**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

**FORM 10-K**

**Annual report under Section13 or 15(d) of the Securities Exchange Act of 1934**

**For the fiscal year endedDecember 31, 2006**

**Commission file number:000-28635**

**Virginia Commerce Bancorp, Inc.**

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

 

Registrant’s telephone number: **703.534.0700**

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

Securities registered underSection 12(g) of the Act:  **None**

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Section405 of 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) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports); and (2) has been subject to suchfiling requirements for the past 90 days.

Yes x No o

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated filer o |
|---------------------------|--------|----------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

The registrant’s Common Stock istraded on the Nasdaq Global Select Market under the symbol VCBI. The aggregatemarket value of the approximately 15,064,857 shares of Common Stock of theregistrant issued and outstanding held by non-affiliates on June 30, 2006 wasapproximately $360.0 million, based on the closing sales price of $23.90 pershare on that date. For purposes of this calculation, the term “affiliate”refers to all directors, executive officers and 10% shareholders of theregistrant.

As of the close of business onMarch 1, 2007, 21,713,976 shares of the registrant’s Common Stock wereoutstanding.

DOCUMENTSINCORPORATED BY REFERENCE

Portions of the registrant’s definitive ProxyStatement for the Annual Meeting of Shareholders, to be held on April 25, 2007,are incorporated by reference in part III hereof.

 

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# **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 onApril 25, 2007, of the information required to be disclosed by the UnitedStates Securities and Exchange Commission Form 10-K. References to pages onlyare to pages in this report.  
| **PART I**   | ** ** | **Item 1.**  | ** ** | **Business.** See “Business” at pages 55 through  64.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|------------|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   | ** ** | **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 64.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **   | ** ** | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | **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 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **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 64.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   |       | **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 54.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **   | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   |       | **Item 9.**  |       | **Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure.** None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   |       | **Item 9A.** |       | **Controls and  Procedures.**See “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. |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   |       | **Item 11.** |       | **Executive Compensation.**The  information required by Item 11 is incorporated by reference from the  material under the caption “Executive Officer Compensation and Certain  Transactions” 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 65 hereof.                                                                                                                                                                                                                                                                |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   |       | **Item 13.** |       | **Certain Relationships and Related  Transactions and Director Independence.** The information required by Item 13  is incorporated by reference from the material under the captions “Election  of Directors” and “Transactions with Management and Related Parties” in the  Proxy Statement.                                                                                                                                                                                                                                                                                                                                                                               |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **   |       | **Item 14.** |       | **Principal Accountant Fees and  Services.** The  information required by Item 14 is incorporated by reference from the  material under the caption “Independent Registered Public Accounting Firm” in  the Proxy Statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **   |       | ** **   |       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **PART IV**  | ** ** | **Item 15.** | ** ** | **Exhibits and Financial Statement Schedules.**  See “Financial Statements and Exhibits” at page 67.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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#### ** **

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

 

|                                                     | ** ** | **Year Ended December 31,**                                         | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                                                           | ** ** | **         2005         ** | ** ** | **         2004         ** | ** ** | **         2003         ** | ** ** | **         2002         ** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **Selected  Year-End Balances**                     |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Total assets                                        |       | $                                                                                  | 1,949,082  |   | $ | 1,518,425 |   | $ | 1,139,353 |   | $ | 881,694 |   | $ | 663,457 |   |
| Total  stockholders’ equity                    |       | 139,851                                                                            |       | 111,818 |   | 91,324 |   | 55,092 |   | 41,850 |   |
| Total loans  (net)                                  |       | 1,629,827                                                                          |       | 1,270,255 |   | 925,782 |   | 654,851 |   | 516,900 |   |
| Total deposits                                      |       | 1,605,941                                                                          |       | 1,243,506 |   | 970,968 |   | 773,511 |   | 566,996 |   |
| **Summary  Results of Operations**                  |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Interest income                                     |       | $                                                                                  | 125,292    |   | $ | 86,478 |   | $ | 57,998 |   | $ | 45,968 |   | $ | 38,998 |   |
| Interest expense                                    |       | 56,487                                                                             |       | 29,811 |   | 16,331 |   | 13,893 |   | 14,128 |   |
| Net interest income                                 |       | $                                                                                  | 68,805     |   | $ | 56,667 |   | $ | 41,667 |   | $ | 32,075 |   | $ | 24,870 |   |
| Provision for  loan losses                          |       | 4,406                                                                              |       | 3,772 |   | 2,989 |   | 1,575 |   | 1,678 |   |
| Net interest income after provision for loan losses |       | $                                                                                  | 64,399     |   | $ | 52,895 |   | $ | 38,678 |   | $ | 30,500 |   | $ | 23,192 |   |
| Non-interest  income                                |       | 7,323                                                                              |       | 6,676 |   | 5,759 |   | 7,746 |   | 5,593 |   |
| Non-interest  expense                               |       | 34,289                                                                             |       | 29,466 |   | 22,807 |   | 20,820 |   | 17,217 |   |
| Income before taxes                                 |       | $                                                                                  | 37,433     |   | $ | 30,105 |   | $ | 21,630 |   | $ | 17,426 |   | $ | 11,568 |   |
| Income tax  expense                                 |       | 12,925                                                                             |       | 10,438 |   | 7,401 |   | 5,880 |   | 3,892 |   |
| Net income                                          |       | $                                                                                  | 24,508     |   | $ | 19,667 |   | $ | 14,229 |   | $ | 11,546 |   | $ | 7,676 |   |
| **Per  Share Data (1)**                             | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income,  basic                                  |       | $                                                                                  | 1.14       |   | $ | 0.93 |   | $ | 0.72 |   | $ | 0.63 |   | $ | 0.46 |   |
| Net income,  diluted                                |       | $                                                                                  | 1.08       |   | $ | 0.87 |   | $ | 0.66 |   | $ | 0.57 |   | $ | 0.41 |   |
| Book value                                          |       | $                                                                                  | 6.49       |   | $ | 5.31 |   | $ | 4.41 |   | $ | 2.99 |   | $ | 2.39 |   |
| Average number  of shares outstanding:              |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                               |       | 21,455,239                                                                         |       | 21,016,032 |   | 19,818,932 |   | 18,250,208 |   | 16,686,362 |   |
| Diluted                                             |       | 22,685,748                                                                         |       | 22,483,714 |   | 21,495,254 |   | 19,951,070 |   | 18,736,562 |   |
| **Growth  and Significant Ratios**                  |       |                                                                               |       |   |   |   |   |   |   |   |   |
| % Change in net  income                             |       | 24.61                                                                              | %          | 38.22 | % | 23.24 | % | 50.42 | % | 64.54 | % |
| % Change in  assets                                 |       | 28.36                                                                              | %          | 33.27 | % | 29.22 | % | 32.89 | % | 35.53 | % |
| % Change in  loans (net)                            |       | 28.31                                                                              | %          | 37.21 | % | 41.37 | % | 26.69 | % | 30.82 | % |
| % Change in  deposits                               |       | 29.15                                                                              | %          | 28.07 | % | 25.53 | % | 36.42 | % | 39.34 | % |
| % Change in  equity                                 |       | 25.07                                                                              | %          | 22.44 | % | 65.77 | % | 31.64 | % | 59.61 | % |
| Equity to asset  ratio                              |       | 7.18                                                                               | %          | 7.36 | % | 8.02 | % | 6.25 | % | 6.31 | % |
| Return on  average assets                           |       | 1.40                                                                               | %          | 1.45 | % | 1.39 | % | 1.47 | % | 1.32 | % |
| Return on  average equity                           |       | 19.51                                                                              | %          | 19.44 | % | 19.28 | % | 23.71 | % | 23.06 | % |
| Average equity  to average assets                   |       | 7.19                                                                               | %          | 7.47 | % | 7.22 | % | 6.21 | % | 5.71 | % |
| Efficiency ratio (2)                                |       | 45.04                                                                              | %          | 46.52 | % | 48.01 | % | 52.17 | % | 56.52 | % |

 

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(1)                                  Adjustedfor all years presented giving retroactive effect to a five-for-four stocksplit in the form of a 25% stock dividend in 2002, 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, and a three-for-two stock split in theform of a 50% stock dividend in 2006.

(2)                                  Computedby dividing 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.

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

**Forward-LookingStatements**

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. Thesestatements are based upon current and anticipated economic conditions,nationally and in the Company’s market, interest rates and interest ratepolicy, competitive factors, and other conditions which by their nature, arenot susceptible to accurate forecast, and are subject to significantuncertainty. Because of these uncertainties and the assumptions on which thisdiscussion and the forward-looking statements are based, actual futureoperations and results may differ materially from those indicated herein.Readers are cautioned against placing undue reliance on any suchforward-looking statements. The Company’s past results are not necessarilyindicative of future performance. 

**Non-GAAPPresentations**

This management’sdiscussion and analysis refers to the efficiency ratio, which is computed bydividing non-interest expense by the sum of net interest income on a taxequivalent basis and non-interest income. This is a non-GAAP financial measurethat we believe provides investors with important information regarding ouroperational efficiency. Comparison of our efficiency ratio with those of othercompanies may not be possible because other companies may calculate theefficiency ratio differently. The Company, in referring to its net income, isreferring to income under accounting principles generally accepted in theUnited States, or “GAAP.”

**General**

The following presentsmanagement’s discussion and analysis of the consolidated financial conditionand results of operations of Virginia Commerce Bancorp, Inc. and subsidiaries(the “Company”) as of the dates and for the periods indicated. This discussionshould be read in conjunction with the Company’s Consolidated FinancialStatements and the Notes thereto, and other financial data appearing elsewherein this report. The Company is the parent bank holding company for VirginiaCommerce Bank (the “Bank”), a Virginia state-chartered bank that commencedoperations in May 1988. The Bank pursues a traditional community bankingstrategy, offering a full range of business and consumer banking servicesthrough twenty branch offices, two residential mortgage offices and one investmentservices office. 

Headquartered inArlington, Virginia, Virginia Commerce serves the Northern Virginia suburbs ofWashington, D.C., including Arlington, Fairfax, Fauquier, Loudoun and PrinceWilliam Counties and the cities of Alexandria, Fairfax, Falls Church, Manassasand Manassas Park. Its service area also covers, to a lesser extent,Washington, D.C. and the nearby Maryland counties of Montgomery and PrinceGeorges. The Bank’s customer base includes small-to-medium sized businessesincluding firms that have contracts with the U.S. government, associations,retailers and industrial businesses, professionals and their firms, businessexecutives, investors and consumers. Additionally, the Bank has strong marketniches in commercial real estate and construction lending and operates itsresidential mortgage lending division as its only business segment. Over thepast five years, the Company has experienced significant growth in totalassets, loans, deposits and net income.

**CriticalAccounting Policies**

During the yearended December 31, 2006, there were no changes in the Company’s criticalaccounting policies as reflected in the last report.

The Company’s financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States (GAAP). The financial information contained within our statements is, to asignificant extent, financial information that is based on measures of thefinancial effects of transactions and events that have already occurred.  A variety of factors could affect theultimate value that is obtained either when earning income,

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recognizing anexpense, recovering an asset or relieving a liability.  We use historical loss factors as one factorin determining the inherent loss that may be present in our loanportfolio.  Actual losses could differsignificantly from the historical factors that we use. In addition, GAAP itselfmay change from one previously acceptable method to another method. Althoughthe economics of our transactions would be the same, the timing of events thatwould impact our transactions could change.

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, whichrequires that losses be accrued when they are probable of occurring andestimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan,which requires that losses be accrued based on the differences between thevalue of collateral, present value of future cash flows or values that areobservable in the secondary market and the loan balance.

Our allowance forloan losses has three basic components: the specific allowance, the formula allowance and the unallocatedallowance.  Each of these components isdetermined based upon estimates that can and do change when the actual eventsoccur.  The specific allowance is used toindividually allocate an allowance for loans identified as impaired. Impairmenttesting includes consideration of the borrower’s overall financial condition,resources and payment record, support available from financial guarantors andthe fair market value of collateral. These factors are combined to estimate the probability and severity ofinherent losses.  When impairment isidentified, then a specific reserve is established based on the Company’scalculation of the loss embedded in the individual loan. Large groups ofsmaller balance, homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment. The formula allowance is used for estimatingthe loss on internally risk rated loans exclusive of those identified asimpaired. The loans meeting the criteria for substandard, doubtful and loss, aswell as impaired loans 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 regulatory requirements).The factors assigned differ by loan type. The unallocated allowance captures losses whose impact on the portfoliohas occurred but has yet to be recognized in either the formula or specificallowance. Allowance factors and the overall size of the allowance may changefrom period to period based on management’s assessment of the above describedfactors and the relative weights given to each factor.  For further information regarding theallowance for loan losses see Notes 1 and 4 to the Consolidated FinancialStatements and the discussion under the caption “Asset Quality – Provision andAllowance 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 1.7 millionshares of common stock. At the 2007 Annual Meeting of Shareholders, theshareholders are being asked to approve an amendment to the Plan to extend itsterm and to increase the number of shares subject to the Plan by 500,000.Option awards are generally granted with an exercise price equal to the marketprice of the Company’s stock at the date of grant, generally vest based on 5years of continuous service and have 10-year contractual terms. The fair valueof each option award is estimated on the date of grant using a Black-Scholesoption pricing model that currently uses historical volatility of the Company’sstock based on a 7.5 year expected term, before exercise, for the optionsgranted, and a risk-free interest rate based on the U.S. Treasury curve ineffect at the time of the grant to estimate total stock-based compensationexpense. This amount is then amortized on a straight-line basis over therequisite service period, currently 5 years, to salaries and benefits expense.Expected term is calculated using the simplified method identified in StaffAccounting Bulletin No. 107.  Changes inthe expected outstanding term for all awards based on historical exercisebehavior could affect the estimated value of future grants. See Notes 1 and 12to the Consolidated Financial Statements for additional information regardingthe Stock Option Plan and related expense.

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**FinancialPerformance Overview**

For the year endedDecember 31, 2006, total assets increased $430.7 million, or 28.4%, from $1.52billion at December 31, 2005, to $1.95 billion, with loans, net of theallowance for loan losses, increasing $359.6 million, or 28.3%, from $1.27billion at December 31, 2005, to $1.63 billion at December 31, 2006. Thisgrowth in loans and total assets was fueled by an increase in total deposits of$362.4 million, or 29.2%, from $1.24 billion at December 31, 2005, to $1.60billion, and a $37.1 million increase in repurchase agreements and federalfunds purchased. Net income for the year ended December 31, 2006 was up $4.8million, or 24.6%, from $19.7 million in 2005, to $24.5 million with a $12.1million increase in net interest income, the Company’s primary source ofrevenue. 

In 2005, totalassets increased $379.1 million, or 33.3%, from $1.14 billion at December 31,2004, to $1.52 billion, with loans increasing $344.5 million, or 37.2%, from$925.8 million at December 31, 2004, to $1.27 billion. As in 2006, the majorityof the growth in loans and total assets was funded by increases in deposits,with total deposits rising $272.5 million, or 28.1%, from $971.0 million atDecember 31, 2004, to $1.24 billion at the end of 2005. Additional funding wasprovided by a $58.6 million increase in repurchase agreements and federal fundspurchased and $25.0 million in proceeds from the issuance of trust preferredcapital notes. Net income in 2005 was up $5.4 million, or 38.2%, from $14.2million in 2004 to $19.7 million with growth in net-interest income again beingthe primary factor. 

As noted, theCompany achieved significant growth in loans in 2006. Loans are the Company’smajor asset and as a result the major contributor to interest income. Themajority of loan growth occurred in real estate mortgage loans, which rose$161.5 million, or 20.7%, from $778.8 million at December 31, 2005, to $940.3million at December 31, 2006. Real estate construction loans represented thesecond largest dollar increase rising $134.0 million, or 35.2%, from $381.0million at December 31, 2005, to $515.0 million, while a greater emphasis bythe Company on commercial lending, beginning in 2004, contributed to a recordlevel increase in commercial loans with total commercial loans increasing $68.3million, or 55.9%, from $122.2 million at December 31, 2005, to $190.5 millionat December 31, 2006. In 2005, growth by category was similar to what wasachieved in 2006, with real estate mortgage loans increasing $173.4 million,real estate construction loans representing the second largest increase at$140.5 million, and commercial loans rising $33.5 million. 

While loans arethe Company’s major asset, deposits are the Company’s major source of fundingand as a result the major contributor to interest expense. In 2006, depositsincreased by $362.4 million, or 29.2%, with non-interest-bearing demanddeposits decreasing by $1.6 million to $186.9 million, savings andinterest-bearing demand deposits increasing $109.9 million, or 31.5%, and timedeposits growing $254.1 million, or 36.0%, from $705.4 million at December 31,2005, to $959.5 million. For the year ended December 31, 2005, deposit growthincluded a $40.5 million increase in non-interest-bearing demand deposits, a$17.2 million increase in savings and interest-bearing demand deposits, and a$214.9 million increase in time deposits. In addition to the strong growth indeposits, repurchase agreements which represent funds of numerous demanddeposit customers of the Bank and fed funds purchased increased $37.1 million,or 33.2%, from $111.8 million at December 31, 2005, to $148.9 million atDecember 31, 2006, and increased $58.6 million, or 110.1%, in 2005. 

The Company’sinvestment securities portfolio represents its second largest asset andcontributor to interest income and is generally maintained as a primary sourceof liquidity. Particularly over the past two years as loan growth outpaceddeposits. In 2006, the portfolio increased by $61.1 million, or 35.3%, from$173.1 million at December 31, 2005, to $234.2 million at December 31, 2006,with growth concentrated in U.S. Government Agency obligations. In 2005 theportfolio increased $9.9 million, or 6.0%, from $163.2 million at December 31,2004, to $173.1 million, with growth again concentrated in U.S. GovernmentAgency obligations.   

For the year endedDecember 31, 2006, the Company achieved record earnings of $24.5 million, anincrease of 24.6% compared to earnings of $19.7 million for the prior fiscalyear as net interest income increased $12.1 million, or 21.4%, from $56.7million in 2005, to $68.8 million in 2006, non-interest income increased $647thousand, or 9.7%, from $6.7 million in 2005, to $7.3 million, while provisionsfor loan losses were up $634 thousand, and non-interest expense rose 16.4%, from $29.5 million in 2005, to $34.3million. As a result, the Company’s efficiency ratio, as defined, improved from46.5% for the year ended December 31, 2005, to 45.0% in 2006. In 2005, earningsof $19.7 million increased $5.5 million, or 38.2%, compared to earnings of$14.2 million in 2004 with net interest income increasing $15.0 million, or36.0%, non-interest income rising $917 thousand, or 15.9%, provisions for loanlosses increasing $783 thousand, while non-interest expense rose $6.7 million,or 29.2%. For the year ended

6

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December 31, 2004,earnings of $14.2 million, represented an increase of 23.2% compared toearnings of $11.5 million in 2003. On a diluted per share basis earnings were$1.08, $0.87, and $0.66 in 2006, 2005, and 2004, respectively, while theCompany’s return on average assets was 1.40% for 2006, as compared to 1.45% in2005 and 1.39% in 2004. Return on average equity was 19.51% in 2006, 19.44% in2005, and 19.28% in 2004.

Stockholders’equity increased by $28.0 million in 2006, or 25.1%, from $111.8 million atDecember 31, 2005, to $139.8 million, with earnings of $24.5 million and $2.4million in proceeds and tax benefits from the exercise of stock options byCompany directors and officers and the purchase of stock by Company employeesunder an Employee Stock Purchase Plan. In 2005, stockholders’ equity increased$20.5 million, or 22.4%, from $91.3 million at December 31, 2004, to $111.8million, with earnings of $19.7 million and $1.7 million in proceeds and taxbenefits from the exercise of stock options and warrants by Company directors andofficers and the purchase of stock by Company employees under an Employee StockPurchase Plan. The total number of common shares outstanding increased in 2006by 7,510,651, with 7,146,064 shares issued due to a three-for-two stock splitin the form of a fifty percent stock dividend in May 2006, 351,122 sharesissued as a result of the exercise of stock options and warrants by Companydirectors and officers and 13,265 shares issued to employees under theCompany’s Employee Stock Purchase Plan.  

**NetInterest Income**

Net interestincome is the excess of interest earned on loans and investments over theinterest paid on deposits and borrowings and is the Company’s primary revenuesource. Net interest income is thereby affected by overall balance sheetgrowth, changes in interest rates and changes in the mix of investments, loans,deposits and borrowings. In 2006, net interest income increased $12.1 million,or 21.4%, from $56.7 million in 2005, to $68.8 million due to the significantgrowth in loans 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 due again to significant loan growth and an increasein the net interest margin from 4.23% in 2004 to 4.30%. In 2004, net interestincome increased $9.6 million, or 29.9%, from $32.1 million in 2003, to $41.7million.  

On June 30, 2004,the Federal Reserve began increasing the fed funds target rate from ahistorically low level of 1.00%, by 325 basis points to 4.25% by the end of2005.  As a result, the Company’s yieldon interest-earning assets increased from 5.89% in 2004 to 6.57% in 2005, whilethe cost of interest-bearing liabilities also increased from 2.03% in 2004 to2.79% in 2005. The result was a decline in the interest rate spread; however,the overall net interest margin increased from 4.23% in 2004 to 4.30% in 2005,as the level of average earning assets to average interest bearing liabilitiesrose from 122.6% in 2004 to 123.5% in 2005. 

In 2006, theFederal Reserve continued increasing the target rate another 100 basis pointsto 5.25%, and the Company’s yield on interest earning assets rose from 6.57% in2005 to 7.41% in 2006. However, as the yield curve eventually inverted withhigher short-term than long-term rates, funds began shifting from lower rate tohigher rate accounts, and as competition for deposits in the local marketintensified, the cost of interest-bearing liabilities increased to a greaterextent from 2.79% in 2005 to 4.00% in 2006. As a result, the net interestmargin fell from 4.30% in 2005 to 4.07% in 2006.  

While localdeposit rates have come down recently, competition does remain strong. Thisfactor and expectations of no significant change in the yield curve, at leastin the first half of 2007, will continue to pressure the net interest marginlower. Tables 1, 2 and 3 provide further information with regard to yields,costs, the changes in net interest income and associated risk. 

7

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

The followingtable shows the average balance sheets for each of the years ended December 31,2006, 2005, and 2004. In addition, the amounts of interest earned on earningassets, with related yields, and interest expense on interest-bearingliabilities, with related rates, are shown. Loans placed on a non-accrual status are included in the averagebalances. Net loan fees and late charges included in interest income on loanstotaled $5.4 million, $4.0 million and $2.8 million for 2006, 2005, and 2004,respectively.
| ** **                                                                 | ** ** | **2006**             | ** ** | **2005**                       | ** ** | **2004**                    | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|-----------------------------|------------|
| **(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)                                                             |       | $                    | 199,658    |                           | $          | 8,746                       |       | 4.42 | % | $ | 168,733 |   | $ | 6,167 |   | 3.70 | % | $ | 159,833 |   | $ | 5,853 |   | 3.71 | % |
| Loans, net of unearned  income                                             |       | 1,470,264            |       | 115,405                        |       | 7.85                        | %          | 1,128,801 |   | 79,614 |   | 7.05 | % | 798,195 |   | 51,814 |   | 6.49 | % |
| Interest-bearing  deposits in other banks                                  |       | 1,055                |       | 55                             |       | 5.21                        | %          | 1,020 |   | 30 |   | 2.95 | % | 447 |   | 10 |   | 2.23 | % |
| Federal funds sold                                                         |       | 21,972               |       | 1,086                          |       | 4.94                        | %          | 19,599 |   | 667 |   | 3.40 | % | 27,748 |   | 321 |   | 1.16 | % |
| **Total interest-earning assets**                                          |       | $                    | 1,692,949  |                           | $          | 125,292                     |       | 7.41 | % | $ | 1,318,153 |   | $ | 86,478 |   | 6.57 | % | $ | 986,223 |   | $ | 57,998 |   | 5.89 | % |
| Other assets                                                               |       | 54,029               |       |                           |       |                        |       | 35,800 |   |   |   |   |   | 36,455 |   |   |   |   |   |
| **Total assets**                                                           |       | $                    | 1,746,978  |                           |       |                        |       |   | $ | 1,353,953 |   |   |   |   |   | $ | 1,022,678 |   |   |   |   |   |
| **Liabilities & Stockholders’  Equity**                           |       |                 |       |                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                                                 |       |                 |       |                           |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                               |       | $                    | 174,853    |                           | $          | 2,880                       |       | 1.65 | % | $ | 207,053 |   | $ | 3,422 |   | 1.65 | % | $ | 209,617 |   | $ | 2,789 |   | 1.33 | % |
| Money market  accounts                                                     |       | 195,482              |       | 6,879                          |       | 3.52                        | %          | 110,623 |   | 1,988 |   | 1.80 | % | 119,963 |   | 1,667 |   | 1.39 | % |
| Savings accounts                                                           |       | 26,934               |       | 608                            |       | 2.26                        | %          | 20,497 |   | 112 |   | 0.55 | % | 20,255 |   | 111 |   | 0.55 | % |
| Time deposits                                                              |       | 843,661              |       | 37,785                         |       | 4.48                        | %          | 633,572 |   | 20,910 |   | 3.30 | % | 395,718 |   | 10,533 |   | 2.66 | % |
| Total interest-bearing  deposits                                           |       | $                    | 1,240,930  |                           | $          | 48,152                      |       | 3.88 | % | $ | 971,745 |   | $ | 26,432 |   | 2.72 | % | $ | 745,553 |   | $ | 15,100 |   | 2.03 | % |
| Securities sold under  agreement to repurchase and federal funds purchased |       | 118,092              |       | 4,730                          |       | 4.01                        | %          | 63,342 |   | 1,710 |   | 2.70 | % | 39,962 |   | 325 |   | 0.81 | % |
| Other borrowed funds                                                       |       | 9,726                |       | 506                            |       | 5.20                        | %          | 13,759 |   | 423 |   | 3.07 | % | 733 |   | 15 |   | 2.00 | % |
| Trust preferred capital  notes                                             |       | 43,000               |       | 3,099                          |       | 7.21                        | %          | 18,822 |   | 1,246 |   | 6.62 | % | 18,000 |   | 891 |   | 4.95 | % |
| **Total interest-bearing  liabilities**                                    |       | $                    | 1,411,748  |                           | $          | 56,487                      |       | 4.00 | % | $ | 1,067,668 |   | $ | 29,811 |   | 2.79 | % | $ | 804,248 |   | $ | 16,331 |   | 2.03 | % |
| Demand deposits and  other liabilities                                     |       | 209,642              |       |                           |       |                        |       | 185,134 |   |   |   |   |   | 144,617 |   |   |   |   |   |
| **Total liabilities**                                                      |       | $                    | 1,621,390  |                           |       |                        |       |   | $ | 1,252,802 |   |   |   |   |   | $ | 948,865 |   |   |   |   |   |
| Stockholders’ equity                                                  |       | 125,588              |       |                           |       |                        |       | 101,151 |   |   |   |   |   | 73,813 |   |   |   |   |   |
| **Total liabilities and  stockholders’ equity**                       |       | $                    | 1,746,978  |                           |       |                        |       |   | $ | 1,353,953 |   |   |   |   |   | $ | 1,022,678 |   |   |   |   |   |
| Interest rate spread                                                       |       |                 |       |                           |       | 3.41                        | %          |   |   |   |   | 3.78 | % |   |   |   |   | 3.86 | % |
| **Net interest income and margin**                                         |       |                 |       | $                              | 68,805     |                        | 4.07       | % |   |   | $ | 56,667 |   | 4.30 | % |   |   | $ | 41,667 |   | 4.23 | % |

** **

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(1) Yields on securities available-for-sale have been calculated on thebasis of historical cost and do not give effect to changes in the fair value ofthose securities, which are reflected as a component of stockholders’ equity.Average yields on tax-exempt securities are stated on a tax equivalent basis,using a 35% rate for 2006, 2005 and 2004.

