |   | 2,226 |   | 1,820 |   |
| Non-interest expense                                 |       | 9,489                  |       | 9,897 |   | 9,900 |   | 10,408 |   |
| Income before taxes                                  |       | $                      | 9,902      |   | $ | 10,434 |   | $ | 10,291 |   | $ | 8,379 |   |
| Income tax expense                                   |       | 3,428                  |       | 3,555 |   | 3,463 |   | 2,773 |   |
| Net income                                           |       | $                      | 6,474      |   | $ | 6,879 |   | $ | 6,828 |   | $ | 5,606 |   |
| Net income per common share:                         |       |                   |       |   |   |   |   |   |   |
| Basic                                                |       | $                      | 0.26       |   | $ | 0.26 |   | $ | 0.25 |   | $ | 0.21 |   |
| Diluted                                              |       | $                      | 0.24       |   | $ | 0.25 |   | $ | 0.25 |   | $ | 0.21 |   |

 

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### **BUSINESS**

### ** **

**General**

 

Virginia Commerce Bancorp, Inc.(the “Company”) was organized under Virginia law on November 5, 1999 tobecome the holding company for Virginia Commerce Bank (the “Bank”).  The Company acquired all of the outstandingshares of the Bank on December 22, 1999, upon the effectiveness of theAgreement and Plan of Share Exchange dated September 22, 1999 between theCompany and the Bank.  As a result of theAgreement and Plan of Share Exchange, each share of the Bank’s common stock wasautomatically exchanged for and converted into one share of the Company’scommon stock.

 

The Bank was organized as a national bankingassociation and commenced operations on May 16, 1988. On June 1, 1995,the Bank converted from a national banking association to a Virginia charteredbank which is a member of the Federal Reserve System.  The Company’s and the Bank’s executiveoffices and main branch are located at 5350 Lee Highway, Arlington, Virginia.The Bank currently has twenty-six additional full service branch officesthroughout Northern Virginia, an investment services office in Vienna,Virginia, and a residential mortgage lending office in Chantilly, Virginia.Additionally, the Bank has entered into a lease agreement for one additionalbranch office to be opened in January 2010.

 

The Companyengages in a general commercial banking business through the Bank, its soledirect operating subsidiary. The Bank’s customer base includessmall-to-medium-sized businesses, including firms that have contracts with theU.S. government, associations, retailers and industrial businesses,professionals and business executives and consumers. The economic base of theBank’s service area includes Arlington, Fairfax, Fauquier, Loudoun, PrinceWilliam, Spotsylvania and Stafford Counties and the City of Alexandria inNorthern Virginia, and the metropolitan Washington, D.C. area generally.Northern Virginia has experienced significant population and economic growthduring the past decade.  The Bankparticipated in this growth through its commercial and retail bankingactivities.

 

The Bank’sprimary service area consists of the Northern Virginia suburbs of WashingtonD.C., including Arlington Fairfax, Fauquier, Loudoun, Prince William,Spotsylvania and Stafford Counties and the cities of Alexandria, Fairfax, FallsChurch, Fredericksburg, Manassas and Manassas Park. ** **This area’s banking business isdominated by a small number of large commercial banks with extensive branchnetworks. ** **Mostare branches of national, state-wide or regional banks.  The Bank’s primary service area is alsoserved by a large number of other financial institutions, including savingsbanks, credit unions and non-bank financial institutions such as securitiesbrokerage firms, insurance companies and mutual funds. The Bank’s primaryservice area is oriented toward independently owned small-to-medium-sizedbusinesses, light industry and firms specializing in government contracting. Anincreasing number of new community banking organizations have been opened inthe Bank’s market area, potentially representing an increased competitivethreat to the Bank.

 

The bankingbusiness in Virginia generally, and in the Bank’s primary service areaspecifically, is highly competitive with respect to both loans and deposits,and is dominated by a relatively small number of major banks with many officesoperating over a wide geographic area. Among the advantages such major banks have over the Bank are theirability to finance wide-ranging advertising campaigns and to allocate theirinvestment assets to regions of highest yield and demand.  Such banks offer certain services such asinternational banking, which are not offered directly by the Bank (but areoffered indirectly through correspondent institutions) and, by virtue of theirgreater total capitalization, such banks have substantially higher lendinglimits than the Bank.  The Bank competesfor deposits and lendable funds with other commercial banks, savings banks,credit unions and other governmental and corporate entities which raiseoperating capital through the issuance of debt and equity securities.  The Bank also competes for availableinvestment dollars with non-bank financial institutions, such as brokeragefirms, insurance companies and mutual funds. With respect to loans, the Bank competes with other commercial banks,savings banks, consumer finance companies, mortgage companies, credit unionsand other lending institutions. Additionally, as a result of enactment offederal and Virginia interstate banking legislation, additional competitorswhich are not currently operating in Virginia may enter the Bank’s markets andcompete directly with the Bank.  Recentlegislation expanding the array of firms that can own banks may also result inincreased competition for the Company and the Bank.

 

The majorityof the Bank’s deposits are attracted from individuals and businesses in themetropolitan Washington D.C. area, and as such, no material portion of the Bank’sdeposits have been obtained from any single person, single entity, or areaoutside the metropolitan Washington D.C. area. The loss of any one or more ofthe Bank’s depositors would not have a materially adverse effect on thebusiness of the Bank.  Although the Bank’sloans are concentrated in its Northern Virginia market area, and a significantportion are secured by real property in that market, the Bank’s loans 

 

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are notconcentrated within a single industry or group of related industries.  See Note 17 to the Consolidated FinancialStatements for more information on concentrations of credit risk.

 

The Bankprovides businesses with a full range of deposit accounts, merchant bankcardservices, electronic funds transfer services, lock-box services, remote depositcapture, on-line banking, lines of credit for working capital, term loans andcommercial real estate loans, and provides consumers with a wide array ofdeposit products, home equity and revolving lines of credit, installment loansand internet banking services.  The Bankalso offers investment services and provides safe deposit boxes as well asother customary banking services. The Bank is not authorized to offer trust servicesnor does it offer international services but makes these services available toits customers through financial institutions with which the Bank hascorrespondent banking relationships.

 

The Bank also offers a widevariety of residential mortgage loans through its mortgage lending unit.  Prior to mid-2007, substantially all of theBank’s mortgage loans were originated on a pre-sold basis, servicing released,to numerous secondary market purchasers. Since mid-2007, and the disruptions in the secondary market for mortgageloans, the Company has been holding a greater portion of mortgage loans inportfolio.  See “Lending Activities —Mortgage Lending” below. Offered types include conventional single family firsttrusts, FHA and VA mortgages for both purchase and refinance purposes. Recentchanges in the local real estate market and interest rates have adverselyimpacted the level of loans originated for sale.

 

The Bank doesnot depend upon seasonal business.  TheBank relies substantially on local promotional activity, personal contact byits officers, directors, employees and stockholders, personalized service andits reputation in the communities served to compete effectively.

 

The Bank hasone wholly owned subsidiary, Northeast Land and Investment Company, a Virginiacorporation, organized to hold and market foreclosed real estate.

 

On December 31,2008, the Company had 312 full-time equivalent employees, including sevenexecutive officers. None of the Company’s employees presently is represented bya union or covered under a collective bargaining agreement. Management of theCompany believes that its employee relations are satisfactory.  Other than its President, the Company doesnot have any employees that are not also employees of the Bank.

 

Banking isdependent upon interest rate differentials. In general, the difference between the interest rate paid by the Bank onits deposits and its other borrowings and the interest rate earned by the Bankon loans, securities and other interest-earning assets comprises the majorsource of the Bank’s earnings, while investment services commissions and feesand net gains on mortgage loans originated for sale have contributed to theBank’s non-interest earnings. Thus, the earnings and growth of the Bank aresubject to the influence of economic conditions generally, both domestic andforeign, and also of the monetary and fiscal policies of the United States andits agencies, particularly the Federal Reserve Board.  The Federal Reserve Board implements nationalmonetary policy, such as seeking to curb inflation and combat recession, by itsopen-market activities in United States government securities, by adjusting therequired level of reserves for financial institutions subject to reserverequirements and through adjustments to the discount rate applicable to borrowingsby banks which are members of the Federal Reserve System.  The actions of the Federal Reserve Board inthese areas influence the growth of bank loans, investments and deposits andalso affect interest rates. The nature and timing of any future changes in suchpolicies and their impact on the Bank cannot be predicted.  In addition, adverse economic conditionscould make a higher provision for loan losses a prudent course and could causehigher loan loss charge-offs, thus adversely affecting the Bank’s net income.

