**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 

**Annual report under Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For thefiscal year ended December 31, 2007**

 

**Commissionfile number: 000-28635**

 

**Virginia CommerceBancorp, Inc.**

(Exactname of registrant as specified in its charter)

 

| **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 telephonenumber: **703.534.0700**

 

Securities registeredunder Section 12(b) of the Act: **Common Stock, $1.00 par value**

 

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

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Section 405of the Securities Act.  

Yes  o No x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.

Yes  o No x

 

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

 

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

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer or a smallerreporting company. See the definitions of “large accelerated filer” “acceleratedfiler” 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 |
|---------------------------------|---------------------|-------------------------|-----------------------------------|

 

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

 

The registrant’s Common Stock is traded on theNasdaq Global Select Market under the symbol VCBI. The aggregate market valueof the approximately 17,155,250 shares of Common Stock of the registrant issuedand outstanding held by non-affiliates on June 30, 2007 was approximately$290.1 million, based on the closing sales price of $16.91 per share on thatdate. For purposes of this calculation, the term “affiliate” refers to alldirectors, executive officers and 10% shareholders of the registrant.

 

As of the close of business on March 1, 2008,24,118,323 shares of the registrant’s Common Stock were outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive ProxyStatement for the Annual Meeting of Shareholders, to be held on April 30,2008, are incorporated by reference in part III hereof.

 

# ** **

# ****

# ** **

# **Form 10-K Cross Reference Sheet**

# ** **

Thefollowing shows the location in this Annual Report on Form 10-K or theCompany’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 30,2008, 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 56 through 65.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-------------------|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **        | **Item 1A.**  | **Risk Factors.** See “Risk Factors” at pages 21 through 24.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|              |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | **Item 1B.**  | **Unresolved Staff Comments.** None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|              |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | **Item 2.**   | **Properties.**See “Properties” at  page 65.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **        | ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **        | **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 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **        | ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **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 66.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **        | ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **        | **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 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **        | ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **        | **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 26 through 55.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | ** **    | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **        | **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 24 and “Management Report on Internal Control Over  Financial Reporting” at page 25.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|              |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **        | **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 66 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, Financial Statement  Schedules.**See “Financial Statements and  Exhibits” at page 68.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

## ** **

2

----

#### ** **

#### **FIVE YEAR FINANCIAL SUMMARY**

 
| ** **                                          | ** ** | **Year Ended December 31,**                                         | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected Year-End Balances**                      |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Total assets                                        |       | $                                                                                  | 2,339,697  |   | $ | 1,949,082 |   | $ | 1,518,425 |   | $ | 1,139,353 |   | $ | 881,694 |   |
| Total stockholders’ equity                     |       | 169,143                                                                            |       | 139,851 |   | 111,818 |   | 91,324 |   | 55,092 |   |
| Total loans (net)                                   |       | 1,924,741                                                                          |       | 1,629,827 |   | 1,270,255 |   | 925,782 |   | 654,851 |   |
| Total deposits                                      |       | 1,869,165                                                                          |       | 1,605,941 |   | 1,243,506 |   | 970,968 |   | 773,511 |   |
| ** **                                          |       |                                                                               |       |   |   |   |   |   |   |   |   |
| **Summary Results of Operations**                   |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Interest income                                     |       | $                                                                                  | 154,138    |   | $ | 125,292 |   | $ | 86,478 |   | $ | 57,998 |   | $ | 45,968 |   |
| Interest expense                                    |       | 78,981                                                                             |       | 56,487 |   | 29,811 |   | 16,331 |   | 13,893 |   |
| Net interest income                                 |       | $                                                                                  | 75,157     |   | $ | 68,805 |   | $ | 56,667 |   | $ | 41,667 |   | $ | 32,075 |   |
| Provision for loan losses                           |       | 4,340                                                                              |       | 4,406 |   | 3,772 |   | 2,989 |   | 1,575 |   |
| Net interest income after provision for loan losses |       | $                                                                                  | 70,817     |   | $ | 64,399 |   | $ | 52,895 |   | $ | 38,678 |   | $ | 30,500 |   |
| Non-interest income                                 |       | 7,883                                                                              |       | 7,323 |   | 6,676 |   | 5,759 |   | 7,746 |   |
| Non-interest expense                                |       | 39,694                                                                             |       | 34,289 |   | 29,466 |   | 22,807 |   | 20,820 |   |
| Income before taxes                                 |       | $                                                                                  | 39,006     |   | $ | 37,433 |   | $ | 30,105 |   | $ | 21,630 |   | $ | 17,426 |   |
| Income tax expense                                  |       | 13,219                                                                             |       | 12,925 |   | 10,438 |   | 7,401 |   | 5,880 |   |
| Net income                                          |       | $                                                                                  | 25,787     |   | $ | 24,508 |   | $ | 19,667 |   | $ | 14,229 |   | $ | 11,546 |   |
| ** **                                          |       |                                                                               |       |   |   |   |   |   |   |   |   |
| **Per Share Data (1)**                              |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Net income, basic                                   |       | $                                                                                  | 1.08       |   | $ | 1.04 |   | $ | 0.85 |   | $ | 0.65 |   | $ | 0.57 |   |
| Net income, diluted                                 |       | $                                                                                  | 1.04       |   | $ | 0.98 |   | $ | 0.79 |   | $ | 0.60 |   | $ | 0.52 |   |
| Book value                                          |       | $                                                                                  | 7.04       |   | $ | 5.90 |   | $ | 4.83 |   | $ | 4.01 |   | $ | 2.72 |   |
| Average number of shares outstanding:               |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                               |       | 23,930,220                                                                         |       | 23,600,762 |   | 23,117,635 |   | 21,800,825 |   | 20,075,228 |   |
| Diluted                                             |       | 24,890,186                                                                         |       | 24,954,322 |   | 24,732,085 |   | 23,644,779 |   | 21,946,177 |   |
| ** **                                          |       |                                                                               |       |   |   |   |   |   |   |   |   |
| **Growth and Significant Ratios**                   |       |                                                                               |       |   |   |   |   |   |   |   |   |
| % Change in net income                              |       | 5.22                                                                               | %          | 24.61 | % | 38.22 | % | 23.24 | % | 50.42 | % |
| % Change in assets                                  |       | 20.04                                                                              | %          | 28.36 | % | 33.27 | % | 29.22 | % | 32.89 | % |
| % Change in loans (net)                             |       | 18.09                                                                              | %          | 28.31 | % | 37.21 | % | 41.37 | % | 26.69 | % |
| % Change in deposits                                |       | 16.39                                                                              | %          | 29.15 | % | 28.07 | % | 25.53 | % | 36.42 | % |
| % Change in equity                                  |       | 20.95                                                                              | %          | 25.07 | % | 22.44 | % | 65.77 | % | 31.64 | % |
| Equity to asset ratio                               |       | 7.23                                                                               | %          | 7.18 | % | 7.36 | % | 8.02 | % | 6.25 | % |
| Return on average assets                            |       | 1.21                                                                               | %          | 1.40 | % | 1.45 | % | 1.39 | % | 1.47 | % |
| Return on average equity                            |       | 16.75                                                                              | %          | 19.51 | % | 19.44 | % | 19.28 | % | 23.71 | % |
| Average equity to average assets                    |       | 7.22                                                                               | %          | 7.19 | % | 7.47 | % | 7.22 | % | 6.21 | % |
| Efficiency ratio (2)                                |       | 47.80                                                                              | %          | 45.04 | % | 46.52 | % | 48.01 | % | 52.17 | % |

 

----

(1)                      Adjusted forall years presented giving retroactive effect to a two-for-one split in theform of a 100% stock dividend in 2003, five-for-four stock splits in the formof 25% stock dividends in 2004 and 2005, a three-for-two stock split in the form of a 50% stock dividend in 2006,and a 10% stock dividend in 2007.

(2)                      Computed bydividing non-interest expense by the sum of net interest income on a taxequivalent basis and non-interest income, net of securities gains orlosses.  This is a non-GAAP financialmeasure, which we believe provides investors with important informationregarding our operational efficiency. Comparison of our efficiency ratio with those of other companies may notbe possible, because other companies may calculate the efficiency ratiodifferently.

 

3

----

 

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

 

**Forward-Looking Statements**

 

This management’sdiscussion and analysis and other portions of this report, containforward-looking statements within the meaning of the Securities and ExchangeAct of 1934, as amended, including statements of goals, intentions, andexpectations as to future trends, plans, events or results of Companyoperations and policies and regarding general economic conditions. In somecases, forward-looking statements can be identified by use of words such as “may,”“will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,”“continue,” “should,” and similar words or phrases. These statements are basedupon current and anticipated economic conditions, nationally and in the Company’smarket, interest rates and interest rate policy, competitive factors, and otherconditions which by their nature, are not susceptible to accurate forecast, andare subject to significant uncertainty. Because of these uncertainties and theassumptions on which this discussion and the forward-looking statements arebased, actual future operations and results may differ materially from thoseindicated herein. Readers are cautioned against placing undue reliance on anysuch forward-looking statements. The Company’s past results are not necessarilyindicative 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 presentsmanagement’s discussion and analysis of the consolidated financial conditionand results of operations of Virginia Commerce Bancorp, Inc. andsubsidiaries (the “Company”) as of the dates and for the periods indicated.This discussion should be read in conjunction with the Company’s ConsolidatedFinancial Statements and the Notes thereto, and other financial data appearingelsewhere in this report. The Company is the parent bank holding company forVirginia Commerce Bank (the “Bank”), a Virginia state-chartered bank thatcommenced operations in May 1988. The Bank pursues a traditional communitybanking strategy, offering a full range of business and consumer bankingservices through twenty-five branch offices, two residential mortgage officesand one investment services office.

 

Headquartered inArlington, Virginia, Virginia Commerce serves the Northern Virginia suburbs of Washington,D.C., including Arlington, Fairfax, Fauquier, Loudoun, Prince William,Spotsylvania and Stafford Counties and the cities of Alexandria, Fairfax, FallsChurch, Fredericksburg, Manassas and Manassas Park. Its service area alsocovers, to a lesser extent, Washington, D.C. and the nearby Maryland countiesof Montgomery and Prince Georges. 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 their firms, business executives, investors and consumers.Additionally, the Bank has strong market niches in commercial real estate andconstruction lending and operates its residential mortgage lending division asits only business segment. Over the past five years, the Company hasexperienced significant growth in total assets, loans, deposits and net income.

 

**Critical Accounting Policies**

 

During the year ended December 31,2007, there were no changes in the Company’s critical accounting policies asreflected in the Company’s most recent annual or quarterly report.

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States (GAAP).  The financial information contained withinour statements is, to a significant extent, financial information that is basedon measures of the financial effects of transactions and events that havealready occurred.  A variety of factorscould affect the ultimate value that is obtained either when earning income,recognizing an expense, recovering an asset or relieving a liability.  We use historical loss factors as one factorin 

 

4

----

 

determiningthe inherent loss that may be present in our loan portfolio.  Actual losses could differ significantly fromthe historical factors that we use. In addition, GAAP itself may change fromone previously acceptable method to another method. Although the economics ofour transactions would be the same, the timing of events that would impact ourtransactions could change.

 

Estimates, assumptions, and judgments are necessarywhen assets and liabilities are required to be recorded at fair value, when adecline in the value of an asset not carried on the financial statements atfair value warrants an impairment write-down or valuation reserve to beestablished, or when an asset or liability needs to be recorded contingent upona future event. Carrying assets and liabilities at fair value inherently resultsin more financial statement volatility. The fair values and the informationused to record valuation adjustments for certain assets and liabilities arebased either on quoted market prices or are provided by other third-partysources, when available. The estimates used in management’s assessment of theadequacy of the allowance for loan losses require that management makeassumptions about matters that are uncertain at the time of estimation.Differences in these assumptions and differences between the estimated andactual losses could have a material effect.

 

The allowance forloan losses 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 for loan losses has three basiccomponents:  the specific allowance, theformula 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 testing includes consideration ofthe borrower’s overall financial condition, resources and payment record,support available from financial guarantors and the fair market value ofcollateral.  These factors are combinedto estimate the probability and severity of inherent losses based on the Company’scalculation of the loss embedded in the individual loan. Large groups ofsmaller balance, homogeneous loans are collectively evaluated for impairment.The formula allowance is used to provide additional reserves within a loancategory for impaired loans where a specific reserve was not allocated.  Impaired loans which meet the criteria forsubstandard, doubtful and loss are segregated from performing loans within theportfolio.  Internally classified loansare then grouped by loan type (commercial, commercial real estate, commercialconstruction, residential real estate, residential construction orinstallment). Each loan type is assigned an allowance factor based onmanagement’s estimate of the associated risk, complexity and size of theindividual loans within the particular loan category.  Classified loans are assigned a higherallowance factor than non-rated loans due to management’s concerns regardingcollectibility or management’s knowledge of particular elements surrounding theborrower.  Allowance factors grow withthe worsening of the internal risk rating. 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 ineither the formula or specific allowance. Allowance factors and the overallsize of the allowance may change from period to period based on management’sassessment of the above described factors and the relative weights given toeach factor.  For furtherinformation regarding the allowance for loan losses see Notes 1 and 4 to theConsolidated Financial Statements and the discussion under the caption “AssetQuality – 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 1,2007.  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 7.5 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 thegrant to 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. For 2007, 

 

5

----

 

expected term wascalculated using the simplified method identified in Staff Accounting Bulletin No. 107.  In 2008, changes in the expected outstandingterm for all awards based on historical exercise behavior could affect theestimated value of future grants. See Notes 1 and 12 to the ConsolidatedFinancial Statements for additional information regarding the Stock Option Planand related expense.

 

**FinancialPerformance Overview**

 

For the year ended December 31, 2007,total assets increased $390.6 million, or 20.0%, from $1.95 billion at December 31,2006, to $2.34 billion, with loans, net of the allowance for loan losses,increasing $294.9 million, or 18.1%, from $1.63 billion at December 31,2006, to $1.92 billion at December 31, 2007. This growth in loans andtotal assets was funded by an increase in total deposits of $263.2 million, or16.4%, from $1.61 billion at December 31, 2006, to $1.87 billion, a $73.6million increase in repurchase agreements and federal funds purchased and $25million in other borrowed funds. Net income for the year ended December 31,2007, was up $1.3 million, or 5.2%, from $24.5 million in 2006, to $25.8million with a $6.4 million increase in net interest income, the Company’sprimary source of revenue.

 

In 2006, total assets increased $430.7million, or 28.4%, from $1.52 billion at December 31, 2005, to $1.95billion, with loans increasing $359.6 million, or 28.3%, from $1.27 billion at December 31,2005, to $1.63 billion. As in 2007, the majority of the growth in loans and totalassets was funded by increases in deposits, with total deposits rising $362.4million, or 29.2%, from $1.24 billion at December 31, 2005, to $1.60billion at the end of 2006. Additional funding was provided by a $37.1 millionincrease in repurchase agreements and federal funds purchased. Net income in2006 was up $4.8 million, or 24.6%, from $19.7 million in 2005, to $24.5million with growth in net-interest income again being the primary factor.

 

Asnoted, the Company achieved significant growth in loans in 2007. Loans are theCompany’s major asset and as a result the major contributor to interest income.The majority of loan growth occurred in real estate mortgage loans, which rose$218.6 million, or 23.2%, from $940.3 million at December 31, 2006, to $1.16billion at December 31, 2007. Commercial loans represented the secondlargest increase rising $48.2 million, or 25.3%, from $190.5 million at December 31,2006, to $238.7 million, while construction loans increased $29.3 million, or5.7%, from $515.0 million at the end of 2006, to $544.3 million. In 2006, realestate mortgage loans rose $161.5 million, real estate construction loansrepresented the second largest increase at $134.0 million, and commercial loansrose $68.3 million.

 

Whileloans are the Company’s major asset, deposits are the Company’s major source offunding and as a result the major contributor to interest expense. In 2007,deposits increased by $263.2 million, or 16.4%, with non-interest-bearingdemand deposits increasing by $26.9 million, or 14.4%, to $213.8 million,savings and interest-bearing demand deposits increasing $57.7 million, or12.6%, and time deposits growing $178.7 million, or 18.6%, from $959.5 millionat December 31, 2006, to $1.14 billion. For the year ended December 31,2006, deposit growth included a decline in non-interest-bearing demand depositsby $1.6 million, a $109.9 million increase in savings and interest-bearingdemand deposits, and a $254.1 million increase in time deposits. In addition tothe strong growth in deposits, repurchase agreements, the majority of whichrepresent sweep funds of significant commercial demand deposit customers, andFederal funds purchased increased $73.6 million, or 49.5%, from $148.9 millionat December 31, 2006, to $222.5 million at December 31, 2007, andincreased $37.1 million, or 33.2%, in 2006.

 

TheCompany’s investment securities portfolio represents its second largest assetand contributor to interest income and is generally maintained as a primarysource of liquidity. In 2007, the portfolio increased by $92.0 million, or39.3%, from $234.2 million at December 31, 2006, to $326.2 million at December 31,2007, with growth concentrated in U.S. Government Agency obligations andobligations of states and political subdivisions. In 2006 the portfolioincreased $61.1 million, or 35.3%, from $173.1 million at December 31,2005, to $234.2 million, with growth concentrated in U.S. Government Agencyobligations.

 

Forthe year ended December 31, 2007, the Company achieved record earnings of$25.8 million, an increase of 5.2% compared to earnings of $24.5 million forthe prior fiscal year as net interest income increased $6.4 million, or 9.2%,from $68.8 million in 2006, to $75.2 million in 2007, non-interest incomeincreased $560 thousand, or 7.6%, from $7.3 million in 2006, to $7.9 million,while provisions for loan losses were down $66 thousand, and  non-interest expense rose 15.8%, from $34.3million in 2006, to $39.7 million. As a result, the Company’s efficiency ratio,as defined, rose from 45.0% for the year ended December 31, 2006, to 47.8%in 2007. In 2006, earnings of $24.5 million increased $4.8 million, or 24.6%,compared to earnings of $19.7 million in 2005, with net interest 

 

6

----

 

incomeincreasing $12.1 million, or 21.4%, non-interest income rising $647 thousand,or 9.7%, provisions for loan losses increasing $634 thousand, whilenon-interest expense rose $4.8 million, or 16.4%. For the year ended December 31,2005, earnings of $19.7 million represented an increase of 38.2% compared toearnings of $14.2 million in 2004. On a diluted per share basis earnings were$1.04, $0.98, and $0.79 in 2007, 2006, and 2005, respectively, while theCompany’s return on average assets was 1.21% for 2007, as compared to 1.40% in2006 and 1.45% in 2005. Return on average equity was 16.75% in 2007, 19.51% in2006, and 19.44% in 2005.

 

Stockholders’equity increased by $29.2 million in 2007, or 20.9%, from $139.9 million at December 31,2006, to $169.1 million, with earnings of $25.8 million, a $1.9 millionincrease in other comprehensive income related to the investment securitiesportfolio, $1.2 million in proceeds and tax benefits related to the exercise ofstock options by Company directors and officers and the purchase of stock byCompany employees under an Employee Stock Purchase Plan, and $427 thousand instock option expense credits.  In 2006,stockholders’ equity increased $28.0 million, or 25.1%, from $111.8 million at December 31,2005, to $139.8 million, with earnings of $24.5 million, an $853 thousandincrease in other comprehensive income related to the investment securitiesportfolio, $2.4 million in proceeds and tax benefits related to the exercise ofstock options by Company directors and officers and the purchase of stock byCompany employees under an Employee Stock Purchase Plan, and $257 thousand instock option expense credits. The total number of common shares outstandingincreased in 2007 by 2,462,597, with 2,171,604 shares issued due to a tenpercent stock dividend in May 2007, 288,976 shares issued as a result ofthe exercise of stock options by Company directors and officers and 2,017shares issued to employees under the Company’s Employee Stock Purchase Plan.

 

**NetInterest Income**

 

Net interest income is the excess of interest earned on loans andinvestments over the interest paid on deposits and borrowings and is theCompany’s primary revenue source. Net interest income is thereby affected byoverall balance sheet growth, changes in interest rates and changes in the mixof investments, loans, deposits and borrowings. In 2007, net interest incomeincreased $6.4 million, or 9.2%, from $68.8 million in 2006, to $75.2 milliondue to the significant growth in loans as the net interest margin fell from4.07% in 2006, to 3.65%. In 2006, net interest income increased $12.1 million,or 21.4%, from $56.7 million in 2005, to $68.8 million due again to significantloan growth as the net interest margin fell from 4.30% in 2005, to 4.07%. In2005, net interest income increased $15.0 million, or 36.0%, from $41.7 millionin 2004, to $56.7 million.

 

On June 30, 2004, the Federal Open Market Committee (FOMC) beganincreasing the fed funds target rate from a historically low level of 1.00%, by325 basis points to 4.25% by the end of 2005. As a result, the Company’s yield on interest-earning assets increasedfrom 5.89% in 2004 to 6.57% in 2005, while the cost of interest-bearingliabilities also increased from 2.03% in 2004 to 2.79% in 2005. The result wasa decline in the interest rate spread; however, the overall net interest marginincreased from 4.23% in 2004 to 4.30% in 2005, as the level of average earningassets to average interest-bearing liabilities rose from 122.6% in 2004 to123.5% in 2005.

 

In 2006, the FOMC continued increasing the target rate another 100basis points to 5.25%, and the Company’s yield on interest-earning assets rosefrom 6.57% in 2005 to 7.41% in 2006. However, as the yield curve eventuallyinverted with higher short-term than long-term rates, funds began shifting fromlower rate to higher rate accounts, and as competition for deposits in thelocal market intensified, the cost of interest-bearing liabilities increased toa greater extent, from 2.79% in 2005 to 4.00% in 2006. As a result, the netinterest margin fell from 4.30% in 2005 to 4.07% in 2006.

 

In 2007, as short term interest rates remained high for most of theyear, and strong competition for deposits in the local market continued, thecost of interest-bearing liabilities rose from 4.00% in 2006 to 4.46%, whilethe yield on interest-earning assets rose by only five basis points from 7.41%in 2006 to 7.46%. While local deposit rates have come down recently, as theFOMC began easing in September 2007, and treasury rates have fallensignificantly, competition does remain strong. This factor and expectations offurther easing by the FOMC, which drives down the prime rate and immediatelyreprices twenty-eight percent of the Company’s loan portfolio, will continue topressure the net interest margin lower, at least in the first half of 2008.Management anticipates the margin to range from 3.30% to 3.55% for theforeseeable future.  Tables 1, 2 and 3provide further information with regard to yields, costs, the changes in netinterest income and associated risk.

 

7

----

 

**TABLE1: AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES**

 

The following table shows the average balance sheets for each of theyears ended December 31, 2007, 2006, and 2005. In addition, the amounts ofinterest earned on interest-earning assets, with related yields, and interestexpense on interest-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 $5.5 million, $5.4 million and $4.0 millionfor 2007, 2006, and 2005, respectively.

 
| ** **                                                                 | ** ** | **2007**             | ** ** | **2006**                     | ** ** | **2005**                    | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------------------------|------------|
| **(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)                                                             |       | $280,852             |       | $13,948                      |       | 5.04                        | %          | $199,658 |   | $8,746 |   | 4.42 | % | $168,733 |   | $6,167 |   | 3.70 | % |
| Loans, net of  unearned income                                             |       | 1,766,501            |       | 138,919                      |       | 7.87                        | %          | 1,470,264 |   | 115,405 |   | 7.85 | % | 1,128,801 |   | 79,614 |   | 7.05 | % |
| Interest-bearing  deposits in other banks                                  |       | 2,802                |       | 140                          |       | 5.01                        | %          | 1,055 |   | 55 |   | 5.21 | % | 1,020 |   | 30 |   | 2.95 | % |
| Federal funds  sold                                                        |       | 22,372               |       | 1,131                        |       | 4.98                        | %          | 21,972 |   | 1,086 |   | 4.94 | % | 19,599 |   | 667 |   | 3.40 | % |
| **Total  interest-earning assets**                                         |       | $2,072,527           |       | $154,138                     |       | 7.46                        | %          | $1,692,949 |   | $125,292 |   | 7.41 | % | $1,318,153 |   | $86,478 |   | 6.57 | % |
| Other assets                                                               |       | 61,415               |       |                         |       |                        |       | 54,029 |   |   |   |   |   | 35,800 |   |   |   |   |   |
| **Total  assets**                                                          |       | $2,133,942           |       |                         |       |                        |       | $1,746,978 |   |   |   |   |   | $1,353,953 |   |   |   |   |   |
|                                                                       |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities &  Stockholders’ Equity**                      |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                                                 |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                               |       | $155,047             |       | $2,499                       |       | 1.61                        | %          | $174,853 |   | $2,880 |   | 1.65 | % | $207,053 |   | $3,422 |   | 1.65 | % |
| Money market  accounts                                                     |       | 224,524              |       | 8,806                        |       | 3.92                        | %          | 195,482 |   | 6,879 |   | 3.52 | % | 110,623 |   | 1,988 |   | 1.80 | % |
| Savings accounts                                                           |       | 120,061              |       | 5,148                        |       | 4.29                        | %          | 26,934 |   | 608 |   | 2.26 | % | 20,497 |   | 112 |   | 0.55 | % |
| Time deposits                                                              |       | 1,054,962            |       | 52,945                       |       | 5.02                        | %          | 843,661 |   | 37,785 |   | 4.48 | % | 633,572 |   | 20,910 |   | 3.30 | % |
| Total  interest-bearing deposits                                           |       | $1,554,594           |       | $69,398                      |       | 4.46                        | %          | $1,240,930 |   | $48,152 |   | 3.88 | % | $971,745 |   | $26,432 |   | 2.72 | % |
| Securities sold under  agreement to repurchase and federal funds purchased |       | 165,499              |       | 6,259                        |       | 3.78                        | %          | 118,092 |   | 4,730 |   | 4.01 | % | 63,342 |   | 1,710 |   | 2.70 | % |
| Other borrowed  funds                                                      |       | 6,986                |       | 225                          |       | 3.18                        | %          | 9,726 |   | 506 |   | 5.20 | % | 13,759 |   | 423 |   | 3.07 | % |
| Trust preferred  capital notes                                             |       | 42,614               |       | 3,099                        |       | 7.17                        | %          | 43,000 |   | 3,099 |   | 7.21 | % | 18,822 |   | 1,246 |   | 6.62 | % |
| **Total  interest-bearing liabilities**                                    |       | $1,769,693           |       | $78,981                      |       | 4.46                        | %          | $1,411,748 |   | $56,487 |   | 4.00 | % | $1,067,668 |   | $29,811 |   | 2.79 | % |
| Demand deposits  and other liabilities                                     |       | 210,262              |       |                         |       |                        |       | 209,642 |   |   |   |   |   | 185,134 |   |   |   |   |   |
| **Total  liabilities**                                                     |       | $1,979,955           |       |                         |       |                        |       | $1,621,390 |   |   |   |   |   | $1,252,802 |   |   |   |   |   |
| Stockholders’  equity                                                 |       | 153,987              |       |                         |       |                        |       | 125,588 |   |   |   |   |   | 101,151 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity**                       |       | $2,133,942           |       |                         |       |                        |       | $1,746,978 |   |   |   |   |   | $1,353,953 |   |   |   |   |   |
| Interest rate  spread                                                      |       |                 |       |                         |       | 3.00                        | %          |   |   |   |   | 3.41 | % |   |   |   |   | 3.78 | % |
| **Net  interest income and margin**                                        |       |                 |       | $75,157                      |       | 3.65                        | %          |   |   | $68,805 |   | 4.07 | % |   |   | $56,667 |   | 4.30 | % |

 

----

(1) Yields on securities available-for-sale have been calculatedon the basis of historical cost and do not give effect to changes in the fairvalue of those securities, which are reflected as a component of stockholders’equity. Average yields on tax-exempt securities are stated on a tax equivalentbasis, using a 35% rate for 2007, 2006 and 2005.