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**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.

 
| ** **                                                                 | ** ** | **2006 compared to 2005** | ** ** | **2005 compared to 2004** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **Increase/(Decrease)  Due to**     | ** ** | **Total  Increase/**                     | ** ** | **Increase/(Decrease)  Due to** | ** ** | **Total  Increase/** | ** ** |
| **(Dollars in thousands)**                                       | ** ** | **Volume**                               | ** ** | **Rate**                                 | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| **Interest Income**                                                        |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans                                                                      |       | $                                        | 26,802     |                                     | $          | 8,989 |   | $ | 35,791 |   | $ | 23,318 |   | $ | 4,482 |   | $ | 27,800 |   |
| Securities                                                                 |       | 1,368                                    |       | 1,211                                    |       | 2,579 |   | 335 |   | (21 | ) | 314 |   |
| Interest bearing  deposits in other banks                                  |       | 2                                        |       | 23                                       |       | 25 |   | 17 |   | 3 |   | 20 |   |
| Federal funds sold                                                         |       | 131                                      |       | 288                                      |       | 419 |   | (277 | ) | 623 |   | 346 |   |
| Total interest income                                                      |       | $                                        | 28,303     |                                     | $          | 10,511 |   | $ | 38,814 |   | $ | 23,393 |   | $ | 5,087 |   | $ | 28,480 |   |
| **Interest Expense**                                                       |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                                                |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                               |       | $                                        | (531       | )                                        | $          | (11 | ) | $ | (542 | ) | $ | (42 | ) | $ | 675 |   | $ | 633 |   |
| Money market  accounts                                                     |       | 2,986                                    |       | 1,905                                    |       | 4,891 |   | (168 | ) | 489 |   | 321 |   |
| Savings accounts                                                           |       | 145                                      |       | 351                                      |       | 496 |   | 1 |   | — |   | 1 |   |
| Time deposits                                                              |       | 9,404                                    |       | 7,471                                    |       | 16,875 |   | 6,414 |   | 3,963 |   | 10,377 |   |
| Total interest-bearing  deposits                                           |       | $                                        | 12,004     |                                     | $          | 9,716 |   | $ | 21,720 |   | $ | 6,205 |   | $ | 5,127 |   | $ | 11,332 |   |
| Securities sold under  agreement to repurchase and federal funds purchased |       | 2,193                                    |       | 827                                      |       | 3,020 |   | 631 |   | 754 |   | 1,385 |   |
| Other borrowed funds                                                       |       | (204                                     | )          | 287                                      |       | 83 |   | 400 |   | 8 |   | 408 |   |
| Trust preferred capital  notes                                             |       | 1,760                                    |       | 93                                       |       | 1,853 |   | 55 |   | 300 |   | 355 |   |
| Total interest expense                                                     |       | $                                        | 15,753     |                                     | $          | 10,923 |   | $ | 26,676 |   | $ | 7,291 |   | $ | 6,189 |   | $ | 13,480 |   |
| **Change in Net Interest Income**                                          | ** ** | **$**                                    | **12,550** | ** **                               | **$**      | **(412** | **)** | **$** | **12,138** | ** ** | **$** | **16,102** | ** ** | **$** | **(1,102** | **)** | **$** | **15,000** | ** ** |

 

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

In the normalcourse of business, the Company is exposed to market risk, or interest raterisk, as its net income is largely dependent on its net interest income. Marketrisk is managed by the Company’s Asset/Liability Management Committee thatformulates and monitors the performance of the Company based on establishedlevels of market risk as dictated by policy. In setting tolerance levels, orlimits on market risk, the Committee considers the impact on earnings andcapital, the level and general direction of interest rates, liquidity, localeconomic conditions and other factors. Interest rate risk, or interestsensitivity, can be defined as the amount of forecasted net interest incomethat may be gained or lost due to favorable or unfavorable movements ininterest rates. Interest rate risk, or sensitivity, arises when the maturity orrepricing of interest-earning assets differs from the maturing or repricing ofinterest-bearing liabilities and as a result of the difference between totalinterest-bearing assets and interest-bearing liabilities. The Company seeks tomanage interest rate sensitivity while enhancing net interest income byperiodically adjusting this asset/liability position; however, in general theCompany has maintained a fairly balanced sensitivity to changes in interestrates.   

One of the toolsused by the Company to assess interest sensitivity on a monthly basis is thestatic gap analysis that measures the cumulative differences between theamounts of assets and liabilities maturing or repricing within various timeperiods. It is the Company’s goal to limit the one-year cumulative difference,or gap, in an attempt to limit changes in future net interest income fromchanges in market interest rates. A static gap analysis is shown in Table 3below, and reflects the earlier of the maturity or repricing dates for variousassets, including prepayment and amortization estimates, and liabilities as ofDecember 31, 2006. At that point in time, the Company had a cumulative netliability sensitive one-year gap position of $235.2 million, or a negative12.43% of total interest-earning assets. 

This positionwould generally indicate that over a period of one-year net interest earningsshould decrease in a rising interest rate environment as more liabilities wouldreprice than assets and should increase in a falling interest rate environment.However, this measurement of interest rate risk sensitivity represents a staticposition as of a single day and is not necessarily indicative of the Company’sposition at any other point in time, does not take into account the differencesin sensitivity of yields and costs on specific assets and liabilities to changesin market rates, and it

9

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does not take intoaccount the specific timing of when changes to a specific asset or liabilitywill occur. More accurate measures of interest sensitivity are provided to theCompany using earnings simulation models. 

**TABLE 3: STATIC GAP ANALYSIS**

 
|                                                                             | ** ** | **Interest Sensitivity Periods** | ** **  |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| **At December 31, 2006**                                     | ** ** | **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                                              |       | $                                          | 19,696      |   | $ | 33,705 |   | $ | 149,240 |   | $ | 32,615 |   | $ | 235,256 |   |
| Interest bearing  deposits in other banks                                   |       | —                                     |        | 1,079 |   | — |   | — |   | 1,079 |   |
| Loans  held-for-sale                                                        |       | 7,796                                      |        | — |   | — |   | — |   | 7,796 |   |
| Loans, net of  unearned income                                              |       | 692,704                                    |        | 283,375 |   | 583,156 |   | 88,693 |   | 1,647,928 |   |
| Total  interest-earning assets                                              |       | $                                          | 720,196     |   | $ | 318,159 |   | $ | 732,396 |   | $ | 121,308 |   | $ | 1,892,059 |   |
| **Interest-bearing  Liabilities**                                           |       |                                       |        |   |   |   |   |   |   |   |   |
| NOW accounts                                                                |       | $                                          | 20,288      |   | $ | 20,288 |   | $ | 121,730 |   | — |   | $ | 162,306 |   |
| Money market  accounts                                                      |       | 73,020                                     |        | 73,020 |   | 87,624 |   | — |   | 233,664 |   |
| Savings accounts                                                            |       | 19,852                                     |        | 19,851 |   | 23,822 |   | — |   | 63,525 |   |
| Time deposits                                                               |       | 267,903                                    |        | 612,426 |   | 79,178 |   | — |   | 959,507 |   |
| Securities sold  under agreements to repurchase and federal funds purchased |       | 148,871                                    |        | — |   | — |   | — |   | 148,871 |   |
| Trust preferred  capital notes                                              |       | —                                     |        | 18,000 |   | — |   | 25,000 |   | 43,000 |   |
| Total  interest-bearing liabilities                                         |       | $                                          | 529,934     |   | $ | 743,585 |   | $ | 312,354 |   | $ | 25,000 |   | $ | 1,610,873 |   |
| **Cumulative  maturity / interest sensitivity gap**                         | ** ** | **$**                                      | **190,262** | ** ** | **$** | **(235,164** | **)** | **$** | **184,878** | ** ** | **$** | **281,186** | ** ** | **$** | **281,186** | ** ** |
| As % of total  interest-earning assets                                      |       | 10.06                                      | %           | (12.43 | )% | 9.77 | % | 14.86 | % |   |   |

 

In order to moreclosely measure interest sensitivity, the Company uses earnings simulationmodels on a quarterly basis. These models utilize the Company’s financial dataand various management assumptions as to balance sheet growth, interest rates,operating expenses and other non-interest income sources to forecast a baselevel of earnings over a one-year period. This base level of earnings is thenshocked assuming a 200 basis points higher and lower level of interest ratesover the forecasted period.  The mostrecent earnings simulation model was run based on data as December 31, 2006,and consistent with the Company’s belief from its static gap analysis that itsbalance sheet structure was liability sensitive at that time, the modelprojected that forecasted earnings over a one-year period would decrease by4.19% if interest rates were to be 200 basis points higher than expected, and forecastedearnings would increase by 5.47% if interest rates were to be 200 basis pointslower 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 inmarket conditions 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 itsmortgage lending division, commissions from non-deposit investment sales andincreases in the cash surrender value of Bank owned life insurance policies.Non-interest income increased $647 thousand in 2006, or 9.7%, from $6.7 millionin 2005 to $7.3 million, and increased $917 thousand, or 15.9%, from $5.8million in 2004, to $6.7 million in 2005. In 2004, non-interest incomedecreased $1.9 million, or 25.6%, from $7.7 million in 2003, to $5.8 million. 

10

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Fees and net gainson mortgage loans held-for-sale accounted for the majority of the decrease innon-interest income in 2004 as lower interest rates and a strong local housingmarket pushed production levels to new highs in 2003, while in 2004 refinancingactivity slowed considerably, and consequently fees and net gains on mortgageloans held-for-sale declined. In 2005, fees and net gains were mostlyunchanged, rising only $77 thousand year-over-year, while in 2006 they declined$248 thousand. 

The Company’smortgage lending division began operations in 1999 and in its first two yearsoriginated an average of $76.7 million in mortgages for sale. Over the nextthree years as mortgage rates began to fall, refinancing and home purchasesincreased significantly with refinancing activity hitting record levels in2003. As a result, mortgages originated for sale increased to $180.7 million in2001, $207.8 million in 2002 and to a record level of $287.8 million in 2003.In 2004, due to lower levels of refinancing activity, originations fell to$175.9 million, while in 2005 that number increased to $202.3 million; however;pricing became more competitive and as noted above, fees and net gains weremostly unchanged.  In 2006 originationsfell back to $174.9 million. Adverse changes in the local real estate market,consumer confidence, and interest rates, as well as increased competition couldadversely impact the level of loans originated for sale, and the resulting feesand earnings thereon. The Company continues to try to expand the level of loansoriginated for sale and the resulting fees and net gains thereon, with thehiring of additional commission based loan officers and expanding its base ofcorrespondents to enhance product offerings. 

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 $673thousand, or 26.4%, from $2.6 million in 2005, to $3.2 million in 2006. In2005, service charges and other fees were up $804 thousand, or 46.0%, from $1.7million to $2.6 million, while in 2004 they were up $140 thousand, or 8.7%. Theincrease 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 the Bank’sretail checking account customers, while in 2005 fees from lock-box operationswere up $348 thousand as a result of increased activity in one customer accountrelated to donations for Hurricane Katrina, and were subsequently down $301thousand in 2006. Management expects service charges and other fees to continuehigher, however, the year-over-year increases may not be what was experiencedin 2006.

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 $427 thousand in additional income in 2004, $456 thousand in 2005 and $621thousand in 2006. Continued improvement is expected in 2007. 

Other non-interestincome increased $57 thousand in 2006 to $418 thousand, was mostly unchanged in2005, and increased by $89 thousand, or 33.6%, to $354 thousand in 2004. Themajority of this income source is related to the purchase of $6 million in Bankowned life insurance policies in May 2003 and another $6.2 million in November2006. These polices, which are recorded on the Company’s balance sheet underother assets, accounted for $309 thousand of the $418 thousand in other incomein 2006, and $259 thousand of the $361 thousand in other income in 2005. TheCompany does not anticipate additional purchases of this insurance in 2007.Income from Bank owned life insurance is non-taxable. 

**Non-InterestExpense**

Non-interestexpense increased $4.8 million, or 16.4%, from $29.5 million in 2005, to $34.3million in 2006, increased $6.7 million, or 29.2%, from $22.8 million in 2004to $29.5 million in 2005, and increased $2.0 million, or 9.5%, from $20.8million in 2003 to $22.8 million in 2004. Salaries and benefits accounted for$2.6 million, or 53.7%, of the total increase in non-interest expense in 2006,$3.8 million, or 57.7%, in 2005, and $916 thousand, or 46.1% in 2004.Commissions and incentive compensation associated with the significantincreases in total loans and loans originated for sale, together with increasedcompensation and benefits expense associated with additional employees addeddue to overall growth and branch expansion were the reasons for the increases.The Company anticipates that salaries and benefits expense will continue to bethe largest single factor in increased non-interest expenses in future periodsdue to branch expansion and overall growth. In addition, the Company expensed$257 thousand for incentive stock options granted in 2006 and that amount isexpected to grow as grants continue in future years.

Occupancyexpenses, which include rents, depreciation, maintenance on buildings,leaseholds and equipment, increased $969 thousand, or 21.6%, from $4.5 millionin 2005, to $5.4 million in 2006, and increased $1.2 million, or 38.2%, in2005. In 2004, occupancy expense was up only $50 thousand, or 1.6%. Theincreases in 2005 and 2006 were due to the opening of seven new branchlocations between August 2004 and August 2006 and expanded office

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facilities forlending units and other back office support departments, while in 2004, occupancyexpense was mostly unchanged as two new branch locations were opened in thelater part of the year while depreciation expenses associated with older branchlocations were reduced. Occupancy is expected to significantly increase againin 2007 with at least five new branch locations to be opened including two inLoudoun County, Virginia, and one in Centreville, Dumfries and Fredericksburg,Virginia. 

Data processingexpense increased by $401 thousand, or 25.8%, in 2006, increased by $239thousand, or 18.2%, in 2005, and was up $75 thousand, or 6.1%, in 2004. Theseincreases are consistent with overall growth in the total number of loan anddeposit accounts processed.

Other operatingexpenses, which include advertising and public relations expenses, bank franchisetaxes, legal and professional fees, insurance, telecommunications, supplies andpostage, increased by $863 thousand, or 14.1%, from $6.1 million in 2005, to$7.0 million in 2006, and increased $1.3 million, or 28.0%, from $4.8 millionin 2004 to $6.1 million in 2005. In 2004, other operating expenses increased$946 thousand, or 24.7%. The increases over the years are generally due tobranch expansion and overall growth, with year-over-year increases inadvertising, public relations and bank franchise tax expenses. In 2004, $239thousand of the increase was due to one-time professional fees associated withinitial Sarbanes/Oxley Section 404 compliance efforts. The Company expectsother operating expenses will continue to increase in future periods as itexpands its branch network and with expectations for the payment of FDICinsurance premiums in 2007. As a result, it is anticipated that the Company’sefficiency ratio will increase slightly in 2007.  

Commencing in2007, the Bank will be required to pay, along with all other depositoryinstitutions insured by the FDIC, deposit insurance premiums.  The Bank does not currently pay depositinsurance premiums.  The premium is expectedto be in the range of 5-7 basis points on the Bank’s assessable deposit base.  While the Bank may seek to adjust interestrates paid on deposits to reflect the payment of premiums, competitivepressures may limit its ability to do so. Institutions which are older and larger than the Bank may havesubstantial premium credits which may temporarily offset all or part of thoseinstitutions premium payments, which may enable them to more aggressively pricedeposits.  If the Bank is unable to pricethe deposit premium into deposit rates, the payment of premiums is likely tohave an adverse affect on earnings.

**IncomeTaxes**

The Company’sincome tax provisions are adjusted for non-deductible expenses and non-taxableinterest after applying the U.S. federal income tax rate of 35%. The provisionfor income taxes totaled $12.9 million, $10.4 million and $7.4 million, for theyears ended December 31, 2006, 2005 and 2004, respectively. The effects ofnon-deductible expenses and non-taxable interest on the Company’s income taxprovisions are minimal. For further information regarding the provisions forincome taxes see Note 8 to the Consolidated 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 2006, net charge-offstotaled $126 thousand compared to $353 thousand and $44 thousand in 2005 and2004, respectively.  The provision forloan loss expense in 2006 was $4.4 million compared to $3.8 million in 2005 and$3.0 million in 2004. As a result the total allowance for loan losses increased$4.3 million, or 31.0%, from $13.8 million at December 31, 2005, to $18.1million at December 31, 2006, increased $3.4 million, or 32.9%, in 2005 andincreased 39.5% in 2004. These increases in the total allowance for loan lossesare consistent with a 28.3% increase in loans in 2006, 37.2% in 2005, and 41.4%in 2004, as well as a $1.9 million increase in the level of non-performingloans from $2.0 million at December 31, 2005, to $3.9 million at December 31,2006, and from $1.2 million at December 31, 2004, to $2.0 million at December31, 2005.  

The allowance hasalso increased as a percent of total loans from 1.07% at December 31, 2005, to1.10% as of December 31, 2006, due to the increase in non-performing loans anda $7.0 million increase in other identified potential problem loans from $4.6million at December 31, 2005, to $11.6 million at December 31, 2006.  See “Risk Elements and Non-Performing Assets”later in this discussion for more information on non-performing loans and otheridentified potential problem loans.

Management feelsthat the allowance for loan losses is adequate at December 31, 2006. However,there can be no assurance that additional provisions for loan losses will notbe required in the future, including as a result of possible

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changes in theeconomic assumptions underlying management’s estimates and judgments, adversedevelopments in the economy, on a national basis or in the Company’s marketarea, 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 allowance for impaired and adversely classified loanswithin the particular category. Each factor is assigned a percentage weight andthat total weight is applied to each loan category. The resulting sum from eachloan category is then combined to arrive at a total 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 allowances are requireddue to an increase in impaired loans and adversely classified loans. Forfurther information regarding the allowance for loan losses see Notes 1 and 4to the Consolidated Financial Statements. 

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

 
| (Dollars in thousands)                                            | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Allowance,  beginning of period                                             |       | $         | 13,821     |      | $          | 10,402    |       | $         | 7,457      |      | $          | 5,924 |   | $ | 4,356 |   |
| **Charge-Offs**                                                             |       |      |       |      |       |      |       |      |       |      |       |
| Real estate loans                                                           |       | $         | —     |      | $          | —    |       | $         | —     |      | $          | — |   | $ | — |   |
| Commercial loans                                                            |       | 112       |       | 341       |       | —    |       | 30        |       | 87        |       |
| Consumer loans                                                              |       | 77        |       | 21        |       | 62        |       | 26        |       | 68        |       |
| Total  charge-offs                                                          |       | $         | 189        |      | $          | 362       |       | $         | 62         |      | $          | 56 |   | $ | 155 |   |
| **Recoveries**                                                              |       |      |       |      |       |      |       |      |       |      |       |
| Real estate loans                                                           |       | $         | —     |      | $          | —    |       | $         | —     |      | $          | — |   | $ | — |   |
| Commercial loans                                                            |       | —    |       | —    |       | 12        |       | 2         |       | 5         |       |
| Consumer loans                                                              |       | 63        |       | 9         |       | 6         |       | 12        |       | 40        |       |
| Total recoveries                                                            |       | $         | 63         |      | $          | 9         |       | $         | 18         |      | $          | 14 |   | $ | 45 |   |
| Net charge-offs                                                             |       | $         | 126        |      | $          | 353       |       | $         | 44         |      | $          | 42 |   | $ | 110 |   |
| **Provision  for loan losses**                                              | ** ** | **4,406** | ** ** | **3,772** | ** ** | **2,989** | ** ** | **1,575** | ** ** | **1,678** | ** ** |
| Allowance, end  of period                                                   |       | $         | 18,101     |      | $          | 13,821    |       | $         | 10,402     |      | $          | 7,457 |   | $ | 5,924 |   |
| Ratio of net  charges-offs to average total loans outstanding during period |       | 0.01      | %          | 0.03      | %          | 0.01      | %          | 0.01      | %          | 0.02      | %          |

 

**TABLE 5: ALLOCATION OF ALLOWANCEFOR LOAN LOSSES**

The allowance for loanlosses includes specific allowances where impairment has been identified and ageneral allowance applicable to all loan categories; however, management hasallocated the allowance to provide an indication of the relative riskcharacteristics of the loan portfolio. The allocation is an estimate and shouldnot be interpreted as an indication that charge-offs will occur in theseamounts, or that the allocation indicates future trends.  The allocation of the allowance at December31 for the years indicated and the ratio of related outstanding loan balancesto total loans are as follows:

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** **
| (Dollars in thousands)              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **Allocation  of allowance for loan losses:** |       |     |       |     |       |     |       |     |       |     |       |
| Real estate –  mortgage                  |       | $        | 8,654      |     | $          | 7,298    |       | $        | 5,584      |     | $          | 4,188 |   | $ | 3,159 |   |
| Real estate –  construction              |       | 4,939    |       | 3,599    |       | 2,328    |       | 1,789    |       | 1,239    |       |
| Commercial                                    |       | 4,449    |       | 2,865    |       | 2,422    |       | 1,434    |       | 1,469    |       |
| Consumer                                      |       | 59       |       | 59       |       | 68       |       | 46       |       | 57       |       |
| Balance,  December 31,                        |       | $        | 18,101     |     | $          | 13,821   |       | $        | 10,402     |     | $          | 7,457 |   | $ | 5,924 |   |
| **Ratio  of loans to total year-end loans:**  |       |     |       |     |       |     |       |     |       |     |       |
| Real estate –  mortgage                  |       | 57       | %          | 60       | %          | 65       | %          | 67       | %          | 70       | %          |
| Real estate –  construction              |       | 31       | %          | 30       | %          | 25       | %          | 23       | %          | 21       | %          |
| Commercial                                    |       | 11       | %          | 9        | %          | 9        | %          | 9        | %          | 8        | %          |
| Consumer                                      |       | 1        | %          | 1        | %          | 1        | %          | 1        | %          | 1        | %          |
|                                          |       | 100      | %          | 100      | %          | 100      | %          | 100      | %          | 100      | %          |

 

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

**RiskElements and Non-Performing Assets**

Non-performingassets consist of non-accrual loans, impaired loans, restructured loans, andother real estate owned (foreclosed properties). The total non-performingassets and loans that are 90 days or more past due and still accruing interestincreased by $1.9 million, or 95.9%, from $2.0 million at year-end 2005 to $3.9million at year-end 2006, and increased by $791 thousand, or 65.4%, from $1.2million at year-end 2004. As a result, the level of non-performing assets andpast due loans to total assets increased from .13% at December 31, 2005 and2004, to .20% at December 31, 2006, but remains significantly below peer. 

The Companyexpects its ratio of non-performing assets to remain low relative to its peers,however, the ratio could increase due to an aggregate of $11.6 million in otheridentified potential problem loans as of December 31, 2006, 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, 2005, other identified potentialproblem loans were $4.6 million and they were $1.7 million at December 31,2004. Of the total increase of $7.0 million in 2006, $6.2 million is related toa single borrower in commercial subcontracting experiencing cash flow problemswhich relate to expansion of production capacity in anticipation of revenue increaseswhich have not yet materialized.  A planto reduce overhead to current operating levels and curtail debt though the saleof non-operating assets has been implemented in an effort to resolve thissituation.  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 for non-accrualstatus established by regulatory authorities. No interest is taken into income on non-accrual loans.  Impaired loans are also on non-accrualstatus. A loan remains on non-accrual status until the loan is current as toboth principal and interest or the borrower demonstrates the ability to pay andremain 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. TheCompany held no foreclosed real properties for any of the years presented. 