 

From time totime, new legislation or regulations are adopted which increase the cost ofdoing business, limit or expand permissible activities, or otherwise affect thecompetitive balance between banks and other financial institutions. Bills havebeen introduced in past Congresses which would permit banks to pay interest onchecking and demand deposit accounts established by businesses, a practicewhich is currently prohibited by regulation. If the legislation effectivelypermitting the payment of interest on business demand deposits is enacted, ofwhich there can be no assurance, it is likely that we may be required to payinterest on some portion of our demand deposits in order to compete againstother banks.  As a significant portion ofour deposits are demand deposits established by businesses, payment of intereston these deposits could have a significant negative impact on our net income,net interest income, interest margin, return on assets and equity, and otherindices of financial performance.  Weexpect that other banks would be faced with similar negative impacts.  We also expect that the primary focus ofcompetition would continue to be based on other factors, such as quality ofservice.

 

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Additionally,since the advent of the Capital Purchase Program and the Emergency EconomicStabilization Act of 2008, as amended (“EESA”), and the entry by manyinstitutions, including the Company, in to Purchase Agreements with Treasury,such institutions are subject to possible additional restrictions, obligations,requirements or burdens in respect to their operations, corporate governance,executive and employee compensation or other business practices, as a result ofthe Treasury’s right to unilaterally amend the Securities Purchase Agreement toconform to legislative changes.

 

Banks or bankholding companies which are undercapitalized and either have not timelyapproved a capital plan or have failed to implement the plan become subject toextraordinary powers pursuant to which the bank regulatory agencies may closethe bank, restrict its growth, force its sale, restrict interest rates paid ondeposits, and dismiss directors or senior executive officers.  Each agency has prescribed standards relatingto internal controls and systems, loan documentation, credit underwriting,interest rate exposure, asset growth, compensation, fees and benefits, andother operational and managerial standards. The agencies have also adopted standards relating to asset quality,earnings, valuation and compensation. Banks or bank holding companies which do not meet such standards may besubject to restrictions and consequences comparable to those which apply toundercapitalized banks and bank holding companies.  Bank regulatory authority to appoint aconservator or receiver for a bank is broad, including grounds such assubstantial dissipation of assets or earnings due to violations of law orregulation or due to any unsafe or unsound practices, an unsafe or unsoundcondition, and certain violations of law or regulation likely to weaken theinstitution’s condition.

 

Regulationspromulgated by the Federal Reserve Board prohibit state member banks such asthe Bank from paying any dividend on common stock out of capital.  Dividends can be paid only to the extent ofnet profits then on hand, less losses and bad debts.  Without the prior approval of the FederalReserve Board, a state member bank cannot pay dividends in any calendar year inexcess of the retained net profits for the prior two years and the profits ofthe current year, less any required transfers to surplus.  As a result of the Company’s acceptance of aninvestment from the Treasury under the Capital Purchase Program, the Company’sability to pay dividends on its common stock is highly restricted.

 

**Lending Activities**

 

The Bank offers a wide array of lending services to its customers,including commercial loans, commercial real estate loans, lines of credit,equipment financing, construction loans, letters of credit, residentialmortgages, personal loans, auto loans and home equity loans and lines ofcredit.  Loan terms, including interestrates, loan-to-value ratios, and maturities, are tailored as much as possibleto meet the needs of the borrower within prudent lending guidelines in terms ofinterest rate risk and credit risk.

 

When considering loan requests, the primary factors taken intoconsideration are the purpose, the cash flow and financial condition of theborrower, primary and secondary repayment sources, the value of the underlyingcollateral, if applicable, and the character and integrity of theborrower.  These factors are evaluated ina number of ways including an analysis of financial statements, credit history,trade references and visits to the borrower’s place of business.  The Bank has adopted a comprehensive loanpolicy manual to provide its loan officers with underwriting, term, collateral,loan-to-value and pricing guidelines.

 

The Bank’s goal is to build and maintain a commercial loan portfolioconsisting of term loans, lines of credit, commercial real estate andconstruction loans provided primarily to locally-based borrowers. Additionally,installment loans and personal lines of credit, as well as residentialmortgages, are made available to consumer customers.  Commercial loans are generally considered tohave a higher degree of risk of default or loss than other types of loans, suchas residential real estate loans, because repayment may be affected by generaleconomic conditions, interest rates, the quality of management of the business,and other factors which may cause a borrower to be unable to repay itsobligations.  General economic conditionscan directly or indirectly affect the quality of a small and mid-sized businessloan portfolio. The Bank manages the loan portfolio to avoid highconcentrations of similar industry loan types and/or property types in relationto total qualifying capital.  Commercialconstruction loans will make up 50-100% of total qualifying capital,residential construction loans 50-100%, non-farm non-residential real estateloans 20-350%, residential mortgages and home equity loans 50-150%, commercialloans 100-200% and consumer installment and personal loans 25-50%.  There can however, be no assurance that theBank will be able to achieve or maintain this distribution of loans.  At December 31, 2008, the loan portfolio’sactual composition compared to total qualifying capital consisted ofapproximately 77% commercial construction loans, 

 

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91% residential construction loans, 291% non-farm non-residential realestate loans, 103% residential mortgages and home equity loans, 81% commercialloans and 3% consumer installment and personal loans.

 

The lending activities in which we engage carry the risk that borrowerswill be unable to perform on their obligations. As such, interest rate policies of the Federal Reserve Board and generaleconomic conditions, nationally and in our primary market area will have asignificant impact on our results of operations.  To the extent that economic conditionsdeteriorate, business and individual borrowers may be less able to meet theirobligations in a timely manner, resulting in decreased earnings or losses tothe Bank.  To the extent that loans aresecured by real estate, adverse conditions in the real estate market may reducethe ability of the borrower to generate the necessary cash flow for repaymentof the loan and reduce our ability to collect the full amount of the loan upona default. These same external factors could also negatively impact collateralvalues.  To the extent that the Bankmakes fixed rate loans, general increases in interest rates will tend to reduceour spread as the interest rates we must pay for deposits increase.  Interest rates may also adversely affect thevalue of property pledged as security for loans.

 

We constantly strive to mitigate risks in the event of unforeseenthreats to the loan portfolio as a result of an economic downturn or othernegative influences.  Plans formitigating inherent risks in managing loan assets include carefully enforcingloan policies and procedures, evaluating each borrower’s industry and businessplan during the underwriting process, identifying and monitoring primary and alternativesources for repayment, obtaining collateral that is margined to minimize lossin the event of liquidation, ongoing tests of borrower credit worthiness andcash flow, ongoing collateral evaluations and site inspections and monitoringof economic and market trends.

 

Loan business is generated primarily through referrals anddirect-calling efforts.  Referrals ofloan business comes from directors, shareholders, current customers andprofessionals such as lawyers, accountants and financial intermediaries.

 

At December 31, 2008, the Banks statutory lending limit to anysingle borrower was $52.0 million subject to certain exceptions provided underapplicable law.  As of December 31,2008, the Bank’s maximum credit exposure to its largest borrower was $31.1million.

 

*Commercial Loans:*  Commercial loans are writtenfor any legitimate business purpose including the financing of plant andequipment, interim working capital pending collection of accounts receivable,permanent working capital for growth and the acquisition and construction ofreal estate projects.  There is a focusin the Bank’s loan portfolio on commercial real estate investment whichrepresents a predominant activity in the Bank’s market area.  The Bank’s commercial loan portfolio reflectsa diverse group of borrowers with no significant concentration in any borrower,or group of borrowers.