 

8

----

 

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

 

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

 
| ** **                                                                 | ** ** | **2007 compared to 2006** | ** ** | **2006 compared to 2005** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **Increase/(Decrease)  Due to**     | ** ** | **Total  Increase/**                     | ** ** | **Increase/(Decrease)  Due to** | ** ** | **Total  Increase/** | ** ** |
| **(Dollars in thousands)**                                       | ** ** | **Volume**                               | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                                                 | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest Income**                                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans                                                                      |       | $                                        | 23,184     |                                     | $          | 330 |   | $ | 23,514 |   | $ | 26,802 |   | $ | 8,989 |   | $ | 35,791 |   |
| Securities                                                                 |       | 3,953                                    |       | 1,249                                    |       | 5,202 |   | 1,368 |   | 1,211 |   | 2,579 |   |
| Interest bearing deposits in other banks                                   |       | 87                                       |       | (2                                       | )          | 85 |   | 2 |   | 23 |   | 25 |   |
| Federal funds sold                                                         |       | 35                                       |       | 10                                       |       | 45 |   | 131 |   | 288 |   | 419 |   |
| Total interest income                                                      |       | $                                        | 27,259     |                                     | $          | 1,587 |   | $ | 28,846 |   | $ | 28,303 |   | $ | 10,511 |   | $ | 38,814 |   |
|                                                                       |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| **Interest Expense**                                                       |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits:                                                 |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                               |       | $                                        | (319       | )                                        | $          | (62 | ) | $ | (381 | ) | $ | (531 | ) | $ | (11 | ) | $ | (542 | ) |
| Money market accounts                                                      |       | 1,139                                    |       | 788                                      |       | 1,927 |   | 2,986 |   | 1,905 |   | 4,891 |   |
| Savings accounts                                                           |       | 3,993                                    |       | 547                                      |       | 4,540 |   | 145 |   | 351 |   | 496 |   |
| Time deposits                                                              |       | 10,605                                   |       | 4,555                                    |       | 15,160 |   | 9,404 |   | 7,471 |   | 16,875 |   |
| Total interest-bearing deposits                                            |       | $                                        | 15,418     |                                     | $          | 5,828 |   | $ | 21,246 |   | $ | 12,004 |   | $ | 9,716 |   | $ | 21,720 |   |
| Securities sold under agreement to repurchase and federal funds  purchased |       | 1,793                                    |       | (264                                     | )          | 1,529 |   | 2,193 |   | 827 |   | 3,020 |   |
| Other borrowed funds                                                       |       | (88                                      | )          | (193                                     | )          | (281 | ) | (204 | ) | 287 |   | 83 |   |
| Trust preferred capital notes                                              |       | (28                                      | )          | 28                                       |       | — |   | 1,760 |   | 93 |   | 1,853 |   |
| Total interest expense                                                     |       | $                                        | 17,095     |                                     | $          | 5,399 |   | $ | 22,494 |   | $ | 15,753 |   | $ | 10,923 |   | $ | 26,676 |   |
| **Change in Net Interest Income**                                          | ** ** | **$**                                    | **10,164** | ** **                               | **$**      | **(3,812** | **)** | **$** | **6,352** | ** ** | **$** | **12,550** | ** ** | **$** | **(412** | **)** | **$** | **12,138** | ** ** |

 

**Asset/LiabilityManagement and Quantitative and Qualitative Disclosures about Market Risk**

 

In the normal course of business, the Company is exposed to marketrisk, or interest rate risk, as its net income is largely dependent on its netinterest income. Market risk is managed by the Company’s Asset/LiabilityManagement Committee that formulates and monitors the performance of theCompany based on established levels of market risk as dictated by policy. Insetting tolerance levels, or limits on market risk, the Committee considers theimpact on earnings and capital, the level and general direction of interestrates, liquidity, local economic conditions and other factors. Interest raterisk, or interest sensitivity, can be defined as the amount of forecasted netinterest income that may be gained or lost due to favorable or unfavorablemovements in interest rates. Interest rate risk, or sensitivity, arises whenthe maturity or repricing of interest-earning assets differs from the maturingor repricing of interest-bearing liabilities and as a result of the differencebetween total interest-earning assets and interest-bearing liabilities. TheCompany seeks to manage interest rate sensitivity while enhancing net interestincome by periodically adjusting this asset/liability position; however, ingeneral the Company has maintained a fairly balanced sensitivity to changes ininterest rates.

 

One of the tools used by the Company to assess interest sensitivity ona monthly basis is the static gap analysis that measures the cumulativedifferences between the amounts of assets and liabilities maturing or repricingwithin various time periods. It is the Company’s goal to limit the one-yearcumulative difference, or gap, in an attempt to limit changes in future netinterest income from changes in market interest rates. A static gap analysis isshown in Table 3 below, and reflects the earlier of the maturity or repricingdates for various assets, including prepayment and amortization estimates, andliabilities as of December 31, 2007. At that point in time, the Companyhad a cumulative net liability sensitive one-year gap position of $313.7million, or a negative 13.8% of total interest-earning assets.

 

Thisposition would generally indicate that over a period of one-year net interestearnings should decrease in a rising interest rate environment as moreliabilities would reprice than assets and should increase in a falling interestrate environment. However, this measurement of interest rate risk sensitivityrepresents a static position as of a single day and is not necessarilyindicative of the Company’s position at any other point in time, does not takeinto account the differences in sensitivity of yields and costs on specificassets and liabilities to changes in market rates, and it 

 

9

----

 

doesnot take into account the specific timing of when changes to a specific assetor liability will occur. More accurate measures of interest sensitivity areprovided to the Company using earnings simulation models.

 

# **TABLE3:  STATIC GAP ANALYSIS**

 
| ** **                                                                  | ** ** | **Interest Sensitivity Periods** | ** **  |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| **At December 31, 2007**                                     | ** ** | **Within**                                 | ** **  | **91 to 365** | ** ** | **Over 1 to 5** | ** ** | **Over 5** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                                        |       | **90 Days**                           |        | **Days** |   | **Years** |   | **Years** |   | **Total** |   |
| ** **                                                                  |       |                                       |        |   |   |   |   |   |   |   |   |
| **Interest-earning Assets**                                                 |       |                                       |        |   |   |   |   |   |   |   |   |
| Securities, at amortized cost                                               |       | $                                          | 57,243      |   | $ | 102,296 |   | $ | 107,163 |   | $ | 57,674 |   | $ | 324,376 |   |
| Interest bearing deposits in other banks                                    |       | —                                     |        | 1,140 |   | — |   | — |   | 1,140 |   |
| Loans held-for-sale                                                         |       | 4,339                                      |        | — |   | — |   | — |   | 4,339 |   |
| Loans, net of unearned income                                               |       | 770,010                                    |        | 312,194 |   | 721,423 |   | 143,374 |   | 1,947,001 |   |
| Total interest-earning assets                                               |       | $                                          | 831,592     |   | $ | 415,630 |   | $ | 828,586 |   | $ | 201,048 |   | $ | 2,276,856 |   |
|                                                                        |       |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing Liabilities**                                            |       |                                       |        |   |   |   |   |   |   |   |   |
| NOW accounts                                                                |       | $                                          | 39,236      |   | — |   | $ | 117,710 |   | — |   | $ | 156,946 |   |
| Money market accounts                                                       |       | 98,148                                     |        | — |   | 98,148 |   | — |   | 196,296 |   |
| Savings accounts                                                            |       | 81,961                                     |        | — |   | 81,962 |   | — |   | 163,923 |   |
| Time deposits                                                               |       | 453,262                                    |        | 625,752 |   | 59,166 |   | — |   | 1,138,180 |   |
| Securities sold under agreements to repurchase and federal funds  purchased |       | 222,534                                    |        | — |   | — |   | — |   | 222,534 |   |
| Other borrowed funds                                                        |       | 25,000                                     |        | — |   | — |   | — |   | 25,000 |   |
| Trust preferred capital notes                                               |       | —                                     |        | 15,000 |   | 25,000 |   | — |   | 40,000 |   |
| Total interest-bearing liabilities                                          |       | $                                          | 920,141     |   | $ | 640,752 |   | $ | 381,986 |   | $ | — |   | $ | 1,942,879 |   |
|                                                                        |       |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cumulative maturity / interest sensitivity gap**                          | ** ** | **$**                                      | **(88,549** | **)** | **$** | **(313,671** | **)** | **$** | **132,929** | ** ** | **$** | **333,977** | ** ** | **$** | **333,977** | ** ** |
| As % of total interest-earning assets                                       |       | (3.9                                       | )%          | (13.8 | )% | 5.8 | % | 14.7 | % |   |   |

 

Inorder to more closely measure interest sensitivity, the Company uses earningssimulation models on a quarterly basis. These models utilize the Company’sfinancial data and various management assumptions as to balance sheet growth,interest rates, operating expenses and other non-interest income sources toforecast a base level of earnings over a one-year period. This base level ofearnings is then shocked assuming a 200 basis points higher and lower level ofinterest rates over the forecasted period. The most recent earnings simulation model was run based on data as December 31,2007, and consistent with the Company’s belief from its static gap analysisthat its balance sheet structure was liability sensitive at that time, themodel projected that forecasted earnings over a one-year period would decreaseby 11.2% if interest rates were to be 200 basis points higher than expected,and forecasted earnings would increase by 8.6% if interest rates were to be 200basis points lower than expected.

 

Managementbelieves the modeled results are consistent with the short duration of itsbalance sheet and given the many variables that affect the actual timing ofwhen assets and liabilities will reprice. The Company has set a limit on thismeasurement of interest sensitivity to a maximum decline in earnings of 20%.Since the earnings model uses numerous assumptions regarding the effect ofchanges in interest rates on the timing and extent of repricingcharacteristics, future cash flows and customer behavior, the model cannotprecisely estimate net income and the effect on net income from sudden changesin interest rates. Actual results will differ from the simulated results due tothe timing, magnitude and frequency of interest rate changes and changes in marketconditions and management strategies, among other factors.

 

**Non-InterestIncome**

 

The Company’snon-interest income sources include service charges and other fees on depositaccounts, fees and net gains from loans originated and sold through its mortgagelending division, commissions from non-deposit investment sales and increasesin the cash surrender value of Bank owned life insurance policies. Non-interestincome increased $560 thousand in 2007, or 7.6%, from $7.3 million in 2006 to$7.9 million, and increased $647 thousand, or 9.7%, from $6.7 million in 2005,to $7.3 million in 2006. In 2005, non-interest income increased $917 thousand,or 15.9%, from $5.8 million in 2004, to $6.7 million. Increases have occurredin all categories over the 

 

10

----

 

three year periodwith the exception of fees and net gains on mortgage loans held-for-sale whichwere up slightly in 2005, but down $248 thousand and $352 thousand in 2006 and2007, respectively.

 

The Company’s mortgagelending division began operations in 1999 and reached a record level of $287.8million in originations in 2003. In 2004, due to lower levels of refinancingactivity, originations fell to $175.9 million, while in 2005, that numberincreased to $202.3 million; however; pricing became more competitive and asnoted above, fees and net gains for 2005 were up slightly. In 2006,originations of mortgage loans for sale fell back to $174.9 million and in 2007fell to $158.0 million as the Bank began to hold more of its originations inportfolio rather than selling them, due to a reduction in demand and availableloan products in the secondary market. The Company continues to try to expandthe level of loans originated for sale and the resulting fees and net gainsthereon, with the hiring of additional commission based loan officers andexpanding its base of correspondents to enhance product offerings. Adversechanges in the local real estate market, consumer confidence, and interestrates, as well as increased competition could adversely impact the level ofloans originated for sale, and the resulting fees and earnings thereon.

 

Service chargesand other fees, which include monthly deposit account maintenance charges,overdraft fees, ATM fees and charges, debit card income, safe deposit boxrents, merchant discount fee income, and lock-box service fees, increased $162thousand, or 5.0%, from $3.2 million in 2006, to $3.4 million in 2007. In 2006,service charges and other fees were up $673 thousand, or 26.4%, from $2.6million to $3.2 million, while in 2005 they were up $804 thousand, or 46.0%.The increase in 2005 and 2006 included $284 thousand and $767 thousand,respectively, in higher overdraft fees associated with a new overdraftprotection program implemented in September 2005 for the majority of theBank’s retail checking account customers, while in 2005 fees from lock-boxoperations were up $348 thousand as a result of increased activity in onecustomer account related to donations for Hurricane Katrina, and weresubsequently down $301 thousand in 2006. Management expects service charges andother fees to continue higher, however, the year-over-year increases may becloser to what was experienced in 2007.

 

In an effort toimprove non-interest income sources, the Company added non-deposit investmentservices, through a third party arrangement, in 2002. This new service providedfor $456 thousand in additional income in 2005, $621 thousand in 2006 and $770thousand in 2007. Slight improvement is expected in 2008.

 

Other non-interestincome increased $350 thousand in 2007 to $768 thousand, increased $57 thousandin 2006, and was mostly unchanged in 2005. The majority of this income sourceis related to the purchase of $6 million in Bank owned life insurance policiesin May 2003 and another $6.2 million in November 2006, which providedfor most of the $350 thousand increase in 2007. These polices, which arerecorded on the Company’s balance sheets under other assets, accounted for $608thousand of the $768 thousand in other income in 2007, and $309 thousand of the$418 thousand in other income in 2006. The Company does not anticipateadditional purchases of this insurance in 2008. Income from Bank owned lifeinsurance is non-taxable.

 

In 2007,non-interest income results also include a gain on the sale of OREO of $638thousand, and a loss of $387 thousand on the sale of securities related to apartial restructuring of the securities portfolio, both in the third quarter.

 

**Non-InterestExpense**

 

Non-interest expense increased $5.4 million, or 15.8%, from $34.3million in 2006, to $39.7 million in 2007, increased $4.8 million, or 16.4%,from $29.5 million in 2005 to $34.3 million in 2006, and increased $6.7million, or 29.2%, from $22.8 million in 2004 to $29.5 million in 2005.Salaries and benefits accounted for $2.6 million, or 48.6%, of the totalincrease in non-interest expense in 2007, $2.6 million, or 53.7%, in 2006, and$3.8 million, or 57.7% in 2005. Commissions and incentive compensationassociated with the significant increases in total loans and the hiring ofadditional loan officers, together with increased compensation and benefitsexpense associated with additional employees added due to overall growth andbranch expansion were the reasons for the increases. The Company anticipatesthat salaries and benefits expense will continue to be the largest singlefactor in increased non-interest expenses in future periods due to branchexpansion and overall growth. In addition, the Company expensed $257 thousandin 2006, and $427 thousand in 2007 for incentive stock options granted in 2006and 2007, and that amount is expected to grow as grants continue in futureyears.

 

Occupancyexpenses, which include rents, depreciation, maintenance on buildings,leaseholds and equipment, increased $1.6 million, or 29.1%, from $5.4 millionin 2006, to $7.0 million in 2007, and increased $969 thousand, or 21.6%, in2006. In 2005, occupancy expense was up $1.2 million, or 38.2%. Theseyear-over-year increases were due to the opening of eleven new branch locationsbetween August 2004 and November 2007 and expanded office 

 

11

----

 

facilitiesfor lending units and other back office support departments. Occupancy expenseis expected to increase again in 2008 with three new branch locations to beopened in the first half of the year.

 

Dataprocessing expense decreased by $14 thousand in 2007, increased by $401thousand, or 25.8%, in 2006, and increased $239 thousand, or 18.2%, in 2005.These increases in 2005 and 2006 are consistent with overall growth in thetotal number of loan and deposit accounts processed, while the decline inexpense in 2007 was due to the signing of a new contract, with the sameprocessor, that resulted in substantially lower per item costs.

 

Otheroperating expenses, which include advertising and public relations expenses,bank franchise taxes, legal and professional fees, insurance,telecommunications, supplies and postage, increased by $1.2 million, or 17.4%,from $7.0 million in 2006, to $8.2 million in 2007, and increased $863thousand, or 14.1%, from $6.1 million in 2005, to $7.0 million in 2006. In2005, other operating expenses increased $1.3 million, or 28.0%. The increasesover the years are generally due to branch expansion and overall growth, withyear-over-year increases in advertising, public relations and bank franchisetax expenses, while in the second quarter of 2007 the Bank, along with allother depository institutions insured by the FDIC, began to pay depositinsurance premiums for the first time since the mid 1990’s. The Company expectsother operating expenses will continue to increase in future periods due tooverall growth and as it continues expanding its branch network.

 

**IncomeTaxes**

 

The Company’s income tax provisions areadjusted for non-deductible expenses and non-taxable interest after applyingthe U.S. federal income tax rate of 35%. The provision for income taxes totaled$13.2 million, $12.9 million and $10.4 million, for the years ended December 31,2007, 2006 and 2005, respectively. The effects of non-deductible expenses andnon-taxable interest on the Company’s income tax provisions are minimal. Forfurther information regarding the provisions for income taxes see Note 8 to theConsolidated Financial Statements.

 

### **AssetQuality - Provision and Allowance For Loan Losses**

### ** **

The provision forloan losses is based upon management’s estimate of the amount required tomaintain an adequate allowance for loan losses reflective of the risks in theloan portfolio.  In 2007, net charge-offstotaled $181 thousand compared to $126 thousand and $353 thousand in 2006 and2005, respectively.  The provision forloan loss expense in 2007 was $4.3 million compared to $4.4 million in 2006,and $3.8 million in 2005. As a result, the total allowance for loan lossesincreased $4.2 million, or 23.0%, from $18.1 million at December 31, 2006,to $22.3 million at December 31, 2007, increased $4.3 million, or 31.0%,in 2006, and increased 32.9% in 2005. These increases in the total allowancefor loan losses over the past three years are consistent with an 18.1% increasein loans in 2007, 28.3% in 2006, and 37.2% in 2005, as well as increases in thelevel of non-performing and past due loans from $1.2 million at December 31,2004, to $2.0 million at December 31, 2005, to $3.9 million at December 31,2006, and to $4.4 million at December 31, 2007.

 

The allowance hasalso increased as a percent of total loans from 1.07% at December 31,2005, to 1.10% as of December 31, 2006, and to 1.14% as of December 31,2007, due to increases in other identified potential problem loans, which areclassified as impaired loans, and although well-secured and currentlyperforming, but requiring higher reserve levels, rose from $4.6 million at December 31,2005, to $11.6 million at December 31, 2006, and to $15.4 million at December 31,2007.   See “Risk Elements andNon-Performing Assets” later in this discussion for more information onnon-performing loans and past due loans and other impaired loans.

 

Management feels that the allowance for loan losses is adequate at December 31,2007. However, there can be no assurance that additional provisions for loanlosses will not be required in the future, including as a result of possiblechanges in the economic assumptions underlying management’s estimates andjudgments, adverse developments in the economy, on a national basis or in theCompany’s market area, or changes in the circumstances of particular borrowers.

 

The Companygenerates a quarterly analysis of the allowance for loan losses, with theobjective of quantifying portfolio risk into a dollar figure of inherentlosses, thereby translating the subjective risk value into an objective number.Emphasis is placed on semi-annual independent external loan reviews and monthlyinternal reviews.  The determination ofthe allowance for loan losses is based on applying and summing the results ofeight qualitative factors and one quantitative factor to each category of loansalong with any specific or additional allowance for impaired loans within theparticular category. Each factor is assigned a percentage weight and that totalweight is applied to each loan category. The resulting sum from each loancategory is then combined to arrive at a total 

 

12

----

 

allowance for allcategories. Factors are different for each loan category. Qualitative factorsinclude: levels and trends in delinquencies and non-accruals, trends in volumesand 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 and additional allowancesare required due to an increase in impaired loans. For further information regarding the allowance for loan losses see Notes1 and 4 to the Consolidated Financial Statements.

 

**TABLE 4: PROVISION AND ALLOWANCEFOR LOAN LOSSES**

 
| **(Dollars in thousands)**                                        | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance, beginning of period                                              |       | $          | 18,101     |       | $          | 13,821     |       | $          | 10,402     |       | $          | 7,457 |   | $ | 5,924 |   |
|                                                                        |       |       |       |       |       |       |       |       |       |       |       |
| **Charge-Offs**                                                             |       |       |       |       |       |       |       |       |       |       |       |
| Real estate loans                                                           |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | — |   | $ | — |   |
| Commercial loans                                                            |       | —     |       | 112        |       | 341        |       | —     |       | 30         |       |
| Consumer loans                                                              |       | 212        |       | 77         |       | 21         |       | 62         |       | 26         |       |
| Total charge-offs                                                           |       | $          | 212        |       | $          | 189        |       | $          | 362        |       | $          | 62 |   | $ | 56 |   |
|                                                                        |       |       |       |       |       |       |       |       |       |       |       |
| **Recoveries**                                                              |       |       |       |       |       |       |       |       |       |       |       |
| Real estate loans                                                           |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | — |   | $ | — |   |
| Commercial loans                                                            |       | —     |       | —     |       | —     |       | 12         |       | 2          |       |
| Consumer loans                                                              |       | 31         |       | 63         |       | 9          |       | 6          |       | 12         |       |
| Total recoveries                                                            |       | $          | 31         |       | $          | 63         |       | $          | 9          |       | $          | 18 |   | $ | 14 |   |
| Net charge-offs                                                             |       | $          | 181        |       | $          | 126        |       | $          | 353        |       | $          | 44 |   | $ | 42 |   |
|                                                                        |       |       |       |       |       |       |       |       |       |       |       |
| **Provision for loan losses**                                               | ** ** | **4,340**  | ** ** | **4,406**  | ** ** | **3,772**  | ** ** | **2,989**  | ** ** | **1,575**  | ** ** |
| Allowance, end of period                                                    |       | $          | 22,260     |       | $          | 18,101     |       | $          | 13,821     |       | $          | 10,402 |   | $ | 7,457 |   |
| Ratio of net charges-offs to average total loans outstanding during  period |       | 0.01       | %          | 0.01       | %          | 0.03       | %          | 0.01       | %          | 0.01       | %          |

 

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

# ** **

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

** **
| **(Dollars in thousands)**         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Allocation of allowance for loan losses:** |       |       |       |       |       |       |       |       |       |       |       |
| Real estate – mortgage                  |       | $          | 9,226      |       | $          | 8,654      |       | $          | 7,298      |       | $          | 5,584 |   | $ | 4,188 |   |
| Real estate – construction              |       | 6,612      |       | 4,939      |       | 3,599      |       | 2,328      |       | 1,789      |       |
| Commercial                                   |       | 6,304      |       | 4,449      |       | 2,865      |       | 2,422      |       | 1,434      |       |
| Consumer                                     |       | 118        |       | 59         |       | 59         |       | 68         |       | 46         |       |
| Balance, December 31,                   |       | $          | 22,260     |       | $          | 18,101     |       | $          | 13,821     |       | $          | 10,402 |   | $ | 7,457 |   |
|                                         |       |       |       |       |       |       |       |       |       |       |       |
| **Ratio of loans to total year-end loans:**  |       |       |       |       |       |       |       |       |       |       |       |
| Real estate – mortgage                  |       | 59         | %          | 57         | %          | 60         | %          | 65         | %          | 67         | %          |
| Real estate – construction              |       | 28         | %          | 31         | %          | 30         | %          | 25         | %          | 23         | %          |
| Commercial                                   |       | 12         | %          | 11         | %          | 9          | %          | 9          | %          | 9          | %          |
| Consumer                                     |       | 1          | %          | 1          | %          | 1          | %          | 1          | %          | 1          | %          |
|                                         |       | 100        | %          | 100        | %          | 100        | %          | 100        | %          | 100        | %          |

 

13

----

 

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

 

**RiskElements and Non-Performing Assets**

 

Non-performingassets consist of non-accrual loans, restructured loans, and other real estateowned (foreclosed properties). The total non-performing assets and loans thatare 90 days or more past due and still accruing interest increased by $485thousand, or 12.4%, from $3.9 million at year-end 2006 to $4.4 million atyear-end 2007, and increased by $1.9 million, or 95.9%, from $2.0 million atyear-end 2005. As a result, the level of non-performing assets and past dueloans to total assets increased from .13% at December 31, 2005, to .20% atDecember 31, 2006, and was down slightly to .19% at December 31,2007.

 

The Company expects itsratio of non-performing assets and past due loans to total assets to remain lowrelative to its peers, however, the ratio could increase due to an aggregate of$15.4 million in other impaired loans as of December 31, 2007, for whichmanagement has identified risk factors that may result in them not being repaidin accordance with their terms although the loans are generally well-securedand are currently performing. At December 31, 2006, other impaired loanswere $11.6 million and they were $4.6 million at December 31, 2005.  The $15.4 million as of December 31,2007, represents eight different borrowing relationships with two relationshipsrepresenting a significant portion of the total. See Notes 1 and 4 to theConsolidated Financial Statements for additional information regarding theCompany’s non-performing assets.