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**TABLE 6: NON-PERFORMING ASSETS**

** **
|                                                               | ** ** | **December 31,**                                    | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(Dollars in thousands)**                          | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
| Non-accrual  loans                                            |       | $                                                        | 10         |   | $ | 14 |   | $ | 18 |   | $ | 46 |   | $ | 1,943 |   |
| Impaired loans                                                |       | 3,910                                                    |       | 1,980 |   | 1,192 |   | 416 |   | 444 |   |
| Restructured  loans                                           |       | —                                                   |       | — |   | — |   | 875 |   | — |   |
| Total non-performing assets                                   |       | $                                                        | 3,920      |   | $ | 1,994 |   | $ | 1,210 |   | $ | 1,337 |   | $ | 2,387 |   |
| Loans past due  90 days and still accruing                    |       | —                                                   |       | 7 |   | — |   | 84 |   | — |   |
| **Total  non-performing assets and past due loans**           | ** ** | **$**                                                    | **3,920**  | ** ** | **$** | **2,001** | ** ** | **$** | **1,210** | ** ** | **$** | **1,421** | ** ** | **$** | **2,387** | ** ** |
| Allowance for  loan losses to total loans                     |       | 1.10                                                     | %          | 1.07 | % | 1.11 | % | 1.13 | % | 1.09 | % |
| Allowance for  loan losses to non-performing loans            |       | 461.76                                                   | %          | 693.1 | % | 859.7 | % | 557.7 | % | 248.2 | % |
| Non-performing  assets and past due loans to total loans      |       | 0.24                                                     | %          | 0.15 | % | 0.13 | % | 0.21 | % | 0.44 | % |
| **Non-performing assets and past  due loans to total assets** | ** ** | **0.20**                                                 | **%**      | **0.13** | **%** | **0.11** | **%** | **0.16** | **%** | **0.36** | **%** |

 

**Loan Portfolio**

 

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 $359.6 million, or 28.3%, from$1.27 billion at December 31, 2005, to $1.63 billion at December 31, 2006, andincreased $344.5 million, or 37.2%, from $925.8 million at December 31, 2004,to $1.27 billion at year-end 2005. The increase in loans in 2006 included anincrease in real estate mortgage loans of $161.5 million, or 20.7%, an increasein real estate construction loans of $134.0 million, or 35.2%, and an increasein commercial loans of $68.3 million, or 55.9%. In 2005 growth in loans bycategory was similar with real estate mortgage loans increasing $173.4 million,or 28.6%, real estate construction loans increasing $140.5 million, or 58.4%,and commercial loans increasing $33.5 million, or 37.8%. The majority of theincrease in real estate mortgage loans is concentrated in non-farmnon-residential properties for which the Bank has had a primary focus foryears, while the majority of the increases in real estate construction loansare attributable to commercial builders of single-family housing. At December31, 2006, $347.5 million of total real estate construction loans were to thesecommercial builders of single-family housing, $18.3 million were to individualson single-family properties and $149.2 million were related to commercialproperties. At December 31, 2005, $257.6 million of real estate constructionloans were to commercial builders of single-family housing, $21.4 million wereto individuals on single-family properties and $101.9 million were related tocommercial properties. The Bank expects that real estate construction loanswill continue to grow, but not at the pace experienced in 2005 and 2006,although there can be no assurance. The Bank has also increased its focus oncommercial lending over the past two years with the hiring of several loanofficers devoted to developing that lending area.

As noted above, the majority of the Bank’s loan portfolio consists ofconstruction and commercial real estate loans. At December 31, 2006, the Bank had $347.5 million of construction loansto commercial builders of single family housing in the Northern Virginiamarket, representing 21.0% of total loans. These loans are made to a number ofunrelated entities and generally have a term of twelve to eighteen months.  Adverse developments in the Northern Virginiareal estate market or economy could have an adverse impact on this portfolio ofloans and the Company’s income and financial position.  In addition, the Bank had $689.1 million, or41.7% of the loan portfolio at December 31, 2006, secured by non-farmnon-residential properties. These loans represent obligations of a diversifiedpool of borrowers across numerous businesses and industries in the NorthernVirginia market and include some loans that, although secured by commercialreal estate, are commercial purpose loans made based on the financial conditionof the underlying business. At December 31, 2006, the Company had no otherconcentrations of loans in any one industry exceeding 10% of its total loanportfolio.  An industry for this purposeis defined as a group of counterparties that are engaged in similar activitiesand have similar economic characteristics that would cause their ability tomeet contractual obligations to be similarly affected by changes in economic orother conditions. The Bank seeks to manage its concentrations of loans throughthe establishment of limits on the level of its various loan types 

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to total loans andto total capital. For further information regarding concentrations of loans seeNote 17 to the Consolidated Financial Statements.

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

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)** | ** ** | **2006**              | ** **    | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Real estate -  mortgage              |       | $                     | 940,270       |   | $ | 778,788 |   | $ | 605,420 |   | $ | 444,411 |   | $ | 362,024 |   |
| Real estate -  construction          |       | 515,040               |          | 380,997 |   | 240,469 |   | 153,400 |   | 111,333 |   |
| Commercial                           |       | 190,527               |          | 122,243 |   | 88,725 |   | 61,178 |   | 44,559 |   |
| Consumer                             |       | 6,997                 |          | 7,386 |   | 5,879 |   | 6,061 |   | 6,941 |   |
| Total loans                          |       | $                     | 1,652,834     |   | $ | 1,289,414 |   | $ | 940,493 |   | $ | 665,050 |   | $ | 524,857 |   |
| Less unearned  income                |       | 4,906                 |          | 5,338 |   | 4,309 |   | 2,742 |   | 2,033 |   |
| Less allowance  for loan losses      |       | 18,101                |          | 13,821 |   | 10,402 |   | 7,457 |   | 5,924 |   |
| **Loans, net**                       | ** ** | **$**                 | **1,629,827** | ** ** | **$** | **1,270,255** | ** ** | **$** | **925,782** | ** ** | **$** | **654,851** | ** ** | **$** | **516,900** | ** ** |

 

**TABLE 8: MATURITY/REPRICING SCHEDULE OF TOTALLOANS**
| **At December 31, 2006  (Dollars in thousands)** | ** ** | **Real estate-  mortgage** | ** **  | **Real estate-  construction** | ** ** | **Commercial** | ** ** | **Consumer** | ** **  | **Total**  | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------|-------------|-------------------------------------|------------|----------------|------------|--------------|-------------|------------|------------|
| **Variable:**                                                             |       |                            |        |                                |       |           |       |         | ** **  | ** ** | ** ** |
| Within 1 year                                                             |       | $                               | 190,203     |                                | $          | 390,230        |       | $            | 105,926     |       | $          | 2,151 |   | $ | 688,510 |   |
| 1-to-5 years                                                              |       | 305,617                         |        | 37,832                              |       | 4,093          |       | —       |        | 347,542    |       |
| After 5 years                                                             |       | 23,248                          |        | 1,643                               |       | —         |       | —       |        | 24,891     |       |
| Total                                                                     |       | $                               | 519,068     |                                | $          | 429,705        |       | $            | 110,019     |       | $          | 2,151 |   | $ | 1,060,943 |   |
| **Fixed Rate:**                                                           |       |                            |        |                                |       |           |       |         | ** **  | ** ** | ** ** |
| Within 1 year                                                             |       | $                               | 28,257      |                                | $          | 34,041         |       | $            | 10,284      |       | $          | 1,393 |   | $ | 73,975 |   |
| 1-to-5 years                                                              |       | 116,629                         |        | 27,371                              |       | 48,996         |       | 3,156        |        | 196,152    |       |
| After 5 years                                                             |       | 276,316                         |        | 23,923                              |       | 21,228         |       | 297          |        | 321,764    |       |
| Total                                                                     |       | $                               | 421,202     |                                | $          | 85,335         |       | $            | 80,508      |       | $          | 4,846 |   | $ | 591,891 |   |
| **Total Loans**                                                           | ** ** | **$**                           | **940,270** | ** **                          | **$**      | **515,040**    | ** ** | **$**        | **190,527** | ** ** | **$**      | **6,997** | ** ** | **$** | **1,652,834** | ** ** |

 

**Investment Securities**

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

Totalsecurities increased $61.1 million, or 35.3%, from $173.1 million at December31, 2005, to $234.2 million at December 31, 2006, and increased $9.9 million,or 6.0%, from $163.2 million at December 31, 2004, to $173.1 million atDecember 31, 2005. Securities of U.S. Government Agencies represent themajority of the portfolio and

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havecontinued to shorten in terms of average maturity over the past two years.  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.

At December 31,2006, there were no single issuers, other than issuers who are U.S. GovernmentAgencies, whose securities owned by the Company had an aggregate book value ofmore than 10% of total stockholder’s equity of the Company.

**TABLE 9: SECURITIES PORTFOLIO**
| ** **                                    | ** ** | **December 31,** | ** **  |
|-----------------------------------------------|------------|-----------------------|-------------|
| ** **                                    | ** ** | **2006**              | ** **  | **2005** | ** ** | **2004** | ** ** |
| **(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           |       | $                     | 174,074     |   | 74.33 | % | $ | 116,624 |   | 67.39 | % | $ | 100,093 |   | 61.32 | % |
| U.S. Treasuries                               |       | —                |        | 0.00 | % | — |   | 0.00 | % | 9,930 |   | 6.08 | % |
| Domestic  corporate debt obligations          |       | 6,055                 |        | 2.59 | % | 6,043 |   | 3.49 | % | 6,020 |   | 3.69 | % |
| Obligations of  states/political subdivisions |       | 3,659                 |        | 1.56 | % | 1,352 |   | 0.78 | % | 1,338 |   | 0.82 | % |
| Federal Reserve  Bank stock                   |       | 1,442                 |        | 0.62 | % | 1,442 |   | 0.83 | % | 1,442 |   | 0.88 | % |
| Federal Home  Loan Bank stock                 |       | 3,034                 |        | 1.30 | % | 2,277 |   | 1.32 | % | 1,761 |   | 1.08 | % |
| Community  Bankers’ Bank stock           |       | 55                    |        | 0.02 | % | 55 |   | 0.03 | % | 55 |   | 0.03 | % |
|                                          | ** ** | **$**                 | **188,319** | ** ** | **80.41** | **%** | **$** | **127,793** | ** ** | **73.84** | **%** | **$** | **120,639** | ** ** | **73.90** | **%** |
|                                          |       |                  |        |   |   |   |   |   |   |   |   |   |   |
| **Held-to-maturity:**                         |       |                  |        |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  Agency obligations           |       | $                     | 35,520      |   | 15.17 | % | $ | 35,798 |   | 20.69 | % | $ | 33,667 |   | 20.63 | % |
| Obligations of  states/political subdivisions |       | 10,364                |        | 4.43 | % | 8,963 |   | 5.18 | % | 8,433 |   | 5.17 | % |
| Domestic  corporate debt obligations          |       | —                |        | 0.00 | % | 499 |   | 0.29 | % | 493 |   | 0.30 | % |
|                                          | ** ** | **$**                 | **45,884**  | ** ** | **19.59** | **%** | **$** | **45,260** | ** ** | **26.16** | **%** | **$** | **42,593** | ** ** | **26.10** | **%** |
|                                          |       | $                     | 234,203     |   | 100.00 | % | $ | 173,053 |   | 100.00 | % | $ | 163,232 |   | 100.00 | % |

 

**TABLE 10: MATURITY OF SECURITIES**
| ** **                             | ** ** | **2006**            | ** **  | **2005**              | ** ** | **2004**            | ** ** |
|----------------------------------------|------------|---------------------|-------------|-----------------------|------------|---------------------|------------|
| **At December 31,**          | ** ** | ** **          | ** **  | **Weighted  Average** | ** ** | ** **          | ** ** | **Weighted  Average** | ** ** | ** ** | ** ** | **Weighted  Average** | ** ** |
| **(Dollars in thousands)**   | ** ** | **Book Value** | ** **  | **Yield**             | ** ** | **Book Value** | ** ** | **Yield** | ** ** | **Book Value** | ** ** | **Yield** | ** ** |
| Maturing within  one year              |       | $                   | 36,246      |                  | 3.49       | %                   | $          | 25,708 |   | 2.58 | % | $ | 14,944 |   | 1.91 | % |
| Maturing after  one through five years |       | 132,512             |        | 4.75                  | %          | 92,673              |       | 3.78 | % | 74,664 |   | 2.88 | % |
| Maturing after  five through ten years |       | 40,328              |        | 4.95                  | %          | 34,741              |       | 4.73 | % | 48,501 |   | 4.41 | % |
| Maturing after  ten years              |       | 25,117              |        | 5.62                  | %          | 19,931              |       | 5.30 | % | 25,123 |   | 4.85 | % |
| ** **                             | ** ** | **$**               | **234,203** | ** **            | **4.67**   | **%**               | **$**      | **173,053** | ** ** | **3.97** | **%** | **$** | **163,232** | ** ** | **3.55** | **%** |

 

#### **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 $362.4 million, or 29.1%, from $1.24 billion at December 31,2005, to $1.61 billion at December 31, 2006, and increased $272.5 million, or28.1%, from $971.0 million at December 31, 2004, to $1.24 billion at December31, 2005. In 2006, growth by deposit category included a 0.9% decrease indemand deposits, a 31.4% increase in savings accounts and interest-

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bearingdemand deposits and a 36.3% increase in time deposits. In 2005, growth includeda 27.3% increase in demand deposits, a 5.2% increase in savings accounts andinterest-bearing demand deposits and a 43.8% 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, dueto historically low interest rates, many depositors held funds in lower ratesavings and interest-bearing demand deposits. As interest rates started toclimb in the second half of 2004, large sums started transferring out intohigher rate accounts including time deposits, and this trend continued into2005 and 2006. The growth in time deposits in 2006 was also supported byspecial advertised rates for maturities ranging from six to thirteen months,while the growth in savings and money market accounts were the result of newproduct offerings that were also supported by special advertised rates, asstrong regional competition for deposits necessitated “paying up” for depositgrowth to help fund strong loan demand. This competitive factor, highshort-term interest rates, and as noted, the shift of funds from lower rateinterest-bearing checking accounts, resulted in the average rate paid oninterest-bearing deposits increasing 69 basis points in 2005, from 2.03% in2004, to 2.72%, and rising 116 basis points from 2.72% for the year endedDecember 31, 2005, to 3.88% in 2006. Management expects these fundingchallenges will continue into 2007.

Table 11 detailsmaturities of time deposits with balances of $100,000 or more, which represent51.1% of total time deposits as of December 31, 2006, compared to 47.9% atDecember 31, 2005. Total time deposits represent 59.7% of total deposits as ofDecember 31, 2006, compared to 56.7% at December 31, 2005. See Note 6 to theConsolidated Financial Statements and Tables 1 and 3 to this Management’sDiscussion and Analysis for additional information regarding the maturities oftime deposits and average rates paid on all interest-bearing deposits.

**TABLE 11: MATURITIES OF TIME DEPOSITS WITH BALANCES$100,000 OR MORE**
|                                      | ** ** | **December 31,** | ** **  |
|--------------------------------------|------------|-----------------------|-------------|
| **(Dollars in thousands)** | ** ** | **2006**              | ** **  | **2005** | ** ** | **2004** | ** ** |
| 3 months or less                     |       | $                     | 151,876     |   | $ | 61,115 |   | $ | 29,899 |   |
| 3-6 months                           |       | 127,637               |        | 41,648 |   | 23,399 |   |
| 6-12 months                          |       | 182,081               |        | 165,738 |   | 123,054 |   |
| Over 12 months                       |       | 29,123                |        | 69,679 |   | 76,829 |   |
| **Total**                            | ** ** | **$**                 | **490,717** | ** ** | **$** | **338,180** | ** ** | **$** | **253,181** | ** ** |

 

**Short-TermBorrowings**

Short-termborrowings consist of securities sold under agreements to repurchase, which aresecured transactions with customers and generally mature the business dayfollowing the date sold. These transactions are provided to several of the Bank’sdemand deposit customers and are considered a core funding source of the Bank.Short-term borrowings also include Federal funds purchased, which are unsecuredovernight borrowings from other financial institutions and are generally usedto accommodate short-term liquidity needs. Table 12 provides information on the balances and interest rates onshort-term borrowings for the years ended December 31, 2006, 2005 and 2004(dollars in thousands):

**TABLE 12:SHORT-TERM BORROWINGS**
| At December 31,                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Securities sold  under agreement to repurchase |       | $        | 108,370    |     | $          | 84,791   |       | $ | 53,207 |   |
| Federal funds  purchased                       |       | 40,501   |       | 27,003   |       | —   |       |
| Total                                          |       | $        | 148,871    |     | $          | 111,794  |       | $ | 53,207 |   |
| Weighted  interest rate at year end            |       | 4.29     | %          | 3.71     | %          | 1.72     | %          |
|                                           |       |     |       |     |       |     |       |
| Averages for the  year ended December 31,      |       |     |       |     |       |     |       |
| Outstanding                                    |       | $        | 118,092    |     | $          | 63,342   |       | $ | 39,962 |   |
| Interest rate                                  |       | 4.01     | %          | 2.70     | %          | 0.81     | %          |
|                                           |       |     |       |     |       |     |       |
| Maximum month-end  outstanding                 |       | $        | 148,871    |     | $          | 111,794  |       | $ | 53,207 |   |

 

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### **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. Considerationsin managing the Company’s liquidity position include, but are not limited to,scheduled cash flows from existing loans and investment securities, anticipateddeposit activity including the maturity of time deposits, and projected needsfrom anticipated extensions of credit. The Company’s liquidity position ismonitored daily by management to maintain a level of liquidity conducive toefficiently meet current needs and is evaluated for both current and longerterm needs as part of the asset/liability management process.

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 $138.4 million, or 34.1%, from $405.9million at December 31, 2005, to $544.3 million at December 31, 2005, andincreased $85.1 million, or 18.2%, from $320.8 million at December 31, 2004, to$405.9 million at December 31, 2005. These increases were due to higher levelsof loans maturing within one-year as growth in investment securities slowed.Additional sources of liquidity available to the Bank include the capacity toborrow funds through established short-term lines of credit with variouscorrespondent banks and the Federal Home Loan Bank of Atlanta. See Note 14 tothe Consolidated Financial Statements for further information regarding theseadditional liquidity sources.

**Capital**

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 7.83% at December 31, 2006, compared to 8.12% atDecember 31, 2005, and its total risk-based capital ratio was 11.34% atDecember 31, 2006, compared to 12.27% at December 31, 2005. These ratios are inexcess of the mandated minimum requirement of 4.00% and 8.00%, respectively.The Bank’s leverage ratio was 7.18% at December 31, 2006, compared to 7.45% atDecember 31, 2005. The Company’s Tier 1 risk-based capital ratio, totalrisk-based capital ratio, and leverage ratio was 10.53%, 11.57%, and 9.61%,respectively, at December 31, 2006, compared to 10.97%, 12.42%, and 10.09% atDecember 31, 2005. The declines in these capital ratios in 2006, was due to thesignificant level of growth in assets. Both the Company’s and Bank’s capitalpositions reflect proceeds of the issuance of $43 million in trust preferredsecurities and the contribution of an equivalent amount to the Bank assubordinated 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.

TheFederal Reserve has revised the capital treatment of trust preferred securitiesin light of recent accounting pronouncements and interpretations regardingvariable interest entities, which have been read to encompass the

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subsidiarytrusts established to issue trust preferred securities, and to which theCompany issued subordinated debentures. As a result, the capital treatment oftrust preferred securities has been revised to provide that in the future, suchsecurities can be counted as Tier 1 capital at the holding company level,together with other restricted core capital elements, up to 25% of totalcapital (net of goodwill), and any excess as Tier 2 capital up to 50% of Tier 1capital.  At December 31, 2006, trustpreferred securities represented 23.4% of the Company’s Tier 1 capital and21.3% of its total risk-based capital. Should future trust preferred issuancesto increase holding company capital levels not be available to the same extentas currently, the Company may be required to raise additional equity capital,through the sale of common stock or other means, sooner than it would otherwisedo so. See Note 15 to the Consolidated Financial Statements for furtherinformation regarding trust preferred securities.

**ContractualObligations**

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 31,2006.

**Table 13: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 |       | $                                    | 148,871    |   | $ | 148,871 |   | $ | — |   | $ | — |   | $ | — |   |
| Trust preferred  securities and related capital notes                       |       | 43,000                               |       | — |   | — |   | — |   | 43,000 |   |
| Operating leases                                                            |       | 24,175                               |       | 2,493 |   | 5,548 |   | 4,620 |   | 11,514 |   |
| Data processing  services                                                   |       | 418                                  |       | 418 |   | — |   | — |   | — |   |
| Total  contractual cash obligations                                         |       | $                                    | 216,464    |   | $ | 151,782 |   | $ | 5,548 |   | $ | 4,620 |   | $ | 54,514 |   |

 

Theobligation for data processing services represents estimates of earlytermination charges.  Of the $43.0million of trust preferred securities and related capital notes shown as dueafter 5 years, $18.0 million become subject to redemption, at par, at theCompany’s option, in November and December 2007. The table does not reflectdeposit liabilities entered into in the ordinary course of the Company’sbanking business.  At December 31, 2006,the Company had approximately $646.4 million of demand and savings deposits,exclusive of interest, which have no stated maturity or payment date.  The Company also had approximately $959.5million 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 $1.3 million of capital notesheld by the trusts that relate to the common securities of the issuing trusts,all of which are owned by the Company. See Note 15 to the Consolidated Financial Statements for additionalinformation regarding the trust preferred capital notes.

**Off-BalanceSheet Arrangements**

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.

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**RISK FACTORS**

*An investment in our common stockinvolves various risks. The following is a summary of certain risks identifiedby us as affecting our business. You should carefully consider the risk factorslisted below, as well as other cautionary statements made in this AnnualReport, and risks and uncertainties which we may identify in our other reportsand documents filed with the Securities and Exchange Commission or other publicannouncements. These risk factors may cause our future earnings to be lower orour financial condition to be less favorable than we expect. In addition, otherrisks of which we are not aware, which relate to the banking and financialservices industries in general, or which we do not believe are material, maycause earnings to be lower, or hurt our future financial condition. You shouldread this section together 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.**

Since the beginning of 2001, our asset level has increased rapidly,including a 28.36% increase in 2006.  Ourdiluted earnings per share have grown at a compound annual rate of 32.2% from2001 to 2006. We may not be able to sustain our historical rate of growth, orgrow at all. Various factors, such as economic conditions, regulatoryconsiderations and competition, may impede our rate of growth and our branchexpansion, or may make future growth or branching less profitable or moreexpensive. If we experience a significant decrease in our rate of growth ascompared to our historic rate of growth, our income, or our rate of incomegrowth, may decline, and we may not be able to maintain or reduce our expenselevels and efficiency ratio, which will adversely affect our results ofoperations and financial condition.

**Our concentrations of loans may create a greater risk of loan defaultsand losses.**

We have a substantial amount of loans secured by realestate in the Northern Virginia/Washington, D.C. metropolitan area, andsubstantially all of our loans are to borrowers in that area.  We also have a significant amount of realestate construction loans and land related loans for residential and commercialdevelopments. At December 31, 2006, 88.1% of our total loans were secured byreal estate, primarily commercial real estate. Of these loans, $515 million, or31.2% of total loans, were construction and land loans.  An additional 11.5% 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 issignificant volatility or weakness in the economy or any significant sector ofthe area’s economy, our ability to develop our business relationships may bediminished, the quality and collectibility of our loans may be adverselyaffected, the value of collateral may decline and loan demand may bereduced.  Additionally, under guidancefrom the banking agencies, we may be required to maintain higher levels ofcapital than we would otherwise be expected to maintain, and to employ greaterrisk management efforts, as a result of our real estate concentrations.

Commercial andcommercial real estate and construction loans also generally have larger balances than single family mortgages loansand other consumer loans. Because the loan portfolio contains a significantnumber of commercial and commercial real estate and construction loans withrelatively large balances, the deterioration of one or a few of these loans maycause a significant increase in nonperforming assets. An increase innonperforming loans could result in: a loss of earnings from these loans, anincrease in the provision for loan losses, or an increase in loan charge-offs,which could have an adverse impact on our results of operations and financialcondition.

**Lack of seasoning of our loanportfolio may 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 are of relatively recentorigin. In general, loans do not begin to show signs of credit deterioration ordefault until they have been outstanding for some period of time, a processreferred to as “seasoning.” As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio. Because a large portionof our loan portfolio is relatively new, the current level of delinquencies anddefaults may not be representative of the level that will prevail when theportfolio becomes more seasoned, which may be higher than current levels. Ifdelinquencies and defaults

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increase, we may be required to increase our provision for loan losses,which would adversely 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 particularly susceptibleto losses due to: (1) the geographic concentration of our loans, (2) theconcentration of higher risk loans, such as commercial real estate,construction and commercial and industrial loans, and (3) the relative lack ofseasoning of certain of our loans.  As aresult, there can be no assurance that we will be able to maintain our lowlevels of non-performing assets and charge-offs. Although we believe that ourallowance for loan losses is maintained at a level adequate to absorb anyinherent losses in our loan portfolio, these estimates of loan losses arenecessarily subjective and their accuracy depends on the outcome of futureevents. If we need to make significant and unanticipated increases in our lossallowance in the future, our results of operations and financial conditionwould be materially adversely affected 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.**

Weintend to seek further growth in the level of our assets and deposits and thenumber of our branches. Our plans for 2007 include the opening of at least fivenew branches, both within our existing footprint and to expand our footprint inNorthern Virginia.  We cannot be certainas to our ability to manage increased levels of assets and liabilities, and anexpanded branch system, without increased expenses and higher levels ofnon-performing assets.  We may berequired to make additional investments in equipment and personnel to managehigher asset levels and loan balances and a larger branch network, which mayadversely impact earnings, 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 growth depends on our ability to meet minimum regulatorycapital levels. Growth and shareholder returns may be adversely affected ifsources of capital are not available to help us meet them.**

Sincewe became the holding company for the Bank, we have sought to maximizeshareholder returns by leveraging our capital. If earnings do not meet our current estimates, if we incur unanticipatedlosses or expenses, or if we grow faster than expected, we may need to obtainadditional capital sooner than expected, through borrowing, additionalissuances of debt or equity securities, or otherwise.  If we do not have continued access tosufficient capital, we may be required to reduce our level of assets or reduceour rate of growth in order to maintain regulatory compliance. Under thosecircumstances net income and the rate of growth of net income may be adverselyaffected. Additional issuances of equity securities could have a dilutiveeffect 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 areain which we operate is considered highly attractive from an economic anddemographic viewpoint, and is a highly competitive banking market. We competefor loans, deposits, and investment dollars with numerous regional and nationalbanks, online divisions of out-of-market banks, and other community bankinginstitutions, as well as other kinds of financial institutions and enterprises,such as securities firms, insurance companies, savings associations, creditunions, mortgage brokers, and private lenders. Many competitors havesubstantially greater resources than us, and operate under less stringentregulatory environments. The differences in resources and regulations may makeit harder for us to compete profitably, reduce the rates that we can earn onloans

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and investments, increase the rates we must offer ondeposits and other funds, and adversely affect our overall financial conditionand earnings.