 

Commercial construction loans, residential construction loans tobuilders and land acquisition and development loans are made to builders withestablished track records of quality construction.  Land loans are discouraged unlessunderwritten in conjunction with a related construction loan or out-salecontract.  Typical advance rates are notgreater than 65% of the lesser of cost or appraisal for raw land, 75% of thevalue of finished lots for land acquisition, and 80% of land cost and 100% ofconstruction costs for construction loans. In all cases, a minimum 10% equity contribution of total project costsis required.  Financing terms generallydo not exceed 24 months.  Constructionloans are subject to progress inspections and controlled advances.  Speculative construction loans are maintainedto a minimum with a majority of loans requiring pre-sale contracts or specifiedlease-up thresholds prior to construction commencement.  Personal guarantees by principals ofborrowing entities is a standard requirement and loans are typically priced tofloat at a factor at or above the prime lending rate.

 

Commercial real estate loans will generally represent borrower occupiedtransactions with a principal reliance on the borrowing businesses’ ability torepay or investor transactions focused on tenant quality, occupancy and expensecontrols, as well as prudent guidelines for assessing real estate values.  Risks inherent in managing a commercial realestate portfolio relate to either sudden or gradual drops in property values asa result of a general or local economic downturn. A decline in real estatevalues can cause loan to value margins to increase and diminish the Bank’sequity cushion on both an individual and portfolio basis.  The Bank attempts to mitigate commercial realestate lending risks by carefully underwriting each loan of this type toaddress the perceived risks in the individual transaction.  Generally, the Bank requires a loan-to-valueratio of 80% of the lesser of cost or appraisal for owner occupied transactionsand 75% for investor transactions.  Aborrower’s ability to repay is carefully analyzed and policy calls for aminimum ongoing cash flow to debt service requirement of 1.15 to 1 althoughmost loans exceed this minimum.  Anapproved list of commercial real estate appraisers selected on the basis of areputation for quality and accuracy has been established.  Each appraisal is scrutinized in an effort toinsure compliance with established 

 

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appraisal guidelines and conformity with current comparable marketvalues.  The Bank generally requirespersonal guarantees on all loans to closely-held entities as a matter ofpolicy.  Borrowers are required toprovide, at a minimum, annual corporate, partnership and personal financialstatements to comply with Bank policy. Interest rate risk to the Bank is mitigated by using either floatinginterest rates or by fixing rates for an intermediate period of time, generallyless than five years.  While loanamortizations may be approved for up to 360 months, loans generally have a callprovision (maturity date) of 10 years or less.

 

Commercial term loans are used to provide funds for equipment andgeneral corporate needs.  This loancategory is designed to support borrowers who have a proven ability to servicedebt over a term generally not to exceed 84 months.  The Bank typically requires a first lienposition on the collateral financed and other business assets and guaranteesfrom owners having at least a 20% interest in the business.  Interest rates on commercial term loansgenerally float or are fixed for a term not to exceed seven years.  Management carefully monitors industry andcollateral concentrations to avoid loan exposures to a large group of similarindustries and/or similar collateral. Commercial loans are evaluated for historical and projected cash flow,balance sheet strength and primary and secondary repayment sources.  Commercial term loan documents includecertain financial and performance covenants and require borrowers to forwardregular financial information on both the business and on personal guarantorsat least annually.  In certain cases,this information is required more frequently, depending on the degree to whichlenders desire information to monitor a borrower’s financial condition andcompliance with loan covenants.  Keyperson life insurance is required as appropriate and as necessary to mitigatethe risk associated with the loss of a primary owner or manager.

 

Commercial lines of credit are used to finance a business borrower’sshort-term or seasonal credit needs and advances are often based on apercentage of eligible receivables and inventory.  In addition to the risks inherent in termloan facilities, line of credit borrowers typically require additionalmonitoring to protect the lender against diminishing collateral values.  Commercial lines of credit are generallyrevolving in nature and payable on demand. The Bank generally requires at least an annual rest period (for seasonalborrowers) and regular financial information (monthly or quarterly financialstatements, monthly accounts receivable agings, borrowing base certificates,etc.) for borrowers with rapid growth and permanent working capital financingneeds.  Advances against collateral aregenerally margined, limiting advances on eligible receivables to 75-80% ofcurrent accounts.  Lines of credit andterm loans to the same borrowers are generally cross-defaulted andcross-collateralized.  Industry andcollateral concentration disciplines are the same as those used in managing thecommercial term loan portfolio.  Interestrate charges on this group of loans generally float at a factor at or above theprime lending rate. Generally, personal guarantees are also required on theseloans.

 

*Consumer Loans.*  Loans are considered for any worthwhilepersonal purpose on a case-by-case basis, such as financing of tuition,household expenditures, home and automobile financing.  Consumer credit facilities are underwrittento focus on the borrower’s credit record, length and stability of employment,income to service debt and quality of collateral.  Residential real estate loans held inportfolio are limited to advances of 90% of loan to appraised value.  Maximum debt to income ratio established byloan policy is 45% and maximum unsecured revolving debt will not exceed 10% ofnet worth.  Installment loan terms rangeout to 72 months and are priced at fixed interest rates.  Home equity loans amortize over 5-15 yearsand are fixed rate while home equity lines are revolving with 10-yearmaturities and have floating rates tied to the prime rate.

 

*Mortgage Lending.*  The Company originates residential mortgageloans, on a pre-sold basis, for sale to secondary market purchasers, on aservicing released basis. This produces benefits primarily in the form of gainson the sale of the loans at a premium. Activity in the residential mortgage loan market is highly sensitive tochanges in interest rates. The loans are sold on a limited recourse basis.  Most contracts with investors containrecourse periods that may vary from 90 days up to one year.  In general, the Company may be required torepurchase a previously sold mortgage loan or indemnify the investor if thereis major non-compliance with defined loan origination or documentationstandards, including fraud, negligence or material misstatement in the loandocuments. Repurchase may also be required if necessary governmental loanguarantees are canceled or never issued, or if an investor is forced to buyback a loan after it has been re-sold as part of a loan pool. In addition, theCompany may have an obligation to repurchase a loan if the mortgagor has defaultedearly in the loan term.  The potentialdefault period is approximately twelve months after sale of the loan to theinvestor. Mortgages subject to recourse are collateralized by single-familyresidential properties, have loan-to-value ratios of 80% or less, or haveprivate mortgage insurance or are insured or guaranteed by an agency of theUnited States government. On a limited basis, the Company holds some firsttrust residential mortgages in portfolio which have loan-to-value ratios of 80%or less.  Maximum debt to income ratio is45%.  ARM products amortize over a 30year period; fixed rate products amortize over 15-30 years.

 

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*Credit and Loan Administration.*  Aspart of its internal credit and loan administration process, the Bank’sDirectors Loan Committee, comprised of directors, reviews all loans 30-daysdelinquent, loans on the watch list, loans rated special mention, substandard,or doubtful and other loans of concern at least quarterly.  The Committee also reviews new loanproduction, credit concentrations, loan loss reserves, declined loans,documentation exceptions, loan policy exceptions, new products andpricing.  The Committee commissionsperiodic documentation and internal control reviews by outside vendors tocomplement internal audit and credit administration oversight.

 

**Regulation, Supervision, and GovernmentalPolicy**

 

*TheCompany.* The Company is a bank holding companyregistered under Bank Holding Company Act of 1956, as amended, (the “BHCA”) andis subject to supervision by the Federal Reserve Board.  As a bank holdingcompany, the Company is required to file with the Federal Reserve Board anannual report and such other additional information as the Federal ReserveBoard may require pursuant to the BHCA.  The Federal Reserve Board mayalso make examinations of the Company and each of its subsidiaries.

 

*BHCA -Activities and other Limitations. *TheBHCA requires approval of the Federal Reserve Board for, among other things,the acquisition by a proposed bank holding company of control of more than fivepercent (5%) of the voting shares, or substantially all the assets, of any bankor the merger or consolidation by a bank holding company with another bankholding company.  The BHCA also generally permits the acquisition by abank holding company of control or substantially all the assets of any banklocated in a state other than the home state of the bank holding company,except where the bank has not been in existence for the minimum period of timerequired by state law, but if the bank is at least 5 years old, the FederalReserve Board may approve the acquisition.