 

Loans are placedin non-accrual status when in the opinion of management the collection ofadditional interest is unlikely or a specific loan meets the criteria fornon-accrual status established by regulatory authorities.  No interest is taken into income onnon-accrual loans.  A loan remains onnon-accrual status until the loan is current as to both principal and interestor the borrower demonstrates the ability to pay and remain current, or both.

 

Foreclosed realproperties include properties that have been substantively repossessed oracquired in complete or partial satisfaction of debt.  Such properties, which are held for resale,are carried at the lower of cost or fair value, including a reduction for theestimated selling expenses, or principal balance of the related loan. In July 2007,the Company foreclosed on a $1.8 million non-performing loan and subsequentlysold the collateral property in September 2007 for a pre-tax gain of $638thousand. As of December 31, 2007, the Company held no foreclosed realproperties.

 

**TABLE 6: NON-PERFORMING ASSETS**

** **
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                          | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Non-accrual loans                                             |       | $                     | 3,826      |   | $ | 3,920 |   | $ | 1,994 |   | $ | 1,210 |   | $ | 462 |   |
| Restructured loans                                            |       | —                |       | — |   | — |   | — |   | 875 |   |
| Total non-performing assets                                   |       | $                     | 3,826      |   | $ | 3,920 |   | $ | 1,994 |   | $ | 1,210 |   | $ | 1,337 |   |
| Loans past due 90 days and still accruing                     |       | 579                   |       | — |   | 7 |   | — |   | 84 |   |
| **Total non-performing assets and past due loans**            | ** ** | **$**                 | **4,405**  | ** ** | **$** | **3,920** | ** ** | **$** | **2,001** | ** ** | **$** | **1,210** | ** ** | **$** | **1,421** | ** ** |
| Allowance for loan losses to total loans                      |       | 1.14                  | %          | 1.10 | % | 1.07 | % | 1.11 | % | 1.13 | % |
| Allowance for loan losses to non-performing loans             |       | 505.33                | %          | 461.76 | % | 693.1 | % | 859.7 | % | 557.7 | % |
| Non-performing assets and past due loans to total loans       |       | 0.23                  | %          | 0.24 | % | 0.15 | % | 0.13 | % | 0.21 | % |
| **Non-performing assets and past due loans to  total assets** | ** ** | **0.19**              | **%**      | **0.20** | **%** | **0.13** | **%** | **0.11** | **%** | **0.16** | **%** |

 

**LoanPortfolio**

 

The Bank’s lendingactivities are its principal source of income. Real estate loans, includingresidential permanents and construction, and commercial permanents, representthe major portion of the Bank’s loan portfolio. Loans, net of unearned incomeand the allowance for loan losses, increased $294.9 million, or 18.1%, from$1.63 billion at December 31, 2006, to $1.92 billion at December 31,2007, and increased $359.6 million, or 28.3%, from $1.27 billion at December 31,2005, to $1.63 billion at year-end 2006. The increase in loans in 2007 includedan increase 

 

14

----

 

in real estatemortgage loans of $218.6 million, or 23.2%, an increase in commercial loans of$48.2 million, or 25.3%, and an increase in real estate construction loans of$29.3 million, or 5.7%. In 2006, real estate mortgage loans increased $161.5million, or 20.7%, while real estate construction loans represented the secondlargest increase rising $134.0 million, or 35.2%, and commercial loansincreased $68.3 million, or 55.9%. The majority of the increase in real estatemortgage loans is concentrated in non-farm non-residential properties, whichhas been a primary focus of the Bank since its organization, while the increasein real estate construction loans in 2007 was attributable to commercialproperties, and in 2006 it was split between commercial properties andcommercial builders of single-family housing. At December 31, 2007, $302.4million of total real estate construction loans were to these commercialbuilders of single-family housing, $23.6 million were to individuals onsingle-family properties and $218.3 million were related to commercialproperties. At December 31, 2006, $347.5 million of real estateconstruction loans were to commercial builders of single-family housing, $18.3million were to individuals on single-family properties and $149.2 million wererelated to commercial properties. The Bank expects that real estateconstruction loans will continue to grow, but more at a pace somewhere betweenwhat was experienced in 2006 and 2007, although there can be no assurance. TheBank has also increased its focus on commercial lending over the past two yearswith the hiring of several loan officers devoted to developing that lendingarea.

 

As noted above,the majority of the Bank’s loan portfolio consists of construction andcommercial real estate loans.  At December 31,2007, the Bank had $302.4 million of construction loans to commercial buildersof single family housing in the Northern Virginia market, representing 15.5% oftotal loans, and down from 21.0% at December 31, 2006. These loans aremade to a number of unrelated entities and generally have a term of twelve toeighteen months.  Adverse developments inthe Northern Virginia real estate market or economy could have an adverseimpact on this portfolio of loans and the Company’s income and financialposition.  In addition, the Bank had$835.5 million, or 42.8% of the loan portfolio at December 31, 2007,secured by non-farm non-residential properties. These 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 business. At December 31,2007, the Company had no other concentrations of loans in any one industryexceeding 10% of its total loan portfolio. An industry for this purpose is defined as a group of counterparties thatare engaged in similar activities and have similar economic characteristicsthat would cause their ability to meet contractual obligations to be similarlyaffected by changes in economic or other conditions. The Bank seeks to manageits concentrations of loans through the establishment of limits on the level ofits various loan types to total loans and to total capital. For furtherinformation regarding concentrations of loans see Note 17 to the ConsolidatedFinancial Statements.

 

Underrecent guidance by the federal banking regulators, banks which haveconcentrations in construction, land development or commercial real estateloans would be expected to maintain higher levels of risk management and,potentially, higher levels of capital. It is possible that we may be requiredto maintain higher levels of capital than we would otherwise be expected tomaintain as a result of our levels of construction, development andcommercial real estate loans, which may require us to obtain additionalcapital.  Excluded from the scope of thisguidance are loans secured by non-farm nonresidential properties where theprimary source of repayment is the cash flow from the ongoing operations andactivities conducted by the party, or affiliate of the party, who owns the property

 

Tables 7 and 8present information pertaining to the composition of the loan portfolioincluding unearned income, the allowance for loan losses, and the maturity andrepricing characteristics of selected loans.

 

# **TABLE 7: SUMMARY OF TOTAL LOANS**

 
| ** **                           | ** ** | **December 31,** | ** **    |
|--------------------------------------|------------|-----------------------|---------------|
| **(Dollars in thousands)** | ** ** | **2007**              | ** **    | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Real estate - mortgage               |       | $                     | 1,158,820     |   | $ | 940,270 |   | $ | 778,788 |   | $ | 605,420 |   | $ | 444,411 |   |
| Real estate - construction           |       | 544,290               |          | 515,040 |   | 380,997 |   | 240,469 |   | 153,400 |   |
| Commercial                           |       | 238,670               |          | 190,527 |   | 122,243 |   | 88,725 |   | 61,178 |   |
| Consumer                             |       | 8,714                 |          | 6,997 |   | 7,386 |   | 5,879 |   | 6,061 |   |
| Farmland                             |       | 1,468                 |          | — |   | — |   | — |   | — |   |
| Total loans                          |       | $                     | 1,951,962     |   | $ | 1,652,834 |   | $ | 1,289,414 |   | $ | 940,493 |   | $ | 665,050 |   |
| Less unearned income                 |       | 4,961                 |          | 4,906 |   | 5,338 |   | 4,309 |   | 2,742 |   |
| Less allowance for loan losses       |       | 22,260                |          | 18,101 |   | 13,821 |   | 10,402 |   | 7,457 |   |
| **Loans, net**                       | ** ** | **$**                 | **1,924,741** | ** ** | **$** | **1,629,827** | ** ** | **$** | **1,270,255** | ** ** | **$** | **925,782** | ** ** | **$** | **654,851** | ** ** |

 

15

----

 

**TABLE 8: MATURITY/REPRICING SCHEDULE OF TOTALLOANS**

** **
| **At December 31, 2007  (Dollars in thousands)** | ** ** | **Real estate-mortgage** | ** **    | **Real estate-construction** | ** ** | **Commercial** | ** ** | **Consumer** | ** **  | **Farmland** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------|---------------|-----------------------------------|------------|----------------|------------|--------------|-------------|--------------|------------|------------|------------|
| ** **                                                                | ** ** | ** **                    | ** **    | ** **                        | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** ** | ** ** |
| **Variable:**                                                             | ** ** | ** **                    | ** **    | ** **                        | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** ** | ** ** |
| Within 1 year                                                             |       | $                             | 175,150       |                              | $          | 338,364        |       | $            | 114,114     |         | $          | 3,609      |       | $ | 1,468 |   | $ | 632,705 |   |
| 1-to-5 years                                                              |       | 371,303                       |          | 21,352                            |       | 5,532          |       | —       |        | —       |       | 398,187    |       |
| After 5 years                                                             |       | 58,295                        |          | 3,875                             |       | —         |       | —       |        | —       |       | 62,170     |       |
| Total                                                                     |       | $                             | 604,748       |                              | $          | 363,591        |       | $            | 119,646     |         | $          | 3,609      |       | $ | 1,468 |   | $ | 1,093,062 |   |
|                                                                      |       |                          |          |                              |       |           |       |         |        |         |       |       |       |
| **Fixed Rate:**                                                           | ** ** | ** **                    | ** **    | ** **                        | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** ** | ** ** |
| Within 1 year                                                             |       | $                             | 50,720        |                              | $          | 77,332         |       | $            | 25,384      |         | $          | 850        |       | — |   | $ | 154,286 |   |
| 1-to-5 years                                                              |       | 142,959                       |          | 70,766                            |       | 46,287         |       | 3,838        |        | —       |       | 263,851    |       |
| After 5 years                                                             |       | 360,393                       |          | 32,601                            |       | 47,353         |       | 416          |        | —       |       | 440,763    |       |
| Total                                                                     |       | $                             | 554,072       |                              | $          | 180,699        |       | $            | 119,024     |         | $          | 5,105      |       | $ | — |   | $ | 858,900 |   |
| **Total Loans**                                                           | ** ** | **$**                         | **1,158,820** | ** **                        | **$**      | **544,290**    | ** ** | **$**        | **238,670** | ** **   | **$**      | **8,714**  | ** ** | **$** | **1,468** | ** ** | **$** | **1,951,962** | ** ** |

#### ** **

**InvestmentSecurities**

 

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

 

Total securitiesincreased $92.0 million, or 39.3%, from $234.2 million at December 31,2006, to $326.2 million at December 31, 2007, and increased $61.1 million,or 35.3%, from $173.1 million at December 31, 2005, to $234.2 million at December 31,2006. Securities of U.S. Government Agencies represent the majority of theportfolio, with $115.1 million in mortgage-backed securities at December 31,2007, versus $40.7 million at December 31, 2006.  Table 9 provides information regarding thecomposition of the securities portfolio and Table 10 details the maturities andweighted average yields (on a tax equivalent basis) at the dates indicated. SeeNote 2 to the Consolidated Financial Statements for additional informationregarding the securities portfolio.

 

AtDecember 31, 2007, there were no single issuers, other than issuers whoare U.S. Government Agencies, whose securities owned by the Company had anaggregate book value of more than 10% of total stockholder’s equity of theCompany.

 

**TABLE 9: SECURITIES PORTFOLIO**

 
| ** **                                   | ** ** | **December 31,** | ** **  |
|----------------------------------------------|------------|-----------------------|-------------|
| ** **                                   | ** ** | **2007**              | ** **  | **2006** | ** ** | **2005** | ** ** |
| **(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           |       | $                     | 242,965     |   | 74.47 | % | $ | 174,074 |   | 74.33 | % | $ | 116,624 |   | 67.39 | % |
| Obligations of states/political subdivisions |       | 23,001                |        | 7.05 | % | 3,659 |   | 1.56 | % | 1,352 |   | 0.78 | % |
| Domestic corporate debt obligations          |       | 8,544                 |        | 2.62 | % | 6,055 |   | 2.59 | % | 6,043 |   | 3.49 | % |
| Federal Reserve Bank stock                   |       | 1,442                 |        | 0.44 | % | 1,442 |   | 0.62 | % | 1,442 |   | 0.83 | % |
| Federal Home Loan Bank stock                 |       | 4,631                 |        | 1.42 | % | 3,034 |   | 1.30 | % | 2,277 |   | 1.32 | % |
| Community Bankers’ Bank stock           |       | 55                    |        | 0.02 | % | 55 |   | 0.02 | % | 55 |   | 0.03 | % |
| ** **                                   | ** ** | **$**                 | **280,638** | ** ** | **86.02** | **%** | **$** | **188,319** | ** ** | **80.41** | **%** | **$** | **127,793** | ** ** | **73.84** | **%** |

 

16

----

 
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Dollars in thousands)**         | ** ** | **Book Value**   | ** ** | **Percent  of total** | ** ** | **Book Value** | ** ** | **Percent  of total** | ** ** | **Book Value** | ** ** | **Percent  of total** | ** ** |
| ** **                                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Held-to-maturity:**                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government Agency obligations           |       | $                     | 33,725     |   | 10.34 | % | $ | 35,520 |   | 15.17 | % | $ | 35,798 |   | 20.69 | % |
| Obligations of states/political subdivisions |       | 11,874                |       | 3.64 | % | 10,364 |   | 4.43 | % | 8,963 |   | 5.18 | % |
| Domestic corporate debt obligations          |       | —                |       | 0.00 | % | — |   | 0.00 | % | 499 |   | 0.29 | % |
| ** **                                   | ** ** | **$**                 | **45,599** | ** ** | **13.98** | **%** | **$** | **45,884** | ** ** | **19.59** | **%** | **$** | **45,260** | ** ** | **26.16** | **%** |
|                                         |       | $                     | 326,237    |   | 100.00 | % | $ | 234,203 |   | 100.00 | % | $ | 173,053 |   | 100.00 | % |

 

**TABLE 10:MATURITY OF SECURITIES**

 
| ** **                                                      | ** ** | **2007**            | ** **  | **2006**                     | ** ** | **2005**            | ** ** |
|-----------------------------------------------------------------|------------|---------------------|-------------|------------------------------|------------|---------------------|------------|
| **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                                        | ** ** | $                   | 8,269       |                         | 5.02       | %                   | $          | 36,246 |   | 3.49 | % | $ | 25,708 |   | 2.58 | % |
| Maturing after one through five years                           | ** ** | 165,110             |        | 5.26                         | %          | 132,512             | ** ** | 4.75 | % | 92,673 |   | 3.78 | % |
| Maturing after five through ten years                           | ** ** | 49,555              |        | 5.19                         | %          | 40,328              | ** ** | 4.95 | % | 34,741 |   | 4.73 | % |
| Maturing after ten years                                        | ** ** | 103,303             |        | 5.67                         | %          | 25,117              | ** ** | 5.62 | % | 19,931 |   | 5.30 | % |
|                                                            |       | **$**               | **326,237** | ** **                   | **5.37**   | **%**               | **$**      | **234,203** | ** ** | **4.67** | **%** | **$** | **173,053** | ** ** | **3.97** | **%** |

#### ** **

#### **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.

 

Totaldeposits increased $263.2 million, or 16.4%, from $1.61 billion at December 31,2006, to $1.87 billion at December 31, 2007, and increased $362.4 million,or 29.1%, from $1.24 billion at December 31, 2005, to $1.61 billion at December 31,2006. In 2007, growth by deposit category included a 14.4% increase in demanddeposits, a 12.6% increase in savings accounts and interest-bearing demanddeposits and an 18.6% increase in time deposits. In 2006, growth included a0.9% decrease in demand deposits, a 31.4% increase in savings accounts andinterest-bearing demand deposits and a 36.3% increase in time deposits. TheCompany attributes its growth in deposits to a strong and affluent localeconomy, the payment of interest rates at or near the highest in its market,and a strong emphasis on customer service.

 

In early 2004, due to historically lowinterest rates, many depositors held funds in lower rate savings andinterest-bearing demand deposits. As interest rates started to climb in thesecond half of 2004, large sums started transferring out into higher rateaccounts including time deposits, and this trend continued into 2005 and 2006. The growth in time deposits in 2006 wasalso supported by special advertised rates for maturities ranging from six tothirteen months, while the growth in savings and money market accounts were theresult of new product offerings that were also supported by special advertisedrates, as strong regional competition for deposits necessitated “paying up” fordeposit growth to help fund strong loan demand. In 2007, percentage growth bycategory was more balanced. Strong local competition, high short-term interestrates, and as noted, the shift of funds from lower rate interest-bearingchecking accounts, resulted in the average rate paid oninterest-bearing deposits increasing 69 basis points in 2005, from 2.03% in2004, to 2.72%, rising 116 basis points from 2.72% for the year ended December 31,2005, to 3.88% in 2006, and increasing another 58 basis points in 2007 toaverage 4.46%.  Due to lower interestrates in later part of 2007 and a continuing downward trend in early 2008, management expects the average rate paidon interest-bearing deposits will be lower in 2008, although there can be noassurance.

 

Table 11 details maturities of time depositswith balances of $100,000 or more, which represent 50.3% of total time depositsas of December 31, 2007, compared to 51.1% at December 31, 2006.Total time deposits represent 60.9% of total deposits as of December 31,2007, compared to 59.7% at December 31, 2006. See Note 6 to the 

 

17

----

 

Consolidated Financial Statements and Tables1 and 3 to this Management’s Discussion and Analysis for additional informationregarding the maturities of time deposits and average rates paid on allinterest-bearing deposits.

 

**TABLE 11: MATURITIES OF TIME DEPOSITS WITHBALANCES OF $100,000 OR MORE**

 
| ** **                           | ** ** | **December 31,** | ** **  |
|--------------------------------------|------------|-----------------------|-------------|
| **(Dollars in thousands)** | ** ** | **2007**              | ** **  | **2006** | ** ** | **2005** | ** ** |
| 3 months or less                     |       | $                     | 209,165     |   | $ | 151,876 |   | $ | 61,115 |   |
| 3-6 months                           |       | 243,880               |        | 127,637 |   | 41,648 |   |
| 6-12 months                          |       | 99,465                |        | 182,081 |   | 165,738 |   |
| Over 12 months                       |       | 19,975                |        | 29,123 |   | 69,679 |   |
| **Total**                            | ** ** | **$**                 | **572,485** | ** ** | **$** | **490,717** | ** ** | **$** | **338,180** | ** ** |

 

**Short-Term Borrowings**

 

Short-termborrowings consist of securities sold under agreements to repurchase, of which,as of December 31, 2007, $125 million are secured transactions withcustomers that mature the business day following the date sold, and the other$75 million are secured transactions with other banks.  The secured transactions with customers areprovided to significant commercial demand deposit customers and are considereda core funding source of the Bank. Short-term borrowings also include Federalfunds purchased, which are unsecured overnight borrowings from other banks andare generally used to accommodate short-term liquidity needs.  Table 12 provides information on the balancesand interest rates on short-term borrowings for the years ended December 31,2007, 2006 and 2005 (dollars in thousands):

 

**TABLE 12: SHORT-TERM BORROWINGS**

** **
| **At December 31,**                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Securities sold under agreement to repurchase |       | $        | 200,534    |     | $          | 108,370  |       | $ | 84,791 |   |
| Federal funds purchased                       |       | 22,000   |       | 40,501   |       | 27,003   |       |
| Total                                         |       | $        | 222,534    |     | $          | 148,871  |       | $ | 111,794 |   |
| Weighted interest rate at year end            |       | 3.36     | %          | 4.29     | %          | 3.71     | %          |
|                                          |       |     |       |     |       |     |       |
| Averages for the year ended December 31, |       |     |       |     |       |     |       |
| Outstanding                                   |       | $        | 165,499    |     | $          | 118,092  |       | $ | 63,342 |   |
| Interest rate                                 |       | 3.78     | %          | 4.01     | %          | 2.70     | %          |
|                                          |       |     |       |     |       |     |       |
| Maximum month-end outstanding                 |       | $        | 222,534    |     | $          | 148,871  |       | $ | 111,794 |   |

### ** **

### **Liquidity**

### ** **

The Company’s principal sources of liquidity and funding are itsdeposit base. The level of deposits necessary to support the Company’s lendingand investment activities is determined through monitoring loan demand.Considerations in managing the Company’s liquidity position include, but arenot limited to, scheduled cash flows from existing loans and investmentsecurities, anticipated deposit activity including the maturity of timedeposits, and projected needs from anticipated extensions of credit. TheCompany’s liquidity position is monitored daily by management to maintain alevel of liquidity conducive to efficiently meet current needs and is evaluatedfor both current and longer term needs as part of the asset/liability managementprocess.

 

TheCompany measures total liquidity through cash and cash equivalents, securitiesavailable-for-sale, mortgage loans held-for-sale, other loans and investmentsecurities maturing within one year, less securities pledged as collateral forrepurchase agreements, public deposits and other purposes, and less anyoutstanding federal funds purchased. These liquidity sources increased $33.2 million, or 6.1%, from $544.3million at December 31, 2006, to $577.5 million at December 31, 2007,and increased $138.4 million, or 34.1%, from $405.9 million at December 31,2005, to $544.3 million at December 31, 2006. 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 

 

18

----

 

Bankof Atlanta. See Note 14 to the Consolidated Financial Statements for furtherinformation regarding these additional liquidity sources.

 

**Capital**

 

Theassessment of capital adequacy depends on a number of factors such as assetquality, liquidity, earnings performance, changing competitive conditions andeconomic forces, and the overall level of growth. The adequacy of the Company’scurrent and future capital is monitored by management on an ongoing basis.Management seeks to maintain a capital structure that will assure an adequatelevel of capital to support anticipated asset growth and to absorb potentiallosses.

 

Boththe Company’s and the Bank’s capital levels continue to meet regulatoryrequirements.  The primary indicatorsrelied on by bank regulators in measuring the capital position are the Tier 1risk-based capital, total risk-based capital, and leverage ratios.  Tier 1 capital consists of common andqualifying preferred stockholders’ equity, less goodwill, and for the Companyincludes certain minority interests relating to bank subsidiary issued 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.  Total risk-based capital consists of Tier 1capital, qualifying subordinated debt, and a portion of the allowance for loanlosses, and for the Company, a limited amount of excess restricted core capitalelements.  Risk-based capital ratios arecalculated with reference to risk-weighted assets.  The leverage ratio compares Tier 1 capital tototal average assets.  The Bank’s Tier 1risk-based capital ratio was 7.77% at December 31, 2007, compared to 7.83%at December 31, 2006, and its total risk-based capital ratio was 10.73% atDecember 31, 2007, compared to 11.34% at December 31, 2006. Theseratios are in excess of the mandated minimum requirement of 4.00% and 8.00%,respectively. The Bank’s leverage ratio was 7.12% at December 31, 2007,compared to 7.18% at December 31, 2006. The Company’s Tier 1 risk-basedcapital ratio, total risk-based capital ratio, and leverage ratio was 9.90%,10.96%, and 9.09%, respectively, at December 31, 2007, compared to 10.53%,11.57%, and 9.61% at December 31, 2006. The declines in these capitalratios in 2007, was due to the significant level of growth in assets. Both theCompany’s and Bank’s capital positions reflect proceeds of the issuance of $40million in trust preferred securities and the contribution of an equivalentamount to the Bank as subordinated debt.

 

Theability of the Company to continue to grow is dependent on its earnings and theability to obtain additional funds for contribution to the Bank’s capital,through borrowing, the sale of additional common stock, or through the issuanceof additional trust preferred securities or other qualifying securities. In theevent that the Company is unable to obtain additional capital for the Bank on atimely basis, the growth of the Company and the Bank may be curtailed, and theCompany and the Bank may be required to reduce their level of assets in orderto maintain compliance with regulatory capital requirements. Under thosecircumstances net income and the rate of growth of net income may be adverselyaffected. The Company believes that its current capital and access to sourcesof additional capital is sufficient to meet anticipated growth over the nextyear, although there can be no assurance.

 

Guidance by the federal banking regulatorsprovides that banks which have concentrations in construction, land developmentor commercial real estate loans (other than loans for majority owner occupiedproperties) would be expected to maintain higher levels of risk management and,potentially, higher levels of capital. It is possible that we may be requiredto maintain higher levels of capital than we would otherwise be expected tomaintain as a result of our levels of construction, development andcommercial real estate loans, which may require us to obtain additionalcapital.

 

TheFederal Reserve has revised the capital treatment of trust preferredsecurities. As a result, the capital treatment of trust preferred securitieshas been revised to provide that beginning in 2009, such securities can becounted as Tier 1 capital at the holding company level, together with otherrestricted core capital elements, up to 25% of total capital (net of goodwill),and any excess as Tier 2 capital up to 50% of Tier 1 capital.  At December 31, 2007, trust preferredsecurities represented 19.2% of the Company’s Tier 1 capital and 17.4% of itstotal risk-based capital. Should future trust preferred issuances to increaseholding company capital levels not be available to the same extent ascurrently, the Company may be required to raise additional equity capital, throughthe sale of common stock or other means, sooner than it would otherwise do so.See Note 15 to the Consolidated Financial Statements for further informationregarding trust preferred securities.

 

19

----

 

**Contractual Obligations**

 

TheCompany has entered into certain contractual obligations including long termdebt, operating leases and obligations under service contracts. The followingtable summarizes the Company’s contractual cash obligations as of December 31,2007.

 

**TABLE13: 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 |       | $                                    | 222,534    |   | $ | 147,534 |   | $ | — |   | $ | 50,000 |   | $ | 25,000 |   |
| Other borrowed funds                                                        |       | 25,000                               |       | — |   | — |   | 25,000 |   | — |   |
| Trust preferred securities and related capital notes                        |       | 40,000                               |       | 15,000 |   | — |   | 25,000 |   | — |   |
| Operating leases                                                            |       | 44,880                               |       | 3,536 |   | 7,725 |   | 6,920 |   | 26,699 |   |
| Data processing services                                                    |       | 4,430                                |       | 4,430 |   | — |   | — |   | — |   |
| Total contractual cash obligations                                          |       | $                                    | 336,844    |   | $ | 170,500 |   | $ | 7,725 |   | $ | 106,920 |   | $ | 51,699 |   |

 

Theobligation for data processing services represents estimates of earlytermination charges.  Of the $40.0million 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 30,2008.  The table does not reflect depositliabilities entered into in the ordinary course of the Company’s bankingbusiness.  At December 31, 2007, theCompany had approximately $731.0 million of demand and savings deposits,exclusive of interest, which have no stated maturity or payment date.  The Company also had approximately $1.14billion 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 $1.2 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-Balance Sheet Arrangements**

 

TheCompany enters into certain off-balance sheet arrangements in the normal courseof 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.