**Trading in our common stock hasbeen relatively light. As a result, shareholders may not be able to quickly andeasily sell their common stock.**

Although our common stock is listed on the Nasdaq GlobalSelect Market, and a number of brokers offer to make a market in the commonstock on a regular basis, trading volume to date has been relatively light,averaging approximately 80,135 shares per day over the year ended December 31,2006. There can be no assurance that an active and liquid market for the commonstock can be maintained.  Accordingly,shareholders may find it difficult to sell a significant number of shares atthe prevailing market price.

**The number of shares owned by****our directors andexecutive officers could make it more difficult to obtain approval for somematters submitted to shareholder vote, including mergers and acquisitions.**

Our directors andexecutive officers and their affiliates own approximately 28.3% of theoutstanding common stock. By voting against a proposal submitted toshareholders, the directors and officers, as a group, may be able to makeapproval more difficult for proposals requiring the vote of shareholders, suchas some mergers, share exchanges, asset sales, and amendments to the Articlesof Incorporation.  The results of thevote may be contrary to the desires or interests of the public shareholders.

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

Our operatingincome and net income depend to a great extent on our net interest margin,i.e., the difference between the interest yields we receive on loans,securities and other interest bearing assets and the interest rates we pay oninterest 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 tomanage our risk from changes in market interest rates by adjusting the rates,maturity, repricing, and balances of the different types of interest-earningassets and interest-bearing liabilities, but interest rate risk managementtechniques are not exact. As a result, a rapid increase or decrease in interestrates could have an adverse effect on our net interest margin and results ofoperations. The results of our interest rate sensitivity simulation modeldepend upon a number of assumptions which may not prove to be accurate. Therecan be no assurance that we will be able to successfully manage our interestrate risk.  Increases in market rates andadverse changes in the local residential real estate market, the generaleconomy or consumer confidence would likely have a significant adverse impacton our non-interest income, as a result of reduced demand for residentialmortgage loans, which we make on a pre-sold basis.

Adversechanges in the real estate market in our market area could also have an adverseaffect on our cost of funds and net interest margin, as we have a large amountof non-interest bearing deposits related to real estate sales anddevelopment.  While we expect that wewould be able to replace the liquidity provided by these deposits, thereplacement funds would likely be more costly, negatively impacting earnings.

Additionally,changes in applicable 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, 2006, 11.6% of our deposits werenon-interest bearing demand deposits.

The requirement that the Bank commence paying depositinsurance premiums in 2007 may also adversely affect our results of operations.We do not currently pay any deposit insurance premiums. Payment of depositinsurance premiums may have an adverse effect on our earnings. This change orother legislative or regulatory developments

23

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could have a significant negative effect on our netinterest income, net income, net interest margin, return on assets and returnon equity.

**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 regulationsprohibit a person or company or a group of persons deemed to be “acting inconcert” from, directly or indirectly, acquiring more than 10% (5% if theacquiror is a bank holding company) of any class of our voting stock orobtaining the ability to control in any manner the election of a majority ofour directors or otherwise direct the management or policies of our companywithout prior notice or application to and the approval of the Federal Reserve.There are comparable prior approval requirements for changes in control underVirginia law. Also, Virginia corporate law contains several provisionsthat may make it more difficult for a third party to acquire control of uswithout the approval of our Board of Directors, and may make it more difficultor expensive for a third party to acquire a majority of our outstanding commonstock.

**CONTROLS AND PROCEDURES**

#### The Company’s management, under the supervisionand with 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 the SecuritiesExchange Act of 1934. Based on that evaluation, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective. There were no changes in the Company’s internalcontrol over financial reporting (as defined in Rule 13a-15 under theSecurities Act of 1934) during the quarter ended December 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

24

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#### **MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

The management ofVirginia Commerce Bancorp, Inc. (the “Company”) is responsible for thepreparation, integrity and fair presentation of the consolidated financialstatements included in this Annual Report. The financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America and reflect management’s judgments and estimatesconcerning the effects of events and transactions that are accounted for ordisclosed.

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

Managementassessed the Company’s system of internal control over financial reporting asof December 31, 2006. This assessment was conducted based on the Committee ofSponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control- Integrated Framework”. Based on this assessment, management believes that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2006. Management’s assessment concluded that there were nomaterial weaknesses within the Company’s internal control structure.

The 2006 end ofyear consolidated financial statements have been audited by the independentaccounting firm of Yount, Hyde & Barbour, P.C. (“YHB”). Personnel from YHBwere given unrestricted access to all financial records and related data, includingminutes of all meetings of the Board of Directors and Committees thereof.  Management believes that all representationsmade to the independent auditors were valid and appropriate. The resultingreport from YHB accompanies the financial statements. YHB has also issued anattestation report on management’s assessment of the effectiveness of internalcontrols over financial reporting. That report has also been made a part ofthis Annual Report.

The Board ofDirectors of the Company, acting through its Audit Committee (the “Committee”),is responsible for the oversight of the Company’s accounting policies,financial reporting and internal control. The Audit Committee of the Board ofDirectors is comprised entirely of outside directors who are independent ofmanagement. The Audit Committee is responsible for the appointment andcompensation of the independent auditors and approves decisions regarding theappointment or removal of members of the internal audit function. The Committeemeets periodically with management, the independent auditors, and the internalauditors to insure that they are carrying out their responsibilities. TheCommittee is also responsible for performing an oversight role by reviewing andmonitoring the financial, accounting, and auditing procedures of the Company inaddition to reviewing the Company’s financial reports. The independent auditorsand the internal auditors have full and unlimited access to the AuditCommittee, with or without the presence of the management of the Company, todiscuss the adequacy of internal control over financial reporting, and anyother matters which they believe should be brought to the attention of theAudit Committee.
| /s/ Peter A. Converse    |                    | /s/ William K. Beauchesne |   |
|--------------------------|-------------------------|---------------------------|--------|
| Chief Executive  Officer | Chief Financial Officer |

 

25

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To the Shareholders and Board of Directors

Virginia Commerce Bancorp, Inc.

Arlington, Virginia

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

We have auditedthe accompanying consolidated balance sheets of Virginia Commerce Bancorp, Inc.and subsidiaries as of December 31, 2006 and 2005, and the related consolidatedstatements of income, changes in shareholders’ equity, and cash flows for theyears ended December 31, 2006, 2005 and 2004. We also have audited management’s assessment, included in theaccompanying Management Report on Internal Control Over Financial Reportingappearing under Item 9A, that Virginia Commerce Bancorp, Inc. maintainedeffective internal control over financial reporting as of December 31, 2006,based on criteria established**in*Internal Control— Integrated Framework*issued by the Committee ofSponsoring 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 financialreporting.  Our responsibility is to expressan opinion on these financial statements, an opinion on management’sassessment, and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained inall material respects.  Our audit offinancial statements included examining, on a test basis, evidence supportingthe amounts and 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,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonablebasis for our opinions.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable

26

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assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

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

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Virginia Commerce Bancorp, Inc.and subsidiaries as of December 31, 2006 and 2005, and the results of itsoperations and its cash flows for the years ended December 31, 2006, 2005 and2004 in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion,management’s assessment that Virginia Commerce Bancorp, Inc. and subsidiariesmaintained effective internal control over financial reporting as of December31, 2006, is fairly stated, in all material respects, based on criteria established in*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Furthermore, in our opinion, Virginia CommerceBancorp, Inc. and subsidiaries maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2006, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

Winchester, Virginia

March 7, 2007

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# **CONSOLIDATED BALANCE SHEETS**

# **(Dollars in thousands exceptshare data)**

| ** **                                                                                                         | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Assets**                                                                                                         |       |                  |       |   |   |
| Cash and due  from banks                                                                                           |       | $                     | 34,989     |   | $ | 32,607 |   |
| Interest-bearing  deposits with other banks                                                                        |       | 1,079                 |       | 1,035 |   |
| Securities (fair  value: 2006, $233,401; 2005, $172,102)                                                           |       | 234,203               |       | 173,053 |   |
| Loans  held-for-sale                                                                                               |       | 7,796                 |       | 12,548 |   |
| Loans, net of  allowance for loan losses of $18,101 in 2006 and $13,821 in 2005                                    |       | 1,629,827             |       | 1,270,255 |   |
| Bank premises  and equipment, net                                                                                  |       | 9,273                 |       | 7,534 |   |
| Accrued interest  receivable                                                                                       |       | 9,315                 |       | 6,550 |   |
| Other assets                                                                                                       |       | 22,600                |       | 14,843 |   |
| Total assets                                                                                                       |       | $                     | 1,949,082  |   | $ | 1,518,425 |   |
| **Liabilities  and Stockholders’ Equity**                                                                     |       |                  |       |   |   |
| **Deposits**                                                                                                       |       |                  |       |   |   |
| Demand deposits                                                                                                    |       | $                     | 186,939    |   | $ | 188,554 |   |
| Savings and interest-bearing demand deposits                                                                       |       | 459,495               |       | 349,566 |   |
| Time deposits                                                                                                      |       | 959,507               |       | 705,386 |   |
| Total deposits                                                                                                     |       | $                     | 1,605,941  |   | $ | 1,243,506 |   |
| Securities sold  under agreement to repurchase and federal funds purchased                                         |       | 148,871               |       | 111,794 |   |
| Trust preferred  capital notes                                                                                     |       | 44,344                |       | 44,344 |   |
| Accrued interest  payable                                                                                          |       | 5,923                 |       | 3,003 |   |
| Other  liabilities                                                                                                 |       | 4,152                 |       | 3,960 |   |
| Commitments and  contingent liabilities                                                                            |       | —                |       | — |   |
| Total liabilities                                                                                                  |       | $                     | 1,809,231  |   | $ | 1,406,607 |   |
| **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 2006,  21,560,253; 2005, 14,049,602 |       | 21,560                |       | 14,050 |   |
| Surplus                                                                                                            |       | 31,231                |       | 36,066 |   |
| Retained  earnings                                                                                                 |       | 87,744                |       | 63,239 |   |
| Accumulated  other comprehensive loss, net                                                                         |       | (684                  | )          | (1,537 | ) |
| Total stockholders’ equity                                                                                    |       | $                     | 139,851    |   | $ | 111,818 |   |
| Total  liabilities and stockholders’ equity                                                                   |       | $                     | 1,949,082  |   | $ | 1,518,425 |   |

See Notes to Consolidated Financial Statements.

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**CONSOLIDATED STATEMENTS OF INCOME**

**(Dollars in thousands except per share data)**
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Interest  and dividend income:**                                         |       |                                       |       |   |   |   |   |
| Interest and fees on loans                                                 |       | $                                          | 115,405    |   | $ | 79,614 |   | $ | 51,814 |   |
| Interest and dividends on investment securities:                           |       |                                       |       |   |   |   |   |
| Taxable                                                                    |       | 8,225                                      |       | 5,726 |   | 5,479 |   |
| Tax-exempt                                                                 |       | 245                                        |       | 238 |   | 250 |   |
| Dividends                                                                  |       | 276                                        |       | 203 |   | 124 |   |
| Interest on deposits with other banks                                      |       | 55                                         |       | 30 |   | 10 |   |
| Interest on federal funds sold                                             |       | 1,086                                      |       | 667 |   | 321 |   |
| Total interest and dividend income                                         |       | $                                          | 125,292    |   | $ | 86,478 |   | $ | 57,998 |   |
| **Interest  expense:**                                                     |       |                                       |       |   |   |   |   |
| Deposits                                                                   |       | $                                          | 48,152     |   | $ | 26,432 |   | $ | 15,100 |   |
| Securities sold under agreement to repurchase and  federal funds purchased |       | 4,730                                      |       | 1,710 |   | 325 |   |
| Other borrowed funds                                                       |       | 506                                        |       | 423 |   | 15 |   |
| Trust preferred capital notes                                              |       | 3,099                                      |       | 1,246 |   | 891 |   |
| Total interest expense                                                     |       | $                                          | 56,487     |   | $ | 29,811 |   | $ | 16,331 |   |
| **Net  interest income**                                                   |       | $                                          | 68,805     |   | $ | 56,667 |   | $ | 41,667 |   |
| Provision for loan losses                                                  |       | 4,406                                      |       | 3,772 |   | 2,989 |   |
| Net interest income after provision for loan losses                        |       | $                                          | 64,399     |   | $ | 52,895 |   | $ | 38,678 |   |
| **Non-interest  income:**                                                  |       |                                       |       |   |   |   |   |
| Service charges and other fees                                             |       | $                                          | 3,226      |   | $ | 2,553 |   | $ | 1,749 |   |
| Non-deposit investment services commissions                                |       | 621                                        |       | 456 |   | 427 |   |
| Fees and net gains on loans held-for-sale                                  |       | 3,058                                      |       | 3,306 |   | 3,229 |   |
| Other                                                                      |       | 418                                        |       | 361 |   | 354 |   |
| Total non-interest income                                                  |       | $                                          | 7,323      |   | $ | 6,676 |   | $ | 5,759 |   |
| **Non-interest  expense:**                                                 |       |                                       |       |   |   |   |   |
| Salaries and employee benefits                                             |       | $                                          | 19,911     |   | $ | 17,321 |   | $ | 13,478 |   |
| Occupancy expense                                                          |       | 5,448                                      |       | 4,479 |   | 3,240 |   |
| Data processing                                                            |       | 1,954                                      |       | 1,553 |   | 1,314 |   |
| Other operating expense                                                    |       | 6,976                                      |       | 6,113 |   | 4,775 |   |
| Total non-interest expense                                                 |       | $                                          | 34,289     |   | $ | 29,466 |   | $ | 22,807 |   |
| Income before taxes on income                                              |       | $                                          | 37,433     |   | $ | 30,105 |   | $ | 21,630 |   |
| Provision for income taxes                                                 |       | 12,925                                     |       | 10,438 |   | 7,401 |   |
| **Net  income**                                                            |       | $                                          | 24,508     |   | $ | 19,667 |   | $ | 14,229 |   |
| Earnings per common share, basic                                           |       | $                                          | 1.14       |   | $ | 0.93 |   | $ | 0.72 |   |
| Earnings per  common share, diluted                                        |       | $                                          | 1.08       |   | $ | 0.87 |   | $ | 0.66 |   |

See Notes to Consolidated Financial Statements.

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## **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, 2003**                                                                               | ** ** | **$**                | **—** | ** **        | **$**      | **7,860**   | ** ** | **$**                  | **17,891** | ** **                                                | **$**      | **29,354**                | ** ** | **$**                                 | **(13**    | **)** | ** ** | ** ** | **$** | **55,092** | ** ** |
| Comprehensive  Income:                                                                                        |       |                 |       |              |       |        |       |                   |       |                                                      |       |                      |       |                                  |       |
| Net Income 2004                                                                                               |       |                 | ** ** | ** **        | ** ** | ** **  |       | 14,229                 |       |                                                      |       | $                         | 14,229     |                                  | 14,229     |   |
| Other  comprehensive income (loss), unrealized holding losses arising during the  period (net of tax of $274) |       |                 |       |              |       |        |       |                   |       | (506                                                      | )          | (506                      | )          | (506                                  | )          |
| Total  comprehensive income                                                                                   |       |                 |       |              |       |        |       |                   |       |                                                      |       | $                         | 13,723     |                                  |       |   |
| Five-for-four  stock split in form of a 25% stock dividend                                                    |       | —               |       | 2,206             |       | (2,206      | )          | —                 |       | —                                                    |       |                      |       | —                                |       |
| Cash paid in  lieu of fractional shares                                                                       |       | —               |       | —            |       | —      |       | (5                     | )          | —                                                    |       |                      |       | (5                                    | )          |
| Follow-on  offering, net                                                                                      |       | —               |       | 891               |       | 20,915      |       | —                 |       | —                                                    |       |                      |       | 21,806                                |       |
| Stock  options/warrants exercised                                                                             |       | —               |       | 83                |       | 449         |       | —                 |       | —                                                    |       |                      |       | 532                                   |       |
| Employee stock  purchase plan                                                                                 |       | —               |       | 6                 |       | 170         |       | —                 |       | —                                                    |       |                      |       | 176                                   |       |
| **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 income (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/warrants 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** | ** ** |

 

See Notes toConsolidated Financial Statements.

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Operating  Activities:**                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest received                                                                          |       | $                                          | 122,132    |   | $ | 83,840 |   | $ | 57,076 |   |
| Other income received                                                                      |       | 7,324                                      |       | 6,676 |   | 5,759 |   |
| Net change in loans  held-for-sale                                                         |       | 4,753                                      |       | (2,886 | ) | (6,149 | ) |
| Interest paid                                                                              |       | (53,567                                    | )          | (28,363 | ) | (15,800 | ) |
| Cash paid to suppliers  and employees                                                      |       | (39,195                                    | )          | (29,165 | ) | (21,540 | ) |
| Income tax benefit of  stock options/warrants exercised                                    |       | (812                                       | )          | (914 | ) | (279 | ) |
| Income taxes paid                                                                          |       | (13,531                                    | )          | (10,370 | ) | (7,530 | ) |
| Net cash  provided by operating activities                                                 |       | $                                          | 27,104     |   | $ | 18,818 |   | $ | 11,537 |   |
| **Cash Flows from Investing  Activities:**                                                 |       |                                       |       |   |   |   |   |
| Proceeds from  maturities and principal payments on securities held-to-maturity            |       | $                                          | 7,541      |   | $ | 9,519 |   | $ | 6,569 |   |
| Proceeds from  maturities and principal payments on securities available-for-sale          |       | 32,456                                     |       | 24,152 |   | 53,075 |   |
| Purchases of securities  held-to-maturity                                                  |       | (8,100                                     | )          | (12,151 | ) | (2,586 | ) |
| Purchases of securities  available-for-sale                                                |       | (91,341                                    | )          | (32,715 | ) | (71,636 | ) |
| Net increase in loans  made to customers                                                   |       | (363,978                                   | )          | (348,246 | ) | (273,920 | ) |
| Purchase of bank  premises and equipment                                                   |       | (3,182                                     | )          | (2,110 | ) | (1,589 | ) |
| Net cash used in  investing activities                                                     |       | $                                          | (426,604   | ) | $ | (361,551 | ) | $ | (290,087 | ) |
| **Cash Flows from Financing  Activities:**                                                 |       |                                       |       |   |   |   |   |
| Net increase in demand,  NOW, money market and savings accounts                            |       | $                                          | 108,314    |   | $ | 57,672 |   | $ | 20,541 |   |
| Net increase in time  deposits                                                             |       | 254,120                                    |       | 214,866 |   | 176,916 |   |
| Net increase in  securities sold under agreement to repurchase and federal funds purchased |       | 37,077                                     |       | 58,587 |   | 22,320 |   |
| Proceeds from issuance  of trust preferred capital notes                                   |       | —                                     |       | 25,774 |   | — |   |
| Proceeds from exercise  of stock options and warrants                                      |       | 2,418                                      |       | 1,690 |   | 708 |   |
| Proceeds from issuance  of capital stock                                                   |       | —                                     |       | — |   | 21,806 |   |
| Cash paid in lieu of  fractional shares                                                    |       | (3                                         | )          | (6 | ) | (5 | ) |
| Net cash  provided by financing activities                                                 |       | $                                          | 401,926    |   | $ | 358,583 |   | $ | 242,286 |   |
| Increase  (decrease) in cash and cash equivalents                                          |       | $                                          | 2,426      |   | $ | 15,850 |   | $ | (36,264 | ) |
| **Cash and Cash Equivalents:**                                                             |       |                                       |       |   |   |   |   |
| Beginning                                                                                  |       | 33,642                                     |       | 17,792 |   | 54,056 |   |
| Ending                                                                                     |       | $                                          | 36,068     |   | $ | 33,642 |   | $ | 17,792 |   |

SeeNotes to Consolidated Financial Statements.

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)**
| **Reconciliation of net income to net cash provided by** | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **operating activities:**                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                       |       | $                                          | 24,508     |   | $ | 19,667 |   | $ | 14,229 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:               |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                                    |       | 1,443                                      |       | 1,268 |   | 1,087 |   |
| Provision for loan losses                                                                        |       | 4,406                                      |       | 3,772 |   | 2,989 |   |
| Stock based compensation expense                                                                 |       | 257                                        |       | 161 |   | — |   |
| Deferred tax benefit                                                                             |       | (1,580                                     | )          | (1,196 | ) | (1,051 | ) |
| Amortization of security premiums and accretion of  discounts, net                               |       | (395                                       | )          | (193 | ) | (189 | ) |
| Origination of loans held-for-sale                                                               |       | (174,856                                   | )          | (202,344 | ) | (175,873 | ) |
| Sale of loans                                                                                    |       | 176,551                                    |       | 197,187 |   | 167,363 |   |
| Proceeds from gain on sale of loans                                                              |       | 3,058                                      |       | 2,271 |   | 2,361 |   |
| Increase in other assets                                                                         |       | (6,636                                     | )          | (1,009 | ) | (296 | ) |
| Increase in other liabilities                                                                    |       | 193                                        |       | 231 |   | 1,119 |   |
| Increase in accrued interest receivable                                                          |       | (2,765                                     | )          | (2,445 | ) | (733 | ) |
| Increase in accrued interest payable                                                             |       | 2,920                                      |       | 1,448 |   | 531 |   |
| **Net  cash provided by operating activities**                                                   |       | $                                          | 27,104     |   | $ | 18,818 |   | $ | 11,537 |   |
| **Supplemental  Schedule of Noncash Investing Activities:**                                      |       |                                       |       |   |   |   |   |
| Unrealized gain (loss)  on securities                                                            |       | $                                          | 1,312      |   | $ | (1,566 | ) | $ | (780 | ) |

SeeNotes to Consolidated Financial Statements.

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**Notes toConsolidated Financial Statements**

**Note 1. Nature of Banking Activities andSignificant Accounting Policies**

**Business**

OnDecember 22, 1999, Virginia Commerce Bancorp, Inc. (the “Company”) became theholding company for Virginia Commerce Bank (the “Bank”). The Company acquiredthe Bank through a share exchange in which the stockholders of the Bankreceived one share of the Company for each share of the Bank. The exchange wasa tax-free transaction for federal income tax purposes. The merger wasaccounted for on the same basis as a pooling-of-interests.

TheCompany provides loan and deposit products to commercial and retail customersin the Washington Metropolitan Area, with the primary emphasis on NorthernVirginia. The loan portfolio is generally collateralized by assets of thecustomers and is expected to be re-paid from cash flows or proceeds from thesale of selected assets of the borrowers.

**Principlesof Consolidation**

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries, the Bank, VCBI Capital Trust I, VCBI Capital TrustII, VCBI Capital Trust III and Northeast Land and Investment Company.  In consolidation, all significant intercompanyaccounts and transactions have been eliminated. FASB Interpretation No. 46 (R)requires that the Company no longer eliminate through consolidation the equityinvestments in VCBI Capital Trust I, II and III, by the parent company,Virginia Commerce Bancorp, Inc, which approximated $1.3 million at December 31,2006. The subordinated debt of the trusts is reflected as a liability of theCompany, and the common securities of the trusts as an other asset.

**Risks andUncertainties**

In its normal course of business, the Company encounters twosignificant 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.

Thedetermination of the allowance for loan losses is based on estimates that are particularlysusceptible to significant changes in the economic environment and marketconditions.  Management believes that, asof December 31, 2006, the allowance for loan losses is adequate based oninformation currently available.  Aworsening or protracted economic decline or substantial increase in interestrates, would increase the likelihood of losses due to credit and market risksand could create the need for substantial increases to the allowance for loanlosses.  The Company is subject to the regulationsof various regulatory agencies, which can change significantly from year toyear.  In addition, the Company undergoesperiodic examinations by regulatory agencies, which may subject it to furtherchanges based on the regulators’ judgments about information available to themat the time of their examination.

**Securities**

Debtsecurities that management has the positive intent and ability to hold tomaturity 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.

Purchasedpremiums and discounts are recognized in interest income using the interestmethod over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-salesecurities below their cost that are deemed to be other than temporary arereflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the tradedate and are determined using the specific identification method. In estimatingother-than-temporary impairment losses, management considers (1) the length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) the intent

33

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andability of the Company to retain its investment in the issuer for a period oftime sufficient to allow for any anticipated recovery in fair value.

**LoansHeld-for-Sale**

Loansheld-for-sale are carried at the lower of cost or market, determined in theaggregate.  Market value considerscommitment agreements with investors and prevailing market prices.  All loans originated by the Company’smortgage banking division are pre-sold and held-for-sale to outside investors,servicing released. Gains and losses on sales of mortgage loans are recognizedbased on the difference between the selling price and the carrying value of therelated mortgage loans sold.