 

Under currentlaw, with certain limited exceptions, a bank holding company is prohibited fromacquiring control of any voting shares of any company which is not a bank orbank holding company and from engaging directly or indirectly in any activityother than banking or managing or controlling banks or furnishing services toor performing service for its authorized subsidiaries.  A bank holdingcompany may, however, engage in or acquire an interest in, a company thatengages in activities which the Federal Reserve Board has determined by orderor regulation to be so closely related to banking or managing or controllingbanks as to be properly incident thereto.  In making such a determination,the Federal Reserve Board is required to consider whether the performance ofsuch activities can reasonably be expected to produce benefits to the public,such as convenience, increased competition or gains in efficiency, whichoutweigh possible adverse effects, such as undue concentration of resources,decreased or unfair competition, conflicts of interest or unsound bankingpractices.  The Federal Reserve Board is also empowered to differentiatebetween activities commenced *de novo* andactivities commenced by the acquisition, in whole or in part, of a goingconcern.  Some of the activities that the Federal Reserve Board hasdetermined by regulation to be closely related to banking include making orservicing loans, performing certain data processing services, acting as afiduciary or investment or financial advisor, and making investments incorporations or projects designed primarily to promote community welfare.

 

Effective on March 11,2000, the Gramm Leach Bliley Act of 1999 (the “GLB Act”) allows a bank holdingcompany or other company to certify status as a financial holding company,which allows such company to engage in activities that are financial in nature,that are incidental to such activities, or are complementary to suchactivities. The GLB Act enumerates certain activities that are deemed financialin nature, such as underwriting insurance or acting as an insurance principal,agent or broker, underwriting, dealing in or making markets in securities, andengaging in merchant banking under certain restrictions.  It also authorizes the Federal Reserve Boardto determine by regulation what other activities are financial in nature, orincidental or complementary thereto.

 

Subsidiarybanks of a bank holding company are subject to certain restrictions imposed bythe Federal Reserve Act on any extensions of credit to the bank company or anyof its subsidiaries, or investments in the stock or other securities thereof,and on the taking of such stock or securities as collateral for loans to anyborrower.  Further, a holding company and any subsidiary bank areprohibited from engaging in certain tie-in arrangements in connection with theextension of credit.  A subsidiary bank may not extend credit, lease orsell property, or furnish any services, or fix or vary the consideration forany of the foregoing on the condition that: (i) the customer obtainor provide some additional credit, property or services from or to such bankother than a loan, discount, deposit or trust service; (ii) the customerobtain or provide some additional credit, property or service from or tocompany or any other subsidiary of the company; or (iii) the customer notobtain some other credit, property or service from competitors, except forreasonable requirements to assure the soundness of credit extended.

 

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*Commitmentsto Subsidiary Banks. *UnderFederal Reserve policy, the Company is expected to act as a source of financialstrength to the Bank and to commit resources to support the Bank incircumstances when it might not do so absent such policy.

 

*Limitationsof Acquisitions of Common Stock. *Thefederal Change in Bank Control Act prohibits a person or group from acquiring “control”of a bank holding company unless the Federal Reserve has been given 60 days’prior written notice of such proposed acquisition and within that time periodthe Federal Reserve Board has not issued a notice disapproving the proposedacquisition or extending for up to another 30 days the period during which sucha disapproval may be issued.  Anacquisition may be made prior to expiration of the disapproval period if theFederal Reserve issues written notice of its intent not to disapprove theaction.  Under a rebuttable presumptionestablished by the Federal Reserve, the acquisition of 10% or more of a classof voting stock of a bank holding company with a class of securities registeredunder Section 12 of the Exchange Act or which would represent the singlelargest interest in the voting stock would, under the circumstances set forthin the presumption, constitute the acquisition of control.

 

In addition,with limited exceptions, any “company” would be required to obtain the approvalof the Federal Reserve under the BHCA before acquiring 25% (5% in the case ofan acquirer that is a bank holding company) or more of the outstanding CommonStock of, or such lesser number of shares as constitute control over, theCompany.  Such approval would becontingent upon, among other things, the acquirer registering as a bank holdingcompany, divesting all impermissible holdings and ceasing any activities notpermissible for a bank holding company.

 

The FederalReserve has adopted capital adequacy guidelines pursuant to which it assessesthe adequacy of an institution’s capital. These guidelines are substantially similar to those which are applicableto the Bank, discussed below.

 

*The Bank. *The Bank, as aVirginia chartered commercial bank which is a member of the Federal ReserveSystem (a “state member bank”) and whose accounts are insured by the DepositInsurance Fund of the FDIC up to the maximum legal limits of the FDIC, issubject to regulation, supervision and regular examination by the StateCorporation Commission/Bureau of Financial Institutions and the Federal ReserveBoard.  The regulations of these variousagencies govern most aspects of the Bank’s business, including requiredreserves against deposits, loans, investments, mergers and acquisitions,borrowing, dividends and location and number of branch offices.  The laws and regulations governing the Bankgenerally have been promulgated to protect depositors and the deposit insurancefunds, and not for the purpose of protecting stockholders.

 

Competitionamong commercial banks, savings banks, and credit unions has increasedfollowing enactment of legislation which greatly expanded the ability of banksand bank holding companies to engage in interstate banking or acquisitionactivities.  As a result of federal andstate legislation, banks in the Washington D.C./Maryland/Virginia area can,subject to limited restrictions, acquire or merge with a bank in another of thejurisdictions, and can branch *de novo* in anyof the jurisdictions. The GLB Act allows a wider array of companies to ownbanks, which could result in companies with resources substantially in excessof the Company’s entering into competition with the Company and the Bank.

 

*Branchingand Interstate Banking.*  The federal banking agencies are authorizedto approve interstate bank merger transactions without regard to whether suchtransaction is prohibited by the law of any state, unless the home state of oneof the banks has opted out of the interstate bank merger provisions of theRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-NealAct”) by adopting a law after the date of enactment of the Riegle-Neal Act andprior to June 1, 1997 which applies equally to all out-of-state banks andexpressly prohibits merger transactions involving out-of-state banks.  Interstate acquisitions of branches arepermitted only if the law of the state in which the branch is located permitssuch acquisitions.  Such interstate bankmergers and branch acquisitions are also subject to the nationwide andstatewide insured deposit concentration limitations described in theRiegle-Neal Act.

 

TheRiegle-Neal Act authorizes the federal banking agencies to approve interstatebranching *de novo*by national and state banks instates which specifically allow for such branching.  The District of Columbia, Maryland andVirginia have all enacted laws which permit interstate acquisitions of banksand bank branches and permit out-of-state banks to establish *de novo*branches.

 

*USA Patriot Act.*  Under the Uniting and Strengthening Americaby Providing Appropriate Tools Required to Intercept and Obstruct TerrorismAct, commonly referred to as the “USA Patriot Act” or the “Patriot Act,” financialinstitutions are subject to prohibitions against specified financialtransactions and account relationships, as well as enhanced due diligencestandards intended to detect, and prevent, the use of the United States financialsystem for money laundering

 

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and terrorist financing activities. The Patriot Act requires financial institutions, including banks, toestablish anti-money laundering programs, including employee training andindependent audit requirements, meet minimum standards specified by the act,follow minimum standards for customer identification and maintenance ofcustomer identification records, and regularly compare customer lists againstlists of suspected terrorists, terrorist organizations and moneylaunderers.  The costs or other effectsof the compliance burdens imposed by the Patriot Act or future anti-terrorist,homeland security or anti-money laundering legislation or regulations cannot bepredicted with certainty.

 

*CapitalAdequacy Guidelines.* The Federal Reserve Board and the FDIC have adopted risk based capitaladequacy guidelines pursuant to which they assess the adequacy of capital inexamining and supervising banks and bank holding companies and in analyzingbank regulatory applications.  Risk-basedcapital requirements determine the adequacy of capital based on the riskinherent in various classes of assets and off-balance sheet items.