 

20

----

 

**RISKFACTORS**

 

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

 

Over the last five years our asset level has increased rapidly,including a 20.0% increase in 2007. Our diluted earnings per share have grownat a compound annual rate of 23.0% from 2003 to 2007. We may not be able tosustain our historical rate of growth, or grow at all. Various factors, such aseconomic conditions, regulatory considerations and competition, may impede ourrate of growth and our branch expansion, or may make future growth or branchingless profitable or more expensive. If we experience a significant decrease inour rate of growth as compared to our historic rate of growth, our income, orour rate of income growth, may decline, and we may not be able to maintain orreduce our expense levels and efficiency ratio, which will adversely affect ourresults of operations and financial condition.

 

**Our concentrations of loans could result in higher than normal risk ofloan defaults and losses.**

 

We have a substantial amount ofloans secured by real estate in the Northern Virginia/Washington, D.C.metropolitan area, and substantially all of our loans are to borrowers in thatarea.  We also have a significant amountof real estate construction loans and land related loans for residential andcommercial developments. At December 31, 2007, 87.3% of our total loans weresecured by real estate, primarily commercial real estate. Of these loans, $544million, or 27.9% of total loans, were construction and land loans.  An additional 12.2% 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 singlefamily residential mortgage loans. In addition, the repayments of these loans,often depends on the successful operation of a business or the sale ordevelopment of the underlying property, and as a result are more likely to beadversely affected by adverse conditions in the real estate market or theeconomy in general. These concentrations expose us to the risk that adversedevelopments in the real estate market, or in the general economic conditionsin the Northern Virginia/Washington, D.C. metropolitan area, could increase thelevels of non-performing loans and charge-offs, and reduce loan demand. In thatevent, we would likely experience lower earnings or losses. Additionally, if, for any reason,economic conditions in the area deteriorate, or there is significant volatilityor weakness in the economy or any significant sector of the area’s economy, ourability to develop our business relationships may be diminished, the qualityand collectibility of our loans may be adversely affected, the value ofcollateral may decline and loan demand may be reduced.  Additionally, under guidance from the bankingagencies, we may be required to maintain higher levels of capital than we wouldotherwise be expected to maintain, and to employ greater risk managementefforts, as a result of our real estate concentrations.

 

Commercial and commercial real estate and construction loans also generally have larger balances than single familymortgages loans and other consumer loans. Because the loan portfoliocontains a significant number of commercial and commercial real estate andconstruction loans with relatively large balances, the deterioration of one ora few of these loans may cause a significant increase in nonperforming assets.An increase in nonperforming loans could result in: a loss of earnings fromthese loans, an increase in the provision for loan losses, or an increase inloan charge-offs, which could have an adverse impact on our results ofoperations and financial condition.

 

**Lack of seasoning of ourloan portfolio could increase the risk of credit defaults in the future.**

 

Due to the rapid growth of the Bank, a large portion of the loans in ourloan portfolio and of our lending relationships is of relatively recent origin.In general, loans do not begin to show signs of credit deterioration or defaultuntil they have been outstanding for some period of time, a process referred toas “seasoning.” As a result, a portfolio of older loans will usually behavemore predictably than a newer portfolio. Because a large portion of our loanportfolio is relatively new, the current level of delinquencies and defaultsmay not be representative of the level that will prevail when the portfoliobecomes more seasoned, which may be higher than current levels. Ifdelinquencies and defaults increase, we 

 

21

----

 

may be required to increase our provision for loan losses, which wouldadversely affect our results of operations and financial condition.

 

**Our financial condition andresults of operations would be adversely affected if our allowance for loanlosses is not sufficient to absorb actual losses or if we are required toincrease our allowance for loan losses.**

 

We havehistorically enjoyed a low level of non-performing assets and net charge-offs,both in absolute dollars, as a percentage of loans and as compared to otherbanking institutions.  As a result ofthis historical experience, we have incurred lower loan loss provision expense,which has positively impacted our earnings. However, experience in the bankingindustry indicates that a portion of our loans will become delinquent, thatsome of our loans may only be partially repaid or may never be repaid and wemay 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.  As a result, there can be no assurance thatwe will be able to maintain our low levels of non-performing assets andcharge-offs. 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 may not be able to successfully managecontinued growth.**

 

We intend to seek further growth in the level of ourassets and deposits and the number of our branches. Our plans for 2008 includethe opening of at least three new branches, both within our existing footprintand to expand our footprint in Northern Virginia.  We cannot be certain as to our ability tomanage increased levels of assets and liabilities, and an expanded branchsystem, 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.

 

**Our continued growthdepends on our ability to meet minimum regulatory capital levels. Growth andshareholder returns may be adversely affected if sources of capital are notavailable to help us meet them.**

 

Since we became the holding company for the Bank, wehave sought to maximize shareholder returns by leveraging our capital.  If earnings do not meet our currentestimates, if we incur unanticipated losses or expenses, or if we grow fasterthan expected, we may need to obtain additional capital sooner than expected,through borrowing, additional issuances of debt or equity securities, orotherwise.  If we do not have continuedaccess to sufficient capital, we may be required to reduce our level of assetsor reduce our rate of growth in order to maintain regulatory compliance. Underthose circumstances net income and the rate of growth of net income may beadversely affected. Additional issuances of equity securities could have adilutive effect on existing shareholders.

 

**There is no assurance that we will be able to successfully compete withothers for business.**

 

The Northern Virginia/Washington,D.C. metropolitan area in which we operate is considered highly attractive froman economic and demographic viewpoint, and is a highly competitive bankingmarket. We compete for loans, deposits, and investment dollars with numerousregional and national banks, online divisions of out-of-market banks, and othercommunity banking institutions, as well as other kinds of financialinstitutions and enterprises, such as securities firms, insurance companies,savings associations, credit unions, mortgage brokers, and private lenders.Many competitors have substantially greater resources than us, and operateunder less stringent regulatory environments. The differences in resources andregulations may make it harder for us to compete profitably, reduce the ratesthat we can earn on loans 

 

22

----

 

and investments, increase therates we must offer on deposits and other funds, and adversely affect ouroverall financial condition and earnings.

 

**Trading in our common stockhas been relatively light. As a result, shareholders may not be able to quicklyand easily sell their common stock.**

 

Althoughour common stock is listed on the Nasdaq Global Select Market, and a number ofbrokers offer to make a market in the common stock on a regular basis, tradingvolume to date has been relatively light, averaging approximately 104,848shares per day over the year ended December 31, 2007. There can be noassurance that an active and liquid market for the common stock can bemaintained.  Accordingly, shareholdersmay find it difficult to sell a significant number of shares at the prevailingmarket price.

 

**The number of shares ownedby****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 28.2% 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.

 

# **Changes ininterest rates and other factors beyond our control could have an adverseimpact on our earnings.**

# ** **

Our operating income and net income depend to a great extent on our netinterest margin, i.e., the difference between the interest yields we receive onloans, securities and other interest bearing assets and the interest rates wepay on interest bearing deposits and other liabilities. Net interest margin isaffected by changes in market interest rates, because different types of assetsand liabilities may react differently, and at different times, to marketinterest rate changes. When interest-bearing liabilities mature or reprice morequickly than interest-earning assets in a period, an increase in market ratesof interest could reduce net interest income. Similarly, when interest-earningassets mature or reprice more quickly than interest-bearing liabilities,falling interest rates could reduce net interest income These rates are highlysensitive to many factors beyond our control, including competition, generaleconomic conditions and monetary and fiscal policies of various governmentaland regulatory authorities, including the Board of Governors of the FederalReserve System.

 

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

 

Adverse changes in the real estate market in ourmarket area could also have an adverse affect on our cost of funds and netinterest margin, as we have a large amount of non-interest bearing depositsrelated to real estate sales and development. While we expect that we would be able to replace the liquidity providedby these deposits, the replacement funds would likely be more costly,negatively impacting earnings.

 

Additionally, changes inapplicable law, if enacted, including those that would permit banks to pay interest on checking and demanddeposit accounts established by businesses, could have a significant negativeeffect on net interest income, net income, net interest margin, return onassets and return on equity. At December 31, 2007, 11.4% of our depositswere non-interest bearing demand deposits.

 

23

----

 

**Substantial regulatorylimitations on changes of control and anti-takeover provisions of Virginia lawmay make it more difficult for you to receive a change in control premium.**

 

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 severalprovisions that may make it more difficult for a third party to acquire controlof us without the approval of our Board of Directors, and may make it moredifficult or expensive for a third party to acquire a majority of ouroutstanding common stock.

 

**DISCLOSURECONTROLS 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.**

#### ** **

24

----

#### ** **

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

#### ** **

The management of Virginia Commerce Bancorp, Inc.(the “Company”) is responsible for the preparation, integrity and fairpresentation of the consolidated financial statements included in this AnnualReport. The financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America andreflect management’s judgments and estimates concerning the effects of eventsand transactions that are accounted for or disclosed.

 

Management is also responsible forestablishing and maintaining an effective internal control over financialreporting.  The Company’s internalcontrol over financial reporting includes those policies and procedures thatpertain to the Company’s ability to record, process, summarize and reportreliable financial data. The internal control system contains monitoringmechanisms, 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.

 

Management assessed the Company’s system ofinternal control over financial reporting as of December 31, 2007. Thisassessment was conducted based on the Committee of Sponsoring Organizations (“COSO”)of the Treadway Commission “Internal Control - Integrated Framework”. Based onthis assessment, management believes that the Company maintained effectiveinternal control over financial reporting as of December 31, 2007.Management’s assessment concluded that there were no material weaknesses withinthe Company’s internal control structure.

 

The 2007 consolidated financial statementshave been audited by the independent accounting firm of Yount, Hyde &Barbour, P.C. (“YHB”). Personnel from YHB were given unrestricted access to allfinancial records and related data, including minutes of all meetings of theBoard of Directors and Committees thereof. Management believes that all representations made to the independentauditors were valid and appropriate. The resulting report from YHB accompaniesthe financial statements. Included in YHB’s report is the Firm’s opinion on theCompany’s effectiveness of internal control over financial reporting.

 

The Board of Directors of the Company, actingthrough its Audit Committee (the “Committee”), is responsible for the oversightof the Company’s accounting policies, financial reporting and internal control.The Audit Committee of the Board of Directors is comprised entirely of outsidedirectors who are independent of management. The Audit Committee is responsiblefor the appointment and compensation of the independent auditors and approvesdecisions regarding the appointment or removal of members of the internal auditfunction. The Committee meets periodically with management, the independentauditors, and the internal auditors to insure that they are carrying out theirresponsibilities. The Committee is also responsible for performing an oversightrole by reviewing and monitoring the financial, accounting, and auditing proceduresof the Company in addition to reviewing the Company’s financial reports. Theindependent auditors and the internal auditors have full and unlimited accessto the Audit Committee, with or without the presence of the management of theCompany, to discuss the adequacy of internal control over financial reporting,and any other matters which they believe should be brought to the attention ofthe Audit Committee.

 

There were no changes in the Company’sinternal control over financial reporting (as defined in Rule 13a-15 underthe Securities Act of 1934) during the quarter ended December 31, 2007that has materially affected, or is reasonably likely to materially affect, thecompany’s internal control over financial reporting.

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

 

25

----

 
|                                      |
|--------------------------------------|
| **Yount,  Hyde & Barbour, P.C.** |   |
| Certified  Public Accountants        |   |
| and  Consultants                     |   |

 

To the Shareholders and Board of Directors

Virginia Commerce Bancorp, Inc.

Arlington, Virginia

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

We have audited the accompanying consolidatedbalance sheets of Virginia Commerce Bancorp, Inc. and subsidiaries as of December 31,2007 and 2006, and the related consolidated statements of income, changes instockholders’ equity, and cash flows for the years ended December 31,2007, 2006 and 2005.  We also haveaudited Virginia Commerce Bancorp, Inc. and subsidiaries’ internal controlover financial reporting as of December 31, 2007, based on criteriaestablished in Internal Control— Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).  Virginia Commerce Bancorp, Inc. andsubsidiaries’ management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying Management Report on Internal Control overFinancial Reporting.  Our responsibilityis to express an opinion on these financial statements and an opinion on theCompany’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audits of financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk.  Our audits also includedperforming such other procedures as we considered necessary in thecircumstances.  We believe that ouraudits provide a reasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable 

 

26

----

 

assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Virginia Commerce Bancorp, Inc. and subsidiaries asof December 31, 2007 and 2006, and the results of their operations andtheir cash flows for the years ended December 31, 2007, 2006 and 2005 inconformity with accounting principles generally accepted in the United Statesof America.  Also in our opinion,Virginia Commerce Bancorp, Inc. and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

 

 

 

Winchester, Virginia

March 12, 2008

 

27

----

# ** **

# **CONSOLIDATED BALANCESHEETS**

# **(Dollars in thousandsexcept share data)**

 
| ** **                                                                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Assets**                                                                                                        |       |                  |       |   |   |
| Cash and due from banks                                                                                           |       | $                     | 34,201     |   | $ | 34,989 |   |
| Interest-bearing deposits with other banks                                                                        |       | 1,140                 |       | 1,079 |   |
| Securities (fair value: 2007, $326,314; 2006, $233,401)                                                           |       | 326,237               |       | 234,203 |   |
| Loans held-for-sale                                                                                               |       | 4,339                 |       | 7,796 |   |
| Loans, net of allowance for loan losses of $22,260 in 2007 and  $18,101 in 2006                                   |       | 1,924,741             |       | 1,629,827 |   |
| Bank premises and equipment, net                                                                                  |       | 12,705                |       | 9,273 |   |
| Accrued interest receivable                                                                                       |       | 11,451                |       | 9,315 |   |
| Other assets                                                                                                      |       | 24,883                |       | 22,600 |   |
| Total assets                                                                                                      |       | $                     | 2,339,697  |   | $ | 1,949,082 |   |
|                                                                                                              |       |                  |       |   |   |   |   |
| **Liabilities and Stockholders’ Equity**                                                                     |       |                  |       |   |   |
| ** **                                                                                                        |       |                  |       |   |   |
| **Deposits**                                                                                                      |       |                  |       |   |   |
| Demand deposits                                                                                                   |       | $                     | 213,820    |   | $ | 186,939 |   |
| Savings and interest-bearing demand deposits                                                                      |       | 517,165               |       | 459,495 |   |
| Time deposits                                                                                                     |       | 1,138,180             |       | 959,507 |   |
| Total deposits                                                                                                    |       | $                     | 1,869,165  |   | $ | 1,605,941 |   |
| Securities sold under agreement to repurchase and federal funds  purchased                                        |       | 222,534               |       | 148,871 |   |
| Other borrowed funds                                                                                              |       | 25,000                |       | — |   |
| Trust preferred capital notes                                                                                     |       | 41,244                |       | 44,344 |   |
| Accrued interest payable                                                                                          |       | 8,942                 |       | 5,923 |   |
| Other liabilities                                                                                                 |       | 3,669                 |       | 4,152 |   |
| Commitments and contingent liabilities                                                                            |       | —                |       | — |   |
| Total liabilities                                                                                                 |       | $                     | 2,170,554  |   | $ | 1,809,231 |   |
|                                                                                                              |       |                  |       |   |   |
| **Stockholders’ Equity**                                                                                     |       |                  |       |   |   |
| Preferred stock, $1.00 par, 1,000,000 shares authorized and unissued                                              |       | $                     | —     |   | $ | — |   |
| Common stock, $1.00 par, 50,000,000 shares authorized, issued and  outstanding 2007, 24,022,850; 2006, 21,560,253 |       | 24,023                |       | 21,560 |   |
| Surplus                                                                                                           |       | 73,672                |       | 31,231 |   |
| Retained earnings                                                                                                 |       | 70,239                |       | 87,744 |   |
| Accumulated other comprehensive income (loss), net                                                                |       | 1,209                 |       | (684 | ) |
| Total stockholders’ equity                                                                                   |       | $                     | 169,143    |   | $ | 139,851 |   |
| Total liabilities and stockholders’ equity                                                                   |       | $                     | 2,339,697  |   | $ | 1,949,082 |   |

 

See Notes toConsolidated Financial Statements.

 

28

----

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

** **
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest and dividend income:**                                          |       |                                       |       |   |   |   |   |
| Interest and fees on loans                                                 |       | $                                          | 138,919    |   | $ | 115,405 |   | $ | 79,614 |   |
| Interest and dividends on investment securities:                           |       |                                       |       |   |   |   |   |
| Taxable                                                                    |       | 12,888                                     |       | 8,225 |   | 5,726 |   |
| Tax-exempt                                                                 |       | 752                                        |       | 245 |   | 238 |   |
| Dividends                                                                  |       | 308                                        |       | 276 |   | 203 |   |
| Interest on deposits with other banks                                      |       | 140                                        |       | 55 |   | 30 |   |
| Interest on federal funds sold                                             |       | 1,131                                      |       | 1,086 |   | 667 |   |
| Total interest and dividend income                                         |       | $                                          | 154,138    |   | $ | 125,292 |   | $ | 86,478 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| **Interest expense:**                                                      |       |                                       |       |   |   |   |   |
| Deposits                                                                   |       | $                                          | 69,398     |   | $ | 48,152 |   | $ | 26,432 |   |
| Securities sold under agreement to repurchase and federal funds  purchased |       | 6,259                                      |       | 4,730 |   | 1,710 |   |
| Other borrowed funds                                                       |       | 225                                        |       | 506 |   | 423 |   |
| Trust preferred capital notes                                              |       | 3,099                                      |       | 3,099 |   | 1,246 |   |
| Total interest expense                                                     |       | $                                          | 78,981     |   | $ | 56,487 |   | $ | 29,811 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| **Net interest income**                                                    |       | $                                          | 75,157     |   | $ | 68,805 |   | $ | 56,667 |   |
| Provision for loan losses                                                  |       | 4,340                                      |       | 4,406 |   | 3,772 |   |
| Net interest income after provision for loan losses                        |       | $                                          | 70,817     |   | $ | 64,399 |   | $ | 52,895 |   |
|                                                                       |       |                                       |       |   |   |   |   |   |   |   |
| **Non-interest income:**                                                   |       |                                       |       |   |   |   |   |
| Service charges and other fees                                             |       | $                                          | 3,388      |   | $ | 3,226 |   | $ | 2,553 |   |
| Non-deposit investment services commissions                                |       | 770                                        |       | 621 |   | 456 |   |
| Fees and net gains on loans held-for-sale                                  |       | 2,706                                      |       | 3,058 |   | 3,306 |   |
| Gain on sale of OREO                                                       |       | 638                                        |       | — |   | — |   |
| Loss on sale of securities                                                 |       | (387                                       | )          | — |   | — |   |
| Other                                                                      |       | 768                                        |       | 418 |   | 361 |   |
| Total non-interest income                                                  |       | $                                          | 7,883      |   | $ | 7,323 |   | $ | 6,676 |   |
|                                                                       |       |                                       |       |   |   |   |   |
| **Non-interest expense:**                                                  |       |                                       |       |   |   |   |   |
| Salaries and employee benefits                                             |       | $                                          | 22,536     |   | $ | 19,911 |   | $ | 17,321 |   |
| Occupancy expense                                                          |       | 7,031                                      |       | 5,448 |   | 4,479 |   |
| Data processing                                                            |       | 1,940                                      |       | 1,954 |   | 1,553 |   |
| Other operating expense                                                    |       | 8,187                                      |       | 6,976 |   | 6,113 |   |
| Total non-interest expense                                                 |       | $                                          | 39,694     |   | $ | 34,289 |   | $ | 29,466 |   |
| Income before taxes on income                                              |       | $                                          | 39,006     |   | $ | 37,433 |   | $ | 30,105 |   |
| Provision for income taxes                                                 |       | 13,219                                     |       | 12,925 |   | 10,438 |   |
| **Net income**                                                             |       | $                                          | 25,787     |   | $ | 24,508 |   | $ | 19,667 |   |
| Earnings per common share, basic                                           |       | $                                          | 1.08       |   | $ | 1.04 |   | $ | 0.85 |   |
| Earnings per common share, diluted                                         |       | $                                          | 1.04       |   | $ | 0.98 |   | $ | 0.79 |   |

 

See Notes toConsolidated Financial Statements.

 

29

----

## ** **

## **CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

## **(Dollars in thousands)**

## ** **

| ** **                                                                                             | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Surplus** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
| **Balance, December 31, 2004**                                                                    | ** ** | **$**                | **—** | ** **        | **$**      | **11,046**  | ** ** | **$**                  | **37,219** | ** **                                                | **$**      | **43,578**                | ** ** | **$**                                 | **(519**   | **)** | ** ** | ** ** | **$** | **91,324** | ** ** |
| Comprehensive Income:                                                                                  |       |                 |       |              |       |        |       |                   |       |                                                      |       |                      |       |                                  |       |
|                                                                                                   |       |                 |       |              |       |        |       |                   |       |                                                      |       |                      |       |                                  |       |
| Net Income 2005                                                                                        |       |                 |       |              |       |        |       | 19,667                 |       |                                                      |       | $                         | 19,667     |                                  | 19,667     |   |
| Other comprehensive loss, unrealized holding losses arising during  the period (net of tax of $548)    |       |                 |       |              |       |        |       |                   |       | (1,018                                                    | )          | (1,018                    | )          | (1,018                                | )          |
| Total comprehensive income                                                                             |       |                 |       |              |       |        |       |                   |       |                                                      |       | $                         | 18,649     |                                  |       |   |
| Five-for-four stock split in form of a 25% stock dividend                                              |       | —               |       | 2,797             |       | (2,797      | )          | —                 |       | —                                                    |       |                      |       | —                                |       |
| Cash paid in lieu of fractional shares                                                                 |       | —               |       | —            |       | —      |       | (6                     | )          | —                                                    |       |                      |       | (6                                    | )          |
| Stock options exercised                                                                                |       | —               |       | 195               |       | 1,272       |       | —                 |       | —                                                    |       |                      |       | 1,467                                 |       |
| Employee stock purchase plan                                                                           |       | —               |       | 12                |       | 211         |       | —                 |       | —                                                    |       |                      |       | 223                                   |       |
| Stock option expense                                                                                   |       | —               |       | —            |       | 161         |       | —                 |       | —                                                    |       |                      |       | 161                                   |       |
|                                                                                                   |       |                 |       |              |       |        |       |                   |       |                                                      |       |                      |       |                                  |       |
| **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** | ** ** |

 

See Notes to ConsolidatedFinancial Statements.

 

30

----

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

** **
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows from Operating Activities:**                                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest received                                                                          |       | $                                          | 151,608    |   | $ | 122,132 |   | $ | 83,840 |   |
| Other income received                                                                      |       | 7,246                                      |       | 7,324 |   | 6,676 |   |
| Net change in loans held-for-sale                                                          |       | 3,456                                      |       | 4,753 |   | (2,886 | ) |
| Interest paid                                                                              |       | (75,962                                    | )          | (53,567 | ) | (28,363 | ) |
| Cash paid to suppliers and employees                                                       |       | (37,784                                    | )          | (39,195 | ) | (29,165 | ) |
| Income tax benefit of stock options/warrants exercised                                     |       | (440                                       | )          | (812 | ) | (914 | ) |
| Income taxes paid                                                                          |       | (16,055                                    | )          | (13,531 | ) | (10,370 | ) |
| Net cash provided by operating activities                                                  |       | $                                          | 32,069     |   | $ | 27,104 |   | $ | 18,818 |   |
| ** **                                                                                 |       |                                       |       |   |   |   |   |
| **Cash Flows from Investing Activities:**                                                  |       |                                       |       |   |   |   |   |
| Proceeds from maturities and principal payments on securities  held-to-maturity            |       | $                                          | 4,765      |   | $ | 7,541 |   | $ | 9,519 |   |
| Proceeds from maturities and principal payments on securities  available-for-sale          |       | 51,794                                     |       | 32,456 |   | 24,152 |   |
| Purchases of securities held-to-maturity                                                   |       | (4,441                                     | )          | (8,100 | ) | (12,151 | ) |
| Purchases of securities available-for-sale                                                 |       | (175,844                                   | )          | (91,341 | ) | (32,715 | ) |
| Sales of securities available-for-sale                                                     |       | 35,000                                     |       | — |   | — |   |
| Net increase in loans made to customers                                                    |       | (298,615                                   | )          | (363,978 | ) | (348,246 | ) |
| Purchase of bank premises and equipment                                                    |       | (5,427                                     | )          | (3,182 | ) | (2,110 | ) |
| Net cash used in investing activities                                                      |       | $                                          | (392,768   | ) | $ | (426,604 | ) | $ | (361,551 | ) |
| ** **                                                                                 |       |                                       |       |   |   |   |   |
| **Cash Flows from Financing Activities:**                                                  |       |                                       |       |   |   |   |   |
| Net increase in demand, NOW, money market and savings accounts                             |       | $                                          | 84,551     |   | $ | 108,314 |   | $ | 57,672 |   |
| Net increase in time deposits                                                              |       | 178,673                                    |       | 254,120 |   | 214,866 |   |
| Net increase in securities sold under agreement to repurchase and  federal funds purchased |       | 73,663                                     |       | 37,077 |   | 58,587 |   |
| Net increase in other borrowed funds                                                       |       | 25,000                                     |       | — |   | — |   |
| (Decrease) increase in trust preferred capital notes                                       |       | (3,100                                     | )          | — |   | 25,774 |   |
| Proceeds from exercise of stock options and warrants                                       |       | 1,197                                      |       | 2,418 |   | 1,690 |   |
| Cash paid in lieu of fractional shares                                                     |       | (12                                        | )          | (3 | ) | (6 | ) |
| Net cash provided by financing activities                                                  |       | $                                          | 359,972    |   | $ | 401,926 |   | $ | 358,583 |   |
| (Decrease) increase in cash and cash equivalents                                           |       | $                                          | (727       | ) | $ | 2,426 |   | $ | 15,850 |   |
| ** **                                                                                 |       |                                       |       |   |   |   |   |
| **Cash and Cash Equivalents:**                                                             |       |                                       |       |   |   |   |   |
| Beginning                                                                                  |       | 36,068                                     |       | 33,642 |   | 17,792 |   |
| Ending                                                                                     |       | $                                          | 35,341     |   | $ | 36,068 |   | $ | 33,642 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

31

----

 
| ** **                                                                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                       |       |                                       |       |   |   |   |   |
| **Reconciliation of net income to net cash provided by operating activities:** |       |                                       |       |   |   |   |   |
| ** **                                                                                                                       |       |                                       |       |   |   |   |   |
| Net income                                                                                                                       |       | $                                          | 25,787     |   | $ | 24,508 |   | $ | 19,667 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                                               |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                                                                    |       | 1,995                                      |       | 1,443 |   | 1,268 |   |
| Provision for loan losses                                                                                                        |       | 4,340                                      |       | 4,406 |   | 3,772 |   |
| Stock based compensation expense                                                                                                 |       | 427                                        |       | 257 |   | 161 |   |
| Deferred tax benefit                                                                                                             |       | (2,087                                     | )          | (1,580 | ) | (1,196 | ) |
| Amortization of security premiums and accretion of discounts, net                                                                |       | (394                                       | )          | (395 | ) | (193 | ) |
| Origination of loans held-for-sale                                                                                               |       | (158,026                                   | )          | (174,856 | ) | (202,344 | ) |
| Sale of loans                                                                                                                    |       | 160,246                                    |       | 176,551 |   | 197,187 |   |
| Gain on sale of loans                                                                                                            |       | 1,236                                      |       | 3,058 |   | 2,271 |   |
| Gain on the sale of OREO                                                                                                         |       | (638                                       | )          | — |   | — |   |
| Increase in other assets                                                                                                         |       | (1,216                                     | )          | (6,636 | ) | (1,009 | ) |
| (Decrease) increase in other liabilities                                                                                         |       | (483                                       | )          | 193 |   | 231 |   |
| Increase in accrued interest receivable                                                                                          |       | (2,136                                     | )          | (2,765 | ) | (2,445 | ) |
| Increase in accrued interest payable                                                                                             |       | 3,018                                      |       | 2,920 |   | 1,448 |   |
| **Net cash provided by operating activities**                                                                                    |       | $                                          | 32,069     |   | $ | 27,104 |   | $ | 18,818 |   |
| ** **                                                                                                                       |       |                                       |       |   |   |   |   |
| **Supplemental Schedule of Noncash Investing  Activities:**                                                                      |       |                                       |       |   |   |   |   |
| Unrealized gain (loss) on securities                                                                                             |       | $                                          | 2,912      |   | $ | 1,312 |   | $ | (1,566 | ) |
| OREO transferred from loans                                                                                                      |       | $                                          | 1,862      |   | $ | — |   | $ | — |   |
| Loans made on the disposition of OREO                                                                                            |       | $                                          | 2,500      |   | $ | — |   | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements.