**Loans**

TheCompany grants mortgage, commercial and consumer loans to customers.  A substantial portion of the loan portfoliois represented by real estate loans.  Theability of the Company’s debtors to honor their contracts is dependent upon thereal estate and general economic conditions of the Company’s market area.

Loansthat management has the intent and ability to hold for the foreseeable futureor until maturity or pay-off are reported at their outstanding unpaid principalbalances adjusted for the allowance for loan losses and any deferred fees orcosts on originated loans.  Interestincome is accrued on the unpaid principal balance.  Loan origination fees, net of certain originationcosts, are deferred and recognized as an adjustment of the related loan yieldusing the interest method.

Theaccrual of interest on real estate and commercial loans is discontinued at thetime the loan is 90 days delinquent unless the credit is well-secured and inthe process of collection.  Installmentloans are typically charged-off no later than 180 days past due.  In all cases, loans are placed on nonaccrualor charged-off at an earlier date if collection of principal or interest isconsidered doubtful.

Allinterest accrued but not collected for loans that are placed on nonaccrual orcharged 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.

**Allowancefor Loan Losses**

Theallowance for loan losses is established as losses are estimated to haveoccurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowancewhen management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are creditedto the allowance.

Theallowance for loan losses is evaluated on a regular basis by management and isbased upon management’s periodic review of the collectibility of the loans inlight of historical experience, the nature and volume of the loan portfolio,adverse situations that may affect the borrower’s ability to repay, estimatedvalue of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation 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 toindividually allocate an allowance for loans identified as impaired. Impairmenttesting includes consideration of the borrower’s overall financial condition,resources and payment record, support available from financial guarantors andthe fair market value of collateral.

Aloan is considered impaired when, based on current information and events, itis probable that the Company will be unable to collect the scheduled paymentsof principal or interest when due according to the contractual terms of theloan agreement. Factors considered by management in determining impairmentinclude payment status, collateral value, and the probability of collectingscheduled principal and interest payments when due.  Loans that experience insignificant paymentdelays and payment shortfalls generally are not classified as impaired.  Management determines the significance of paymentdelays and payment shortfalls on a case-by-case basis, taking into considerationall of the circumstances surrounding the loan and the borrower, including thelength of the delay, the reasons for the delay, the borrower’s prior paymentrecord, and the amount of the shortfall in relation to the

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principaland interest owed.  Impairment ismeasured on a loan-by-loan basis for commercial and construction loans byeither the present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent. These factors are combined to estimate the probability and severity ofinherent losses.  When impairment isidentified, then a specific reserve is established based on the Company’scalculation of the loss embedded in the individual loan. Large groups ofsmaller balance, homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment. The formula allowance is used for estimatingthe loss on internally risk rated loans exclusive of those identified asimpaired. The loans meeting the criteria for substandard, doubtful and loss, aswell as impaired loans, are segregated from performing loans within the portfolio.  Internally classified loans are then groupedby loan type (commercial, commercial real estate, commercial construction,residential real estate, residential construction or installment).  Each loan type is assigned an allowancefactor based on management’s estimate of the associated risk, complexity andsize of the individual loans within the particular loan category.  Classified loans are assigned a higherallowance factor than non-rated loans due to management’s concerns regardingtheir collectibility or management’s knowledge of particular elementssurrounding the borrower.  Allowancefactors grow with the worsening of the internal risk rating.  The unallocated formula is used to estimate theloss of non-classified loans. These un-criticized loans are also segregated byloan type and allowance factors are assigned by management based ondelinquencies, 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 captures losseswhose impact on the portfolio have occurred but have 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. See Note 4 for information regarding the allowance for loanlosses.

**BankPremises and Equipment**

Premisesand equipment are stated at cost less accumulated depreciation andamortization.  Land is carried at cost.Furniture, fixtures, equipment and computer software are depreciated over theirestimated useful lives, generally from three to seven years; leaseholdimprovements are amortized over the lives of the respective leases or theestimated useful life of the leasehold improvement, generally from five to tenyears.  Depreciation and amortization arerecorded on the straight-line and declining-balance methods.

Costsof maintenance and repairs are charged to expense as incurred.  The costs of replacing structural parts ofmajor units are considered individually and are expensed or capitalized as thefacts dictate.

**IncomeTaxes**

Deferredincome tax assets and liabilities are determined using the liability (orbalance sheet) method. Under this method, the net deferred tax asset orliability is determined based on the tax effects of the temporary differencesbetween book and tax bases of the various balance sheet assets and liabilitiesand gives current recognition to changes in tax rates and laws.

**AdvertisingCost**

TheCompany follows the policy of charging the production costs of advertising toexpense as incurred. Total advertising expense was $596 thousand, $545 thousandand $283 thousand in 2006, 2005 and 2004, respectively.

**Use ofEstimates**

In preparing consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities as of the date of the balance sheetand the reported amounts of revenues and expenses during the reported 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.

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**Rate Lock Commitments**

TheCompany enters into commitments to originate mortgage loans whereby theinterest rate on the loans is determined prior to funding (rate lock commitments).Rate lock commitments on mortgage loans that are intended to be sold areconsidered to be derivatives. The period of time between issuance of a loancommitment and closing and the sale of the loan generally ranges from thirty toninety days. The Company protects itself from changes in interest rates throughthe use of best efforts forward delivery commitments, whereby the Companycommits to sell a loan at the time the borrower commits to an interest ratewith the intent that the buyer has assumed interest rate risk on the loan. As aresult, the Company is not exposed to losses nor will it realize significantgains related to its rate lock commitments due to changes in interest rates.The correlation between the rate lock commitments and the best effortscontracts is very high due to their similarity. Because of this highcorrelation, no gain or loss occurs on the rate lock commitments.

**Cash andCash Equivalents**

Forpurposes of reporting cash flows, cash and cash equivalents include cash onhand, amounts due from banks, and federal funds sold.  Generally, federal funds are sold andpurchased for one-day periods.

**EarningsPer Share**

Basic earnings pershare represents income available to common stockholders divided by theweighted-average number of common shares outstanding during the period.  Diluted earnings per share reflectsadditional common shares that would have been outstanding if dilutive potentialcommon shares had been issued, as well as any adjustment to income that wouldresult from the assumed issuance. Potential common shares that may be issued by the Company relate solelyto outstanding stock options and warrants, and are determined using thetreasury method.

**ComprehensiveIncome**

Accountingprinciples generally require that recognized revenue, expenses, gains andlosses be included in net income. Although certain changes in assets andliabilities, such as unrealized gains and losses on available-for-salesecurities, are reported as a separate component of the equity section of thebalance sheet, such items, along with net income, are components ofcomprehensive income.

**Stock Compensation Plan**

AtDecember 31, 2006, the Company has a stock-based compensation plan which is accountedfor in accordance withFAS No. 123 (R). Prior to 2006, the Company accounted for the plan under therecognition and measurement principles of APB Opinion 25, “Accounting for StockIssued to Employees,”**and relatedinterpretations. As such, no stock-based compensation expense was reflected innet income, as all options granted under the plan had an exercise price equalto the market value of the underlying common stock on the date of the grant. OnDecember 29, 2005, the Company accelerated the vesting of all outstandingoptions under the plan in order to avoid a total of approximately $2.3 millionin expense in future periods following the adoption of FASB Statement No. 123(R) effective January 1, 2006, using the modified prospective method and assuch, results for prior periods have not been restated. The following tableillustrates the effect on net income and earnings per share for the twelvemonths ended December 31, 2005 and 2004 had the fair value recognitionprovisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,”**been adopted in 2005.

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| (Dollars in thousands except per share amounts)                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Net  income, as reported**                                                                                          |       | $        | 19,667     |     | $          | 14,229 |   |
| Deduct: total  stock-based employee compensation expense determined based on fair value  method of awards, net of tax |       | (3,124   | )          | (593     | )          |
| **Pro  forma net income**                                                                                             |       | $        | 16,543     |     | $          | 13,636 |   |
| ** **                                                                                                            |       |     |       |     |       |
| **Basic  earnings per share:**                                                                                        |       |     |       |     |       |
| As reported                                                                                                           |       | $        | 0.93       |     | $          | 0.72 |   |
| Pro forma                                                                                                             |       | $        | 0.79       |     | $          | 0.69 |   |
|                                                                                                                  |       |     |       |     |       |
| ** Diluted earning per share:**                                                                                  |       |     |       |     |       |
| As reported                                                                                                           |       | $        | 0.87       |     | $          | 0.66 |   |
| Pro forma                                                                                                             |       | $        | 0.73       |     | $          | 0.63 |   |

 

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

#### **RecentAccounting Pronouncements**

In February 2006,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 155, “Accounting for Certain Hybrid FinancialInstruments – an amendment of FASB Statements No. 133 and 140” (SFAS 155).  SFAS 155 permits fair value measurement ofany hybrid financial instrument that contains an embedded derivative thatotherwise would require bifurcation.  TheStatement also clarifies which interest-only strips and principal-only stripsare not subject to the requirements of Statement 133.  It establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives. SFAS 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The Company does not expect the implementation of SFAS 155to have a material impact on its consolidated financial statements.

In March 2006, theFASB issued Statement of Financial Accounting Standards No. 156, “Accountingfor Servicing of Financial Assets – an amendment of FASB Statement No. 140”(SFAS 156).  SFAS 156 requires an entityto recognize a servicing asset or servicing liability each time it undertakesan obligation to service a financial asset by entering into certain servicingcontracts.  The Statement also requiresall separately recognized servicing assets and servicing liabilities to beinitially measured at fair value, if practicable.  SFAS 156 permits an entity to choose betweenthe amortization and fair value methods for subsequent measurements.  At initial adoption, the Statement permits aone-time reclassification of available for sale securities to tradingsecurities by entities with recognized servicing rights.  SFAS 156 also requires separate presentationof servicing assets and servicing liabilities subsequently measured at fairvalue in the statement of financial position and additional disclosures for allseparately recognized servicing assets and servicing liabilities.  This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after September 15,2006.  The Company does not expect theimplementation of SFAS 155 to have a material impact on its consolidatedfinancial statements.

In June 2006,the FASB issued Interpretation No. 48, *“*Accounting forUncertainty in Income Taxes: An Interpretation of FASB Statement No. 109*”*(FIN 48). FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with SFAS 109. The Interpretation prescribes a recognition threshold and measurementprinciples for the financial statement recognition and measurement of taxpositions taken or expected to be taken on a tax return that are not certain tobe realized.  FIN 48 is effective forfiscal years beginning after December 15, 2006. The Company does notexpect FIN 48 to have a material impact on its consolidated  financial statements*.*

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (SFAS 157). SFAS 157 defines fair value, establishes aframework for measuring fair value in

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generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS 157 does not requireany new fair value measurements but may change current practice for someentities.  This Statement is effectivefor financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those years. The Company does not expect theimplementation of SFAS 157 to have a material impact on its financialstatements*.*

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS 158).  SFAS 158 requires an employer to recognizethe overfunded or underfunded status of a defined benefit postretirement planas an asset or liability in its statement of financial position and torecognize changes in that funded status in the year in which the changes occurthrough comprehensive income.  TheCompany does not have a defined benefit plan or post retirement plan andtherefore, the statement will not have an impact on the Company’s consolidatedfinancial statements.

In September 2006,the Securities and Exchange Commission (SEC) released Staff Accounting BulletinNo. 108 (SAB 108).  SAB 108 expresses theSEC staff’s views regarding the process of quantifying financial statementmisstatements.    SAB 108 expresses theSEC staff’s view that a registrant’s materiality evaluation of an identifiedunadjusted error should quantify the effects of the error on each financialstatement and related financial statement disclosures and that prior yearmisstatements should be considered in quantifying misstatements in current yearfinancial statements.  SAB 108 alsostates that correcting prior year financial statements for immaterial errorswould not require previously filed reports to be amended.  Such correction may be made the next time theregistrant files the prior year financial statements.  The cumulative effect of the initialapplication should be reported in the carrying amounts of assets andliabilities as of the beginning of that fiscal year and the offsettingadjustment should be made to the opening balance of retained earnings for that year.  Registrants should disclose the nature andamount of each individual error being corrected in the cumulativeadjustment.  The SEC staff encouragesearly application of the guidance in SAB 108 for interim periods of the firstfiscal year ending after November 15, 2006**.**The Companydoes not expect application of SAB 108 to have a material impact on itsfinancial statements.

In September 2006,the Emerging Issues Task Force issued EITF 06-4, “Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements.” This consensus concludes that for a split-dollarlife insurance arrangement within the scope of this Issue, an employer shouldrecognize a liability for future benefits in accordance with FASB Statement No.106 (if, in substance, a postretirement benefit plan exits) or APB Opinion No.12 (if the arrangement is, in substance, an individual deferred compensationcontract) based on the substantive agreement with the employee. The consensusis effective for fiscal years beginning after December 15, 2007. The Company iscurrently evaluating the effect that EITF No. 06-4 will have on itsconsolidated financial statements when implemented.

In September 2006,The Emerging Issues Task Force issued EITF 06-5, “Accounting for Purchases ofLife Insurance- Determining the Amount That Could Be Realized in Accordancewith FASB Technical Bulletin No. 85-4.” This consensus concludes that apolicyholder should consider any additional amounts included in the contractualterms of the insurance policy other than the cash surrender value indetermining the amount that could be realized under the insurance contract. Aconsensus also was reached that a policyholder should determine the amount thatcould be realized under the life insurance contract assuming the surrender ofan individual-life by individual-life policy (or certificate by certificate ina group policy). The consensuses are effective for fiscal years beginning afterDecember 15, 2006. The Company is currently evaluating the effect that EITF No.06-5 will have on its consolidated financial statements when implemented.

**Stockholders’Equity**

A three-for-two stock split in the form of a 50% stockdividend was declared on May 12, 2006. This transaction was recorded by increasing common stock by $7.1 millionand decreasing surplus by $7.1 million.

A five-for-four stock split in the form of a 25% stockdividend was declared on March 23, 2005. This transaction was recorded byincreasing common stock by $2.8 million and decreasing surplus by $2.8 million.

A five-for-four stock split in the form of a 25% stockdividend was declared on June 3, 2004. This transaction was recorded byincreasing common stock by $2.2 million and decreasing surplus by $2.2 million.

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**Note 2. Securities**

Amortized cost and fair value of the securitiesavailable-for-sale and held-to-maturity as of December 31, 2006 and 2005, areas follows (dollars in thousands):
| **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 |   |

 
| **December 31, 2005**                   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  (Losses)** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|------------------------------|------------|---------------------------------|------------|---------------------|------------|
| **Available-for-sale:**                           |       |                |       |                         |       |                            |       |                |       |
| U.S. Government  Agency obligations               |       | $                   | 119,076    |                         | $          | 44                              |       | $                   | (2,496     | ) | $ | 116,624 |   |
| Domestic  corporate debt obligations              |       | 6,000               |       | 43                           |       | —                          |       | 6,043               |       |
| Obligations of  states and political subdivisions |       | 1,307               |       | 45                           |       | —                          |       | 1,352               |       |
| Restricted stock:                                 |       |                |       |                         |       |                            |       |                |       |
| Federal Reserve Bank                              |       | 1,442               |       | —                       |       | —                          |       | 1,442               |       |
| Federal Home Loan Bank                            |       | 2,277               |       | —                       |       | —                          |       | 2,277               |       |
| Community Bankers’ Bank                      |       | 55                  |       | —                       |       | —                          |       | 55                  |       |
|                                              |       | $                   | 130,157    |                         | $          | 132                             |       | $                   | (2,496     | ) | $ | 127,793 |   |
| **Held-to-maturity:**                             |       |                |       |                         |       |                            |       |                |       |
| U.S. Government  Agency obligations               |       | $                   | 35,798     |                         | $          | 29                              |       | $                   | (898       | ) | $ | 34,929 |   |
| Obligations of  state and political subdivisions  |       | 8,963               |       | 59                           |       | (144                            | )          | 8,878               |       |
| Domestic  corporate debt obligations              |       | 499                 |       | 3                            |       | —                          |       | 502                 |       |
|                                              |       | $                   | 45,260     |                         | $          | 91                              |       | $                   | (1,042     | ) | $ | 44,309 |   |

 

39

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The amortized cost andfair value of the securities, including restricted stock, as of December 31,2006 by contractual maturity, are shown below (dollars in thousands):
| **December 31, 2006**         | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|---------------------|------------|
| **Available-for-sale:**                 |       |                    |       |                |       |
| Due within one  year                    |       | $                       | 36,541     |                | $          | 36,246 |   |
| Due after one  year through five years  |       | 116,182                 |       | 115,605             |       |
| Due after five  years through ten years |       | 16,495                  |       | 16,363              |       |
| Due after ten  years                    |       | 15,623                  |       | 15,574              |       |
| Restricted stock                        |       | 4,531                   |       | 4,531               |       |
|                                    |       | $                       | 189,372    |                | $          | 188,319 |   |
| **Held-to-maturity:**                   |       |                    |       |                |       |
| Due after one  year through five years  |       | $                       | 16,907     |                | $          | 16,526 |   |
| Due after five  years through ten years |       | 23,965                  |       | 23,572              |       |
| Due after ten  years                    |       | 5,012                   |       | 4,984               |       |
|                                    |       | $                       | 45,884     |                | $          | 45,082 |   |

 

The amortized cost of securities pledged as collateralfor repurchase agreements, certain public deposits, and other purposes were$159.2 million and $92.8 million at December 31, 2006 and 2005, 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 which thefair value has been less than cost, (2) the financial condition and near-termprospects of the issuer, and (3) the intent and ability of the Company toretain its investment in the issuer for a period of time sufficient to allowfor any anticipated recovery in fair value.

Provided below is a summary of securities which werein an unrealized loss position at December 31, 2006, and 2005. Of the totalsecurities in an unrealized loss position at December 31, 2006, 93.7%, orsixty-two positions, were U.S. Government Agency securities with maturitiesranging from one month to thirteen years. As the Company has the ability andintent to hold these securities until maturity, or until such time as the valuerecovers, 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, 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 | ) |

 

40

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** **
| ** **                                                                | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Longer** | ** ** | **Total**       | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|-----------------|------------|
| **At December 31, 2005  (Dollars in thousands)** | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**                 | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| **Available-for-sale:**                                                   |       |                                   |       |                                   |       |            |       |   |   |   |   |   |   |
| U.S. Government  Agency obligations                                       |       | $                                      | 42,157     |                                   | $          | (424            | )          | $ | 73,006 |   | $ | (2,072 | ) | $ | 115,163 |   | $ | (2,496 | ) |
| ** **                                                                |       | $                                      | 42,157     |                                   | $          | (424            | )          | $ | 73,006 |   | $ | (2,072 | ) | $ | 115,163 |   | $ | (2,496 | ) |
| **Held-to-maturity:**                                                     |       |                                   |       |                                   |       |            |       |   |   |   |   |   |   |
| U.S. Government  Agency obligations                                       |       | $                                      | 34,140     |                                   | $          | (898            | )          | $ | — |   | $ | — |   | $ | 34,140 |   | $ | (898 | ) |
| Obligations of  states/political subdivisions                             |       | 2,691                                  |       | (22                                    | )          | 3,462           |       | (122 | ) | 6,153 |   | (144 | ) |
|                                                                      |       | $                                      | 36,831     |                                   | $          | (920            | )          | $ | 3,462 |   | $ | (122 | ) | $ | 40,293 |   | $ | (1,042 | ) |

 

**Note 3. Loans**

Major classifications of loans, excluding loansheld-for-sale, are summarized as follows (dollars in thousands):
| ** **                             | ** ** | **2006** | ** **    | **2005**   | ** ** |
|----------------------------------------|------------|----------|---------------|------------|------------|
| Commercial                             |       | $        | 190,527       |       | $          | 122,243 |   |
| Real estate -  1-4 family residential  |       | 193,247  |          | 160,355    |       |
| Real estate -  multifamily residential |       | 57,913   |          | 58,567     |       |
| Real estate -  nonfarm, nonresidential |       | 689,110  |          | 559,866    |       |
| Real estate -  construction            |       | 515,040  |          | 380,997    |       |
| Consumer                               |       | 6,997    |          | 7,386      |       |
| **Total  Loans**                       | ** ** | **$**    | **1,652,834** | ** ** | **$**      | **1,289,414** | ** ** |
| Less unearned  income                  |       | 4,906    |          | 5,338      |       |
| Less allowance  for loan losses        |       | 18,101   |          | 13,821     |       |
| **Loans, net**                         | ** ** | **$**    | **1,629,827** | ** ** | **$**      | **1,270,255** | ** ** |

 

As of December 31, 2006and 2005, there were $665 thousand and $591 thousand, respectively, in checkingaccount overdrafts that were reclassified on the balance sheet as loans.

**Note 4. Allowance for Loan Losses**

An analysis of the allowance for loan losses for theyears ended December 31, 2006, 2005 and 2004 is shown below (dollars inthousands):
| ** **                         | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Allowance, at  beginning of period |       | $        | 13,821     |       | $          | 10,402     |       | $ | 7,457 |   |
| Provision  charged against income  |       | 4,406    |       | 3,772      |       | 2,989      |       |
| Recoveries added  to reserve       |       | 63       |       | 9          |       | 18         |       |
| Losses charged  to reserve         |       | (189     | )          | (362       | )          | (62        | )          |
| **Allowance, at end of period**    | ** ** | **$**    | **18,101** | ** ** | **$**      | **13,821** | ** ** | **$** | **10,402** | ** ** |

** **

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Information about impaired loans as of and for theyears ended December 31, 2006, 2005 and 2004, is as follows (dollars inthousands):
| ** **                                                                        | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
| Impaired loans  for which an allowance has been provided                          |       | $        | 3,910      |       | $          | 1,980     |       | $ | 1,177 |   |
| Impaired loans  for which no allowance has been provided                          |       | —   |       | —     |       | 15        |       |
| **Total impaired loans**                                                          | ** ** | **$**    | **3,910**  | ** ** | **$**      | **1,980** | ** ** | **$** | **1,192** | ** ** |
| Allowance  provided for impaired loans, included in the allowance for loan losses |       | 507      |       | 245        |       | 400       |       |
| Average balance  in impaired loans                                                |       | $        | 4,017      |       | $          | 2,035     |       | $ | 1,782 |   |
| Interest income recognized                                                        |       | —   |       | —     |       | —    |       |

 

Non-accrual loans excluded from impaired loandisclosure under FASB 114 amounted to $10 thousand, $14 thousand, and $18thousand at December 31, 2006, 2005 and 2004, respectively.  If interest on these loans had been accruedas interest income, such income would have approximated $1 thousand, $3thousand and $1 thousand for the years ended December 31, 2006, 2005 and 2004,respectively. There were no loans past due 90 days or more, and still accruinginterest at December 31, 2006. Loans past due 90 days or more, and stillaccruing interest totaled $7 thousand at December 31, 2005.

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

Premisesand equipment are stated at cost less accumulated depreciation at December 31,2006 and 2005, as follows (dollars in thousands):
| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                            |       | $        | 1,839      |     | $          | 1,839 |   |
| Buildings                                       |       | 2,292    |       | 2,275    |       |
| Furniture,  fixtures and equipment              |       | 10,593   |       | 8,713    |       |
| Leasehold  improvements                         |       | 3,824    |       | 2,799    |       |
| Construction in  progress                       |       | 500      |       | 242      |       |
| Total Cost                                      |       | $        | 19,048     |     | $          | 15,868 |   |
| Less accumulated  depreciation and amortization |       | 9,775    |       | 8,334    |       |
| Net premises and  equipment                     |       | $        | 9,273      |     | $          | 7,534 |   |

 

Depreciation and amortization expense onpremises and equipment amounted to $1.4 million, $1.3 million and $1.1 millionin 2006, 2005 and 2004, respectively.

**Note 6. Time Deposits**

The aggregate amount of time deposits with a minimumdenomination of $100 thousand each, was approximately $490.7 million and $338.2million at December 31, 2006 and 2005, respectively. Scheduled maturities ofall time deposits at December 31, 2006, are as follows (dollars in thousands):
| 2007   |       | $      | 880,329     |       |
|--------|------------|--------|-------------|------------|
| 2008   |       | 41,684 |        |
| 2009   |       | 21,108 |        |
| 2010   |       | 6,195  |        |
| 2011   |       | 10,191 |        |
|   | ** ** | **$**  | **959,507** | ** ** |

 

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**Note 7. Securities Sold UnderAgreements To Repurchase**

Securities sold underagreements to repurchase, which are classified as secured borrowings, representfunds of numerous demand deposit customers, and mature one day from thetransaction date.  Securities sold underagreements to repurchase are reflected at the amount of cash received and arecollateralized by securities in the Company’s investment securities portfolio.