 

State memberbanks are expected to meet a minimum ratio of total qualifying capital (the sumof core capital (Tier 1) and supplementary capital (Tier 2)) to risk weightedassets of 8%.  At least half of thisamount (4%) should be in the form of core capital. Tier 1 Capital generallyconsists of the sum of common stockholders’ equity and perpetual preferredstock (subject in the case of the latter to limitations on the kind and amountof such stock which may be included as Tier 1 Capital), less goodwill, withoutadjustment for changes in the market value of securities classified as “available-for-sale”in accordance with FAS 115.  For theCompany, the cumulative perpetual stock issued to the Treasury Departmentpursuant to the Capital Purchase Program established under the EESA is eligiblefor treatment as Tier 1 capital without limitation.  Tier 2 Capital consists of the following:hybrid capital instruments; perpetual preferred stock which is not otherwiseeligible to be included as Tier 1 Capital; term subordinated debt andintermediate-term preferred stock; and, subject to limitations, generalallowances for loan losses.  Assets areadjusted under the risk-based guidelines to take into account different riskcharacteristics, with the categories ranging from 0% (requiring no risk-basedcapital) for assets such as cash and certain U.S. government and agencysecurities, to 100% for the bulk of assets which are typically held by a bankholding company, including commercial real estate loans, commercial businessloans and consumer loans.  Residentialfirst mortgage loans on one-to-four family residential real estate and certainseasoned multi-family residential real estate loans, which are not 90 days ormore past-due or non-performing and which have been made in accordance withprudent underwriting standards are assigned a 50% level in the risk-weightingsystem, as are certain privately-issued mortgage-backed securities representingindirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certainrisk characteristics.

 

In addition tothe risk-based capital requirements, the Federal Reserve Board has establisheda minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets)requirement for the most highly-rated banks, with an additional cushion of atleast 100 to 200 basis points for all other banks, which effectively increasesthe minimum Leverage Capital Ratio for such other banks to 4.0% - 5.0% ormore.  The highest-rated banks are thosethat are not anticipating or experiencing significant growth and have welldiversified risk, including no undue interest rate risk exposure, excellentasset quality, high liquidity, good earnings and, in general, those which areconsidered a strong banking organization. A bank having less than the minimum Leverage Capital Ratio requirementshall, within 60 days of the date as of which it fails to comply with suchrequirement, submit a reasonable plan describing the means and timing by whichthe bank shall achieve its minimum Leverage Capital Ratio requirement.  A bank which fails to file such plan isdeemed to be operating in an unsafe and unsound manner, and could subject abank to a cease-and-desist order.  Anyinsured depository institution with a Leverage Capital Ratio that is less than2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) ofthe Federal Deposit Insurance Act (the “FDIA”) and is subject to potentialtermination of deposit insurance. However, such an institution will not be subject to an enforcementproceeding solely on account of its capital ratios, if it has entered into andis in compliance with a written agreement to increase its Leverage CapitalRatio and to take such other action as may be necessary for the institution tobe operated in a safe and sound manner. The capital regulations also provide, among other things, for theissuance of a capital directive, which is a final order issued to a bank thatfails to maintain minimum capital or to restore its capital to the minimumcapital requirement within a specified time period.  Such directive is enforceable in the samemanner as a final cease-and-desist order. At December 31, 2008, the Bank’sTier 1 risk based capital ratio was 13.16%, its Total risk based capital ratiowas 14.41% and its Leverage Capital ratio was 11.81%.  At December 31, 2008, the Company’s Tier1 Capital was 13.07%, its Total Capital was 14.44% and its Leverage Capitalratio was 11.76%.

 

*PromptCorrective Action.* Under Section 38 of the FDIA, each federal banking agency isrequired to implement a system of prompt corrective action for institutionswhich it regulates.  The federal bankingagencies have promulgated substantially similar regulations to implement thesystem of prompt corrective action established by Section 38 of theFDIA.  Under the regulations, a bankshall be deemed to be: (i) “well capitalized” if it has a Total Risk BasedCapital 

 

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Ratio of 10.0%or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage CapitalRatio of 5.0% or more and is not subject to any written capital order ordirective; (ii) “adequately capitalized” if it has a Total Risk BasedCapital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% ormore and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances)and does not meet the definition of “well capitalized;” (iii) “undercapitalized”if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1Risk based Capital Ratio that is less than 4.0% or a Leverage Capital Ratiothat is less than 4.0% (3.0% under certain circumstances); (iv) “significantlyundercapitalized” if it has a Total Risk Based Capital Ratio that is less than6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a LeverageCapital Ratio that is less than 3.0%; and (v) “critically undercapitalized”if it has a ratio of tangible equity to total assets that is equal to or lessthan 2.0%.

 

An institutiongenerally must file a written capital restoration plan which meets specifiedrequirements with an appropriate federal banking agency within 45 days of thedate the institution receives notice or is deemed to have notice that it isundercapitalized, significantly undercapitalized or criticallyundercapitalized.  A federal bankingagency must provide the institution with written notice of approval ordisapproval within 60 days after receiving a capital restoration plan, subjectto extensions by the applicable agency. An institution which is required tosubmit a capital restoration plan must concurrently submit a performanceguaranty by each company that controls the institution.  Such guaranty shall be limited to the lesserof (i) an amount equal to 5.0% of the institution’s total assets at thetime the institution was notified or deemed to have notice that it wasundercapitalized or (ii) the amount necessary at such time to restore therelevant capital measures of the institution to the levels required for theinstitution to be classified as adequately capitalized.  Such a guaranty shall expire after thefederal banking agency notifies the institution that it has remained adequatelycapitalized for each of four consecutive calendar quarters.  An institution which fails to submit awritten capital restoration plan within the requisite period, including anyrequired performance guaranty, or fails in any material respect to implement acapital restoration plan, shall be subject to the restrictions in Section 38of the FDIA which are applicable to significantly undercapitalizedinstitutions.  At December 31, 2007,the Company and Bank were considered to be a “well capitalized” institution forpurposes of Section 38 of the FDIA.

 

A “criticallyundercapitalized institution” is to be placed in conservatorship orreceivership within 90 days unless the FDIC formally determines thatforbearance from such action would better protect the deposit insurance fund.Unless the FDIC or other appropriate federal banking regulatory agency makesspecific further findings and certifies that the institution is viable and isnot expected to fail, an institution that remains critically undercapitalizedon average during the fourth calendar quarter after the date it becomescritically undercapitalized must be placed in receivership. The general rule isthat the FDIC will be appointed as receiver within 90 days after a bank becomescritically undercapitalized unless extremely good cause is shown and anextension is agreed to by the federal regulators.  In general, good cause is defined as capitalwhich has been raised and is imminently available for infusion into the bankexcept for certain technical requirements which may delay the infusion for aperiod of time beyond the 90 day time period.

 

Immediately  upon becoming undercapitalized, aninstitution shall become subject to the provisions of Section 38 of theFDIA, which (i) restrict payment of capital distributions and managementfees; (ii) require that the appropriate federal banking agency monitor thecondition of the institution and its efforts to restore its capital; (iii) requiresubmission of a capital restoration plan; (iv) restrict the growth of theinstitution’s assets; and (v) require prior approval of certain expansionproposals.  The appropriate federalbanking agency for an undercapitalized institution also may take any number ofdiscretionary supervisory actions if the agency determines that any of theseactions is necessary to resolve the problems of the institution at the leastpossible long-term cost to the deposit insurance fund, subject in certain casesto specified procedures. These discretionary supervisory actions include:requiring the institution to raise additional capital; restricting transactionswith affiliates; requiring divestiture of the institution or the sale of theinstitution to a willing purchaser; and any other supervisory action that theagency deems appropriate.  These andadditional mandatory and permissive supervisory actions may be taken withrespect to significantly undercapitalized and critically undercapitalized institutions.

 

Additionally,under Section 11(c)(5) of the FDIA, a conservator or receiver may beappointed for an institution where:  (i) aninstitution’s obligations exceed its assets; (ii) there is substantial dissipation of the institution’s assetsor earnings as a result of any violation of law or any unsafe or unsoundpractice;  (iii) the institution isin an unsafe or unsound condition;  (iv) thereis a willful violation of a cease-and-desist order;  (v) the institution is unable to pay itsobligations in the ordinary course of business; (vi) losses or threatened losses deplete all or substantially allof an institution’s capital, and there is no reasonable prospect of becoming “adequatelycapitalized” without assistance;  (vii) thereis any violation of law or unsafe or unsound practice or condition that islikely to cause insolvency or substantial dissipation of assets or earnings,weaken the institution’s condition, or otherwise seriously prejudice theinterests of depositors or 

 

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the insurancefund;  (viii) an institution ceasesto be insured;  (ix) the institutionis undercapitalized and has no reasonable prospect that it will becomeadequately capitalized, fails to become adequately capitalized when required todo so, or fails to submit or materially implement a capital restoration plan;or (x) the institution is critically undercapitalized or otherwise hassubstantially insufficient capital.