 

32

----

 

**Notes to Consolidated Financial Statements**

 

**Note 1. Nature of BankingActivities and Significant Accounting Policies**

 

**Business**

 

On December 22, 1999, Virginia Commerce Bancorp, Inc. (the “Company”)became the holding company for Virginia Commerce Bank (the “Bank”). The Companyacquired the Bank through a share exchange in which the stockholders of theBank received one share of the Company for each share of the Bank. The exchangewas a tax-free transaction for federal income tax purposes. The merger was accountedfor on the same basis as a pooling-of-interests.

 

The Company provides loan and deposit products to commercial and retailcustomers in the Washington Metropolitan Area, with the primary emphasis onNorthern Virginia. The loan portfolio is generally collateralized by assets ofthe customers and is expected to be re-paid from cash flows or proceeds fromthe sale of selected assets of the borrowers.

 

**Principles of Consolidation**

 

The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries, the Bank, VCBI Capital Trust I, VCBICapital Trust II, VCBI Capital Trust III and Northeast Land and InvestmentCompany.  In consolidation, allsignificant intercompany accounts and transactions have been eliminated. FASBInterpretation No. 46 (R) requires that the Company no longereliminate through consolidation the equity investments in VCBI Capital Trust I, IIand III, by the parent company, Virginia Commerce Bancorp, Inc, whichapproximated $1.2 million at December 31, 2007. The subordinated debt ofthe trusts is reflected as a liability of the Company, and the commonsecurities 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 morerapidly or 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 loan losses is based onestimates that are particularly susceptible to significant changes in the economicenvironment and market conditions. Management believes that, as of December 31, 2007, the allowancefor loan losses is adequate based on information currently available.  A worsening or protracted economic decline orsubstantial increase in interest rates, would increase the likelihood of lossesdue to credit and market risks and could create the need for substantialincreases to the allowance for loan losses. The Company is subject to the regulations of various regulatoryagencies, which can change significantly from year to year.  In addition, the Company undergoes periodicexaminations by regulatory agencies, which may subject it to further changesbased on the regulators’ judgments about information available to them at thetime of their examination.

 

**Securities**

 

Debt securities that management has the positive intent and ability tohold to maturity are classified as held-to-maturity and recorded at amortizedcost.  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.  Restricted stocks,such as Federal Reserve Bank stock, Federal Home Bank stock, and CommunityBankers Bank stock, are carried at cost.

 

Purchased premiums and discounts are recognized in interest incomeusing the interest method over the terms of the securities.  Declines in the fair value ofheld-to-maturity and available-for-sale securities below their cost that aredeemed to be other than temporary are reflected in earnings as realizedlosses.  Gains and losses on the sale ofsecurities are 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 thefair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent 

 

33

----

 

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 lower of cost or market,determined in the aggregate.  Marketvalue considers commitment agreements with investors and prevailing marketprices.  Loans originated by the Company’smortgage banking division and held-for-sale to outside investors, are done on apre-sold basis and servicing released. Gains and losses on sales of mortgageloans are recognized based on the difference between the selling price and thecarrying value of the related mortgage loans sold.

 

**Loans**

 

The Company grants mortgage, commercial and consumer loans tocustomers.  A substantial portion of theloan portfolio is represented by real estate loans.  The ability of the Company’s debtors to honortheir contracts is dependent upon the general economic conditions and realestate climate of the Company’s market area.

 

Loans that management has the intent and ability to hold for theforeseeable future or until maturity or pay-off are reported at theiroutstanding unpaid principal balances adjusted for the allowance for loan lossesand any deferred fees or costs on originated loans.  Interest income is accrued on the unpaidprincipal balance.  Loan originationfees, net of certain origination costs, are deferred and recognized as anadjustment of the related loan yield using the interest method.

 

The accrual of interest on real estate and commercial loans isdiscontinued at the time the loan is 90 days delinquent unless the credit iswell-secured and in the process of collection. Installment loans are typically charged-off no later than 180 days pastdue.  In all cases, loans are placed onnonaccrual or charged-off at an earlier date if collection of principal orinterest is considered doubtful.

 

All interest accrued but not collected for loans that are placed onnonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted foron the cash-basis or cost-recovery method, until qualifying for return toaccrual.  Loans are returned to accrualstatus when all principal and interest amounts contractually due are broughtcurrent and future payments are reasonably assured.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is established to address potentiallosses that could occur through a provision for loan losses charged toearnings.  Loan losses are chargedagainst the allowance when management believes the uncollectibility of a loanbalance is confirmed.  Subsequentrecoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by managementand is based upon management’s periodic review of the collectibility of theloans in light of historical experience, the nature and volume of the loanportfolio, adverse situations that may affect the borrower’s ability to repay,estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

Our allowance for loan losses has three basiccomponents:  the specific allowance, theformula 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 to individuallyallocate an allowance for loans identified as impaired. Impairment testingincludes consideration of the borrower’s overall financial condition, resourcesand payment record, support available from financial guarantors and the fairmarket value of collateral.

 

A loan is considered impaired when, based oncurrent information and events, it is probable that the Company will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement. Factors considered bymanagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest paymentswhen due.  Loans that experience insignificantpayment delays and payment shortfalls generally are not classified asimpaired.  Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan and theborrower, including the length of the delay, the reasons for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe 

 

34

----

 

principal and interest owed.  Impairment is measured on a loan-by-loanbasis for commercial and construction loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price, or the fair value of the collateral if theloan is collateral dependent. Thesefactors are combined to estimate the probability and severity of inherentlosses.  When impairment is identified,then a specific reserve may be established based on the Company’s calculationof the loss embedded in the individual loan. Large groups of smaller balance,homogeneous loans are collectively evaluated for impairment. The formulaallowance is used to provide additional reserves within a loan category forimpaired loans where a specific reserve was not allocated. Impaired loans whichmeet 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). Each loan type is assigned an allowance factor based on management’sestimate of the associated risk, complexity and size of the individual loanswithin the particular loan category. Classified loans are assigned a higher allowance factor than non-ratedloans due to management’s concerns regarding their collectibility or management’sknowledge of particular elements surrounding the borrower.  Allowance factors grow with the worsening ofthe internal risk rating.  Theunallocated formula is used to estimate the loss of non-classified loans. Theseun-criticized loans are also segregated by loan type and allowance factors areassigned by management based on delinquencies, loss history, trends in volumeand terms of loans, effects of changes in lending policy, the experience anddepth of management, national and local economic trends, concentrations ofcredit, quality of the loan review system and the effect of external factors(i.e. competition and regulatory requirements). The factors assigned differ byloan type.  The unallocated allowancerecognizes potential losses whose impact on the portfolio has yet to berecognized in either the formula or specific allowance. Allowance factors andthe overall size of the allowance may change from period to period based onmanagement’s assessment of the above described factors and the relative weightsgiven to each factor. See Note 4 for information regarding the allowance forloan losses.

 

**Bank Premises and Equipment**

 

Premises and equipment are stated at cost less accumulated depreciationand amortization.  Land is carried atcost. Furniture, fixtures, equipment and computer software are depreciated overtheir estimated useful lives, generally from three to seven years; leaseholdimprovements are depreciated over the term of the respective leases or theestimated useful life of the leasehold improvement.  Depreciation and amortization are recorded onthe straight-line and declining-balance methods.

 

Costs of maintenance and repairs are charged to expense asincurred.  The costs of replacingstructural parts of major units are considered individually and are expensed orcapitalized as the facts dictate.

 

**Income Taxes**

 

Deferred income tax assets and liabilities are determined using theliability (or balance sheet) method. Under this method, the net deferred taxasset or liability is determined based on the tax effects of the temporarydifferences between book and tax bases of the various balance sheet assets andliabilities and gives current recognition to changes in tax rates and laws.

 

Whentax returns are filed, it is highly certain that some positions taken would besustained upon examination by the taxing authorities, while others are subjectto uncertainty about the merits of the position taken or the amount of theposition that would be ultimately sustained. The benefit of a tax position is recognized in the financial statementsin the period during which, based on all available evidence, managementbelieves it is more likely than not that the position will be sustained uponexamination, including the resolution of appeals or litigation processes, ifany.  Tax positions taken are not offsetor aggregated with other positions.  Taxpositions that meet the more-likely-than-not recognition threshold are measuredas the largest amount of tax benefit that is more than 50 percent likely ofbeing realized upon settlement 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 with unrecognized tax benefits areclassified as additional income taxes in the statement of income.

 

35

----

 

**Advertising Cost**

 

The Company follows the policy of charging the production costs ofadvertising to expense as incurred. Total advertising expense was $500thousand, $596 thousand and $545 thousand in 2007, 2006 and 2005, respectively.

 

**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, and the valuation of deferred tax assets.

 

**Rate Lock Commitments**

 

The Company enters into commitments to originate mortgage loans wherebythe interest rate on the loans is determined prior to funding (rate lockcommitments). Rate lock commitments on mortgage loans that are intended to besold are considered to be derivatives. The period of time between issuance of aloan commitment and closing and the sale of the loan generally ranges fromthirty to ninety days. The Company protects itself from changes in interest ratesthrough the use of best efforts forward delivery commitments, whereby theCompany commits to sell a loan at the time the borrower commits to an interestrate with the intent that the buyer has assumed interest rate risk on the loan.As a result, the Company is not exposed to losses nor will it realizesignificant gains related to its rate lock commitments due to changes ininterest rates. The correlation between the rate lock commitments and the bestefforts contracts is very high due to their similarity. Because of this highcorrelation, no gain or loss occurs on the rate lock commitments.

 

**Cash and Cash Equivalents**

 

For purposes of reporting cash flows, cash and cash equivalents includecash on hand, amounts due from banks, and federal funds sold.  Generally, federal funds are sold andpurchased 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 that recognized revenue,expenses, gains and losses be included in net income. Although certain changesin assets and liabilities, such as unrealized gains and losses onavailable-for-sale securities, are reported as a separate component of theequity section of the balance sheet, such items, along with net income, are componentsof comprehensive income.

 

**Stock Compensation Plan**

 

TheCompany has a stock-based compensation plan which is accounted for inaccordance with FAS No. 123 (R). Through 2005, the Company accounted forthe plan under the recognition and measurement principles of APB Opinion 25, “Accountingfor Stock Issued to Employees,”**and relatedinterpretations. As such, no stock-based compensation expense relating to thegrant of options was reflected in net income, as all options granted under theplan had an exercise price equal to the market value of the underlying commonstock on the date of the grant. On December 29, 2005, the Companyaccelerated the vesting of all outstanding options under the plan in order toavoid a total of approximately $2.3 million in expense in future periodsfollowing the adoption of FASB Statement No. 123 (R) effective January 1,2006, using the modified prospective method. Due to this modification of vesting terms, the Company recognized $161thousand in stock based compensation expense in December 2005.  The following table illustrates the effect onnet income and earnings per share for the twelve months ended December 31,2005, had the fair value recognition provisions of FASB Statement No. 123,“Accounting for Stock-Based Compensation,”**been adoptedin 2005.

 

36

----

 
| **(Dollars in thousands except per share amounts)**                                    | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Net income, as reported**                                                                                          |       | $        | 19,667     |   |
|                                                                                                                 |       |     |       |
| Deduct: total stock-based employee compensation expense determined  based on fair value method of awards, net of tax |       | (3,124   | )          |
| **Pro forma net income**                                                                                             |       | $        | 16,543     |   |
| ** **                                                                                                           |       |     |       |
| **Basic earnings per share:**                                                                                        |       |     |       |
| As reported                                                                                                          |       | $        | 0.85       |   |
| Pro forma                                                                                                            |       | $        | 0.72       |   |
| ** **                                                                                                           |       |     |       |
| **Diluted earning per share:**                                                                                       |       |     |       |
| As reported                                                                                                          |       | $        | 0.79       |   |
| Pro forma                                                                                                            |       | $        | 0.66       |   |

 

SeeNote 12 to the Consolidated Financial Statements for further informationregarding the Company’s stock-based compensation plan.

 

#### **RecentAccounting Pronouncements**

#### ** **

In September 2006, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157).  SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  SFAS 157 does notrequire any new fair value measurements, but rather, provides enhanced guidanceto other pronouncements that require or permit assets or liabilities to bemeasured at fair value.  This Statementis effective for financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of theStatement for nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis.  The Company does notexpect the implementation of SFAS 157 to have a material impact on itsconsolidated financial statements.

 

In February 2007, the FASB issued Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (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 does not expect the implementation of SFAS 159 to have amaterial impact on its consolidated financial statements.

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)).The Standard will significantly change the financial accounting and reportingof business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizesand measures the identifiable assets acquired, liabilities assumed, and anynoncontrolling interest in the acquiree; recognizes and measures the goodwillacquired in the business combination or a gain from a bargain purchase; anddetermines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  SFAS 141(R) iseffective for acquisition dates on or after the beginning of an entity’s firstyear that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) tohave a material impact on its consolidated financial statements.

 

37

----

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements an Amendment of ARB No. 51” (SFAS 160).  The Standard will significantly change thefinancial accounting and reporting of noncontrolling (or minority) interests inconsolidated financial statements.  SFAS160 is effective as of the beginning of an entity’s first fiscal year thatbegins after December 15, 2008, with early adoption prohibited.  The Company does not expect theimplementation of SFAS 160 to have a material impact on its consolidatedfinancial statements.

 

In September 2006, the Emerging Issues Task Force (EITF) issuedEITF 06-4, “Accounting for Deferred Compensation and Postretirement BenefitAspects of Endorsement Split-Dollar Life Insurance Arrangements.”  This consensus concludes that for asplit-dollar life insurance arrangement within the scope of this Issue, anemployer should recognize a liability for future benefits in accordance withSFAS 106 (if, in substance, a postretirement benefit plan exists) or APBOpinion No. 12 (if the arrangement is, in substance, an individualdeferred compensation contract) based on the substantive agreement with theemployee.  The consensus is effective forfiscal years beginning after December 15, 2007, with early applicationpermitted.  The Company does not expectthe implementation of EITF 06-4 to have a material impact on its consolidatedfinancial statements.

 

In November 2006, the EITF issued “Accounting for CollateralAssignment Split-Dollar Life Insurance Arrangements” (EITF 06-10).  In this Issue, a consensus was reached thatan employer should recognize a liability for the postretirement benefit relatedto a collateral assignment split-dollar life insurance arrangement inaccordance with either SFAS 106 or APB Opinion No. 12, as appropriate, ifthe employer has agreed to maintain a life insurance policy during the employee’sretirement or provide the employee with a death benefit based on thesubstantive agreement with the employee. A consensus also was reached that an employer should recognize andmeasure an asset based on the nature and substance of the collateral assignmentsplit-dollar life insurance arrangement. The consensuses are effective for fiscal years beginning after December 15,2007, including interim periods within those fiscal years, with earlyapplication permitted.  The Company doesnot expect the implementation of EITF 06-10 to have a material impact on itsconsolidated financial statements.

 

In November 2007, the Securities and Exchange Commission (SEC)issued Staff Accounting Bulletin No. 109, “Written Loan CommitmentsRecorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses thecurrent view of the staff that the expected net future cash flows related tothe associated servicing of the loan should be included in the measurement ofall written loan commitments that are accounted for at fair value throughearnings. SEC registrants are expected to apply the views in Question 1 of SAB109 on a prospective basis to derivative loan commitments issued or modified infiscal quarters beginning after December 15, 2007.  The Company does not expect theimplementation of SAB 109 to have a material impact on its consolidatedfinancial statements.

 

In December 2007, the SEC issued Staff Accounting Bulletin No. 110,“Use of a Simplified Method in Developing Expected Term of Share Options” (SAB110).  SAB 110 expresses the current viewof the staff that it will accept a company’s election to use the simplifiedmethod discussed in SAB 107 for estimating the expected term of “plain vanilla”share options regardless of whether the company has sufficient information tomake more refined estimates.  The staffnoted that it understands that detailed information about employee exercisepatterns may 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.  The Company does not expect theimplementation of SAB 110 to have a material impact on its consolidated financialstatements.

 

**Stockholders’Equity**

 

A 10% stock dividend was declared on March 28,2007. This transaction was recorded by increasing common stock by $2.2 million,increasing surplus by $41.1 million and decreasing retained earnings by $43.3million.

 

A three-for-two stock split in the form of a50% stock dividend was declared on May 12, 2006.  This transaction was recorded by increasingcommon stock by $7.1 million and decreasing surplus by $7.1 million.

 

A five-for-four stock split in the form of a25% stock dividend was declared on March 23, 2005. This transaction wasrecorded by increasing common stock by $2.8 million and decreasing surplus by$2.8 million.

 

38

----

 

**Note 2.  Securities**

 

Amortized cost and fair valueof the securities available-for-sale and held-to-maturity as of December 31,2007 and 2006, are as follows (dollars in thousands):

##### ** **

| **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 |   |

 
| **December 31, 2006**                  | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   (Losses)** | ** ** | **Fair Value** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|---------------------|------------|
| ** **                                       |       |                      |       |                                     |       |                                        |       |                |       |
| **Available–for-sale:**                     |       |                      |       |                                     |       |                                        |       |                |       |
| U.S. Government Agency obligations               |       | $                         | 175,234    |                                     | $          | 329                                         |       | $                   | (1,489     | ) | $ | 174,074 |   |
| Domestic corporate debt obligations              |       | 6,000                     |       | 55                                       |       | —                                      |       | 6,055               |       |
| Obligations of states and political subdivisions |       | 3,607                     |       | 60                                       |       | (8                                          | )          | 3,659               |       |
| Restricted stock:                                |       |                      |       |                                     |       |                                        |       |                |       |
| Federal Reserve Bank                             |       | 1,442                     |       | —                                   |       | —                                      |       | 1,442               |       |
| Federal Home Loan Bank                           |       | 3,034                     |       | —                                   |       | —                                      |       | 3,034               |       |
| Community Bankers’ Bank                     |       | 55                        |       | —                                   |       | —                                      |       | 55                  |       |
|                                             |       | $                         | 189,372    |                                     | $          | 444                                         |       | $                   | (1,497     | ) | $ | 188,319 |   |
| ** **                                       |       |                      |       |                                     |       |                                        |       |                |       |
| **Held-to-maturity:**                            |       |                      |       |                                     |       |                                        |       |                |       |
| U.S. Government Agency obligations               |       | $                         | 35,520     |                                     | $          | 21                                          |       | $                   | (705       | ) | $ | 34,836 |   |
| Obligations of state and political subdivisions  |       | 10,364                    |       | 56                                       |       | (174                                        | )          | 10,246              |       |
|                                             |       | $                         | 45,884     |                                     | $          | 77                                          |       | $                   | (879       | ) | $ | 45,082 |   |

 

39

----

 

Theamortized cost and fair value of the securities, including restricted stock, asof December 31, 2007 by contractual maturity, are shown below (dollars inthousands):

 
| **December 31, 2007**        | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                             |       |                    |       |                |       |
| **Available-for-sale:**                |       |                    |       |                |       |
| Due within one year                    |       | $                       | 8,057      |                | $          | 8,114 |   |
| Due after one year through five years  |       | 139,468                 |       | 140,989             |       |
| Due after five years through ten years |       | 36,708                  |       | 37,157              |       |
| Due after ten years                    |       | 88,416                  |       | 88,250              |       |
| Restricted stock                       |       | 6,128                   |       | 6,128               |       |
|                                   |       | $                       | 278,777    |                | $          | 280,638 |   |
| ** **                             |       |                    |       |                |       |
| **Held-to-maturity:**                  |       |                    |       |                |       |
| Due within one year                    |       | $                       | 155        |                | $          | 156 |   |
| Due after one year through five years  |       | 24,121                  |       | 24,116              |       |
| Due after five years through ten years |       | 12,398                  |       | 12,422              |       |
| Due after ten years                    |       | 8,925                   |       | 8,982               |       |
|                                   |       | $                       | 45,599     |                | $          | 45,676 |   |

 

The amortized cost of securities pledged ascollateral for repurchase agreements, certain public deposits, and otherpurposes were $274.0 million and $159.2 million at December 31, 2007 and 2006,respectively.

 

Management evaluates securities forother-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 of securitieswhich were in an unrealized loss position at December 31, 2007 and 2006.Of the total securities in an unrealized loss position at December 31,2007, 53.2%, or twelve positions, were U.S. Government Agency securities withmaturities ranging from two to twenty-eight years, 30.1%, or twenty-fivepositions were obligations of states and political subdivisions with maturitiesranging from two years to twenty years and 16.7%, or four positions, werecorporate debt obligations with maturities ranging from five to ten years.   As the Company has the ability and intent tohold these securities until maturity, or until such time as the value recovers,no declines are deemed to be other-than-temporary.  In addition, there has been no deteriorationin the ratings for any of the securities.

 
| ** **                                                  | ** ** | **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 | ) |

 

40

----

 
| ** **                                                  | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Longer** | ** ** | **Total**             | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------------|------------|
| **At  December 31, 2006  (Dollars in thousands)** | ** ** | **Fair   Value**                  | ** ** | **Unrealized   Losses**           | ** ** | **Fair   Value** | ** ** | **Unrealized   Losses** | ** ** | **Fair   Value** | ** ** | **Unrealized   Losses** | ** ** |
| ** **                                                  |       |                                   |       |                                   |       |                  |       |   |   |   |   |   |   |
| **Available-for-sale:**                                     |       |                                   |       |                                   |       |                  |       |   |   |   |   |   |   |
| U.S. Government Agency obligations                          |       | $                                      | 24,762     |                                   | $          | (50                   | )          | $ | 81,174 |   | $ | (1,439 | ) | $ | 105,936 |   | $ | (1,489 | ) |
| Obligations of states/political subdivisions                |       | 2,245                                  |       | (8                                     | )          | —                |       | — |   | 2,245 |   | (8 | ) |
|                                                        |       | $                                      | 27,007     |                                   | $          | (58                   | )          | $ | 81,174 |   | $ | (1,439 | ) | $ | 108,181 |   | $ | (1,497 | ) |
| ** **                                                  |       |                                   |       |                                   |       |                  |       |   |   |   |   |   |   |
| **Held-to-maturity:**                                       |       |                                   |       |                                   |       |                  |       |   |   |   |   |   |   |
| U.S. Government Agency obligations                          |       | $                                      | 1,521      |                                   | $          | (8                    | )          | $ | 28,248 |   | $ | (697 | ) | $ | 29,769 |   | $ | (705 | ) |
| Obligations of states/political subdivisions                |       | 2,128                                  |       | (38                                    | )          | 4,802                 |       | (136 | ) | 6,930 |   | (174 | ) |
|                                                        |       | $                                      | 3,649      |                                   | $          | (46                   | )          | $ | 33,050 |   | $ | (833 | ) | $ | 36,699 |   | $ | (879 | ) |

 

**Note 3. Loans**

 

Major classifications of loans, excludingloans held-for-sale, are summarized as follows (dollars in thousands):

 
| ** **                             | ** ** | **2007** | ** **    | **2006**   | ** ** |
|----------------------------------------|------------|----------|---------------|------------|------------|
| Commercial                             |       | $        | 238,670       |       | $          | 190,527 |   |
| Real estate - 1-4 family residential   |       | 266,365  |          | 193,247    |       |
| Real estate - multifamily residential  |       | 56,952   |          | 57,913     |       |
| Real estate - non-farm, nonresidential |       | 835,503  |          | 689,110    |       |
| Real estate - construction             |       | 544,290  |          | 515,040    |       |
| Consumer                               |       | 8,714    |          | 6,997      |       |
| Farmland                               |       | 1,468    |          | —     |       |
| **Total Loans**                        | ** ** | **$**    | **1,951,962** | ** ** | **$**      | **1,652,834** | ** ** |
| Less unearned income                   |       | 4,961    |          | 4,906      |       |
| Less allowance for loan losses         |       | 22,260   |          | 18,101     |       |
| **Loans, net**                         | ** ** | **$**    | **1,924,741** | ** ** | **$**      | **1,629,827** | ** ** |

 

As of December 31, 2007and 2006, there were $238 thousand and $665 thousand, respectively, in checkingaccount overdrafts that were reclassified on the consolidated balance sheets asloans.