**Note 8. Income Taxes**

Net deferred tax assets consist of thefollowing components at December 31, 2006 and 2005 (dollars in thousands):
| ** **                             | ** ** | **2006** | ** ** | **2005**   | ** ** |
|----------------------------------------|------------|----------|------------|------------|------------|
| **Deferred  tax assets:**              |       |     |       |       |       |
| Allowance for  loan losses             |       | $        | 6,336      |       | $          | 4,778 |   |
| Non-accrual  loans                     |       | 2        |       | 6          |       |
| Securities  available-for-sale         |       | 368      |       | 828        |       |
| Bank premises  and equipment           |       | 365      |       | 347        |       |
| Non-qualified  incentive stock options |       | 6        |       | —     |       |
|                                   |       | $        | 7,077      |       | $          | 5,959 |   |
| **Deferred  tax liabilities:**         |       |     |       |       |       |
| Federal Home  Loan Bank stock          |       | 2        |       | 2          |       |
| Deferred loan  fees                    |       | —   |       | 2          |       |
| ** **                             | ** ** | **2**    | ** ** | **4**      | ** ** |
| **Net deferred tax assets**            | ** ** | **$**    | **7,075**  | ** ** | **$**      | **5,955** | ** ** |

 

The provision for income tax and itscomponents for the years ending December 31, 2006, 2005, and 2004 are asfollows (dollars in thousands):
| **December 31,** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Current tax  expense  |       | $        | 14,505     |     | $          | 11,634   |       | $ | 8,452 |   |
| Deferred tax  benefit |       | (1,580   | )          | (1,196   | )          | (1,051   | )          |
|                  |       | $        | 12,925     |     | $          | 10,438   |       | $ | 7,401 |   |

 

The income tax provision differs from theamount of income tax determined by applying the U.S. Federal income tax rate topretax income from continuing operations for the years ended December 31, 2006,2005 and 2004, due to the following (dollars in thousands):
| **December 31,**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed  “expected” tax expense at 35%    |       | $        | 13,101     |     | $          | 10,536   |       | $ | 7,571 |   |
| Increase  (decrease) in income taxes resulting from: |       |     |       |     |       |     |       |
|  Nondeductible  expense                         |       | 53       |       | 75       |       | 16       |       |
|  Nontaxable  income                             |       | (229     | )          | (173     | )          | (186     | )          |
|                                                 |       | $        | 12,925     |     | $          | 10,438   |       | $ | 7,401 |   |

 

**Note 9. Earnings Per Share**

The following shows the weighted averagenumber of shares used in computing earnings per share and the effect on theweighted average number of shares of diluted potential common stock. For theyears reported, the weighted average number of shares have been adjusted togive effect to stock dividends and splits. Potential dilutive common stock had no effect on income available tocommon stockholders.

43

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| ** **                      | ** ** | **2006**   | ** ** | **2005**                   | ** ** | **2004**   | ** ** |
|---------------------------------|------------|------------|------------|----------------------------|------------|------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| **Basic  earnings per share**   |       | 21,455,239 |       | $                          | 1.14       |       | 21,016,032 |   | $ | 0.93 |   | 19,818,932 |   | $ | 0.72 |   |
| Effect of  dilutive securities: |       |       |       |                       |       |       |       |   |   |   |   |   |   |
|  Stock options             |       | 1,230,509  |       |                       |       | 1,467,683  |       |   |   | 1,590,118 |   |   |   |
|  Warrants                  |       | —     |       |                       |       | —     |       |   |   | 86,202 |   |   |   |
| **Diluted earnings per share**  |       | 22,685,748 |       | $                          | 1.08       |       | 22,483,715 |   | $ | 0.87 |   | 21,495,252 |   | $ | 0.66 |   |

 

Stock options for156,400 shares of common stock were not included in computing diluted earningsper share in 2006, because their effects were anti-dilutive.  There were no anti-dilutive shares in 2004and 2005.

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

The Company leases office space for seventeen of itsbranch locations, its operations, mortgage lending, and construction lendingdepartments and has entered into leases for 5 additional branch locations to beopened between 2007 and 2008. These non-cancellable agreements, which expirethrough December 2017, in some instances require payment of certain operatingcharges. Generally, all leases contain renewal options of one to two additionalfive-year terms.  The total minimum leasecommitment, adjusted for the effect of annual fixed increases or the ConsumerPrice Index, at December 31, 2006, is $24.2 million, due as follows (dollars inthousands):
| Due in the year ending  December 31, |   | 2007       |   | $      | 2,493  |   |
|--------------------------------------|--------|------------|--------|--------|--------|--------|
|                                 |   | 2008       |   | 2,868  |   |
|                                 |   | 2009       |   | 2,680  |   |
|                                 |   | 2010       |   | 2,647  |   |
|                                 |   | 2011       |   | 1,973  |   |
|                                 |   | Thereafter |   | 11,514 |   |

 

The total lease expense was $2.5 million, $1.9 million and $1.3 millionin 2006, 2005 and 2004, respectively. In the normal course of business, theCompany makes various commitments and incurs certain contingent liabilitiesthat are not presented in the accompanying financial statements.  The Company does not anticipate any materiallosses as a result of the commitments and contingent liabilities.

**Note 11. Loans to Officers andDirectors**

Officers, directors and/or their related businessinterests are loan customers in the ordinary course of business.  In management’s opinion, these loans are madeon substantially the same terms as those prevailing at the time for comparableloans with other persons and do not involve more than normal risk ofcollectibility or present other unfavorable features.  The aggregate amount outstanding on suchloans at December 31, 2006 and 2005, was $28.2 million and $17.7 million,respectively. During 2006, new loans and advances amounted to $13.2 million andrepayments of $2.7 million were made.

**Note 12. Stock Option Plan**

The Company’s current plan, adopted May 29, 1998, andamended in May 2001, is a qualified Incentive Stock Option Plan, that isshareholder approved, and provides for the granting of options to purchase upto 1,684,185 shares of common stock at a price to be determined by the Board ofDirectors at the date of grant, but in any event no less than 100% of the fairmarket value. Options outstanding prior to May 29, 1998, were granted under theCompany’s plan adopted in 1988 which was replaced by the current plan. Optionsare awarded to employees and 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, vested overthree years, while options granted since December 31, 2002, vested over fiveyears.

Includedin salaries and employee benefits expense for the twelve months ended December31, 2006, is $217 thousand of stock-based compensation expense which is basedon the estimated fair value of 156,400 options

44

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grantedduring the period, amortized on a straight-line basis over a five yearrequisite service period.  As of December31, 2006, there was $987 thousand remaining of total unrecognized compensationexpense related to the 156,357 non-vested stock option awards which will berecognized over the remaining requisite service period. There was nostock-based compensation cost recognized in 2004 and $161 thousand in 2005.

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 ineffect at the time of grant. During 2006, the Company took into considerationguidance under 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 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 2004 and 2005, expected term wasbased on the grants expiration date.
|                           | ** ** | **2006**       | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------------|------------|----------|------------|----------|------------|
| Expected  volatility      |       | 21.91%         |       | 21.98%   |       | 29.61%   |       |
| Expected  dividends       |       | .00%           |       | .02%     |       | .03%     |       |
| Expected term  (in years) |       | 7.5            |       | 10.0     |       | 10.0     |       |
| Risk-free rate            |       | 4.42% to 4.75% |       | 4.22%    |       | 4.37%    |       |

 

A summary of option activity under the Plan as ofDecember 31, 2006, and changes during the year then ended is presented below:
| Options                           | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | 1,994,547                  |       | $                                       | 5.04       |                                                 |       |                                    |       |   |
| Granted                           |       | 156,357                    |       | $                                       | 20.59      |                                                 |       |                                    |       |   |
| Exercised                         |       | 351,122                    |       | $                                       | 2.89       |                                                 |       |                                    |       |   |
| Forfeited                         |       | 4,522                      |       | $                                       | 18.39      |                                                 |       |                                    |       |   |
| Outstanding at  December 31, 2006 |       | 1,795,260                  |       | $                                       | 6.93       |                                                 | 5.0 years  |                                    | $          | 23,249 |   |
| Exercisable at December  31, 2006 |       | 1,641,860                  |       | $                                       | 5.65       |                                                 | 4.6 years  |                                    | $          | 23,364 |   |

 

Theweighted-average grant date fair value of options granted during the years2006, 2005 and 2004 was $7.70, $6.67 and $6.47, respectively. The totalintrinsic value of options exercised during the years ended December 31, 2006,2005 and 2004, was $8.8 million, $4.8 million and $2.2 million, respectively.

A further summary about the options outstanding andexercisable at December 31, 2006 is provided in the following table:
| Options Outstanding and Exercisable | ** ** |
|----------------------------------------------------|------------|
| **Range of Exercise  Prices**            | ** ** | **Number Of Options** | ** ** | **Remaining  Contractual Life** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $1.00 to $2.31                                     |       | 144,753 |   | 0.1 years |   | $ | 0.83 |   |
| $2.32 to $2.79                                     |       | 656,293 |   | 3.0 years |   | 1.75 |   |
| $2.80 to $5.46                                     |       | 0 |   | 0 years |   | 0 |   |
| $5.47 to $7.82                                     |       | 399,026 |   | 5.6 years |   | 4.44 |   |
| $7.83 to $23.74                                    |       | 441,788 |   | 7.7 years |   | 14.11 |   |
| **$1.00 to $23.74**                                | ** ** | **1,641,860** | ** ** | **4.6 years** | ** ** | **$** | **5.65** | ** ** |

 

All options granted, available under the current Plan,and exercisable have been adjusted for giving retroactive effect to athree-for-two stock split in the form of 50% stock dividend in 2006. In January2007, a total of 116,400 options

45

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were granted to fifty-nine officers and six outsidedirectors of the Company at an exercise price of $19.35 per share and with afive year vesting period.

In September 2003, the Company adopted an EmployeeStock Purchase Plan. Under the plan a total of 327,238 shares of common stock,as adjusted for stock dividends and splits, were reserved for issuance toeligible employees at a price equal to at least 85% of the fair market value ofthe shares of common stock on the date of grant. Grants each year expire at theend of that fiscal year if not exercised by the employee. On September 24,2003, eligible employees were granted the right to purchase 19,026 shares at aprice of $23.18, as adjusted, which was equal to 100% of the fair market valueof the shares at that time. Of the total grant, 8,433 were purchased. OnJanuary 10, 2004, rights to purchase 27,035 shares of common stock were grantedat a price of $21.38, as adjusted, which was equal to 85% of the fair marketvalue of the shares at that time. Of the total grant, 6,058 were purchased. OnJanuary 18, 2005, rights to purchase 28,551 shares of common stock were grantedat a price of $19.72, as adjusted, which was equal to 85% of the fair marketvalue of the shares at that time. Of the total grant, 11,096 were purchased. OnJanuary 11, 2006, rights to purchase 36,278 shares of common stock were grantedat a price of $17.24, as adjusted, which was equal to 85% of the fair marketvalue of the shares at that time. Of the total grant, 13,265 shares werepurchased.

Included in salaries and employee benefits expense forthe twelve months ended December 31, 2006, is $40 thousand of stock-basedcompensation expense related to the 15% discount on the 13,265 shares purchasedby Company employees in 2006. There was no stock-based compensation costrecognized in 2004 and 2005 for shares purchased under the plan. On January 16,2007, rights to purchase 50,704 shares of common stock were granted at a priceof $16.45, which was equal to 85% of the fair market value of the shares atthat time.

**Note 13. Director Compensation Plan**

In April 1996, the Company granted an aggregate of185,286 warrants at an exercise price of $3.56 to the outside Directors. InJanuary 1998, the Company granted 51,990 warrants at an exercise price of $2.89to an additional outside Director. All warrants have been restated givingretroactive effect to all stock splits and or stock dividends through theirexercise date. Of the total warrants granted in April 1996, 46,321 wereexercised in 2002, and 138,965 were exercised in 2003. The 51,990 warrantsgranted in January 1998 were exercised in January 2005.

In addition to the warrants, the outside Directors,have been awarded a total of 240,058, 90,621, 37,890, 64,350, 40,779, 26,250and 18,000 options under the Company’s Incentive Option Plan in 2000, 2001,2002, 2003, 2004, 2005 and 2006 respectively, as adjusted for all stock splitsand or stock dividends through 2006. In January 2007, each of the outsideDirectors were awarded an additional 2,000 options. All director options areincluded in the tables under Note 12.

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

The Bank maintains a $292.1 million line ofcredit with the Federal Home Loan Bank of Atlanta. The interest rate and termof each advance from the line is dependent upon the advance and commitmenttype. Advances on the line are secured by all of the Bank’s qualifying firstliens and home equity lines-of-credit, on one-to-four unit single-familydwellings. As of December 31, 2006, the book value of these qualifying loanstotaled approximately $97.1 million and the amount of available credit usingthis collateral was $58.8 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, 2006 and 2005, the Bank hadno advances outstanding. The Bank has additional short-term lines ofcredit totaling $115 million with nonaffiliated banks at December 31, 2006, onwhich $40.5 million was outstanding at that date.

**Note 15. Trust Preferred Capital Notes**

On November 13,2002, the Company completed a private placement issuance of $3.0 million oftrust preferred securities through a newly formed, wholly-owned, subsidiarytrust (VCBI Capital Trust I) which issued $100 thousand in common equity to theCompany. The securities bear a floating rate of interest, adjustedsemi-annually, of 340 basis points over six month Libor, currently 8.78%, witha maximum rate of 12.0% until November 15, 2007. The securities are callable atpar beginning November 15, 2007. On December 19, 2002, the Company completed aprivate placement issuance of $15.0 million of trust preferred securitiesthrough a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust II)which issued $470 thousand in common equity to the Company. These

46

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securities bear afloating rate of interest, adjusted semi-annually, of 330 basis points over sixmonth Libor, currently 8.67%, with a maximum rate of 11.9% until December 30,2007. These securities are callable at par beginning December 30, 2007. OnDecember 20, 2005, the Company completed a private placement of $25.0 millionof trust preferred securities through a newly formed, wholly-owned, subsidiarytrust (VCBI Capital Trust III) which issued $774 thousand in common equity tothe Company. These securities bear a fixed rate of interest of 6.19% untilFebruary 23, 2011, at which time they convert to a floating rate, adjustedquarterly, of 142 basis points over three month Libor. These securities arecallable at par beginning February 23, 2011.

The principalasset of each trust is a similar amount of the Company’s junior subordinateddebt securities with an approximately 30 year term from issuance and likeinterest rates to the trust preferred securities. The obligations of theCompany with respect to the trust preferred securities constitute a full andunconditional guarantee by the Company of each Trust’s obligations with respectto the trust preferred securities to the extent set forth in the relatedguarantees. Subject to certain exceptions and limitations, the Company mayelect from time to time to defer interest payments on the junior subordinateddebt securities, resulting in a deferral of distribution payments on therelated trust preferred securities.

The TrustPreferred Securities may be included in Tier 1 capital for regulatory capitaladequacy purposes up to 25.0% of Tier 1 capital after its inclusion. Theportion of the trust preferred securities not qualifying as Tier 1 capital maybe included as part of total qualifying capital in Tier 2 capital.

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

The Company is party to financial instruments withoff-balance-sheet risk in the normal course of business to meet the financingneeds of its customers. These financial instruments include commitments toextend credit, standby letters of credit and financial guarantees. Theseinstruments involve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the balance sheet. The contract ornotional amounts of those instruments reflect the extent of involvement theCompany has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit and standby letters of credit and financial guarantees writtenis represented by the contractual or notional amount of those instruments. TheCompany uses the same credit policies in making commitments and conditionalobligations as it does for on-balance-sheet instruments.

A summary of the contract or notional amount of the Company’s exposureto off-balance-sheet risk as of December 31, 2006 and 2005, is as follows:
| **(Dollars in thousands)**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Financial  instruments whose contract amounts represent credit risk: |       |     |       |     |       |
| Commitments to  extend credit                                        |       | $        | 50,336     |     | $          | 55,097 |   |
| Standby letters  of credit and financial guarantees written          |       | $        | 29,378     |     | $          | 29,564 |   |
| Unfunded lines of  credit                                            |       | $        | 450,049    |     | $          | 381,715 |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in the contract. Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee. Since many of the commitments are expected to expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company upon extension of credit, is based onmanagement’s credit evaluation of the customer. 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 financial guaranteeswritten are conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. Those guarantees are primarilyissued to support public and private borrowing arrangements, includingcommercial paper, bond financing, and similar transactions. The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending loan facilities to

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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 for sale tosecondary market investors subject to contractually specified and limitedrecourse provisions. In 2006, the Company originated $174.9 million and sold$176.6 million to investors, compared to $202.3 million originated and $197.2million sold in 2005. Most contracts with investors contain certain recourselanguage that may vary from 90 days up to 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 isapproximately twelve months after sale of the loan to the investor. Mortgagessubject to recourse are collateralized by single-family residential properties,have loan-to-value ratios of 80% or less, or have private mortgage insurance orare insured or guaranteed by an agency of the United States government.

At December 31, 2006, the Bank had rate lockcommitments to originate and sell mortgage loans amounting to $11.4 million andloans held-for-sale of $7.8 million. Risks arise from the possible inability ofcounterparties to meet the terms of their contracts. The Bank does not expectany counterparty to fail to meet its obligation.

**Note 17. Concentrations of Credit Risk**

The Bank does a general banking business, serving thecommercial and personal banking needs of its customers. The Bank’s market areaconsists of the Northern Virginia suburbs of Washington, D.C., includingArlington, Fairfax, Fauquier, Loudoun and Prince William Counties, the citiesof Alexandria, Fairfax, Falls Church, Manassas and Manassas Park, and to someextent the Maryland suburbs and the city of Washington D.C. Substantially allof the Company’s loans are made within its market area.

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

At December 31, 2006 and 2005, there were $1.26billion and $999.4 million, or 76.4% and 77.5%, respectively of total loansconcentrated in commercial real estate. Commercial real estate for purposes ofthis note includes all construction loans, loans secured by 5+ family residentialproperties and loans secured by non-farm, non-residential properties. AtDecember 31, 2006 and 2005, construction loans represented 31.2% and 29.5% oftotal loans, loans secured by 5+ family residential properties represented 3.5%and 4.5%, and loans secured by non-farm, non-residential properties represented41.7% and 43.4%, respectively. Construction loans at December 31, 2006 and 2005included $347.5 million and $257.6 million in loans to commercial builders ofsingle family housing in the Northern Virginia market, representing 21.0% and20.0% of total loans, respectively.

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

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

The transfer of funds from the Bank to the Company inthe form of loans, advances, and cash dividends are restricted by Federal andState regulatory authorities. As of December 31, 2006, the aggregate amount ofunrestricted funds that could be transferred in the form of a cash dividendtotaled approximately $60.0 million, or 42.9%, of the consolidated net assetsof the Company.

As members of the Federal Reserve System, the Companyis required to maintain certain average reserve balances. For the final weeklyreporting period in the years ended December 31, 2006 and 2005, the aggregateamounts of daily average required balances were approximately****$2.9 million and $3.2 million,****respectively.

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**Note 19. Employee Benefits**

The Company has a 401(k) defined contribution plancovering substantially all full-time employees and provides that an employeebecomes eligible to participate at the date he or she has reached the age of 21and has completed three months of service, whichever occurs last. Under theplan, a participant may contribute up to 15% of his or her covered compensationfor the year, subject to certain limitations. The Company may also make, but isnot required to make, a discretionary contribution for each participant out ofits current or accumulated net profits. The amount of contribution, if any, isdetermined on an annual basis by the Board of Directors. Contributions made bythe Company totaled $347 thousand, $294 thousand and $234 thousand for theyears ended December 31, 2006, 2005 and 2004, respectively.

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

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

**Cash and Short-Term Investments**

For those short-term instruments, the carrying amountis a reasonable estimate of fair value.

**Securities**

For securities held for investment purposes, fairvalues are based on quoted market prices or dealer quotes. The carrying valueof restricted stock approximates fair value based on the redemption provisionsof the issuers.

**Loans Held-for-Sale**

Fair value is based on selling price arranged byarms-length contracts with third parties.

**Loan Receivables**

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

**Deposits and Borrowings**

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

**Accrued Interest**

The carrying amounts of accrued interest approximatefair value.

**Off-Balance Sheet Financial Instruments**

The fair value ofcommitments to extend credit is estimated using the fees currently charged toenter similar agreements, taking into account the remaining terms of theagreements and the present creditworthiness of the counterparties. Forfixed-rate loan commitments, fair value also considers the difference betweencurrent levels of interest rates and the committed rates. The fair value ofstand-by letters of credit is based on fees currently charged for similaragreements or on the estimated cost to terminate them or otherwise settle theobligations with the counterparties at the reporting date.

At December 31, 2006 and 2005, the fair value of loancommitments and stand-by letters of credit were deemed immaterial.

49

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The carrying amounts and estimated fairvalues of the Company’s financial instruments are as follows:
| ** **                           | ** ** | **2006**             | ** ** | **2005**                       | ** ** |
|--------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| **Financial  assets:**               |       |                 |       |                           |       |   |   |   |   |
| Cash and  short-term investments     |       | $                    | 36,068     |                           | $          | 36,068 |   | $ | 33,642 |   | $ | 33,642 |   |
| Securities                           |       | 234,203              |       | 233,401                        |       | 173,053 |   | 172,102 |   |
| Loans  held-for-sale                 |       | 7,796                |       | 7,796                          |       | 12,548 |   | 12,548 |   |
| Loans                                |       | 1,629,827            |       | 1,674,244                      |       | 1,270,255 |   | 1,296,219 |   |
| Accrued interest  receivable         |       | 9,315                |       | 9,315                          |       | 6,550 |   | 6,550 |   |
| Total Financial  assets              |       | $                    | 1,917,209  |                           | $          | 1,960,824 |   | $ | 1,496,048 |   | $ | 1,521,061 |   |

 
| ** **                                                                  | ** ** | **2006**             | ** ** | **2005**                       | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **(Dollars in thousands)**                                        | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
| **Financial  liabilities:**                                                 |       |                 |       |                           |       |   |   |   |   |
| Deposits                                                                    |       | $                    | 1,605,941  |                           | $          | 1,593,494 |   | $ | 1,243,506 |   | $ | 1,213,934 |   |
| Securities sold  under agreements to repurchase and federal funds purchased |       | 148,871              |       | 148,030                        |       | 111,794 |   | 111,788 |   |
| Trust preferred  capital notes                                              |       | 44,344               |       | 48,020                         |       | 44,344 |   | 49,502 |   |
| Accrued interest  payable                                                   |       | 5,923                |       | 5,923                          |       | 3,003 |   | 3,003 |   |
| Total Financial  liabilities                                                |       | $                    | 1,805,079  |                           | $          | 1,795,467 |   | $ | 1,402,647 |   | $ | 1,378,227 |   |

 

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

**Note 21. Capital Requirements**

The Company and the Bank are subject to variousregulatory capital requirements administered by the Federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory,possibly additional discretionary, actions by regulators that, if undertaken,could have a direct material effect on the Company’s and Bank’s financialstatements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Company and the Bank must meet specific capitalguidelines that involve quantitative measures of their assets, liabilities, andcertain off-balance-sheet items as calculated under regulatory accountingpractices. The capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors. Prompt corrective action provisions are not applicable to bankholding companies.

Quantitative measures established by regulation toensure capital adequacy require the Company and the Bank to maintain minimumamounts and ratios (set forth in the table below) of Total Capital, Tier 1Capital and Tier 1 Leverage Capital. Total Capital and Tier 1 Capital ratiosare in reference to risk-weighted assets (as defined), and the Tier 1 LeverageCapital ratio is in reference to average assets. Management believes, as ofDecember 31, 2006 and 2005, that the Company and Bank met all capital adequacyrequirements to which they are subject.

As of December 31, 2006, theBank is categorized as “well-capitalized” under the regulatory framework forprompt corrective action. To be categorized as “well-capitalized,” the Bankmust maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverageratios as set forth in the table. There are no conditions or events sinceDecember 31, 2006, that management believes changed the Bank’s category. TheCompany’s and the Bank’s actual capital amounts and ratios are also presentedin the table.