 

*RegulatoryEnforcement Authority*. Federal banking law grants substantial enforcement powers to federalbanking regulators.  This enforcementauthority includes, among other things, the ability to assess civil moneypenalties, to issue cease-and-desist or removal orders and to initiateinjunctive actions against banking organizations and institution-affiliatedparties.  In general, these enforcementactions may be initiated for violations of laws and regulations and unsafe orunsound practices.  Other actions orinactions may provide the basis for enforcement action, including misleading oruntimely reports filed with regulatory authorities.

 

As a result ofthe volatility and instability in the financial system during 2008, theCongress, the bank regulatory authorities and other government agencies havecalled for or proposed additional regulation and restrictions on theactivities, practices and operations of banks and their holding companies.  In addition to proposals that relate toinstitutions, such as the Company, that have accepted investments from, or soldtroubled assets to, the Department of the Treasury or other governmentinstrumentalities, or otherwise participate in government programs intended topromote financial stabilization, the Congress and the federal banking agencieshave broad authority to require all banks and holding companies to adhere tomore rigorous or costly operating procedures, corporate governance procedures,or to engage in activities or practices which they would not otherwiseelect.  Any such requirement couldadversely affect the Company’s and Bank’s business and results of operations.

 

*Deposit Insurance Premiums.*  The FDIC maintains a risk based assessmentsystem for determining deposit insurance premiums.  Four risk categories (I-IV), each subject todifferent premium rates, are established, based upon an institution’s status aswell capitalized, adequately capitalized or undercapitalized, and theinstitution’s supervisory rating.  During2008, all insured depository institutions will pay deposit insurance premiums,currently ranging between 5 and 7 basis points on an institution’s assessmentbase for institutions in risk category I (well capitalized institutionsperceived as posing the least risk to the insurance fund), and 10, 28 and 43basis points for institutions in risk categories II, III, and IV.  The levels of rates are subject to periodicadjustment by the FDIC.

 

Commencing in 2009, the premium rates increased by 7 basis points ineach category for the first quarter of 2009. For the second quarter of 2009 and beyond, the FDIC has issued a final rule providingfor further changes in rates, which introduces three adjustments that could bemade to an institution’s initial base assessment rate: (1) a potentialdecrease for long-term unsecured debt, including senior and subordinated debtand, for small institutions, a portion of Tier 1 capital; (2) a potentialincrease for secured liabilities above a threshold amount; and (3) fornon-Risk Category I institutions, a potential increase for brokered depositsabove a threshold amount, other than those received through a deposit placementnetwork on a reciprocal basis.  Theschedule for base assessment rates and potential adjustment is set forth in thefollowing table.

 
| ** **                   | ** ** | **Risk  Category I** | ** ** | **Risk  Category II** | ** ** | **Risk  Category III** | ** ** | **Risk  Category IV** | ** ** |
|------------------------------|------------|---------------------------|------------|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Initial Base Assessment Rate |       | 12 – 16              |       | 22                         |       | 32                          |       | 45                         |       |
| Unsecured Debt Adjustment    |       | (5) – 0              |       | (5) – 0               |       | (5) – 0                |       | (5) – 0               |       |
| Secured Liability Adjustment |       | 0 to 8                    |       | 0 to 11                    |       | 0 to 16                     |       | 0 to 22.5                  |       |
| Brokered Deposit Adjustment  |       | N/A                       |       | 0 to 10                    |       | 0 to 10                     |       | 0 to 10                    |       |
| Total Base Assessment Rate   |       | 7 to 24                   |       | 17 to 43                   |       | 27 to 58                    |       | 40 to 77.5                 |       |

 

Additionally, the Bank has elected to participate in the FDIC programwhereby non-interest bearing transaction account deposits will be insuredwithout limitation through December 31, 2009.  The bank is required to pay an additionalpremium to the FDIC of 10 basis point on the amount of balances in non-interestbearing transaction accounts that exceed the existing deposit insurance limitof $250,000.

 

Further, in late February, the FDIC adopted an interim rule imposingan emergency special assessment on all banks, potentially up to 20 basispoints, on June 30, 2009. The assessment is to be collected on September 30,2009. The 

 

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interim rule would also permit the FDIC to impose an emergencyspecial assessment after June 30, 2009, of up to 10 basis points, ifnecessary to maintain public confidence in federal deposit insurance.  As a result of competitive pressures fordeposits, the Company may not be able to adjust deposit rates to offset thecost of increased deposit insurance premiums. In any event, the Company will have to absorb the cost of the increasedpremiums until such time as it is able to reprice its time deposits.

 

**PROPERTIES**

 

The Bank offers its services from its main office,located at 5350 Lee Highway in Arlington, Virginia, and twenty-six additionalbanking offices, one mortgage lending office, one investment services officeand its bank operations center.  The mainoffice consists of two connected red brick buildings, contains an aggregate ofapproximately 18,000 square feet of space on three levels.  The Bank utilizes one of the buildings,containing approximately 10,000 square feet, as the executive offices and abranch facility.  In August 1995,the Bank sold the connected building which it had previously leased out.  The Bank operates a branch located at 2930Wilson Boulevard, Arlington, Virginia. That property, which consists of a stand alone brick building containingapproximately 2,400 square feet on a parcel of approximately 18,087 squarefeet, was purchased by the Bank in April 1997. The Bank also operates abranch location at 5140 Duke Street, Alexandria, Virginia.  That property, which consists of a two storybrick building containing approximately 4,800 square feet on a parcel ofapproximately 16,800 square feet, was also purchased by the Bank in April 1997.

 

The Bank leases twenty-seven office locations: theAlexandria Office, located at 1414 Prince Street, Alexandria, Virginia,consists of 2,500 square feet; the McLean Office, located at 1356 Chain BridgeRoad, McLean, Virginia, consists of 1,625 square feet; the WilliamsburgBoulevard Office, located at 6500 Williamsburg Road, Arlington, Virginia,consists of 1,781 square feet; the Annandale Office, located at 4230 John MarrDrive, Annandale, Virginia, consists of 2,400 square feet; the Fairfax Office,located at 4021 University Drive, Fairfax Virginia, consists of 3,000 squarefeet; the Vienna Office, located at 374 Maple Avenue, Vienna, Virginia,consists of 5,831 square feet; the King Street Office, located at 506 KingStreet, Alexandria Virginia, consists of 1,484 square feet; the ChantillyOffice, located at 13881 G Metrotech Drive, Chantilly Virginia, consists of1,950 square feet; the Lake Ridge office, located at 2030 Old Bridge Road, LakeRidge, Virginia consists of 2,492 square feet; the Reston Office, located at11820 Spectrum Center, Reston Virginia consists of 3,700 square feet; the MountVernon office, located at 7901 Richmond Highway, Alexandria, Virginia, consistsof 2,831 square feet; the Walney Road office, located at 4221Walney Road,Chantilly, Virginia, consists of 2,661 square feet; the Del Ray office, locatedat 2401 Mount Vernon Avenue, Alexandria, Virginia, consists of 1,750 squarefeet; the Tysons Corner office, located at 8251 Greensboro Drive, McLean,Virginia, consists of 1,801 square feet; the Battlefield office, located at10830 Balls Ford Road, Manassas, Virginia, consists of 7,409 square feet; theNewington office, located at 7830 Backlick Road, Springfield, Virginia,consists of 2,778 square feet; the Signal Hill office, located at 9161 LiberiaAvenue, Manassas, Virginia, consists of 3,613 square feet; the Ryan Parkoffice, located at 21885 Ryan Center Way, Ashburn, Virginia, consists of 2,656square feet; the Courthouse Road office, located at 10800 A Courthouse Road,Fredericksburg, Virginia, consists of 3,000 square feet; the Centre Ridgeoffice, located at 6335 Multiplex Drive, Centreville, Virginia, consists of2,870 square feet; the Leesburg office, located at 341 East Market Street,Leesburg, Virginia, consists of 2,705 square feet; the Central Park office,located at 1304 Central Park Blvd., Fredericksburg, Virginia, consists of 3,000square feet; the Dulles Trade Center office, located at 23510 Overland Drive,Sterling, Virginia, consists of 3,000 square feet; the Falls Church office,located at 7116 Leesburg Pike, Falls Church, Virginia, consists of 2,014 squarefeet; the Fairfax Lending office, located at 4221 Walney Road, Chantilly,Virginia, consists of 17,273 square feet; the Leesburg Lending office, locatedat 50 Catoctin Circle, Leesburg, Virginia, consists of 1,638 square feet; andthe Bank’s operations center, located at 14201 Sullyfield Circle, Chantilly,Virginia consists of 25,001 square feet. Generally the leases contain renewal option clauses for one or twoadditional five-year terms, and in some instances require payment of certainoperating charges. In addition, the Bank has entered into a lease agreement forone additional office to be opened in January 2010. The total rentalexpense under the leases was $4.2 million in 2008.  The total minimum rental commitment under theleases, including the one additional office to be opened in January 2010,as of December 31, 2008 is as follows: $4.0 million for 2009; $4.1 millionfor 2010, $3.5 million for 2011, $3.7 million for 2012, $3.5 million for 2013and $17.3 million for 2014 and beyond.