 

**Note4.  Allowance for Loan Losses**

 

An analysis of the allowance for loan lossesfor the years ended December 31, 2007, 2006 and 2005 is shown below(dollars in thousands):

 
| ** **                        | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Allowance, at beginning of period |       | $        | 18,101     |       | $          | 13,821     |       | $ | 10,402 |   |
| Provision charged against income  |       | 4,340    |       | 4,406      |       | 3,772      |       |
| Recoveries added to reserve       |       | 31       |       | 63         |       | 9          |       |
| Losses charged to reserve         |       | (212     | )          | (189       | )          | (362       | )          |
| **Allowance, at end of period**   | ** ** | **$**    | **22,260** | ** ** | **$**      | **18,101** | ** ** | **$** | **13,821** | ** ** |

 

41

----

 

Information about impaired loans as of andfor the years ended December 31, 2007, 2006 and 2005, is as follows(dollars in thousands):

 
| ** **                                                                        | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Non-accrual loans for which a specific allowance has been provided                |       | $        | 3,826      |       | $          | 3,920      |       | $ | 1,994 |   |
| Non-accrual loans for which no specific allowance has been provided               |       | —   |       | —     |       | —     |       |
| Other impaired loans for which no specific allowance has been  provided           |       | 15,444   |       | 11,619     |       | 4,647      |       |
| **Total impaired loans**                                                          | ** ** | **$**    | **19,270** | ** ** | **$**      | **15,539** | ** ** | **$** | **6,641** | ** ** |
| Allowance provided for impaired loans, included in the allowance for  loan losses |       | 1,228    |       | 507        |       | 245        |       |
| Average balance in impaired loans                                                 |       | $        | 17,404     |       | $          | 11,090     |       | $ | 4,514 |   |
| Interest income recognized                                                        |       | $        | 934        |       | $          | 871        |       | $ | 318 |   |

 

If interest on non-accrualloans had been accrued as interest income, such income would have approximated$139 thousand, $5 thousand and $21 thousand for the years ended December 31,2007, 2006 and 2005, respectively. There were $579 thousand in loans past due90 days or more, and still accruing interest at December 31, 2007. Therewere no loans past due 90 days or more, and still accruing interest at December 31,2006.

 

**Note 5. Bank Premises andEquipment, Net**

 

Premises and equipment are stated at costless accumulated depreciation at December 31, 2007 and 2006, as follows(dollars in thousands):

 
| ** **                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                           |       | $        | 1,839      |     | $          | 1,839 |   |
| Buildings                                      |       | 2,300    |       | 2,292    |       |
| Furniture, fixtures and equipment              |       | 13,118   |       | 10,593   |       |
| Leasehold improvements                         |       | 6,344    |       | 3,824    |       |
| Construction in progress                       |       | 875      |       | 500      |       |
| Total Cost                                     |       | $        | 24,476     |     | $          | 19,048 |   |
| Less accumulated depreciation and amortization |       | 11,771   |       | 9,775    |       |
| Net premises and equipment                     |       | $        | 12,705     |     | $          | 9,273 |   |

 

Depreciation and amortizationexpense on premises and equipment amounted to $2.0 million, $1.4 million and$1.3 million in 2007, 2006 and 2005, respectively.

 

**Note 6. Time Deposits**

 

The aggregate amount of time deposits with aminimum denomination of $100 thousand each, was approximately $572.5 millionand $490.7 million at December 31, 2007 and 2006, respectively. Scheduledmaturities of all time deposits at December 31, 2007, are as follows(dollars in thousands):

 
| 2008       |       | $      | 1,078,415     |       |
|------------|------------|--------|---------------|------------|
| 2009       |       | 33,608 |          |
| 2010       |       | 12,539 |          |
| 2011       |       | 4,741  |          |
| 2012       |       | 8,877  |          |
| ** ** | ** ** | **$**  | **1,138,180** | ** ** |

 

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

 

Securities sold underagreements to repurchase, which are classified as secured borrowings, representboth funds of significant commercial demand deposit customers, which mature oneday from the transaction date, and secured transactions with other banks. As ofDecember 31, 2007, the Company had $125 million in funds from customers 

 

42

----

 

and $75 million in funds from other banks. Ofthis $75 million, $50 million matures on November 2, 2012, and $25 millionmatures on March 22, 2014. Both of these transactions are callable by theother bank on any quarterly interest payment date.  At December 31, 2006, customers fundswere $108 million and there were no funds from other banks. Securities soldunder agreements to repurchase are reflected at the amount of cash received andare collateralized by securities in the Company’s investment securities portfolio.  As of December 31, 2007 and 2006 therewere $22 million  and $40.5 million inFederal funds purchased, respectively.

 

**Note 8. Income Taxes**

 

TheCompany files income tax returns in the U.S. federal jurisdiction and the stateof Virginia.  With few exceptions, theCompany is no longer subject to U.S. federal and state income tax examinationsby tax authorities for years prior to 2004.

 

TheCompany adopted the provisions of FIN 48, “Accounting for Uncertainty in IncomeTaxes”, on January 1, 2007 with no impact on the financial statements.

 

Net deferred tax assetsconsist of the following components at December 31, 2007 and 2006 (dollarsin thousands):

 
| ** **                            | ** ** | **2007** | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|
| **Deferred tax assets:**              |       |     |       |       |       |
| Allowance for loan losses             |       | $        | 7,918      |       | $          | 6,336 |   |
| Bank premises and equipment           |       | 454      |       | 365        |       |
| Deferred compensation                 |       | 183      |       | —     |       |
| Accrued Rents                         |       | 171      |       | —     |       |
| Non-accrual loans                     |       | 49       |       | 2          |       |
| Non-qualified incentive stock options |       | 21       |       | 6          |       |
| Securities available-for-sale         |       | —   |       | 368        |       |
|                                  |       | $        | 8,796      |       | $          | 7,077 |   |
| **Deferred tax liabilities:**         |       |     |       |       |       |
| Securities available-for-sale         |       | 651      |       | —     |       |
| Federal Home Loan Bank stock          |       | 2        |       | 2          |       |
| ** **                            | ** ** | **653**  | ** ** | **2**      | ** ** |
| **Net deferred tax assets**           | ** ** | **$**    | **8,143**  | ** ** | **$**      | **7,075** | ** ** |

 

The provision for income taxand its components for the years ending December 31, 2007, 2006, and 2005are as follows (dollars in thousands):

 
| **December 31,** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Current tax expense   |       | $        | 15,306     |     | $          | 14,505   |       | $ | 11,634 |   |
| Deferred tax benefit  |       | (2,087   | )          | (1,580   | )          | (1,196   | )          |
|                  |       | $        | 13,219     |     | $          | 12,925   |       | $ | 10,438 |   |

 

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, 2007, 2006 and 2005, due to the following (dollars inthousands):

 
| **December 31,**                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed “expected” tax expense at 35%    |       | $        | 13,652     |     | $          | 13,101   |       | $ | 10,536 |   |
| Increase (decrease) in income taxes resulting from: |       |     |       |     |       |     |       |
| Nondeductible expense                               |       | 274      |       | 53       |       | 75       |       |
| Nontaxable income                                   |       | (707     | )          | (229     | )          | (173     | )          |
|                                                |       | $        | 13,219     |     | $          | 12,925   |       | $ | 10,438 |   |

 

43

----

** **

**Note 9.Earnings Per 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.

 
| ** **                     | ** ** | **2007**   | ** ** | **2006**                   | ** ** | **2005**   | ** ** |
|--------------------------------|------------|------------|------------|----------------------------|------------|------------|------------|
| ** **                     | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| **Basic earnings per share**   |       | 23,930,220 |       | $                          | 1.08       |       | 23,600,762 |   | $ | 1.04 |   | 23,117,635 |   | $ | 0.85 |   |
| Effect of dilutive securities: |       |       |       |                       |       |       |       |   |   |   |   |   |   |
| Stock options                  |       | 959,966    |       |                       |       | 1,353,560  |       |   |   | 1,614,450 |   |   |   |
| **Diluted earnings per share** |       | 24,890,186 |       | $                          | 1.04       |       | 24,954,322 |   | $ | 0.98 |   | 24,732,085 |   | $ | 0.79 |   |

#### ** **

Stockoptions for 534,590 and 172,040 shares of common stock were not included incomputing diluted earnings per share in 2007 and 2006, respectively, becausetheir effects were anti-dilutive.  Therewere no anti-dilutive shares in 2005.

 

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

#### ** **

The Company leases officespace for twenty-two of its branch locations, its operations, mortgage lending,and construction lending departments and has entered into leases for 5additional branch locations to be opened between 2008 and 2009. Thesenon-cancellable agreements, which expire through June 2034, in someinstances require payment of certain operating charges. Generally, all leasescontain 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 31,2007, is $44.9 million, due as follows (dollars in thousands):

 
| Due in the year ending December 31, |   | 2008       |   | $     | 3,536  |   |
|------------------------------------------|--------|------------|--------|-------|--------|--------|
|                                     |   | 2009       |   | 3,741 |   |
|                                     |   | 2010       |   | 3,984 |   |
|                                     |   | 2011       |   | 3,379 |   |
|                                     |   | 2012       |   | 3,541 |   |
|                                     |   | Thereafter |   | $     | 26,699 |   |

 

The total lease expense was $3.1 million, $2.5 millionand $1.9 million in 2007, 2006 and 2005, 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.

 

#### **Note 11. Loans toOfficers and Directors**

#### ** **

Officers, directors and/ortheir related business interests are loan customers in the ordinary course ofbusiness.  In management’s opinion, theseloans are made on substantially the same terms as those prevailing at the timefor comparable loans with other persons and do not involve more than normalrisk of collectibility or present other unfavorable features.  The aggregate amount outstanding on suchloans at December 31, 2007 and 2006, was $20.2 million and $28.2 million,respectively. During 2007, new loans and advances amounted to $429 thousand andrepayments 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 a qualified IncentiveStock Option Plan, that is shareholder approved, and provides for the grantingof options to purchase up to 2,298,072 shares of common stock at a price to bedetermined by the Board of Directors at the date of grant, but in any event noless than 100% of the fair market value. Options outstanding prior to May 29,1998 were granted under the Company’s plan adopted in 1988 which was replacedby the current plan. Options are awarded to employees and 

 

44

----

 

the Board of Directors of the Company at thediscretion of the Board of Directors, and expire 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, vestedover five years.

 

Includedin salaries and employee benefits expense for the twelve months ended December 31,2007, is $421 thousand of stock-based compensation expense which is based onthe estimated fair value of 305,050 options granted between January 2006and December 2007, amortized on a straight-line basis over a five yearrequisite service period. As of December 31, 2007, there was $1.6 millionremaining of total unrecognized compensation expense related to these optionawards which will be recognized over the remaining requisite service period.There was $217 thousand and $161 thousand in stock option expense in 2006 and2005, respectively.

 

Thefair value of each grant is estimated at the grant date using the Black-Scholesoption-pricing model and using the assumptions noted in the following table.Expected volatility is based on the historical volatility of the Company’sstock and the risk-free rate is based on the U.S. Treasury yield curve in effectat the time of grant. During 2006, the Company took into consideration guidanceunder SFAS 123(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107)when reviewing and updating assumptions. The weighted average expected option term for 2006 and 2007 reflects theapplication of the simplified method set out in SAB 107, which defines the lifeas the average of the contractual term of the options and the weighted averagevesting period for all option tranches. For 2005, expected term was based onthe grant expiration date.

 
| ** **               | ** ** | **2007**        | ** ** | **2006**        | ** ** | **2005** | ** ** |
|--------------------------|------------|-----------------|------------|-----------------|------------|----------|------------|
| Expected volatility      |       | 23.59%          |       | 21.91%          |       | 21.98%   |       |
| Expected dividends       |       | .00%            |       | .00%            |       | .02%     |       |
| Expected term (in years) |       | 7.5             |       | 7.5             |       | 10.0     |       |
| Risk-free rate           |       | 3.70%  to 4.93% |       | 4.42%  to 4.75% |       | 4.22%    |       |

 

A summary of option activity under the Planas of December 31, 2007, and changes during the year then ended ispresented below:

 
| **Options**                            | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value********($000)** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 1,974,786                  |       | $                                       | 6.30       |                                                 |       |                                          |       |   |
| Granted                                |       | 160,207                    |       | $                                       | 17.14      |                                                 |       |                                          |       |   |
| Exercised                              |       | 304,972                    |       | $                                       | 2.37       |                                                 |       |                                          |       |   |
| Forfeited                              |       | 11,380                     |       | $                                       | 17.46      |                                                 |       |                                          |       |   |
| Outstanding at  December 31, 2007 |       | 1,818,641                  |       | $                                       | 7.84       |                                                 | 4.9 years  |                                          | $          | 7,076 |   |
| Exercisable at  December 31, 2007 |       | 1,532,999                  |       | $                                       | 5.98       |                                                 | 4.2 years  |                                          | $          | 8,816 |   |

 

Theweighted-average grant date fair value of options granted during the years2007, 2006 and 2005 was $6.74, $7.70 and $6.67, respectively. The totalintrinsic value of options exercised during the years ended December 31,2007, 2006 and 2005, was $4.3 million, $8.8 million and $4.8 million,respectively.

 

45

----

 

A further summary about theoptions outstanding and exercisable at December 31, 2007 is provided inthe 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              |       | 631,143                      |       | 2.0  years                       |       | $ | 1.59 |   | 631,143 |   | 2.0  years |   | $ | 1.59 |   |
| $ 2.80 to $ 5.46              |       | 409,454                      |       | 4.6  years                       |       | 4.02 |   | 409,454 |   | 4.6  years |   | 4.02 |   |
| $ 5.47 to $ 7.82              |       | 5,155                        |       | 5.4  years                       |       | 7.52 |   | 5,155 |   | 5.4  years |   | 7.52 |   |
| $ 7.83 to $21.59                   |       | 772,889                      |       | 7.5  years                       |       | 14.96 |   | 487,247 |   | 6.8  years |   | 13.29 |   |
| **$ 1.00 to $21.59**               | ** ** | **1,818,641**                | ** ** | **4.9  years**                   | ** ** | **$** | **7.84** | ** ** | **1,532,999** | ** ** | **4.2  years** | ** ** | **$** | **5.98** | ** ** |

 

All options granted, available under thecurrent Plan, and exercisable have been adjusted for giving retroactive effectto a 10% stock dividend in May 2007. In January 2008, a total of209,565 options were granted to sixty-three officers and six outside directorsof the Company at an exercise price of $11.74 per share and with a five yearvesting period.

 

In September 2003, the Company adoptedan Employee Stock Purchase Plan. Under the plan a total of 355,929 shares ofcommon stock, as adjusted for stock dividends and splits, were reserved forissuance to eligible employees at a price equal to at least 85% of the fairmarket value of the shares of common stock on the date of grant. Grants eachyear expire at the end of that fiscal year if not exercised by the employee. OnSeptember 24, 2003, eligible employees were granted the right to purchase19,026 shares at a price of $23.18, as adjusted, which was equal to 100% of thefair market value of the shares at that time. Of the total grant, 8,433 werepurchased. On January 10, 2004, rights to purchase 27,035 shares of commonstock were granted at a price of $21.38, as adjusted, which was equal to 85% ofthe fair market value of the shares at that time. Of the total grant, 6,058were purchased. On January 18, 2005, rights to purchase 28,551 shares ofcommon stock were granted at a price of $19.72, as adjusted, which was equal to85% of the fair market value of the shares at that time. Of the total grant,11,096 were purchased. On January 11, 2006, rights to purchase 36,278shares of common stock were granted at a price of $17.24, as adjusted, whichwas equal to 85% of the fair market value of the shares at that time.  Of the total grant, 13,265 shares werepurchased. On January 16, 2007, rights to purchase 54,051 shares of commonstock were granted at a price of $14.95, as adjusted, which was equal to 85% ofthe fair market value of the shares at that time.  Of the total grant, 2,017 shares werepurchased.

 

Included in salaries and employee benefitsexpense for the twelve months ended December 31, 2007 and 2006, is $6thousand and $40 thousand, respectively of stock-based compensation expense relatedto the 15% discount on the 2,017 shares purchased by Company employees in 2007,and the 13,265 shares purchased in 2006. There was no stock-based compensation cost recognized in 2005 for sharespurchased under the plan. On February 1, 2008, rights to purchase 100,435shares of common stock were granted at a price of $10.23, which was equal to85% of the fair market value of the shares at that time.

 

**Note 13. Director CompensationPlan**

 

In April 1996, the Company granted anaggregate of 185,286 warrants at an exercise price of $3.56 to the outsideDirectors.  In January 1998, theCompany granted 51,990 warrants at an exercise price of $2.89 to an additionaloutside Director. All warrants have been restated giving retroactive effect toall stock splits and or stock dividends through their exercise date. Of thetotal warrants granted in April 1996, 46,321 were exercised in 2002, and138,965 were exercised in 2003. The 51,990 warrants granted in January 1998were exercised in January 2005.

 

In addition to the warrants, the outsideDirectors, have been awarded a total of 264,061, 99,683, 41,679, 70,785,44,856, 28,875, 19,800 and 16,200 options under the Company’s 1998 IncentiveOption Plan in 2000, 2001, 2002, 2003, 2004, 2005, 2006 and 2007 respectively,as adjusted for all stock splits and or stock dividends through 2007. In January 2008,each of the outside Directors were awarded an additional 6,000 options. Alldirector options are included in the tables under Note 12.

 

46

----

 

**Note 14. Other Borrowed Funds andLines of Credit**

 

The Bank maintains a $350.8million 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, 2007, the book value of these qualifying loanstotaled approximately $124.9 million and the amount of available credit usingthis collateral was $78 million. Advances on the line of credit in excess ofthis amount require pledging of additional assets, including other types ofloans and investment securities. As of December 31, 2007, the Bank had $25million in advances outstanding that mature on September 21, 2012, but arecallable by the Federal Home Loan Bank on any quarterly interest payment date.At December 31, 2006, there were no outstanding advances. The Bank has additional short-term linesof credit totaling $115 million with nonaffiliated banks at December 31,2007, on which $22 million was outstanding at that date.

 

**Note 15. Trust Preferred Capital Notes**

 

On November 13, 2002, the Company completed a private placementissuance of $3.0 million of trust preferred securities through a newly formed,wholly-owned, subsidiary trust (VCBI Capital Trust I) which issued $100thousand in common equity to the Company. The securities bear a floating rateof interest, adjusted semi-annually, of 340 basis points over six month Libor,with a maximum rate of 12.0% until November 15, 2007. The securities wereredeemed in November 2007.  On December 19,2002, the Company completed a private placement issuance of $15.0 million oftrust preferred securities through a newly formed, wholly-owned, subsidiarytrust (VCBI Capital Trust II) which issued $470 thousand in common equity tothe Company. These securities bear a floating rate of interest, adjustedsemi-annually, of 330 basis points over six month Libor, currently 8.02%, witha maximum rate of 11.9% until December 30, 2007. 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.

 

Theprincipal asset of each trust is a similar amount of the Company’s juniorsubordinated debt securities with an approximately 30 year term from issuanceand like interest rates to the trust preferred securities. The obligations ofthe Company with respect to the trust preferred securities constitute a fulland unconditional guarantee by the Company of each Trust’s obligations withrespect to the trust preferred securities to the extent set forth in therelated guarantees. Subject to certain exceptions and limitations, the Companymay elect from time to time to defer interest payments on the juniorsubordinated debt securities, resulting in a deferral of distribution paymentson the related trust preferred securities.

 

TheTrust Preferred Securities may be included in Tier 1 capital for regulatorycapital adequacy purposes up to 25.0% of Tier 1 capital after its inclusion.The portion of the trust preferred securities not qualifying as Tier 1 capitalmay be included as part of total qualifying capital in Tier 2 capital.  Commencing March 31, 2009, the aggregateamount of qualifying trust preferred securities which may be included in Tier 2capital, along with other restricted core capital elements, is limited to 50%of Tier 1 capital, net of goodwill and certain other intangible assets.

 

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

 

The Company is party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness 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.

 

47

----

 

A summary of the contract or notional amount of theCompany’s exposure to off-balance-sheet risk as of December 31, 2007 and2006, is as follows:

 
| **(Dollars in thousands)**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Financial instruments whose contract amounts represent credit risk: |       |     |       |     |       |
|                                                                |       |     |       |     |       |
| Commitments to extend credit                                        |       | $        | 104,480    |     | $          | 50,336 |   |
|                                                                |       |     |       |     |       |
| Standby letters of credit and financial guarantees written          |       | $        | 53,734     |     | $          | 29,378 |   |
|                                                                |       |     |       |     |       |
| Unfunded lines of credit                                            |       | $        | 543,714    |     | $          | 450,049 |   |

 

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 and financialguarantees written are conditional commitments issued by the Company toguarantee 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 mortgage loans forsale to secondary market investors subject to contractually specified andlimited recourse provisions. In 2007, the Company originated $158.0 million andsold $160.2 million to investors, compared to $174.9 million originated and$176.6 million sold in 2006. 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, 2007, the Bank had ratelock commitments to originate and sell mortgage loans amounting to $11.9million which includes $4.3 million of those commitments closed and wereheld-for-sale. 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.

 

**Note 17. Concentrations of CreditRisk**

 

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

 

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

 

48

----

 

At December 31, 2007 and 2006, therewere $1.44 billion and $1.26 billion, or 73.7% and 76.4%, respectively of totalloans concentrated in commercial real estate. Commercial real estate forpurposes of this note includes all construction loans, loans secured by 5+family residential properties and loans secured by non-farm, non-residentialproperties. At December 31, 2007 and 2006, construction loans represented27.9% and 31.2% of total loans, loans secured by 5+ family residentialproperties represented 2.9% and 3.5%, and loans secured by non-farm,non-residential properties represented 42.8% and 41.7%, respectively.  Construction loans at December 31, 2007and 2006 included $302.4 million and $347.5 million in loans to commercialbuilders of single family housing in the Northern Virginia market, representing15.5% and 21.0% of total loans, respectively.

 

The Bank has established formal policiesrelating to the credit and collateral requirements in loan originationsincluding policies that establish limits on various loan types as a percentageof total loans and total capital.  Loansto purchase real property are generally collateralized by the related propertywith limitations based on the property’s appraised value. Credit approval isprimarily a function of collateral and the evaluation of the creditworthinessof the individual borrower, guarantors and or the individual project.Management considers the concentration of credit risk to be minimal due to thediversification of borrowers over numerous business and industries.

 

**Note 18. Fund Restrictions andReserve Balance**

 

The transfer of funds from the Bank to theCompany in the form of loans, advances, and cash dividends are restricted byFederal and State regulatory authorities. As of December 31, 2007, theaggregate amount of unrestricted funds that could be transferred in the form ofa cash dividend totaled approximately $57.3 million, or 33.9%, of theconsolidated net assets of the Company.

 

As members of the FederalReserve System, the Company is required to maintain certain average reservebalances.  For the final weekly reportingperiod in the years ended December 31, 2007 and 2006, the aggregateamounts of daily average required balances were approximately****$3.5 million and $2.9 million,****respectively.

 

**Note 19.  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$526 thousand, $347 thousand and $294 thousand for the years ended December 31,2007, 2006 and 2005, respectively.

 

**Note 20.  Disclosures About Fair Value of FinancialInstruments and Interest Rate Risk**

 

The following methods and assumptions wereused to estimate the fair value of each class of financial instruments forwhich it is practicable to estimate that value:

 

**Cash and Short-Term Investments**

 

For those short-term instruments, thecarrying amount is a reasonable estimate of fair value.

 

**Securities**

 

For securities held for investment purposes,fair values are based on quoted market prices or dealer quotes. The carryingvalue of restricted stock approximates fair value based on the redemptionprovisions of the issuers.

 

**Loans Held-for-Sale**

 

Fair value is based on selling price arrangedby arms-length contracts with third parties.

 

**Loan Receivables**

 

For certain homogeneous categories of loans,such as some residential mortgages, and other consumer loans, fair value isestimated using the quoted market prices for securities backed by similarloans, adjusted for differences in 

 

49

----

 

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.

 

**Deposits and Borrowings**

 

The fair value of demand deposits, savingsaccounts, and certain money market deposits is the amount payable on demand atthe reporting date.  For all otherdeposits and borrowings, the fair value is determined using the discounted cashflow method.  The discount rate was equalto the rate currently offered on similar products.

 

**Accrued Interest**

 

The carrying amounts of accrued interestapproximate fair value.

 

**Off-Balance Sheet FinancialInstruments**

 

Thefair value of commitments to extend credit is estimated using the feescurrently 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, 2007 and 2006, the fairvalue of loan commitments and stand-by letters of credit were deemedimmaterial, and therefore, are not included in the table below.

 

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

 
| ** **                           | ** ** | **2007**             | ** ** | **2006**                       | ** ** |
|--------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| **Financial assets:**                |       |                 |       |                           |       |   |   |   |   |
| Cash and short-term investments      |       | $                    | 35,341     |                           | $          | 35,341 |   | $ | 36,068 |   | $ | 36,068 |   |
| Securities                           |       | 326,237              |       | 326,314                        |       | 234,203 |   | 233,401 |   |
| Loans held-for-sale                  |       | 4,339                |       | 4,339                          |       | 7,796 |   | 7,796 |   |
| Loans                                |       | 1,924,741            |       | 2,015,487                      |       | 1,629,827 |   | 1,674,244 |   |
| Accrued interest receivable          |       | 11,451               |       | 11,451                         |       | 9,315 |   | 9,315 |   |
|                                      |            |                      |            |                                |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                  | ** ** | **2007**             | ** ** | **2006**                       | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)**                                        | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| **Financial liabilities:**                                                  |       |                 |       |                           |       |   |   |   |   |
| Deposits                                                                    |       | $                    | 1,869,165  |                           | $          | 1,885,014 |   | $ | 1,605,941 |   | $ | 1,593,494 |   |
| Securities sold under agreements to repurchase and federal funds  purchased |       | 222,534              |       | 225,530                        |       | 148,871 |   | 148,030 |   |
| Other borrowed funds                                                        |       | 25,000               |       | 24,977                         |       | — |   | — |   |
| Trust preferred capital notes                                               |       | 41,244               |       | 46,321                         |       | 44,344 |   | 48,020 |   |
| Accrued interest payable                                                    |       | 8,942                |       | 8,942                          |       | 5,923 |   | 5,923 |   |
|                                                                             |            |                      |            |                                |            |  |  |  |  |  |  |  |  |

 

In the normal course of business, the Companyis subject to market risk which includes interest rate risk (the risk thatgeneral interest rate levels will change). As a result, the fair values of the Company’s financial instruments willchange when interest rate levels change and that change may be either favorableor unfavorable to the Company. Management attempts to match maturities ofassets and liabilities to the extent believed necessary to minimize this risk.