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| ** **                                       | ** ** | **Actual Capital** | ** ** | **Minimum Capital  Requirement*** | ** ** | **Minimum To Be Well-  Capitalized Under Prompt   Corrective Action Provisions** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| **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 | % |

 
| **As of December 31, 2005:** | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount** | ** ** | **Ratio**  | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Total  Capital:**                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Company                                          |       | $          | 170,176    |       | 12.42      | %          | $          | 109,607    |       | 8.00       | %          | $          | N/A        |   | N/A |   |
| Bank                                             |       | 167,975    |       | 12.27      | %          | 109,482    |       | 8.00       | %          | 136,853    |       | 10.00      | %          |
| **Tier 1  Capital:**                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Company                                          |       | $          | 150,355    |       | 10.97      | %          | $          | 54,803     |       | 4.00       | %          | $          | N/A        |   | N/A |   |
| Bank                                             |       | 111,154    |       | 8.12       | %          | 54,741     |       | 4.00       | %          | 82,112     |       | 6.00       | %          |
| **Tier 1  Leverage Capital**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Company                                          |       | $          | 150,355    |       | 10.09      | %          | $          | 59,583     |       | 4.00       | %          | $          | N/A        |   | N/A |   |
| Bank                                             |       | 111,154    |       | 7.45       | %          | 59,689     |       | 4.00       | %          | 75,126     |       | 5.00       | %          |

 

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

**Note 22. Condensed Financial Statements of ParentCompany**
| **Balance Sheets (in thousands)**     | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Assets:                                              |       |                            |       |                            |       |
| Cash and due from banks                              |       | $                               | 4,311      |                            | $          | 1,984 |   |
| Investment in Subsidiaries                           |       | 136,990                         |       | 110,961                         |       |
| Subordinated Debt of Subsidiary                      |       | 43,000                          |       | 43,000                          |       |
| Other Assets                                         |       | 111                             |       | 302                             |       |
| **Total Assets**                                     |       | $                               | 184,412    |                            | $          | 156,247 |   |
|                                                 |       |                            |       |                            |       |
| Liabilities and  Stockholders’ Equity:          | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Trust preferred capital notes                        |       | $                               | 44,344     |                            | $          | 44,344 |   |
| Other Liabilities                                    |       | 217                             |       | 85                              |       |
| Total Liabilities                                    |       | $                               | 44,561     |                            | $          | 44,429 |   |
| Stockholders’ Equity                            |       | 139,851                         |       | 111,818                         |       |
| **Total  Liabilities and Stockholders’ Equity** |       | $                               | 184,412    |                            | $          | 156,247 |   |

 

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| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Statements Of Income (in thousands)**                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income,                                                                              |       |                                       |       |   |   |   |   |
| Interest on subordinated debt                                                        |       | $                                          | 3,097      |   | $ | 1,036 |   | $ | 888 |   |
| Expenses:                                                                            |       |                                       |       |   |   |   |   |
| Interest on trust preferred capital notes                                            |       | $                                          | 3,099      |   | $ | 1,246 |   | $ | 892 |   |
| Other operating expense                                                              |       | 888                                        |       | 714 |   | 419 |   |
| Total Expenses                                                                       |       | 3,987                                      |       | 1,960 |   | 1,311 |   |
| Loss before  income tax (benefit) and equity in undistributed earnings of subsidiary |       | $                                          | (890       | ) | $ | (924 | ) | $ | (423 | ) |
| Income tax  (benefit)                                                                |       | (221                                       | )          | (267 | ) | (148 | ) |
|                                                                                 |       | (669                                       | )          | (657 | ) | (275 | ) |
| Equity in  undistributed net income of Virginia Commerce Bank                        |       | 25,177                                     |       | 20,324 |   | 14,504 |   |
| Net Income                                                                           |       | $                                          | 24,508     |   | $ | 19,667 |   | $ | 14,229 |   |

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Statements Of Cash Flows (in thousands)**           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash Flows from  Operating Activities:                                         |       |                                       |       |   |   |   |   |
| Net Income                                                                     |       | $                                          | 24,508     |   | $ | 19,667 |   | $ | 14,229 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                       |       |   |   |   |   |
| Equity in  undistributed net income of Virginia Commerce Bank                  |       | (25,177                                    | )          | (20,324 | ) | (14,504 | ) |
| Stock option  expense                                                          |       | 257                                        |       | 161 |   | — |   |
| Decrease in  other assets                                                      |       | 191                                        |       | 50 |   | 79 |   |
| Increase in  other liabilities                                                 |       | 133                                        |       | 60 |   | 24 |   |
| Net cash used in  operating activities                                         |       | $                                          | (88        | ) | $ | (386 | ) | $ | (172 | ) |
| Cash Flows from  Investing Activities:                                         |       |                                       |       |   |   |   |   |
| Purchase additional stock in subsidiary                                        |       | —                                     |       | (774 | ) | (22,000 | ) |
| Purchase of debt securities                                                    |       | —                                     |       | (25,000 | ) | — |   |
| Net cash used in  investing activities                                         |       | $                                          | —     |   | $ | (25,774 | ) | $ | (22,000 | ) |
| Cash Flows from  Financing Activities:                                         |       |                                       |       |   |   |   |   |
| Net increase in junior subordinated capital notes                              |       | —                                     |       | 25,774 |   | — |   |
| Common stock issued                                                            |       | 2,418                                      |       | 1,690 |   | 22,514 |   |
| Cash paid in lieu of fractional shares                                         |       | (3                                         | )          | (6 | ) | (5 | ) |
| Net cash  provided by financing activities                                     |       | $                                          | 2,415      |   | $ | 27,458 |   | $ | 22,509 |   |
| Change in cash  and cash equivalents                                           |       | $                                          | 2,327      |   | $ | 1,298 |   | $ | 337 |   |
| Beginning                                                                      |       | 1,984                                      |       | 686 |   | 349 |   |
| Ending                                                                         |       | $                                          | 4,311      |   | $ | 1,984 |   | $ | 686 |   |

 

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**Note 23. Quarterly Financial Information (Unaudited)**

Selected financialinformation for the quarterly periods of 2006 and 2005 is presented below(dollars in thousands except per share data):
|                                                      | ** ** | **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                                                |       | $                 | 0.27       |   | $ | 0.29 |   | $ | 0.28 |   | $ | 0.30 |   |
| Diluted                                              |       | $                 | 0.25       |   | $ | 0.28 |   | $ | 0.27 |   | $ | 0.28 |   |

 
|                                                      | ** ** | **2005 Quarters** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **First**         | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Interest income                                      |       | $                 | 18,300     |   | $ | 20,422 |   | $ | 22,665 |   | $ | 25,091 |   |
| Interest expense                                     |       | 5,587             |       | 6,856 |   | 8,119 |   | 9,249 |   |
| Net interest  income                                 |       | $                 | 12,713     |   | $ | 13,566 |   | $ | 14,546 |   | $ | 15,842 |   |
| Provision for loan  losses                           |       | 831               |       | 1,031 |   | 950 |   | 960 |   |
| Net interest  income after provision for loan losses |       | $                 | 11,882     |   | $ | 12,535 |   | $ | 13,596 |   | $ | 14,882 |   |
| Non-interest income                                  |       | 1,219             |       | 1,543 |   | 1,898 |   | 2,016 |   |
| Non-interest expense                                 |       | 6,514             |       | 7,271 |   | 7,395 |   | 8,286 |   |
| Income before  taxes                                 |       | $                 | 6,587      |   | $ | 6,807 |   | $ | 8,099 |   | $ | 8,612 |   |
| Income tax expense                                   |       | 2,266             |       | 2,343 |   | 2,796 |   | 3,033 |   |
| Net income                                           |       | $                 | 4,321      |   | $ | 4,464 |   | $ | 5,303 |   | $ | 5,579 |   |
| Net income per common  share:                        |       |              |       |   |   |   |   |   |   |
| Basic                                                |       | $                 | 0.21       |   | $ | 0.21 |   | $ | 0.24 |   | $ | 0.27 |   |
| Diluted                                              |       | $                 | 0.19       |   | $ | 0.20 |   | $ | 0.23 |   | $ | 0.25 |   |

 

**Note 24:Segment Reporting**

Inaccordance with SFAS No. 131, “Disclosures About Segments of an Enterprise andRelated Information” the Company has two reportable segments, its communitybanking operations and its mortgage banking division. Community bankingoperations, the major segment, involves making loans and gathering depositsfrom individuals and businesses in the Bank’s market area, while the mortgagebanking division originates and sells mortgage loans servicing released, onone-to-four family residential properties. Revenues from mortgage lending consistof interest earned on mortgage loans held-for-sale, loan origination fees, andnet gains 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

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presentssegment information for the years ended December 31, 2006, 2005 and 2004.Eliminations consist of overhead and interest charges by the Bank to themortgage lending division.
| ** **                    | ** ** | **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 |   |

 
| ** **                    | ** ** | **2004**               | ** ** |
|-------------------------------|------------|------------------------|------------|
| **(In thousands)**       | ** ** | **Community  Banking** | ** ** | **Mortgage  Lending** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Interest income               |       | $                      | 57,591     |   | $ | 407 |   | $ | — |   | $ | 57,998 |   |
| Non-interest income           |       | 2,530                  |       | 3,229 |   | — |   | 5,759 |   |
| Total operating income        |       | $                      | 60,121     |   | $ | 3,636 |   | $ | — |   | $ | 63,757 |   |
|                          |       |                   |       |   |   |   |   |   |   |
| Interest expense              |       | $                      | 16,331     |   | $ | 85 |   | $ | (85 | ) | $ | 16,331 |   |
| Provision for loan losses     |       | 2,989                  |       | — |   | — |   | 2,989 |   |
| Non-interest expense          |       | 20,326                 |       | 2,529 |   | (48 | ) | 22,807 |   |
| Total operating expense       |       | $                      | 39,646     |   | $ | 2,614 |   | $ | (133 | ) | $ | 42,127 |   |
| Income before taxes on income |       | $                      | 20,475     |   | $ | 1,022 |   | $ | 133 |   | $ | 21,630 |   |
| Provision for income taxes    |       | 7,043                  |       | 358 |   | — |   | 7,401 |   |
| Net Income                    |       | $                      | 13,432     |   | $ | 664 |   | $ | 133 |   | $ | 14,229 |   |
|                          |       |                   |       |   |   |   |   |   |   |
| Total Assets                  |       | $                      | 1,129,587  |   | $ | 9,766 |   | $ | — |   | $ | 1,139,353 |   |

 

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### **BUSINESS**

**General**

Virginia Commerce Bancorp, Inc.(the “Company”) was organized under Virginia law on November 5, 1999 to becomethe holding company for Virginia Commerce Bank (the “Bank”). The Companyacquired all of the outstanding shares of the Bank on December 22, 1999, uponthe effectiveness of the Agreement and Plan of Share Exchange dated September22, 1999 between the Company and the Bank. As a result of the Agreement andPlan of Share Exchange, each share of the Bank’s common stock was automaticallyexchanged for and converted into one share of the Company’s common stock.

The Bank was organized as a national bankingassociation and commenced operations on May 16, 1988. On June 1, 1995, the Bankconverted from a national banking association to a Virginia chartered bankwhich is a member of the Federal Reserve System. The Company’s and the Bank’sexecutive offices and main branch are located at 5350 Lee Highway, Arlington,Virginia. The Bank currently has twenty additional full service branch officesthroughout Northern Virginia, an investment services office in Vienna,Virginia, and residential mortgage lending offices in Vienna and Warrenton,Virginia. Additionally, the Bank has entered into lease agreements for fiveadditional branch office locations to be opened in 2007.

The Company engages in a generalcommercial banking business through the Bank, its sole direct operatingsubsidiary. The Bank’s customer base includes small-to-medium-sized businesses,including firms that have contracts with the U.S. government, associations,retailers and industrial businesses, professionals and business executives andconsumers. The economic base of the Bank’s service area includes Arlington,Fairfax, Fauquier, Loudoun and Prince William Counties and the City ofAlexandria in Northern Virginia, and the metropolitan Washington, D.C. areagenerally. Northern Virginia has experienced significant population andeconomic growth during the past decade. The Bank participated in this growththrough its commercial and retail banking activities.

The Bank’s primary service areaconsists of the Northern Virginia suburbs of Washington D.C., includingArlington Fairfax, Fauquier, Loudoun and Prince William Counties and the citiesof Alexandria, Fairfax, Falls Church, Manassas and Manassas Park. This area’sbanking business is dominated by a small number of large commercial banks withextensive branch networks. Most are branches of national, state-wide orregional banks. The Bank’s primary service area is also served by a largenumber of other financial institutions, including savings banks, credit unionsand non-bank financial institutions such as securities brokerage firms,insurance companies and mutual funds. The Bank’s primary service area isoriented toward independently owned small-to-medium-sized businesses, lightindustry and firms specializing in government contracting. An increasing numberof new community banking organizations have been opened in the Bank’s marketarea, potentially representing an increased competitive threat to the Bank.

The banking business in Virginiagenerally, and in the Bank’s primary service area specifically, is highlycompetitive with respect to both loans and deposits, and is dominated by arelatively small number of major banks with many offices operating over a widegeographic area. Among the advantages such major banks have over the Bank aretheir ability to finance wide-ranging advertising campaigns and to allocatetheir investment assets to regions of highest yield and demand. Such banksoffer certain services such as international banking, which are not offereddirectly by the Bank (but are offered indirectly through correspondentinstitutions) and, by virtue of their greater total capitalization, such bankshave substantially higher lending limits than the Bank. The Bank competes fordeposits and lendable funds with other commercial banks, savings banks, creditunions and other governmental and corporate entities which raise operatingcapital through the issuance of debt and equity securities. The Bank alsocompetes for available investment dollars with non-bank financial institutions,such as brokerage firms, insurance companies and mutual funds. With respect toloans, the Bank competes with other commercial banks, savings banks, consumerfinance companies, mortgage companies, credit unions and other lendinginstitutions. Additionally, as a result of enactment of federal and Virginiainterstate banking legislation, additional competitors which are not currentlyoperating in Virginia may enter the Bank’s markets and compete directly with theBank. Recent legislation expanding the array of firms that can own banks mayalso result in increased competition for the Company and the Bank.

The majority of the Bank’sdeposits are attracted from individuals and business in the metropolitanWashington D.C. area, and as such, no material portion of the Bank’s depositshave been obtained from any single person, single entity, or area outside themetropolitan Washington D.C. area. The loss of any one or more of the Bank’sdepositors would not have a materially adverse effect on the business of theBank. Although the Bank’s loans are concentrated in its Northern Virginiamarket area, and a significant portion are secured by real property in thatmarket, the Bank’s loans

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are not concentrated within asingle industry or group of related industries. See Note 17 to the ConsolidatedFinancial Statements for more information on concentrations of credit risk.

The Bank provides businesses witha full range of deposit accounts, merchant bankcard services, electronic fundstransfer services, lock-box services, on-line banking, lines of credit forworking capital, term loans and commercial real estate loans, and providesconsumers with a wide array of deposit products, home equity and revolvinglines of credit, installment loans and internet banking services. The Bank alsooffers investment services and provides safe deposit boxes as well as othercustomary banking services. The Bank is not authorized to offer trust servicesnor does it offer international services but makes these services available toits customers through financial institutions with which the Bank hascorrespondent banking relationships.

The Bank also offers a widevariety of residential mortgage loans through its mortgage lending divisionwhich are originated on a pre-sold, servicing released basis to numerousinvestors. Offered types include conventional single family first trusts, FHAand VA mortgages for both purchase and 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 local real estate market and interest ratescould adversely impact the level of loans originated for sale and the level ofconstruction loans originated and outstanding, and the resulting fees andearnings thereon.

The Bank does not depend uponseasonal business. The Bank relies substantially on local promotional activity,personal contact by its officers, directors, employees and stockholders,personalized service and its reputation in the communities served to competeeffectively.

The Bank has one wholly ownedsubsidiary, Northeast Land and Investment Company, a Virginia corporation,organized to hold and market foreclosed real estate.

On December 31, 2006, the Companyhad 275 full-time equivalent employees, including seven executive officers.None of the Company’s employees presently is represented by a union or coveredunder a collective bargaining agreement. Management of the Company believesthat its employee relations are satisfactory. Other than its President, theCompany does not have any employees that are not also employees of the Bank.

Banking is dependent uponinterest rate differentials. In general, the difference between the interestrate paid by the Bank on its deposits and its other borrowings and the interestrate earned by the Bank on loans, securities and other interest-earning assetscomprises the major source of the Bank’s earnings, while increasing fees andnet gains on mortgage loans originated for sale have made a significantcontribution to the Bank’s non-interest earnings. Thus, the earnings and growthof the Bank are subject to the influence of economic conditions generally, bothdomestic and foreign, and also of the monetary and fiscal policies of theUnited States and its agencies, particularly the Federal Reserve Board. TheFederal Reserve Board implements national monetary policy, such as seeking tocurb inflation and combat recession, by its open-market activities in UnitedStates government securities, by adjusting the required level of reserves forfinancial institutions subject to reserve requirements and through adjustmentsto the discount rate applicable to borrowings by banks which are members of theFederal Reserve System. The actions of the Federal Reserve Board in these areasinfluence the growth of bank loans, investments and deposits and also affectinterest rates. The nature and timing of any future changes in such policiesand their impact on the Bank cannot be predicted. In addition, adverse economicconditions could make a higher provision for loan losses a prudent course andcould cause higher loan loss charge-offs, thus adversely affecting the Bank’snet income.

From time to time, newlegislation or regulations are adopted which increase the cost of doingbusiness, limit or expand permissible activities, or otherwise affect thecompetitive balance between banks and other financial institutions. Bills havebeen introduced in each of the last several Congresses which would permit banksto pay interest on checking and demand deposit accounts established bybusinesses, a practice which is currently prohibited by regulation. If thelegislation effectively permitting the payment of interest on business demanddeposits is enacted, of which there can be no assurance, it is likely that wemay be required to pay interest on some portion of our demand deposits in orderto 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. We expect that other banks would be facedwith similar negative impacts. We also expect that the primary focus ofcompetition would continue to be based on other factors, such as quality ofservice. Additionally, commencing in 2007, we will be required to pay depositinsurance premiums for the first time since 1996. It is likely that the paymentof deposit insurance premiums, will adversely affect our earnings, if wecannot, for competitive reasons, price the premium into deposit rates.

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Banks or bank holding companieswhich are undercapitalized and either have not timely approved a capital planor have failed to implement the plan become subject to extraordinary powerspursuant to which the bank regulatory agencies may close the bank, restrict itsgrowth, force its sale, restrict interest rates paid on deposits, and dismissdirectors or senior executive officers. Each agency has prescribed standardsrelating to internal controls and systems, loan documentation, creditunderwriting, interest rate exposure, asset growth, compensation, fees andbenefits, and other operational and managerial standards. The agencies havealso adopted standards relating to asset quality, earnings, valuation andcompensation. Banks or bank holding companies which do not meet such standardsmay be subject to restrictions and consequences comparable to those which applyto undercapitalized banks and bank holding companies. Bank regulatory authorityto appoint a conservator or receiver for a bank is broad, including groundssuch as substantial dissipation of assets or earnings due to violations of lawor regulation 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.

Regulations promulgated by theFederal Reserve Board prohibit state member banks such as the Bank from payingany dividend on common stock out of capital. Dividends can be paid only to theextent of net profits then on hand, less losses and bad debts. Without theprior approval of the Federal Reserve Board, a state member bank cannot paydividends in any calendar year in excess of the retained net profits for theprior two years and the profits of the current year, less any requiredtransfers 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, autoloans and home equity loans and lines of credit. Loan terms, including interestrates, loan-to-value ratios, and maturities, are tailored as much as possibleto meet the needs of the borrower within prudent lending guidelines in terms ofinterest rate risk and credit risk.

When 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 anumber of ways including an analysis of financial statements, credit history,trade references and visits to the borrower’s place of business. The Bank hasadopted a comprehensive loan policy manual to provide its loan officers withunderwriting, 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 loans are generally considered to have ahigher degree of risk of default or loss than other types of loans, such asresidential real estate loans, because repayment may be affected by generaleconomic conditions, interest rates, the quality of management of the business,and other factors which may cause a borrower to be unable to repay itsobligations. General economic conditions can directly or indirectly affect thequality of a small and mid-sized business loan portfolio. The Bank manages theloan portfolio to avoid high concentrations of similar industry loan typesand/or property types in relation to total qualifying capital. Commercialconstruction loans will make up 50-100% of total qualifying capital,residential construction loans 125-250%, non-farm non-residential real estateloans 400-600%, residential mortgages and home equity loans 100-200%,commercial loans 100-200% and consumer installment and personal loans 50-100%. Overall,real estate loans will not exceed 1,150% of total capital. There can however,be no assurance that the Bank will be able to achieve or maintain thisdistribution of loans. At December 31, 2006 the loan portfolio’s actualcomposition compared to total qualifying capital consisted of approximately 76%commercial construction loans, 185% residential construction loans, 378%non-farm non-residential real estate loans, 98% residential mortgages and homeequity loans, 97% commercial loans and 4% consumer installment and personalloans. Total real estate loans were 737% of total qualifying capital.

The lending activities inwhich we engage carry the risk that borrowers will be unable to perform ontheir obligations. As such, interest rate policies of the Federal Reserve Boardand general economic conditions, nationally and in our primary market area willhave a significant impact on our results of operations. To the extent thateconomic conditions deteriorate, business and individual borrowers may be lessable to meet their obligations in a timely manner, resulting in decreasedearnings or losses to the Bank. To the extent that loans are secured by realestate, adverse conditions in the real estate market may reduce the ability ofthe borrower to generate the necessary

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cash flow for repaymentof the loan and reduce our ability to collect the full amount of the loan upona default. These same external factors could also negatively impact collateralvalues. To the extent that the Bank makes fixed rate loans, general increasesin interest rates will tend to reduce our spread as the interest rates we mustpay for deposits increase. Interest rates may also adversely affect the valueof 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 negative influences. Plansfor mitigating inherent risks in managing loan assets include carefullyenforcing loan policies and procedures, evaluating each borrower’s industry andbusiness plan during the underwriting process, identifying and monitoringprimary and alternative sources for repayment, obtaining collateral that ismargined to minimize loss in the event of liquidation, ongoing tests ofborrower credit worthiness and cash flow, ongoing collateral evaluations andsite inspections and monitoring of economic and market trends

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

At December 31,2006, the Banks statutory lending limit to any single borrower was $29.6million subject to certain exceptions provided under applicable law. As ofDecember 31, 2006, the Bank’s maximum credit exposure to its largest borrowerwas $19.2 million.

*CommercialLoans:* Commercial loans are written for any legitimatebusiness purpose including the financing of plant and equipment, interimworking capital pending collection of accounts receivable, permanent workingcapital for growth and the acquisition and construction of real estateprojects. There is a focus in the Bank’s loan portfolio on commercial realestate investment which represents a predominant activity in the Bank’s marketarea. 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. Land loans are discouraged unless underwrittenin conjunction with a related construction loan or out-sale contract. Typicaladvance rates are not greater than 65% of the lesser of cost or appraisal forraw land, 75% of the value of finished lots for land acquisition, and 80% ofland cost and 100% of construction costs for construction loans. In all cases,a minimum 10% equity contribution of total project costs is required. Financingterms generally do not exceed 24 months. Construction loans are subject toprogress inspections and controlled advances. Speculative construction loansare maintained to a minimum with a majority of loans requiring pre-salecontracts or specified lease-up thresholds prior to construction commencement. Personalguarantees by principals of borrowing entities is a standard requirement andloans are typically priced to float at a factor at or above the prime lendingrate.

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 inmanaging a commercial real estate portfolio relate to either sudden or gradualdrops in property values as a result of a general or local economic downturn. Adecline in real estate values can cause loan to value margins to increase anddiminish the Bank’s equity cushion on both an individual and portfolio basis. TheBank attempts to mitigate commercial real estate lending risks by carefullyunderwriting each loan of this type to address the perceived risks in theindividual transaction. Generally, the Bank requires a loan-to-value ratio of80% of the lesser of cost or appraisal for owner occupied transactions and 75%for investor transactions. A borrower’s ability to repay is carefully analyzedand policy calls for a minimum ongoing cash flow to debt service requirement of1.10 to 1 although most loans exceed this minimum. An approved list ofcommercial real estate appraisers selected on the basis of a reputation forquality and accuracy has been established. Each appraisal is scrutinized in aneffort to insure compliance with established appraisal guidelines andconformity with current comparable market values. The Bank generally requirespersonal guarantees on all loans to closely-held entities as a matter ofpolicy. Borrowers are required to provide, at a minimum, annual corporate,partnership and personal financial statements to comply with Bank policy. Interestrate risk to the Bank is mitigated by using either floating interest rates orby fixing rates for an intermediate period of time, generally less than fiveyears. While loan amortizations may be approved for up to 360 months, loansgenerally have a call provision (maturity date) of 10 years or less.

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Commercial termloans are used to provide funds for equipment and general corporate needs. Thisloan category is designed to support borrowers who have a proven ability toservice debt over a term generally not to exceed 84 months. The Bank typicallyrequires a first lien position on the collateral financed and other businessassets and guarantees from owners having at least a 20% interest in thebusiness. Interest rates on commercial term loans generally float or are fixedfor 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 forhistorical and projected cash flow, balance sheet strength and primary andsecondary repayment sources. Commercial term loan documents include certainfinancial and performance covenants and require borrowers to forward regularfinancial information on both the business and on personal guarantors at leastannually. In certain cases, this information is required more frequently,depending on the degree to which lenders desire information to monitor aborrower’s financial condition and compliance with loan covenants. Key personlife insurance is required as appropriate and as necessary to mitigate the riskassociated 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 addition to the risks inherent in term loanfacilities, line of credit borrowers typically require additional monitoring toprotect the lender against diminishing collateral values. Commercial lines ofcredit are generally revolving in nature and payable on demand. The Bankgenerally requires at least an annual rest period (for seasonal borrowers) andregular financial information (monthly or quarterly financial statements,monthly accounts receivable agings, borrowing base certificates, etc.) forborrowers with rapid growth and permanent working capital financing needs. Advancesagainst collateral are generally margined, limiting advances on eligiblereceivables to 75-80% of current accounts. Lines of credit and term loans tothe same borrowers are generally cross-defaulted and cross-collateralized. Industryand collateral concentration disciplines are the same as those used in managingthe commercial term loan portfolio. Interest rate charges on this group ofloans 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 worthwhile personalpurpose on a case-by-case basis, such as financing of tuition, householdexpenditures, home and automobile financing. Consumer credit facilities areunderwritten to focus on the borrower’s credit record, length and stability ofemployment, income to service debt and quality of collateral. Residential realestate loans held in portfolio are limited to advances of 90% of loan toappraised value. Maximum debt to income ratio established by loan policy is 40%and maximum unsecured revolving debt will not exceed 10% of net worth. Installmentloan terms range out to 72 months and are priced at fixed interest rate. Homeequity loans amortize over 5-15 years and are fixed rate while home equitylines are revolving with 10-year maturities and have floating rates tied to theprime rate.

*MortgageLending.* 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 theresidential mortgage loan market is highly sensitive to changes in interestrates. The loans are sold on a limited recourse basis. Most contractswith investors contain recourse periods that may vary from 90 days up to oneyear. In general, the Company may be required to repurchase a previously soldmortgage loan or indemnify the investor if there is major non-compliance withdefined loan origination or documentation standards, including fraud,negligence or material misstatement in the loan documents. Repurchase may alsobe required if necessary governmental loan guarantees are canceled or neverissued, or if an investor is forced to buy back a loan after it has beenre-sold as part of a loan pool. In addition, the Company may have an obligationto repurchase a loan if the mortgagor has defaulted early in the loan term. Thepotential default period is approximately twelve months after sale of the loanto the investor. Mortgages subject to recourse are collateralized bysingle-family residential properties, have loan-to-value ratios of 80% or less,or have private mortgage insurance or are insured or guaranteed by an agency ofthe United States government.

*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 reviews new loan production, creditconcentrations, loan loss reserves, declined loans, documentation exceptions,loan policy exceptions, new products and pricing. The Committee commissionsperiodic documentation and internal control reviews by outside vendors tocomplement internal audit and credit administration oversight.