 

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**MARKETPRICE OF STOCK AND DIVIDENDS**

 

The Company’s stock is traded on the NasdaqGlobal Select Market under the symbol “VCBI”. Set forth below is the range of high and low sales prices (adjusted forstock dividends and splits), as reported by Nasdaq, for each full quarterlyperiod within the two most recent fiscal years.

 

**MARKETPRICE OF STOCK**

 
| ** **  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $        | 11.22      |     | $          | 8.49 |   | $ | 18.19 |   | $ | 15.79 |   |
| Second      |       | $        | 11.26      |     | $          | 4.84 |   | $ | 18.12 |   | $ | 15.21 |   |
| Third       |       | $        | 6.25       |     | $          | 3.86 |   | $ | 15.52 |   | $ | 12.55 |   |
| Fourth      |       | $        | 6.12       |     | $          | 3.42 |   | $ | 14.12 |   | $ | 9.82 |   |

 

The Company has not paid cash dividends since1995, electing to retain earnings for funding the growth of the Company and itsbusiness. The Company currently anticipates continuing the policy of retainingearnings to fund growth. The ability of the Company to pay dividends, should itelect to do so, depends largely upon the ability of the Bank to declare and paydividends to the Company, as the principal source of the Company’s revenue isdividends paid by the Bank. Future dividends will depend primarily upon theBank’s earnings, financial condition, and need for funds, as well asgovernmental policies and regulations applicable to the Company and the Bank,which limit the amount that may be paid as dividends without prior approval.Under the terms of the Series A Preferred Stock issued to Treasury underthe Capital Purchase Program, the Company may not commence paying cashdividends on the common stock during the first three years the Treasury ownsthe preferred stock, warrants or Warrant shares, without prior approval.  Additionally, the Company may not pay cashdividends on the common stock while any dividend on the Series A PreferredStock is in arrears.

 

At December 31, 2008, the Company had 567 stockholders of record,and an aggregate of approximately 2,650 beneficial owners.  Information regarding stock dividends andsplits in 2008, 2007, and 2006 is as follows:

 

1.               A 10% stockdividend was declared on March 26, 2008, for stockholders of record on April 14,2008, and was paid on May 7, 2008.

 

2.               A 10% stockdividend was declared on March 28, 2007, for stockholders of record on April 16,2007, and was paid on May 1, 2007.

 

3.               A three-for-twostock split in the form of a 50% stock dividend was declared on March 16,2006, for stockholders of record on April 28, 2006, and was paid on May 12,2006.

 

**Securities Authorized for Issuance Under Equity Compensation Plans.*** *Thefollowing table sets forth information regarding outstanding options and otherrights to purchase common stock granted under the Company’s compensation plansas of December 31, 2008:

 

Equity Compensation PlanInformation

 
| **Plan category**                                     | ** ** | **Number of securities to be issued  upon exercise of outstanding  options, warrants and rights** | ** ** | **Weighted average exercise  price of outstanding options,  warrants and rights** | ** ** | **Number of securities remaining available  for future issuance under equity  compensation plans (excluding securities  reflected in column (a)** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                       |       | **(a)**                                                                                                                                                  | ** ** | **(b)**                                                                                                              | ** ** | **(c)**                                                                                                                                                                                                                 | ** ** |
| Equity compensation plans approved by security holders (1) |       | 2,035,458                                                                                                                                                |       | $                                                                                                                    | 7.73       |                                                                                                                                                                                                                    | 687,833    | (2) |
| Equity compensation plans not approved by security holders |       | 0                                                                                                                                                        |       | 0                                                                                                                    |       | 0                                                                                                                                                                                                                       |       |
| Total                                                      |       | 2,035,458                                                                                                                                                |       | $                                                                                                                    | 7.73       |                                                                                                                                                                                                                    | 687,833    |   |

 

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(1)               Consists of the Company’s 1989 and 1998Stock Option Plans and the 2003 Employee Stock Purchase Plan. For additionalinformation, see Notes 12 and 13 to the Consolidated Financial Statements.

(2)               Consists of 341,701 shares available forissuance under the 1998 Stock Option Plan and 346,132 shares available for issuanceunder the 2003 Employee Stock Purchase Plan.

 

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****Issuer Repurchasesof Common Stock.****No shares of the Company’s common stock wererepurchased by or on behalf of the Company during the fourth quarter of 2008.

 

**STOCK PERFORMANCE COMPARISON**

 

The following table compares the cumulativetotal return on a hypothetical investment of $100 in Virginia Commerce Bancorp’scommon stock at the closing price on December 31, 2003 through December 31,2008, with the hypothetical cumulative total return on the Nasdaq Stock MarketIndex (Total U.S.) and the Nasdaq Bank Index for the comparable period.

 

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Virginia Commerce Bancorp, Inc.          |       | $                     | 100.00     |   | $ | 111.29 |   | $ | 142.89 |   | $ | 146.48 |   | $ | 95.07 |   | $ | 46.09 |   |
| Nasdaq Stock Market Index - (Total U.S.) |       | $                     | 100.00     |   | $ | 108.59 |   | $ | 110.08 |   | $ | 120.56 |   | $ | 132.39 |   | $ | 78.72 |   |
| Nasdaq Bank Index                        |       | $                     | 100.00     |   | $ | 110.99 |   | $ | 106.18 |   | $ | 117.87 |   | $ | 91.85 |   | $ | 69.88 |   |

 

73

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**Annual Meeting of Stockholders**

 

The annual meeting of stockholders ofVirginia Commerce Bancorp, Inc. (the “Company”) will be held at 4:00 pm onWednesday, April 29, 2008 at “The Washington Golf & Country Club,”3017 North Glebe Road, Arlington, Virginia.

 

**Annual Report on Form 10-K**

 

**A copy of Form 10-K as filed with the Securities and ExchangeCommission is available without charge to stockholders upon written request to:**

 

**Lynda S. Cornell**

**Assistant to the Chief Executive Officer**

**Virginia Commerce Bancorp, Inc.**

**5350 Lee Highway**

**Arlington, VA 22207**

 

#### **InternetAccess To Company Documents**

 

The Company provides access to its SEC filings through the Bank’s website at www.vcbonline.com. After accessing the web site, the filings areavailable upon selecting “about us/stock information/financial information.”Reports available include the annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and all amendmentsto those reports as soon as reasonably practicable after the reports areelectronically filed or furnished to the SEC.

 

#### **FINANCIAL STATEMENTS ANDEXHIBITS**

 

The following financialstatements are included in this report:

 

Consolidated Balance Sheets at December 31,2007 and 2008

ConsolidatedStatements of Income for the years ended December 31, 2006, 2007 and 2008

ConsolidatedStatements of Cash Flows for the years ended December 31, 2006, 2007 and2008

ConsolidatedStatements of Changes in Stockholders’ Equity for the years ended December 31,2006, 2007 and 2008

Notes to the ConsolidatedFinancial Statements

Reports of IndependentRegistered Public Accounting Firm

 

All financialstatement schedules have been omitted as the required information is eitherinapplicable or included in the consolidated financial statements or relatednotes.