 

50

----

 

**Note21.  Capital Requirements**

 

The Company (on aconsolidated basis) and the Bank are subject to various regulatory capitalrequirements administered by the Federal banking agencies. Failure to meetminimum 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 the regulatoryframework for prompt corrective action, the Company and the Bank must meetspecific capital guidelines that involve quantitative measures of their assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors. Promptcorrective action provisions are not applicable to bank holding companies.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios (set forth in the table below)of Total Capital, Tier 1 Capital and Tier 1 Leverage Capital. Total Capital andTier 1 Capital ratios are in reference to risk-weighted assets (as defined),and the Tier 1 Leverage Capital ratio is in reference to average assets.  Management believes, as of December 31,2007 and 2006, that the Company and Bank met all capital adequacy requirementsto which they are subject.

 

Asof December 31, 2007, the Bank is categorized as “well-capitalized” underthe regulatory framework for prompt corrective action. To be categorized as “well-capitalized,”the Bank 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, 2007, thatmanagement believes changed the Bank’s category. The Company’s and the Bank’sactual capital amounts and ratios are also presented in the table.

 
| ** **                                       | ** ** | **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 | % |

 
| **As of December 31, 2006:** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|
| **Total Capital:**                               |       |       |       |      |       |       |       |      |       |       |       |      |       |
| Company                                          |       | $          | 201,636    |      | 11.57      | %          | $          | 139,425   |       | 8.00       | %          | $         | N/A        |   | N/A |   |
| Bank                                             |       | 197,432    |       | 11.34     | %          | 139,308    |       | 8.00      | %          | 174,136    |       | 10.00     | %          |
|                                             |       |       |       |      |       |       |       |      |       |       |       |      |       |
| **Tier 1 Capital:**                              |       |       |       |      |       |       |       |      |       |       |       |      |       |
| Company                                          |       | $          | 183,535    |      | 10.53      | %          | $          | 69,712    |       | 4.00       | %          | $         | N/A        |   | N/A |   |
| Bank                                             |       | 136,331    |       | 7.83      | %          | 69,654     |       | 4.00      | %          | 104,481    |       | 6.00      | %          |
|                                             |       |       |       |      |       |       |       |      |       |       |       |      |       |
| **Tier 1 Leverage Capital**                      |       |       |       |      |       |       |       |      |       |       |       |      |       |
| Company                                          |       | $          | 183,535    |      | 9.61       | %          | $          | 76,393    |       | 4.00       | %          | $         | N/A        |   | N/A |   |
| Bank                                             |       | 136,331    |       | 7.18      | %          | 75,950     |       | 4.00      | %          | 94,938     |       | 5.00      | %          |

 

----

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

 

51

----

 

**Note 22. CondensedFinancial Statements of Parent Company**

 
| **Balance Sheets (in thousands)**    | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Assets:                                             |       |                            |       |                            |       |
| Cash and due from banks                             |       | $                               | 4,826      |                            | $          | 4,311 |   |
| Investment in subsidiaries                          |       | 165,405                         |       | 136,990                         |       |
| Subordinated debt of subsidiary                     |       | 40,000                          |       | 43,000                          |       |
| Other assets                                        |       | 336                             |       | 111                             |       |
| **Total Assets**                                    |       | $                               | 210,567    |                            | $          | 184,412 |   |
| ** **                                          | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Liabilities and Stockholders’ Equity:          | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Trust preferred capital notes                       |       | $                               | 41,244     |                            | $          | 44,344 |   |
| Other liabilities                                   |       | 180                             |       | 217                             |       |
| Total Liabilities                                   |       | $                               | 41,424     |                            | $          | 44,561 |   |
| Stockholders’ Equity                           |       | 169,143                         |       | 139,851                         |       |
| **Total Liabilities and Stockholders’ Equity** |       | $                               | 210,567    |                            | $          | 184,412 |   |

 
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Statements Of Income (in thousands)**                          | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income,                                                                              |       |                                       |       |   |   |   |   |
| Interest on subordinated debt                                                        |       | $                                          | 3,165      |   | $ | 3,097 |   | $ | 1,036 |   |
| Expenses:                                                                            |       |                                       |       |   |   |   |   |
| Interest on trust preferred capital notes                                            |       | $                                          | 3,099      |   | $ | 3,099 |   | $ | 1,246 |   |
| Other operating expense                                                              |       | 1,086                                      |       | 888 |   | 714 |   |
| Total Expenses                                                                       |       | 4,185                                      |       | 3,987 |   | 1,960 |   |
| Loss before income tax (benefit) and equity in undistributed earnings  of subsidiary |       | $                                          | (1,020     | ) | $ | (890 | ) | $ | (924 | ) |
| Income tax (benefit)                                                                 |       | (186                                       | )          | (221 | ) | (267 | ) |
|                                                                                 |       | (834                                       | )          | (669 | ) | (657 | ) |
| Equity in undistributed net income of Virginia Commerce Bank                         |       | 26,621                                     |       | 25,177 |   | 20,324 |   |
|  Net Income                                                                     |       | $                                          | 25,787     |   | $ | 24,508 |   | $ | 19,667 |   |

 

52

----

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Statements Of Cash Flows (in thousands)**           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash Flows from Operating Activities:                                          |       |                                       |       |   |   |   |   |
| Net Income                                                                     |       | $                                          | 25,787     |   | $ | 24,508 |   | $ | 19,667 |   |
| Adjustments to reconcile net income to net cash used in operating  activities: |       |                                       |       |   |   |   |   |
| Equity in undistributed net income of Virginia Commerce Bank                   |       | (26,621                                    | )          | (25,177 | ) | (20,324 | ) |
| Stock option expense                                                           |       | 427                                        |       | 257 |   | 161 |   |
| (Increase) decrease in other assets                                            |       | (226                                       | )          | 191 |   | 50 |   |
| (Decrease) increase in other liabilities                                       |       | (37                                        | )          | 133 |   | 60 |   |
| Net cash used in operating activities                                          |       | $                                          | (670       | ) | $ | (88 | ) | $ | (386 | ) |
| Cash Flows from Investing Activities:                                          |       |                                       |       |   |   |   |   |
| Retirement (purchase) of equity interest in subsidiary                         |       | 100                                        |       | — |   | (774 | ) |
| Retirement (purchase) of debt securities                                       |       | 3,000                                      |       | — |   | (25,000 | ) |
| Net cash provided by (used in) investing activities                            |       | $                                          | 3,100      |   | $ | — |   | $ | (25,774 | ) |
| Cash Flows from Financing Activities:                                          |       |                                       |       |   |   |   |   |
| Net (decrease) increase in junior subordinated capital notes                   |       | (3,100                                     | )          | — |   | 25,774 |   |
| Common stock issued                                                            |       | 1,197                                      |       | 2,418 |   | 1,690 |   |
| Cash paid in lieu of fractional shares                                         |       | (12                                        | )          | (3 | ) | (6 | ) |
| Net cash (used in) provided by financing activities                            |       | $                                          | (1,915     | ) | $ | 2,415 |   | $ | 27,458 |   |
| Change in cash and cash equivalents                                            |       | $                                          | 515        |   | $ | 2,327 |   | $ | 1,298 |   |
| Beginning                                                                      |       | 4,311                                      |       | 1,984 |   | 686 |   |
| Ending                                                                         |       | $                                          | 4,826      |   | $ | 4,311 |   | $ | 1,984 |   |

 

53

----

 

**Note23. Quarterly Financial Information (Unaudited)**

 

Selected financial information for the quarterly periods of 2007 and2006 is presented below (dollars in thousands except per share data):

 
| ** **                                          | ** ** | **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                                               |       | $                      | 0.27       |   | $ | 0.29 |   | $ | 0.28 |   | $ | 0.24 |   |
| Diluted                                             |       | $                      | 0.26       |   | $ | 0.28 |   | $ | 0.27 |   | $ | 0.23 |   |

 
| ** **                                          | ** ** | **2006 Quarters** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **First**              | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Interest income                                     |       | $                      | 27,241     |   | $ | 30,594 |   | $ | 32,537 |   | $ | 34,920 |   |
| Interest expense                                    |       | 11,089                 |       | 13,246 |   | 15,086 |   | 17,066 |   |
| Net interest income                                 |       | $                      | 16,152     |   | $ | 17,348 |   | $ | 17,451 |   | $ | 17,854 |   |
| Provision for loan losses                           |       | 1,005                  |       | 955 |   | 1,420 |   | 1,026 |   |
| Net interest income after provision for loan losses |       | $                      | 15,147     |   | $ | 16,393 |   | $ | 16,031 |   | $ | 16,828 |   |
| Non-interest income                                 |       | 1,711                  |       | 1,735 |   | 1,844 |   | 2,033 |   |
| Non-interest expense                                |       | 8,194                  |       | 8,484 |   | 8,551 |   | 9,060 |   |
| Income before taxes                                 |       | $                      | 8,664      |   | $ | 9,644 |   | $ | 9,324 |   | $ | 9,801 |   |
| Income tax expense                                  |       | 2,950                  |       | 3,366 |   | 3,239 |   | 3,370 |   |
| Net income                                          |       | $                      | 5,714      |   | $ | 6,278 |   | $ | 6,085 |   | $ | 6,431 |   |
| Net income per common share:                        |       |                   |       |   |   |   |   |   |   |
| Basic                                               |       | $                      | 0.25       |   | $ | 0.27 |   | $ | 0.25 |   | $ | 0.27 |   |
| Diluted                                             |       | $                      | 0.23       |   | $ | 0.25 |   | $ | 0.25 |   | $ | 0.25 |   |

 

**Note 24: Segment Reporting**

 

In accordance with SFAS No. 131, “Disclosures About Segments of anEnterprise and Related Information” the Company has two reportable segments,its community banking operations and its mortgage banking division. Communitybanking operations, the major segment, involves making loans and gatheringdeposits from individuals and businesses in the Bank’s market area, while themortgage banking division originates and sells mortgage loans servicingreleased, on one-to-four family residential properties.  Revenues from mortgage lending consist ofinterest earned on mortgage loans held-for-sale, loan origination fees, and netgains on the sale of loans in the secondary market. The Bank provides themortgage division with short term funds to originate loans and charges itinterest on the funds based on what the Bank earns on overnight funds. Expensesinclude both fixed overhead and variable costs on originated loans such as loanofficer commissions, document preparation and courier fees. The following table

 

54

----

 

presents segment information for the years ended December 31,2007, 2006 and 2005. Eliminations consist of overhead and interest charges bythe Bank to the mortgage lending division.

 
| ** **                           | ** ** | **2007**               | ** ** |
|--------------------------------------|------------|------------------------|------------|
| **(In thousands)**              | ** ** | **Community  Banking** | ** ** | **Mortgage  Lending** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Interest income                      |       | $                      | 153,708    |   | $ | 430 |   | $ | — |   | $ | 154,138 |   |
| Non-interest income                  |       | 5,177                  |       | 2,706 |   | — |   | 7,883 |   |
| Total operating income               |       | $                      | 158,885    |   | $ | 3,137 |   | $ | — |   | $ | 162,021 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Interest expense                     |       | $                      | 78,981     |   | $ | 348 |   | $ | (348 | ) | $ | 78,981 |   |
| Provision for loan losses            |       | 4,340                  |       | — |   | — |   | 4,340 |   |
| Non-interest expense                 |       | 36,891                 |       | 2,861 |   | (58 | ) | 39,694 |   |
| Total operating expense              |       | $                      | 120,212    |   | $ | 3,209 |   | $ | (406 | ) | $ | 123,015 |   |
| Income (loss) before taxes on income |       | $                      | 38,673     |   | $ | (73 | ) | $ | 406 |   | $ | 39,006 |   |
| Provision for income taxes           |       | 13,244                 |       | (25 | ) | — |   | 13,219 |   |
| Net Income (loss)                    |       | $                      | 25,429     |   | $ | (48 | ) | $ | 406 |   | $ | 25,787 |   |
|                                 |       |                   |       |   |   |   |   |   |   |
| Total Assets                         |       | $                      | 2,335,176  |   | $ | 4,521 |   | $ | — |   | $ | 2,339,697 |   |

 
| ** **                    | ** ** | **2006**               | ** ** |
|-------------------------------|------------|------------------------|------------|
| **(In thousands)**       | ** ** | **Community  Banking** | ** ** | **Mortgage  Lending** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Interest income               |       | $                      | 124,837    |   | $ | 455 |   | $ | — |   | $ | 125,292 |   |
| Non-interest income           |       | 4,265                  |       | 3,058 |   | — |   | 7,323 |   |
| Total operating income        |       | $                      | 129,102    |   | $ | 3,513 |   | $ | — |   | $ | 132,615 |   |
|                          |       |                   |       |   |   |   |   |   |   |
| Interest expense              |       | $                      | 56,487     |   | $ | 357 |   | $ | (357 | ) | $ | 56,487 |   |
| Provision for loan losses     |       | 4,406                  |       | — |   | — |   | 4,406 |   |
| Non-interest expense          |       | 31,480                 |       | 2,867 |   | (58 | ) | 34,289 |   |
| Total operating expense       |       | $                      | 92,373     |   | $ | 3,224 |   | $ | (415 | ) | $ | 95,182 |   |
| Income before taxes on income |       | $                      | 36,729     |   | $ | 289 |   | $ | 415 |   | $ | 37,433 |   |
| Provision for income taxes    |       | 12,824                 |       | 101 |   | — |   | 12,925 |   |
| Net Income                    |       | $                      | 23,905     |   | $ | 188 |   | $ | 415 |   | $ | 24,508 |   |
|                          |       |                   |       |   |   |   |   |   |   |
| Total Assets                  |       | $                      | 1,941,197  |   | $ | 7,885 |   | $ | — |   | $ | 1,949,082 |   |

 
| ** **                    | ** ** | **2005**               | ** ** |
|-------------------------------|------------|------------------------|------------|
| **(In thousands)**       | ** ** | **Community  Banking** | ** ** | **Mortgage  Lending** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Interest income               |       | $                      | 85,879     |   | $ | 599 |   | $ | — |   | $ | 86,478 |   |
| Non-interest income           |       | 3,370                  |       | 3,306 |   | — |   | 6,676 |   |
| Total operating income        |       | $                      | 89,249     |   | $ | 3,905 |   | $ | — |   | $ | 93,154 |   |
|                          |       |                   |       |   |   |   |   |   |   |
| Interest expense              |       | $                      | 29,811     |   | $ | 348 |   | $ | (348 | ) | $ | 29,811 |   |
| Provision for loan losses     |       | 3,772                  |       | — |   | — |   | 3,772 |   |
| Non-interest expense          |       | 26,538                 |       | 2,977 |   | (49 | ) | 29,466 |   |
| Total operating expense       |       | $                      | 60,121     |   | $ | 3,325 |   | $ | (397 | ) | $ | 63,049 |   |
| Income before taxes on income |       | $                      | 29,128     |   | $ | 580 |   | $ | 397 |   | $ | 30,105 |   |
| Provision for income taxes    |       | 10,234                 |       | 204 |   | — |   | 10,438 |   |
| Net Income                    |       | $                      | 18,894     |   | $ | 376 |   | $ | 397 |   | $ | 19,667 |   |
|                          |       |                   |       |   |   |   |   |   |   |
| Total Assets                  |       | $                      | 1,505,751  |   | $ | 12,674 |   | $ | — |   | $ | 1,518,425 |   |

 

55

----

### ** **

### **BUSINESS**

### ** **

**General**

 

Virginia CommerceBancorp, Inc. (the “Company”) was organized under Virginia law on November 5,1999 to become 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 Virginiachartered bank 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-four additional full service branch officesthroughout Northern Virginia, an investment services office in Vienna,Virginia, and residential mortgage lending offices in Chantilly and Warrenton,Virginia. Additionally, the Bank has entered into lease agreements for fiveadditional branch office locations to be opened between 2008 and 2009.

 

TheCompany engages in a general commercial banking business through the Bank, itssole direct 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.

 

TheBank’s primary service area consists of the Northern Virginia suburbs ofWashington D.C., including Arlington Fairfax, Fauquier, Loudoun, PrinceWilliam, Spotsylvania and Stafford Counties and the cities of Alexandria,Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park. ** **This area’s bankingbusiness is dominated by a small number of large commercial banks withextensive branch networks. ** **Most are branches of national,state-wide or regional banks.  The Bank’sprimary service area is also served by a large number of other financialinstitutions, including savings banks, credit unions and non-bank financialinstitutions such as securities brokerage firms, insurance companies and mutualfunds. The Bank’s primary service area is oriented toward independently ownedsmall-to-medium-sized businesses, light industry and firms specializing ingovernment contracting. An increasing number of new community bankingorganizations have been opened in the Bank’s market area, potentiallyrepresenting an increased competitive threat to the Bank.

 

Thebanking business 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.

 

Themajority of the Bank’s deposits are attracted from individuals and business inthe metropolitan Washington D.C. area, and as such, no material portion of theBank’s deposits have been obtained from any single person, single entity, orarea outside the metropolitan Washington D.C. area. The loss of any one or moreof the 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 

 

56

----

 

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.

 

TheBank provides businesses with a full range of deposit accounts, merchantbankcard services, electronic funds transfer services, lock-box services,remote deposit capture, on-line banking, lines of credit for working capital,term loans and commercial real estate loans, and provides consumers with a widearray of deposit products, home equity and revolving lines of credit,installment loans and internet banking services.  The Bank also offers investment services andprovides safe deposit boxes as well as other customary banking services. TheBank is not authorized to offer trust services nor does it offer internationalservices but makes these services available to its customers through financialinstitutions with which the Bank has correspondent banking relationships.

 

The Bank also offers awide variety of residential mortgage loans through its mortgage lendingdivision.  Prior to mid-2007,substantially all of the Bank’s mortgage loans were originated on a pre-soldbasis, servicing released, to numerous secondary market purchasers.  Since mid-2007, and the disruptions in thesecondary market for mortgage loans, the Company has been holding a greaterportion of mortgage loans in portfolio. See “Lending Activities — Mortgage Lending” below. Offered types includeconventional single family first trusts, FHA and VA mortgages for both purchaseand refinance purposes.  In addition, theBank offers construction loans to both individuals and commercial builders onsingle family residential properties which are generally for terms of twelve toeighteen months.  Changes in the localreal estate market and interest rates could adversely impact the level of loansoriginated for sale and the level of construction loans originated andoutstanding, and the resulting fees and earnings thereon.

 

TheBank does not depend upon seasonal business. The Bank relies substantially on local promotional activity, personalcontact by its officers, directors, employees and stockholders, personalizedservice and its reputation in the communities served to compete effectively.

 

TheBank has one wholly owned subsidiary, Northeast Land and Investment Company, aVirginia corporation, organized to hold and market foreclosed real estate.

 

On December 31,2007, the Company had 299 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.

 

Bankingis dependent 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 toborrowings by 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.

 

Fromtime to time, new legislation or regulations are adopted which increase thecost of doing business, limit or expand permissible activities, or otherwiseaffect the competitive balance between banks and other financial institutions.Bills have been introduced in each of the last several Congresses which wouldpermit banks to pay interest on checking and demand deposit accountsestablished by businesses, a practice which is currently prohibited byregulation. If the legislation effectively permitting the payment of intereston business demand deposits is enacted, of which there can be no assurance, itis likely that we may be required to pay interest on some portion of our demanddeposits in order to compete against other banks.  As a significant portion of our deposits aredemand deposits established by businesses, payment of interest on thesedeposits could have a significant negative impact on our net income, netinterest 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.

 

57

----

 

Banksor bank holding 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 orbank holding companies which do not meet such standards may be subject torestrictions 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.

 

**Lending Activities**

 

The Bank offers awide array of lending services to its customers, including commercial loans,commercial real estate loans, lines of credit, equipment financing,construction loans, letters of credit, residential mortgages, personal loans,auto loans and home equity loans and lines of credit.  Loan terms, including interest rates,loan-to-value ratios, and maturities, are tailored as much as possible to meetthe needs of the borrower within prudent lending guidelines in terms ofinterest rate risk and credit risk.

 

When consideringloan requests, the primary factors taken into consideration are the purpose,the cash flow and financial condition of the borrower, primary and secondaryrepayment sources, the value of the underlying collateral, if applicable, andthe character and integrity of the borrower. These factors are evaluated in a number of ways including an analysis offinancial statements, credit history, trade references and visits to theborrower’s place of business.  The Bankhas adopted a comprehensive loan policy manual to provide its loan officerswith underwriting, term, collateral, loan-to-value and pricing guidelines.

 

The Bank’s goal isto build and maintain a commercial loan portfolio consisting of term loans,lines of credit, commercial real estate and construction loans providedprimarily to locally-based borrowers. Additionally, installment loans andpersonal lines of credit, as well as residential mortgages, are made availableto consumer customers.  Commercial loansare generally considered to have a higher degree of risk of default or lossthan other types of loans, such as residential real estate loans, becauserepayment may be affected by general economic conditions, interest rates, thequality of management of the business, and other factors which may cause aborrower to be unable to repay its obligations. General economic conditions can directly or indirectly affect the qualityof a small and mid-sized business loan portfolio. The Bank manages the loanportfolio to avoid high concentrations of similar industry loan types and/orproperty types in relation to total qualifying capital.  Commercial construction loans will make up 50-100%of total qualifying capital, residential construction loans 125-250%, non-farmnon-residential real estate loans 400-600%, residential mortgages and homeequity loans 100-200%, commercial loans 100-200% and consumer installment andpersonal loans 50-100%.  There canhowever, be no assurance that the Bank will be able to achieve or maintain thisdistribution of loans.  At December 31,2007, the loan portfolio’s actual composition compared to total qualifyingcapital consisted of approximately 97% commercial construction loans, 145%residential construction loans, 396% non-farm non-residential real estateloans, 118% residential mortgages and home equity loans, 106% commercial loansand 4% 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 upon adefault. 

 

58

----

 

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 constantlystrive to mitigate risks in the event of unforeseen threats to the loanportfolio as a result of an economic downturn or other negativeinfluences.  Plans for mitigatinginherent risks in managing loan assets include carefully enforcing loanpolicies and procedures, evaluating each borrower’s industry and business planduring the underwriting process, identifying and monitoring primary andalternative sources for repayment, obtaining collateral that is margined tominimize loss in the event of liquidation, ongoing tests of borrower creditworthiness and cash flow, ongoing collateral evaluations and site inspectionsand monitoring of economic and market trends

 

Loan business isgenerated primarily through referrals and direct-calling efforts.  Referrals of loan business comes fromdirectors, shareholders, current customers and professionals such as lawyers,accountants and financial intermediaries.

 

At December 31,2007, the Banks statutory lending limit to any single borrower was $33.8million subject to certain exceptions provided under applicable law.  As of December 31, 2007, the Bank’s maximumcredit exposure to its largest borrower was $19.2 million.

 

*CommercialLoans:*  Commercial loans are written for anylegitimate business purpose including the financing of plant and equipment,interim working capital pending collection of accounts receivable, permanentworking capital for growth and the acquisition and construction of real estateprojects.  There is a focus in the Bank’sloan portfolio on commercial real estate investment which represents apredominant activity in the Bank’s market area. The Bank’s commercial loan portfolio reflects a diverse group ofborrowers with no significant concentration in any borrower, or group ofborrowers.

 

Commercialconstruction loans, residential construction loans to builders and landacquisition and development loans are made to builders with established trackrecords of quality construction.  Landloans are discouraged unless underwritten in conjunction with a relatedconstruction loan or out-sale contract. Typical advance rates are not greater than 65% of the lesser of cost orappraisal for raw land, 75% of the value of finished lots for land acquisition,and 80% of land cost and 100% of construction costs for constructionloans.  In all cases, a minimum 10% equitycontribution of total project costs is required.  Financing terms generally do not exceed 24months.  Construction loans are subjectto 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 realestate loans will generally represent borrower occupied transactions with aprincipal reliance on the borrowing businesses’ ability to repay or investortransactions focused on tenant quality, occupancy and expense controls, as wellas 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 1.10 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 appraisal guidelines and conformity withcurrent comparable market values.  TheBank generally requires personal guarantees on all loans to closely-heldentities as a matter of policy. Borrowers are required to provide, at a minimum, annual corporate,partnership and personal financial statements to comply with Bank policy.  Interest rate risk to the Bank is mitigatedby using either floating interest rates or by fixing rates for an intermediateperiod of time, generally less than five years. While loan amortizations may be approved for up to 360 months, loansgenerally have a call provision (maturity date) of 10 years or less.

 

Commercial termloans are used to provide funds for equipment and general corporate needs.  This loan category is designed to supportborrowers who have a proven ability to service debt over a term generally notto exceed 84 

 

59

----

 

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 loans generallyfloat or are fixed for a term not to exceed five 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 linesof credit are used to finance a business borrower’s short-term or seasonalcredit needs and advances are often based on a percentage of eligiblereceivables and inventory.  In additionto the risks inherent in term loan facilities, line of credit borrowerstypically require additional monitoring to protect the lender against diminishingcollateral values.  Commercial lines ofcredit are generally revolving in nature and payable on demand.  The Bank generally requires at least anannual rest period (for seasonal borrowers) and regular financial information(monthly or quarterly financial statements, monthly accounts receivable agings,borrowing base certificates, etc.) for borrowers with rapid growth andpermanent working capital financing needs. Advances against collateral are generally margined, limiting advances oneligible receivables to 75-80% of current accounts.  Lines of credit and term loans to the sameborrowers are generally cross-defaulted and cross-collateralized.  Industry and collateral concentrationdisciplines are the same as those used in managing the commercial term loanportfolio.  Interest rate charges on thisgroup of loans generally float at a factor at or above the prime lending rate.Generally, personal guarantees are also required on these loans.

 

*ConsumerLoans.*  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 rate.  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 originatesresidential mortgage loans, on a pre-sold basis, for sale to secondary marketpurchasers, on a servicing released basis. This produces benefits primarily inthe form of gains on the sale of the loans at a premium.  Activity in the residential mortgage loanmarket is highly sensitive to changes in interest rates. The loans are sold ona limited recourse basis.  Mostcontracts with investors contain recourse periods that may vary from 90 days upto one year.  In general, the Company maybe required to repurchase a previously sold mortgage loan or indemnify theinvestor if there is major non-compliance with defined loan origination ordocumentation standards, including fraud, negligence or material misstatementin the loan documents. Repurchase may also be required if necessarygovernmental loan guarantees are canceled or never issued, or if an investor isforced to buy back a loan after it has been re-sold as part of a loan pool. Inaddition, the Company may have an obligation to repurchase a loan if themortgagor has defaulted early in the loan term. The potential default period is approximately twelve months after saleof the loan to the investor. Mortgages subject to recourse are collateralizedby single-family residential properties, have loan-to-value ratios of 80% orless, or have private mortgage insurance or are insured or guaranteed by anagency of the United States government.Ona limited basis, the Company holds some first trust residential mortgages inportfolio which have loan-to-value ratios of 80% or less.  Maximum debt to income ratio is 45%.  ARM products amortize over a 30 year period;fixed rate products amortize over 15-30 years.

 

*LoanAdministration.*  As part of its internal loan administrationprocess, the Bank’s Directors Loan Committee, comprised of directors, reviewsall loans 30-days delinquent, loans on the watch list, loans rated specialmention, substandard, or doubtful and other loans of concern at leastquarterly.  The Committee also reviewsnew loan production, 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 to complementinternal audit and credit administration oversight.

 

60

----

 

**Regulation, Supervision, andGovernmental Policy**

 

*The Company.* TheCompany is a bank holding company registered under Bank Holding Company Act of1956, as amended, (the “BHCA”) and is subject to supervision by the FederalReserve Board.  As a bank holding company, the Company is required to filewith the Federal Reserve Board an annual report and such other additionalinformation as the Federal Reserve Board may require pursuant to theBHCA.  The Federal Reserve Board may also make examinations of the Companyand each of its subsidiaries.

 

*BHCA -Activities and other Limitations. *The BHCA requires approval of the Federal Reserve Board for, among otherthings, the acquisition by a proposed bank holding company of control of morethan five percent (5%) of the voting shares, or substantially all the assets,of any bank or the merger or consolidation by a bank holding company withanother bank holding company.  The BHCA also generally permits theacquisition by a bank holding company of control or substantially all theassets of any bank located in a state other than the home state of the bankholding company, except where the bank has not been in existence for theminimum period of time required by state law, but if the bank is at least 5years old, the Federal Reserve Board may approve the acquisition.

 

Undercurrent law, with certain limited exceptions, a bank holding company isprohibited from acquiring control of any voting shares of any company which isnot a bank or bank holding company and from engaging directly or indirectly inany activity other than banking or managing or controlling banks or furnishingservices to or performing service for its authorized subsidiaries.  A bankholding company may, however, engage in or acquire an interest in, a companythat engages in activities which the Federal Reserve Board has determined byorder or regulation to be so closely related to banking or managing orcontrolling banks as to be properly incident thereto.  In making such adetermination, the Federal Reserve Board is required to consider whether theperformance of such activities can reasonably be expected to produce benefitsto the public, such as convenience, increased competition or gains inefficiency, which outweigh possible adverse effects, such as undueconcentration of resources, decreased or unfair competition, conflicts ofinterest or unsound banking practices.  The Federal Reserve Board is alsoempowered to differentiate between activities commenced *de novo*and activities 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 GrammLeach Bliley Act of 1999 (the “GLB Act”) allows a bank holding company or othercompany to certify status as a financial holding company, which allows suchcompany to engage in activities that are financial in nature, that areincidental to such activities, or are complementary to such activities. The GLBAct enumerates certain activities that are deemed financial in nature, such asunderwriting insurance or acting as an insurance principal, agent or broker,underwriting, dealing in or making markets in securities, and engaging inmerchant banking under certain restrictions. It also authorizes the Federal Reserve Board to determine by regulationwhat other activities are financial in nature, or incidental or complementarythereto.

 

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.

 

*Commitmentsto Subsidiary Banks. *Under Federal Reserve policy, the Company is expected to act as a sourceof financial strength to the Bank and to commit resources to support the Bankin circumstances when it might not do so absent such policy.

 

*Limitationsof Acquisitions of Common Stock. *The federal Change in Bank Control Act prohibits a person or group fromacquiring “control” of a bank holding company unless the Federal Reserve hasbeen given 60 days’ prior written notice of such proposed acquisition andwithin that time period the Federal Reserve Board has not issued a noticedisapproving the proposed acquisition or extending for up to another 30 daysthe period during which such a disapproval may be issued.  An acquisition may be made prior toexpiration of the disapproval period if the Federal 

 

61

----

 

Reserveissues written notice of its intent not to disapprove the action.  Under a rebuttable presumption established bythe Federal Reserve, the acquisition of 10% or more of a class of voting stockof a bank holding company with a class of securities registered under Section 12of the Exchange Act or which would represent the single largest interest in thevoting stock would, under the circumstances set forth in the presumption,constitute the acquisition of control.

 

Inaddition, with limited exceptions, any “company” would be required to obtainthe approval of the Federal Reserve under the BHCA before acquiring 25% (5% inthe case of an acquirer that is a bank holding company) or more of theoutstanding Common Stock of, or such lesser number of shares as constitutecontrol over, the Company.  Such approvalwould be contingent upon, among other things, the acquirer registering as abank holding company, divesting all impermissible holdings and ceasing anyactivities not permissible for a bank holding company.

 

TheFederal Reserve has adopted capital adequacy guidelines pursuant to which itassesses the adequacy of an institution’s capital.  These guidelines are substantially similar tothose which are applicable to the Bank, discussed below.

 

*TheBank. *TheBank, as a Virginia chartered commercial bank which is a member of the FederalReserve System (a “state member bank”) and whose accounts are insured by theDeposit Insurance Fund of the FDIC up to the maximum legal limits of the FDIC,is subject 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 acquisition activities.  As a result of federal and state legislation,banks in the Washington D.C./Maryland/Virginia area can, subject to limitedrestrictions, acquire or merge with a bank in another of the jurisdictions, andcan branch *de novo* in any of the jurisdictions. TheGLB Act allows a wider array of companies to own banks, which could result incompanies with resources substantially in excess of the Company’s entering intocompetition 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 in stateswhich specifically allow for such branching. The District of Columbia, Maryland and Virginia have all enacted lawswhich permit interstate acquisitions of banks and bank branches and permitout-of-state banks to establish *de novo*branches.

 

*USA Patriot Act.*  Under the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act, commonly referred to as the “USA Patriot Act” or the “PatriotAct,” financial institutions are subject to prohibitions against specifiedfinancial transactions and account relationships, as well as enhanced duediligence standards intended to detect, and prevent, the use of the UnitedStates financial system for money laundering and terrorist financingactivities.  The Patriot Act requiresfinancial institutions, including banks, to establish anti-money launderingprograms, including employee training and independent audit requirements, meetminimum standards specified by the act, follow minimum standards for customeridentification and maintenance of customer identification records, andregularly compare customer lists against lists of suspected terrorists,terrorist organizations and money launderers. The costs or other effects of the compliance burdens imposed by thePatriot Act or future anti-terrorist, homeland security or anti-moneylaundering legislation or regulations cannot be predicted with certainty.

 

*CapitalAdequacy Guidelines.*  The Federal Reserve Board and the FDIC haveadopted risk based capital adequacy guidelines pursuant to which they assessthe adequacy of capital in examining and supervising banks and bank holding 

 

62

----

 

companies and inanalyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital basedon the risk inherent in various classes of assets and off-balance sheet items.

 

Statemember banks are expected to meet a minimum ratio of total qualifying capital(the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to riskweighted assets of 8%.  At least half ofthis amount (4%) should be in the form of core capital. Tier 1 Capitalgenerally consists of the sum of common stockholders’ equity and perpetualpreferred stock (subject in the case of the latter to limitations on the kindand amount of such stock which may be included as Tier 1 Capital), lessgoodwill, without adjustment for changes in the market value of securitiesclassified as “available-for-sale” in accordance with FAS 115.  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, general allowancesfor loan losses.  Assets are adjustedunder 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-weighing system,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.

 

Inaddition to the risk-based capital requirements, the Federal Reserve Board hasestablished a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to totaladjusted assets) requirement for the most highly-rated banks, with anadditional cushion of at least 100 to 200 basis points for all other banks, whicheffectively increases the minimum Leverage Capital Ratio for such other banksto 4.0% - 5.0% or more.  Thehighest-rated banks are those that are not anticipating or experiencingsignificant growth and have well diversified risk, including no undue interestrate risk exposure, excellent asset quality, high liquidity, good earnings and,in general, those which are considered a strong banking organization.  A bank having less than the minimum LeverageCapital Ratio requirement shall, within 60 days of the date as of which itfails to comply with such requirement, submit a reasonable plan describing themeans and timing by which the bank shall achieve its minimum Leverage CapitalRatio requirement.  A bank which fails tofile such plan is deemed to be operating in an unsafe and unsound manner, andcould subject a bank to a cease-and-desist order.  Any insured depository institution with aLeverage Capital Ratio that is less than 2.0% is deemed to be operating in anunsafe or unsound condition pursuant to Section 8(a) of the FederalDeposit Insurance Act (the “FDIA”) and is subject to potential termination ofdeposit insurance.  However, such aninstitution will not be subject to an enforcement proceeding solely on accountof its capital ratios, if it has entered into and is in compliance with awritten agreement to increase its Leverage Capital Ratio and to take such otheraction as may be necessary for the institution to be operated in a safe andsound manner.  The capital regulationsalso provide, among other things, for the issuance of a capital directive,which is a final order issued to a bank that fails to maintain minimum capitalor to restore its capital to the minimum capital requirement within a specifiedtime period.  Such directive isenforceable in the same manner as a final cease-and-desist order. At December 31,2007, the Bank’s Tier 1 risk based capital ratio was 7.77%, its Total riskbased capital ratio was 10.73% and its Leverage Capital ratio was 7.12%.  At December 31, 2007, the Company’s Tier1 Capital was 9.90%, its Total Capital was 10.96% and its Leverage Capitalratio was 9.09%.

 

*PromptCorrective Action.*  Under Section 38 of the FDIA, eachfederal banking agency is required to implement a system of prompt correctiveaction for institutions which it regulates. The federal banking agencies have promulgated substantially similarregulations to implement the system of prompt corrective action established by Section 38of the FDIA.  Under the regulations, abank shall be deemed to be: (i) “well capitalized” if it has a Total RiskBased Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0%or more, a Leverage Capital Ratio of 5.0% or more and is not subject to anywritten capital order or directive; (ii) “adequately capitalized” if ithas a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk BasedCapital Ratio of 4.0% or more and a Tier 1 Leverage Capital Ratio of 4.0% ormore (3.0% under certain circumstances) and does not meet the definition of “wellcapitalized;” (iii) “undercapitalized” if it has a Total Risk BasedCapital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that isless than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% undercertain circumstances); (iv) “significantly undercapitalized” if it has aTotal Risk Based Capital Ratio that is less than 6.0%, a Tier 1 Risk BasedCapital Ratio that is less than 3.0% or a Leverage Capital Ratio that is lessthan 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangibleequity to total assets that is equal to or less than 2.0%.

 

Aninstitution generally must file a written capital restoration plan which meetsspecified requirements with an appropriate federal banking agency within 45days of the date the institution receives notice or is deemed to have notice 

 

63

----

 

that itis undercapitalized, 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 performance guarantyby each company that controls the institution. Such guaranty shall be limited to the lesser of (i) an amount equalto 5.0% of the institution’s total assets at the time the institution wasnotified or deemed to have notice that it was undercapitalized or (ii) theamount necessary at such time to restore the relevant capital measures of theinstitution to the levels required for the institution to be classified asadequately capitalized.  Such a guarantyshall expire after the federal banking agency notifies the institution that ithas remained adequately capitalized for each of four consecutive calendarquarters.  An institution which fails tosubmit a written capital restoration plan within the requisite period,including any required performance guaranty, or fails in any material respectto implement a capital restoration plan, shall be subject to the restrictionsin Section 38 of the FDIA which are applicable to significantlyundercapitalized institutions.  At December 31,2007, the Company and Bank were considered to be a “well capitalized”institution for purposes of Section 38 of the FDIA.

 

A “criticallyundercapitalized institution” is to be placed in conservatorship orreceivership within 90 days unless the FDIC formally determines that forbearancefrom such action would better protect the deposit insurance fund. Unless theFDIC or other appropriate federal banking regulatory agency makes specificfurther findings and certifies that the institution is viable and is notexpected to fail, an institution that remains critically undercapitalized onaverage during the fourth calendar quarter after the date it becomes criticallyundercapitalized must be placed in receivership. The general rule is thatthe 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.

 

Immediatelyupon becoming undercapitalized, an institution shall become subject to theprovisions of Section 38 of the FDIA, which (i) restrict payment ofcapital distributions and management fees; (ii) require that theappropriate federal banking agency monitor the condition of the institution andits efforts to restore its capital; (iii) require submission of a capitalrestoration plan; (iv) restrict the growth of the institution’s assets;and (v) require prior approval of certain expansion proposals.  The appropriate federal banking agency for anundercapitalized institution also may take any number of discretionary supervisoryactions if the agency determines that any of these actions is necessary toresolve the problems of the institution at the least possible long-term cost tothe deposit insurance fund, subject in certain cases to specified procedures.These discretionary supervisory actions include: requiring the institution toraise additional capital; restricting transactions with affiliates; requiringdivestiture of the institution or the sale of the institution to a willingpurchaser; and any other supervisory action that the agency deemsappropriate.  These and additionalmandatory and permissive supervisory actions may be taken with respect tosignificantly 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 the insurance fund; (viii) an institution ceases to be insured;  (ix) the institution is undercapitalizedand has no reasonable prospect that it will become adequately capitalized,fails to become adequately capitalized when required to do so, or fails tosubmit or materially implement a capital restoration plan; or (x) theinstitution is critically undercapitalized or otherwise has substantiallyinsufficient capital.

 

*RegulatoryEnforcement Authority*.  Federal banking law grants substantialenforcement powers to federal banking regulators.  This enforcement authority includes, amongother things, the ability to assess civil money penalties, to issuecease-and-desist or removal orders and to initiate injunctive actions againstbanking organizations and institution-affiliated parties.  In general, these enforcement actions may beinitiated for violations of laws and regulations and unsafe or unsoundpractices.  Other actions or inactionsmay provide the basis for enforcement action, including misleading or untimelyreports filed with regulatory authorities.

 

64

----

 

*DepositInsurance Premiums.*  Pursuant to deposit insurance reformlegislation, in December 2006, the FDIC adopted a new risk basedassessment system for determining deposit insurance premiums.  Under the new requirements, four riskcategories (I-IV), each subject to different premium rates, are established,based upon an institution’s status as well capitalized, adequately capitalizedor undercapitalized, and the institution’s supervisory rating.  Under the new rules, all insured depositoryinstitutions will pay deposit insurance premiums, currently ranging between 5and 7 basis points on an institution’s assessment base for institutions in riskcategory I (well capitalized institutions perceived as posing the least risk tothe insurance fund), and 10, 28 and 43 basis points for institutions in riskcategories II, III, and IV.  Thelevels of rates are subject to periodic adjustment by the FDIC.

 

**PROPERTIES**

 

The Bank offers its services from its main office,located at 5350 Lee Highway in Arlington, Virginia, and twenty-four additionalbanking offices, two mortgage lending offices, 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 square feet,was purchased by the Bank in April 1997. The Bank also operates a branchlocation at 5140 Duke Street, Alexandria, Virginia.  That property, which consists of a two storybrick building containing approximately 4,800 square feet on a parcel of approximately16,800 square feet, was also purchased by the Bank in April 1997.

 

The Bank leases twenty-six 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 10777 Main Street, Fairfax Virginia, consists of 2,038 square feet;the Vienna Office, located at 374 Maple Avenue, Vienna, Virginia, consists of5,831 square feet; the King Street Office, located at 506 King Street,Alexandria Virginia, consists of 1,484 square feet; the Chantilly Office,located at 13881 G Metrotech Drive, Chantilly Virginia, consists of 1,950square 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 Lee office,located at 14701 Lee Highway, Centreville, Virginia, consists of 2,870 squarefeet; the Leesburg office, located at 341 East Market Street, Leesburg,Virginia, consists of 2,705 square feet; the Central Park office, located at1304 Central Park Blvd., Fredericksburg, Virginia, consists of 3,000 squarefeet; the Fairfax Lending office, located at 4221 Walney Road, Chantilly,Virginia, consists of 17,273 square feet; the Warrenton Mortgage Lendingoffice, located at 54 East Lee Street, Warrenton, Virginia, consists of 300square feet; the Leesburg Lending office, located at 50 Catoctin Circle,Leesburg, Virginia, consists of 1,638 square feet; and the Bank’s operationscenter, located at 14201 Sullyfield Circle, Chantilly, Virginia consists of25,001 square feet.  Generally the leasescontain renewal option clauses for one or two additional five-year terms, andin some instances require payment of certain operating charges. In addition,the Bank has entered into lease agreements for five additional offices to beopened between 2008 and 2009. The total rental expense under the leases was$3.1 million in 2007.  The total minimumrental commitment under the leases, including the five additional offices to beopened between 2008 and 2009, as of December 31, 2007 is as follows: $3.5million for 2008; $3.7 million for 2009, $4.0 million for 2010, $3.4 millionfor 2011, $3.5 million for 2012 and $26.7 million for 2013 and beyond.

 

65

----

 

**MARKET PRICE OF STOCK ANDDIVIDENDS**

 

The Company’s stock is traded on the Nasdaq Global Select Market underthe symbol “VCBI”.  Set forth below isthe range of high and low sales prices (adjusted for stock dividends andsplits), as reported by Nasdaq, for each full quarterly period within the twomost recent fiscal years.

 

**MARKET PRICE OF STOCK**

 
| ** **  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $        | 20.01      |     | $          | 17.37 |   | $ | 22.28 |   | $ | 17.90 |   |
| Second      |       | $        | 19.93      |     | $          | 16.73 |   | $ | 23.86 |   | $ | 21.10 |   |
| Third       |       | $        | 17.07      |     | $          | 13.80 |   | $ | 22.24 |   | $ | 19.58 |   |
| Fourth      |       | $        | 15.53      |     | $          | 10.80 |   | $ | 20.21 |   | $ | 17.51 |   |

 

The Company has not paid cash dividends since 1995, electing to retainearnings for funding the growth of the Company and its business. The Companycurrently anticipates continuing the policy of retaining earnings to fundgrowth. The ability of the Company to pay dividends, should it elect to do so,depends largely upon the ability of the Bank to declare and pay dividends tothe Company, as the principal source of the Company’s revenue is dividends paidby the Bank. Future dividends will depend primarily upon the Bank’s earnings,financial condition, and need for funds, as well as governmental policies andregulations applicable to the Company and the Bank, which limit the amount thatmay be paid as dividends without prior approval.

 

At December 31, 2007, the Company had 586 stockholders of record,and an aggregate of approximately 2,650 beneficial owners.  Information regarding stock dividends andsplits in 2007, 2006, and 2005 is as follows:

 

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

 

2.               A three-for-two stock split in the form of a 25% stockdividend was declared on March 16, 2006, for stockholders of record on April 28,2006, and was paid on May 12, 2006.

 

3.               A five-for-four stock split in the form of a 25% stockdividend was declared on March 23, 2005, for stockholders of record on April 15,2005,and was paid on May 9, 2005.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans.*** *The following table setsforth information regarding outstanding options and other rights to purchasecommon stock granted under the Company’s compensation plans as of December 31,2007:

 

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) |       | 1,818,641                                                                                                                                                |       | $                                                                                                                    | 7.84       |                                                                                                                                                                                                                    | 794,491    | (2) |
| Equity compensation plans not approved by security holders |       | 0                                                                                                                                                        |       | 0                                                                                                                    |       | 0                                                                                                                                                                                                                       |       |
| Total                                                      |       | 1,818,641                                                                                                                                                |       | $                                                                                                                    | 7.84       |                                                                                                                                                                                                                    | 794,491    |   |

 

----

(1)   Consists of theCompany’s 1989 and 1998 Stock Option Plans and the 2003 Employee Stock PurchasePlan. For additional information, see Notes 12 and 13 to the ConsolidatedFinancial Statements.

(2)   Consists of479,431 shares available for issuance under the 1998 Stock Option Plan and315,060 shares available for issuance under the 2003 Employee Stock PurchasePlan.

 

****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 2007.

 

66

----

 

**STOCK PERFORMANCE COMPARISON**

 

The following table compares the cumulative totalreturn on a hypothetical investment of $100 in Virginia Commerce Bancorp’scommon stock at the closing price on December 31, 2002 through December 31,2007, 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,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2002**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Virginia Commerce Bancorp, Inc.     |       | $                     | 100.00     |   | $ | 269.01 |   | $ | 299.37 |   | $ | 384.38 |   | $ | 394.03 |   | $ | 255.74 |   |
| Nasdaq Stock Market Index - (Total U.S.) |       | $                     | 100.00     |   | $ | 150.01 |   | $ | 162.89 |   | $ | 165.13 |   | $ | 180.85 |   | $ | 198.60 |   |
| Nasdaq Bank Index                        |       | $                     | 100.00     |   | $ | 129.93 |   | $ | 144.21 |   | $ | 137.97 |   | $ | 153.15 |   | $ | 119.35 |   |

 

67

----

 

**AnnualMeeting of Stockholders**

 

The annual meeting of stockholders of Virginia Commerce Bancorp, Inc.(the “Company”) will be held at 4:00 pm on Wednesday, April 30, 2008 at “TheWashington Golf & Country Club,” 3017 North Glebe Road, Arlington,Virginia.

 

**AnnualReport on Form 10-K**

 

**A copy ofForm 10-K as filed with the Securities and Exchange Commission isavailable without charge to stockholders upon written request to:**

 

**Lynda S.Cornell**

**Assistantto the Chief Executive Officer**

**VirginiaCommerce Bancorp, Inc.**

**5350 LeeHighway**

**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 are available upon selecting “about us/stockinformation/financial information.” Reports available include the annual reporton Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and all amendments to those reports as soon as reasonably practicable after thereports are electronically filed or furnished to the SEC.

 

#### **FINANCIAL STATEMENTS AND EXHIBITS**

#### ** **

#### **The following financial statements are included inthis report:**

#### ** **

Consolidated BalanceSheets at December 31, 2006 and 2007

Consolidated Statementsof Income for the years ended December 31, 2005, 2006 and 2007

Consolidated Statementsof Cash Flows for the years ended December 31, 2005, 2006 and 2007

Consolidated Statementsof Changes in Stockholders’ Equity for the years ended December 31, 2005,2006 and 2007

Notes to theConsolidated Financial Statements

Report on IndependentRegistered Public Accounting Firm

 

Allfinancial statement schedules have been omitted as the required information iseither inapplicable or included in the consolidated financial statements orrelated notes.

 

Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Articles of Incorporation of Virginia Commerce  Bancorp, Inc., as amended (1)                                                                                                                                                                                                                                               |
| 3.2                  |       | Bylaws of Virginia Commerce Bancorp, Inc.  (2)                                                                                                                                                                                                                                                                              |
| 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 (3)                                                                                                                                                              |
| 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 (3) |
| 4.3                  |       | Guarantee Agreement dated as of December 19, 2002, between  Virginia Commerce Bancorp, Inc. and The Bank of New York, as Guarantee  Trustee (3)                                                                                                                                                                        |
| 4.4                  |       | Junior Subordinated Indenture, dated as of December 20, 2005  between Virginia Commerce Bancorp, Inc. and Wilmington Trust Company, as  Trustee, (3)                                                                                                                                                                   |
| 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 (3)                      |

 

68

----

 
| **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 (3) |
| 10.1                 |       | Amended and Restated 1998 Stock Option Plan (4)                                                                                                               |
| 10.2                 |       | 2003 Employee Stock Purchase Plan (5)                                                                                                                         |
| 10.3                 |       | 2007 Virginia Commerce Bank Executive and  Director Deferred Compensation Plan (6)                                                                            |
| 11                   |       | Statement Regarding Computation of Per Share  EarningsSee 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’sQuarterly Report on Form 10-K for the quarter ended March 31, 2006.

(2)   Incorporated by reference to the same numbered exhibit to the Company’sCurrent Report on Form 8-K filed July 27, 2007.

(3)   Not filed inaccordance with the provisions of Item 601(b)(4)(iii) of Regulation S-K.Virginia Commerce Bancorp, Inc. agrees to provide a copy of these documentsto the Commission upon request.

(4)   Incorporated by reference toexhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-142447).

(5)   Incorporated by reference toexhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-109079).

(6)   Incorporated by reference tothe same numbered exhibit to the Company’s annual Report on Form 10-K forthe year ended December 31, 2007.

 

69

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

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

 

Dated:  March 13, 2008

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| **Name**                       | ** ** | **Capacity**                                 | ** ** | **Date**            |
|--------------------------------|------------|----------------------------------------------|------------|---------------------|
|                           |       |                                         |       |                |
| /s/ Leonard Adler              |       | Director                                     |       | March 13, 2008 |
| Leonard Adler                  |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ Michael G. Anzilotti       |       | Director, President                          |       | March 13, 2008 |
| Michael G. Anzilotti           |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ Peter A. Converse          |       | Director, Chief Executive Officer            |       | March 13, 2008 |
| Peter A. Converse              |       | (Principal Executive Officer)                |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ W. Douglas Fisher          |       | Chairman of the Board of Directors           |       | March 13, 2008 |
| W. Douglas Fisher              |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ David M. Guernsey          |       | Vice Chairman of the Board of Directors      |       | March 13, 2008 |
| David M. Guernsey              |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ Robert H. L’Hommedieu |       | Director                                     |       | March 13, 2008 |
| Robert H. L’Hommedieu     |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ Norris E. Mitchell         |       | Director                                     |       | March 13, 2008 |
| Norris E. Mitchell             |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ Arthur L. Walters          |       | Vice Chairman of the Board of Directors      |       | March 13, 2008 |
| Arthur L. Walters              |       |                                         |       |                |
|                           |       |                                         |       |                |
|                           |       |                                         |       |                |
| /s/ William K. Beauchesne      |       | Treasurer and Chief Financial Officer        |       | March 13, 2008 |
| William K. Beauchesne          |       | (Principal Financial and Accounting Officer) |       |                |

 

70

----