 

Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Articles of Incorporation of Virginia  Commerce Bancorp, Inc., as amended (1)                                                                                                                                                                                                                                               |
| 3.2                  |       | Articles of Amendment to the Articles of Incorporation relating to  the Series A Preferred Stock (2)                                                                                                                                                                                                                        |
| 3.3                  |       | Bylaws of Virginia Commerce  Bancorp, Inc. (3)                                                                                                                                                                                                                                                                              |
| 4.1                  |       | Junior Subordinated Indenture, dated as of  December 19, 2002 between Virginia Commerce Bancorp, Inc. and The  Bank of New York, as Indenture Trustee (4)                                                                                                                                                              |
| 4.2                  |       | Amended and Restated Declaration of Trust,  dated as of December 19, 2002 among Virginia Commerce  Bancorp, Inc., The Bank of New York, as Property Trustee, The Bank of  New York (Delaware), as Delaware Trustee, and Peter A. Converse, William K.  Beauchesne and Marcia J. Hopkins as Administrative Trustees (4) |
| 4.3                  |       | Guarantee Agreement dated as of  December 19, 2002, between Virginia Commerce Bancorp, Inc. and The  Bank of New York, as Guarantee Trustee (4)                                                                                                                                                                        |
| 4.4                  |       | Junior Subordinated Indenture, dated as of  December 20, 2005 between Virginia Commerce Bancorp, Inc. and  Wilmington Trust Company, as Trustee, (4)                                                                                                                                                                   |
| 4.5                  |       | Amended and Restated Declaration of Trust,  dated as December 20, 2005, between Virginia Commerce Bancorp, Inc.  and Wilmington Trust Company, as Delaware Trustee and Institutional Trustee,  and Peter A. Converse, William K. Beauchesne and Marcia J. Hopkins as  Administrative Trustees (4)                      |

 

74

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6                  |       | Guarantee Agreement dated as of  December 20, 2005, between Virginia Commerce Bancorp, Inc. and  Wilmington Trust Company, as Guarantee Trustee (4)                                                                                                                                                                            |
| 4.7                  |       | Junior Subordinated Indenture, dates as of  September 24, 2008, between Virginia Commerce Bancorp, Inc. and  Wilmington Trust Company, as Indenture Trustee (5)                                                                                                                                                                |
| 4.8                  |       | Amended and Restated Declaration of Trust,  dated as of September 24, 2008 among Virginia Commerce  Bancorp, Inc., Wilmington Trust Company, as Property Trustee, Wilmington  Trust Company (Delaware), as Delaware Trustee, and Peter A. Converse, William  K. Beauchesne and Jennifer Manning as Administrative Trustees (5) |
| 4.9                  |       | Guarantee Agreement dated as of September 24, 2008, between  Virginia Commerce Bancorp, Inc. and Wilmington Trust Company, as  Guarantee Trustee (5)                                                                                                                                                                           |
| 4.10                 |       | Warrant to Purchase Common Stock issued in connection with 2008 Trust  Preferred Securities (6)                                                                                                                                                                                                                                          |
| 4.10                 |       | Warrant to Purchase Common Stock issued pursuant to Capital Purchase  Program (7)                                                                                                                                                                                                                                                        |
| 10.1                 |       | Amended and Restated 1998 Stock Option Plan  (8)                                                                                                                                                                                                                                                                                         |
| 10.2                 |       | Virginia Commerce Bancorp amended and Restated  Employee Stock Purchase plan (9)                                                                                                                                                                                                                                                         |
| 10.3                 |       | 2007 Virginia Commerce Bank Executive and  Director Deferred Compensation Plan (10)                                                                                                                                                                                                                                                      |
| 11                   |       | Statement Regarding Computation of Per  Share Earnings See Note 9 to the Consolidated Financial Statements                                                                                                                                                                                                                               |
| 21                   |       | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                           |
| 23                   |       | Consent of Yount, Hyde & Barbour, PC, Independent Registered  Public Accounting Firm                                                                                                                                                                                                                                            |
| 31.1                 |       | Certification of Peter A. Converse, Chief  Executive Officer                                                                                                                                                                                                                                                                             |
| 31.2                 |       | Certification of William K. Beauchesne,  Treasurer and Chief Financial Officer                                                                                                                                                                                                                                                           |
| 32.1                 |       | Certification of Peter A. Converse, Chief  Executive Officer                                                                                                                                                                                                                                                                             |
| 32.2                 |       | Certification of William K. Beauchesne,  Treasurer and Chief Financial Officer                                                                                                                                                                                                                                                           |

 

----

| (1)  |   | Incorporated by reference to the same  numbered exhibit to the Company’s Quarterly Report on Form 10-K for the  quarter ended March 31, 2006.                                                   |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Incorporated by reference to exhibit 3.1 to  the Company’s Current Report on Form 8-K filed on December 15,  2008.                                                                              |
| (3)  |   | Incorporated by reference to exhibit 3.2 to  the Company’s Current Report on Form 8-K filed July 27, 2007.                                                                                      |
| (4)  |   | Not filed in accordance with the provisions  of Item 601(b)(4)(iii) of Regulation S-K. Virginia Commerce  Bancorp, Inc. agrees to provide a copy of these documents to the  Commission upon request. |
| (5)  |   | Incorporated by reference to the Company’s  current report on Form 8-K filed on September 25, 2008.                                                                                             |
| (6)  |   | Incorporated by reference to the Company’s  current report on Form 8-K filed on September 25, 2008.                                                                                             |
| (7)  |   | Incorporated by reference to exhibit 4.1 to  the Company’s Current Report on Form 8-K filed on December 15,  2008.                                                                              |
| (8)  |   | Incorporated by reference to exhibit 4 to  the Company’s Registration Statement on Form S-8 (No. 333-142447).                                                                                   |
| (9)  |   | Incorporated by reference to exhibit 4 to  the Company’s Registration Statement on Form S-8 (No. 333-109079).                                                                                   |
| (10) |   | Incorporated by reference to the same  numbered exhibit to the Company’s annual Report on Form 10-K for the  year ended December 31, 2006.                                                      |

 

75

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | VIRGINIA COMMERCE BANCORP, INC. |
|--------|---------------------------------|
|   |                            |
|   |                            |
|   | By:                             | /s/ Peter A. Converse |
|   |                            | Peter A. Converse, Chief Executive Officer |

 

Dated:  March 11, 2009

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Name**                              | ** ** | **Capacity**                                  | ** ** | **Date**            |
|---------------------------------------|------------|-----------------------------------------------|------------|---------------------|
|                                  |       |                                          |       |                |
|  /s/  Leonard Adler              |       | Director                                      |       | March 11, 2009 |
| Leonard Adler                         |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
| /s/ Michael G. Anzilotti              |       | Director, President                           |       | March 11, 2009 |
| Michael G. Anzilotti                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  Peter A. Converse          |       | Director, Chief Executive Officer             |       | March 11, 2009 |
| Peter A. Converse                     |       | (Principal Executive Officer)                 |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  W. Douglas Fisher          |       | Chairman of the Board of Directors            |       | March 11, 2009 |
| W. Douglas Fisher                     |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  David M. Guernsey          |       | Vice Chairman of the Board of Directors       |       | March 11, 2009 |
| David M. Guernsey                     |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  Robert H. L’Hommedieu |       | Director                                      |       | March 11, 2009 |
| Robert H. L’Hommedieu            |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  Norris E. Mitchell         |       | Director                                      |       | March 11, 2009 |
| Norris E. Mitchell                    |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  Arthur L. Walters          |       | Vice Chairman of the Board of Directors       |       | March 11, 2009 |
| Arthur L. Walters                     |       |                                          |       |                |
|                                  |       |                                          |       |                |
|                                  |       |                                          |       |                |
|  /s/  William K. Beauchesne      |       | Treasurer and Chief Financial Officer         |       | March 11, 2009 |
| William K. Beauchesne                 |       | (Principal Financial and Accounting  Officer) |       |                |

 

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