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**Regulation, Supervision, and Governmental Policy**

*The Company.*The Company is a bank holding company registeredunder Bank Holding Company Act of 1956, as amended, (the “BHCA”) and is subjectto supervision by the Federal Reserve Board. As a bank holding company, theCompany is required to file with the Federal Reserve Board an annual report andsuch other additional information as the Federal Reserve Board may requirepursuant to the BHCA. The Federal Reserve Board may also make examinations ofthe Company and each of its subsidiaries.

*BHCA - Activities and otherLimitations.*The BHCArequires approval of the Federal Reserve Board for, among other things, theacquisition by a proposed bank holding company of control of more than fivepercent (5%) of the voting shares, or substantially all the assets, of any bankor the merger or consolidation by a bank holding company with another bankholding company. The BHCA also generally permits the acquisition by a bankholding company of control or substantially all the assets of any bank locatedin a state other than the home state of the bank holding company, except wherethe bank has not been in existence for the minimum period of time required bystate law, but if the bank is at least 5 years old, the Federal Reserve Boardmay approve the acquisition.

Under current law, with certainlimited exceptions, a bank holding company is prohibited from acquiring controlof any voting shares of any company which is not a bank or bank holding companyand from engaging directly or indirectly in any activity other than banking ormanaging or controlling banks or furnishing services to or performing servicefor its authorized subsidiaries. A bank holding company may, however, engage inor acquire an interest in, a company that engages in activities which theFederal Reserve Board has determined by order or regulation to be so closelyrelated to banking or managing or controlling banks as to be properly incidentthereto. In making such a determination, the Federal Reserve Board is requiredto consider whether the performance of such activities can reasonably beexpected to produce benefits to the public, such as convenience, increasedcompetition or gains in efficiency, which outweigh possible adverse effects,such as undue concentration of resources, decreased or unfair competition,conflicts of interest or unsound banking practices. The Federal Reserve Boardis also empowered to differentiate between activities commenced *de novo* and activities commenced by the acquisition, inwhole or in part, of a going concern. Some of the activities that the FederalReserve Board has determined by regulation to be closely related to bankinginclude making or servicing loans, performing certain data processing services,acting as a fiduciary or investment or financial advisor, and makinginvestments in corporations or projects designed primarily to promote communitywelfare.

Effective on March 11, 2000, the Gramm Leach BlileyAct of 1999 (the “GLB Act”) allows a bank holding company or other company tocertify status as a financial holding company, which allows such company toengage in activities that are financial in nature, that are incidental to suchactivities, or are complementary to such activities. The GLB Act enumeratescertain activities that are deemed financial in nature, such as underwritinginsurance or acting as an insurance principal, agent or broker, underwriting,dealing in or making markets in securities, and engaging in merchant bankingunder certain restrictions. It also authorizes the Federal Reserve Board todetermine by regulation what other activities are financial in nature, or incidentalor complementary thereto.

Subsidiary banks of a bankholding company are subject to certain restrictions imposed by the FederalReserve Act on any extensions of credit to the bank company or any of itssubsidiaries, or investments in the stock or other securities thereof, and onthe taking of such stock or securities as collateral for loans to any borrower.Further, a holding company and any subsidiary bank are prohibited from engagingin certain tie-in arrangements in connection with the extension ofcredit. A subsidiary bank may not extend credit, lease or sell property, orfurnish any services, or fix or vary the consideration for any of the foregoingon the condition that: (i) the customer obtain or provide some additionalcredit, property or services from or to such bank other than a loan, discount,deposit or trust service; (ii) the customer obtain or provide some additionalcredit, property or service from or to company or any other subsidiary of thecompany; or (iii) the customer not obtain some other credit, property orservice from competitors, except for reasonable requirements to assure thesoundness of credit extended.

*Commitments to SubsidiaryBanks.*Under FederalReserve policy, the Company is expected to act as a source of financial strengthto the Bank and to commit resources to support the Bank in circumstances whenit might not do so absent such policy.

*Limitations of Acquisitionsof Common Stock.*Thefederal Change in Bank Control Act prohibits a person or group from acquiring “control”of a bank holding company unless the Federal Reserve has been given 60 days’prior written notice of such proposed acquisition and within that time periodthe Federal Reserve Board has not issued a notice disapproving the proposedacquisition or extending for up to another 30 days the period during which sucha disapproval may be issued. An acquisition may be made prior to expiration ofthe disapproval period if the Federal

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Reserve issues written notice ofits intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve, theacquisition of 10% or more of a class of voting stock of a bank holding companywith a class of securities registered under Section 12 of the Exchange Act orwhich would represent the single largest interest in the voting stock would,under the circumstances set forth in the presumption, constitute theacquisition of control.

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

The Federal Reserve has adoptedcapital adequacy guidelines pursuant to which it assesses the adequacy of aninstitution’s capital.  These guidelinesare substantially similar to those which are applicable to the Bank, discussedbelow.

*The Bank. *The Bank, as a Virginia chartered commercial bank which is a member ofthe Federal Reserve System (a “state member bank”) and whose accounts areinsured by the Bank Insurance Fund of the FDIC up to the maximum legal limitsof the FDIC, is subject to regulation, supervision and regular examination bythe State Corporation Commission/Bureau of Financial Institutions and theFederal Reserve Board.  The regulationsof these various agencies govern most aspects of the Bank’s business, includingrequired reserves against deposits, loans, investments, mergers andacquisitions, borrowing, dividends and location and number of branchoffices.  The laws and regulationsgoverning the Bank generally have been promulgated to protect depositors andthe deposit insurance funds, and not for the purpose of protectingstockholders.

Competition among commercialbanks, savings banks, and credit unions has increased following enactment oflegislation which greatly expanded the ability of banks and bank holdingcompanies 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.

*Branching and InterstateBanking.*  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 permits suchacquisitions.  Such interstate bank mergersand branch acquisitions are also subject to the nationwide and statewideinsured deposit concentration limitations described in the Riegle-Neal Act.

The Riegle-Neal Act authorizesthe federal banking agencies to approve interstate branching *de novo*by national and state banks in states whichspecifically 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 theUniting and Strengthening America by Providing Appropriate Tools Required toIntercept and Obstruct Terrorism Act, commonly referred to as the “USA PatriotAct” or the “Patriot Act,” financial institutions are subject to prohibitionsagainst specified financial transactions and account relationships, as well asenhanced due diligence standards intended to detect, and prevent, the use ofthe United States 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.

*Capital Adequacy Guidelines.*  TheFederal Reserve Board and the FDIC have adopted risk based capital adequacyguidelines pursuant to which they assess the adequacy of capital in examiningand supervising banks and bank holding

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companies and in analyzing bankregulatory applications.  Risk-basedcapital requirements determine the adequacy of capital based on the riskinherent in various classes of assets and off-balance sheet items.

State member banks are expectedto meet a minimum ratio of total qualifying capital (the sum of core capital(Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of8%.  At least half of this amount (4%)should be in the form of core capital. Tier 1 Capital generally consists of thesum of common stockholders’ equity and perpetual preferred stock (subject inthe case of the latter to limitations on the kind and amount of such stockwhich may be included as Tier 1 Capital), less goodwill, without adjustment forchanges in the market value of securities classified as “available-for-sale” inaccordance with FAS 115.  Tier 2 Capitalconsists of the following: hybrid capital instruments; perpetual preferredstock which is not otherwise eligible to be included as Tier 1 Capital; termsubordinated debt and intermediate-term preferred stock; and, subject tolimitations, general allowances for loan losses.  Assets are adjusted under the risk-basedguidelines to take into account different risk characteristics, with thecategories ranging from 0% (requiring no risk-based capital) for assets such ascash and certain U.S. government and agency securities, to 100% for the bulk ofassets which are typically held by a bank holding company, including commercialreal estate loans, commercial business loans and consumer loans.  Residential first mortgage loans onone-to-four family residential real estate and certain seasoned multi-familyresidential real estate loans, which are not 90 days or more past-due ornon-performing and which have been made in accordance with prudent underwritingstandards are assigned a 50% level in the risk-weighing system, as are certainprivately-issued mortgage-backed securities representing indirect ownership ofsuch loans.  Off-balance sheet items alsoare adjusted to take into account certain risk characteristics.

In addition to the risk-basedcapital requirements, the Federal Reserve Board has established a minimum 3.0%Leverage Capital Ratio (Tier 1 Capital to total adjusted assets) requirementfor the most highly-rated banks, with an additional cushion of at least 100 to200 basis points for all other banks, which effectively increases the minimumLeverage Capital Ratio for such other banks to 4.0% - 5.0% or more.  The highest-rated banks are those that arenot anticipating or experiencing significant growth and have well diversifiedrisk, including no undue interest rate risk exposure, excellent asset quality,high liquidity, good earnings and, in general, those which are considered astrong banking organization.  A bankhaving less than the minimum Leverage Capital Ratio requirement shall, within60 days of the date as of which it fails to comply with such requirement,submit a reasonable plan describing the means and timing by which the bankshall achieve its minimum Leverage Capital Ratio requirement.  A bank which fails to file such plan is deemedto be operating in an unsafe and unsound manner, and could subject a bank to acease-and-desist order.  Any insureddepository institution with a Leverage Capital Ratio that is less than 2.0% isdeemed to be operating in an unsafe or unsound condition pursuant to Section8(a) of the Federal Deposit Insurance Act (the “FDIA”) and is subject topotential termination of deposit insurance. However, such an institution will not be subject to an enforcementproceeding solely on account of its capital ratios, if it has entered into andis in compliance with a written agreement to increase its Leverage CapitalRatio and to take such other action as may be necessary for the institution tobe operated in a safe and sound manner. The capital regulations also provide, among other things, for theissuance of a capital directive, which is a final order issued to a bank thatfails to maintain minimum capital or to restore its capital to the minimumcapital requirement within a specified time period.  Such directive is enforceable in the samemanner as a final cease-and-desist order. At December 31, 2006, the Bank’s Tier1 risk based capital ratio was 7.83%, its Total risk based capital ratio was11.34% and its Leverage Capital ratio was 7.18%.  At December 31, 2006, the Company’s Tier 1Capital was 10.53%, its Total Capital was 11.57% and its Leverage Capital ratiowas 9.61%.

*Prompt Corrective Action.*  UnderSection 38 of the FDIA, each federal banking agency is required to implement asystem of prompt corrective action for institutions which it regulates.  The federal banking agencies have promulgatedsubstantially similar regulations to implement the system of prompt correctiveaction established by Section 38 of the FDIA. Under the regulations, a bank shall be deemed to be: (i) “wellcapitalized” if it has a Total Risk Based Capital Ratio of 10.0% or more, aTier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage Capital Ratio of5.0% or more and is not subject to any written capital order or directive; (ii)“adequately capitalized” if it has a Total Risk Based Capital Ratio of 8.0% ormore, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a Tier 1 LeverageCapital Ratio of 4.0% or more (3.0% under certain circumstances) and does notmeet the definition of “well capitalized;” (iii) “undercapitalized” if it has aTotal Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk basedCapital Ratio that is less than 4.0% or a Leverage Capital Ratio that is lessthan 4.0% (3.0% under certain circumstances); (iv) “significantlyundercapitalized” if it has a Total Risk Based Capital Ratio that is less than6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a LeverageCapital Ratio that is less than 3.0%; and (v) “critically undercapitalized” ifit has a ratio of tangible equity to total assets that is equal to or less than2.0%.

An institution generally mustfile a written capital restoration plan which meets specified requirements withan appropriate federal banking agency within 45 days of the date theinstitution receives notice or is deemed to have notice

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that it is undercapitalized,significantly undercapitalized or critically undercapitalized.  A federal banking agency must provide theinstitution with written notice of approval or disapproval within 60 days afterreceiving a capital restoration plan, subject to extensions by the applicableagency. An institution which is required to submit a capital restoration planmust concurrently submit a performance guaranty by each company that controlsthe institution.  Such guaranty shall be limitedto the lesser of (i) an amount equal to 5.0% of the institution’s total assetsat the time the institution was notified or deemed to have notice that it wasundercapitalized or (ii) the amount necessary at such time to restore therelevant capital measures of the institution to the levels required for theinstitution to be classified as adequately capitalized.  Such a guaranty shall expire after thefederal banking agency notifies the institution that it has remained adequatelycapitalized for each of four consecutive calendar quarters.  An institution which fails to submit awritten capital restoration plan within the requisite period, including anyrequired performance guaranty, or fails in any material respect to implement acapital restoration plan, shall be subject to the restrictions in Section 38 ofthe FDIA which are applicable to significantly undercapitalizedinstitutions.  At December 31, 2006, theCompany and Bank were considered to be a “well capitalized” institution forpurposes of Section 38 of the FDIA.

A “critically undercapitalizedinstitution” is to be placed in conservatorship or receivership within 90 daysunless the FDIC formally determines that forbearance from such action wouldbetter protect the deposit insurance fund. Unless the FDIC or other appropriatefederal banking regulatory agency makes specific further findings and certifiesthat the institution is viable and is not expected to fail, an institution thatremains critically undercapitalized on average during the fourth calendarquarter after the date it becomes critically undercapitalized must be placed inreceivership. The general rule is that the FDIC will be appointed as receiverwithin 90 days after a bank becomes critically undercapitalized unlessextremely good cause is shown and an extension is agreed to by the federalregulators.  In general, good cause isdefined as capital which has been raised and is imminently available forinfusion into the bank except for certain technical requirements which maydelay the infusion for a period of time beyond the 90 day time period.

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

Additionally, under Section11(c)(5) of the FDIA, a conservator or receiver may be appointed for aninstitution where:  (i) an institution’sobligations exceed its assets;  (ii)there is substantial dissipation of the institution’s assets or earnings as aresult of any violation of law or any unsafe or unsound practice;  (iii) the institution is in an unsafe orunsound condition;  (iv) there is awillful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in the ordinarycourse of business;  (vi) losses orthreatened losses deplete all or substantially all of an institution’s capital,and there is no reasonable prospect of becoming “adequately capitalized”without assistance;  (vii) there is anyviolation of law or unsafe or unsound practice or condition that is likely tocause insolvency or substantial dissipation of assets or earnings, weaken theinstitution’s condition, or otherwise seriously prejudice the interests ofdepositors or the insurance fund;  (viii)an institution ceases to be insured; (ix) the institution is undercapitalized and has no reasonable prospectthat it will become adequately capitalized, fails to become adequatelycapitalized when required to do so, or fails to submit or materially implementa capital restoration plan; or (x) the institution is criticallyundercapitalized or otherwise has substantially insufficient capital.

*Regulatory EnforcementAuthority*.  Federal banking law grants substantialenforcement powers to federal banking regulators.  This enforcement authority includes, amongother things, the ability to assess civil money penalties, to issue cease-and-desistor removal orders and to initiate injunctive actions against bankingorganizations 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.

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*Deposit Insurance Premiums.*  .Pursuant to deposit insurance reform legislation,in December 2006, the FDIC adopted a new risk based assessment system fordetermining deposit insurance premiums. Under the new requirements, four risk categories (I-IV), each subject todifferent premium rates, are established, based upon an institution’s status aswell capitalized, adequately capitalized or undercapitalized, and theinstitution’s supervisory rating.  Underthe new rules, all insured depository institutions will pay deposit insurancepremiums, currently ranging between 5 and 7 basis points on an institution’sassessment base for institutions in risk category I (well capitalizedinstitutions perceived as posing the least risk to the insurance fund), and 10,28 and 43 basis points for institutions in risk categories II, III, andIV.  The level of rates are subject toperiodic adjustment by the FDIC.

**PROPERTIES**

TheBank offers its services from its main office, located at 5350 Lee Highway inArlington, Virginia, and twenty additional banking offices, two mortgagelending offices, one investment services office and its bank operationscenter.  The main office consists of twoconnected red brick buildings, contains an aggregate of approximately 18,000square feet of space on three levels. The Bank utilizes one of the buildings, containing approximately 10,000square feet, as the executive offices and a branch facility.  In August 1995, the Bank sold the connectedbuilding which it had previously leased out. The Bank operates a branch located at 2930 Wilson Boulevard, Arlington,Virginia.  That property, which consistsof a stand alone brick building containing approximately 2,400 square feet on aparcel of approximately 18,087 square feet, was purchased by the Bank in April1997. The Bank also operates a branch location at 5140 Duke Street, Alexandria,Virginia.  That property, which consistsof a two story brick building containing approximately 4,800 square feet on aparcel of approximately 16,800 square feet, was also purchased by the Bank inApril 1997.

TheBank leases twenty-two office locations: the Alexandria Office, located at 1414Prince Street, Alexandria, Virginia, consists of 2,500 square feet; the McLeanOffice, located at 1356 Chain Bridge Road, McLean, Virginia, consists of 1,625square feet; the Williamsburg Boulevard Office, located at 6500 Williamsburg Road,Arlington, Virginia, consists of 1,781 square feet; the Annandale Office,located at 4230 John Marr Drive, Annandale, Virginia, consists of 2,400 squarefeet; 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 of 5,831 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 1,950 square feet; the Lake Ridge office, located at 2030 OldBridge Road, Lake Ridge, Virginia consists of 2,492 square feet; the RestonOffice, located at 11820 Spectrum Center, Reston Virginia consists of 3,700 squarefeet; the Mount Vernon office, located at 7901 Richmond Highway, Alexandria,Virginia, consists of 2,831 square feet; the Walney Road office, located at4221Walney Road, Chantilly, Virginia, consists of 2,661 square feet; the DelRay office, located at 2401 Mount Vernon Avenue, Alexandria, Virginia, consistsof 1,750 square feet; the Tysons Corner office, located at 8251 GreensboroDrive, McLean, Virginia, consists of 1,801 square feet; the Battlefield office,located at 10830 Balls Ford Road, Manassas, Virginia, consists of 7,409 squarefeet; the Newington office, located at 7830 Backlick Road, Springfield,Virginia, consists of 2,778 square feet; the Signal Hill office, located at9161 Liberia Avenue, Manassas, Virginia, consists of 3,613 square feet; theFairfax Lending office, located at 4221 Walney Road, Chantilly, Virginia,consists of 17,273 square feet; the Warrenton Mortgage Lending office, locatedat 54 East Lee Street, Warrenton, Virginia, consists of 300 square feet; theLeesburg Lending office, located at 210 Wirt Street, S.W., Leesburg, Virginia,consists of 630 square feet; the Fredericksburg Lending office, located at 2217Prince Anne Street, Fredericksburg, Virginia, consists of 742 square feet; andthe Bank’s operations center, located at 14201 Sullyfield Circle, Chantilly,Virginia consists of 25,001 square feet. Generally the leases contain renewal option clauses for one or twoadditional five-year terms, and in some instances require payment of certainoperating charges. In addition, the Bank has entered into lease agreements forfive additional offices to be opened between 2007 and 2008. The total rentalexpense under the leases was $2.5 million in 2006.  The total minimum rental commitment under theleases, including the five additional offices to be opened between 2007 and2008, as of December 31, 2006 is as follows: $2.5 million for 2007; $2.9million for 2008, $2.7 million for 2009, $2.6 million for 2010, $2.0 millionfor 2011 and $11.5 million for 2012 and beyond.

**MARKET PRICE OF STOCK AND DIVIDENDS**

TheCompany’s stock is traded on the Nasdaq Global Select Market under the symbol “VCBI”.  Set forth below is the range of high and lowsales prices (adjusted for stock dividends and splits) known to the Company foreach full quarterly period within the two most recent fiscal years.

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**MARKET PRICE OF STOCK**
|             | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $        | 24.51      |     | $          | 19.69 |   | $ | 15.47 |   | $ | 13.94 |   |
| Second      |       | 26.25    |       | 23.21    |       | 16.67 |   | 13.87 |   |
| Third       |       | 24.46    |       | 21.54    |       | 18.67 |   | 16.13 |   |
| Fourth      |       | 22.23    |       | 19.26    |       | 19.90 |   | 17.10 |   |
|             |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

TheCompany has not paid cash dividends since 1995, electing to retain earnings forfunding the growth of the Company and its business. The Company currentlyanticipates continuing the policy of retaining earnings to fund growth. Theability of the Company to pay dividends, should it elect to do so, dependslargely upon the ability of the Bank to declare and pay dividends to theCompany, as the principal source of the Company’s revenue is dividends paid bythe 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 31,2006, the Company had 586 stockholders of record, and an aggregate ofapproximately 2,987 beneficial owners. Information regarding stock dividends and splits in 2006, 2005, and 2004is as follows:

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

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

3.               A five-for-fourstock split in the form of a 25% stock dividend was declared on June 3, 2004,for stockholders of record on June 15, 2004, and was paid on July 15, 2004.

**Securities Authorizedfor Issuance Under Equity Compensation Plans.*** *Thefollowing table sets forth information regarding outstanding options and otherrights to purchase common stock granted under the Company’s compensation plansas of December 31, 2006:

**Equity Compensation Plan Information**
| **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) |       | 1,795,260                                                                                                                                                |       | $                                                                                                                    | 6.93       |                                                                                                                                                                                                                    | 404,984    | (2) |
| Equity  compensation plans not approved by security holders |       | 0                                                                                                                                                        |       | 0                                                                                                                    |       | 0                                                                                                                                                                                                                       |       |
| Total                                                       |       | 1,795,260                                                                                                                                                |       | $                                                                                                                    | 6.93       |                                                                                                                                                                                                                    | 404,984    |   |

 

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(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)                  Sharesinclude 116,598 available for issuance under the 1998 Stock Option Plan and288,386 under the 2003 Employee Stock Purchase Plan.

****Issuer Repurchases of Common Stock.****No shares of the Company’s common stockwere repurchased by or on behalf of the Company during the fourth quarter of2006.

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**STOCKPERFORMANCE COMPARISON**

The following table compares the cumulative total returnon a hypothetical investment of $100 in Virginia Commerce Bancorp’s commonstock at the closing price on December 31, 2001 through December 31, 2006, withthe hypothetical cumulative total return on the Nasdaq Stock Market Index(Total U.S.) and the Nasdaq Bank Index for the comparable period.
|                                           | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2001**              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Virginia Commerce  Bancorp, Inc.          |       | $                     | 100.00     |   | $ | 140.77 |   | $ | 378.69 |   | $ | 421.43 |   | $ | 541.11 |   | $ | 554.69 |   |
| Nasdaq Stock  Market Index - (Total U.S.) |       | $                     | 100.00     |   | $ | 68.47 |   | $ | 102.72 |   | $ | 111.54 |   | $ | 113.07 |   | $ | 123.84 |   |
| Nasdaq Bank Index                         |       | $                     | 100.00     |   | $ | 104.52 |   | $ | 135.80 |   | $ | 150.73 |   | $ | 144.20 |   | $ | 160.07 |   |

 

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**AnnualMeeting of Stockholders**

The annual meeting of stockholders of VirginiaCommerce Bancorp, Inc. (the “Company”) will be held at 4:00 pm on Wednesday,April 25, 2007 at “The Tower Club”, 8000 Tower Crescent Drive, Suite 1700,Vienna, Virginia.

**AnnualReport on Form 10-K**

**A copy ofForm 10-K as filed with the Securities and Exchange Commission is availablewithout 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**

TheCompany provides access to its SEC filings through the Bank’s web site atwww.vcbonline.com. After accessing  the website, 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, andall amendments to those reports as soon as reasonably practicable after thereports are electronically filed or furnished to the SEC.

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

#### Thefollowing financial statements are included in this report:

Consolidated Balance Sheets at December 31, 2005 and 2006

Consolidated Statements of Income for the yearsended December 31, 2004, 2005 and 2006

Consolidated Statements of Cash Flows for theyears ended December 31, 2004, 2005 and 2006

Consolidated Statements of Changes in Stockholders’Equity for the years ended December 31, 2004, 2005 and 2006

Notes to the Consolidated Financial Statements

Reporton Independent Registered Public Accounting Firm

All financial statement scheduleshave been omitted as the required information is either inapplicable orincluded in the consolidated financial statements or related notes.

Exhibits
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                        |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Articles of Incorporation of Virginia Commerce  Bancorp, Inc. (1)                                                                                                                                                                                                                                                      |
| 3.2         |       | Bylaws of Virginia Commerce Bancorp, Inc. (1)                                                                                                                                                                                                                                                                          |
| 4.1         |       | Junior Subordinated Indenture, dated as of November  15, 2002 between Virginia Commerce Bancorp, Inc. and The Bank of New York, as  Trustee (2)                                                                                                                                                                        |
| 4.2         |       | Amended and Restated Declaration of Trust, dated as  of November 15, 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 (2) |
| 4.3         |       | Guarantee Agreement dated as of November 15, 2002,  between Virginia Commerce Bancorp, Inc. and The Bank of New York, as  Guarantee Trustee (2)                                                                                                                                                                        |
| 4.4         |       | Junior Subordinated Indenture, dated as of December  19, 2002 between Virginia Commerce Bancorp, Inc. and The Bank of New York, as  Indenture Trustee (2)                                                                                                                                                              |
| 4.5         |       | 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 (2) |
| 4.6         |       | Guarantee Agreement dated as of December 19, 2002,  between Virginia Commerce Bancorp, Inc. and The Bank of New York, as  Guarantee Trustee (2)                                                                                                                                                                        |

 

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                   |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7         |       | Junior Subordinated Indenture, dated as of December  20, 2005 between Virginia Commerce Bancorp, Inc. and Wilmington Trust  Company, as Trustee, (2)                                                                                                                                              |
| 4.8         |       | 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 (2) |
| 4.9         |       | Guarantee Agreement dated as of December 20, 2005,  between Virginia Commerce Bancorp, Inc. and Wilmington Trust Company, as  Guarantee Trustee (2)                                                                                                                                               |
| 10.1        |       | 1998 Stock Option Plan (1)                                                                                                                                                                                                                                                                        |
| 10.2        |       | 2003 Employee Stock Purchase Plan (3)                                                                                                                                                                                                                                                             |
| 10.3        |       | 2007 Virginia Commerce Bank Executive and Director  Deferred Compensation Plan                                                                                                                                                                                                                    |
| 11          |       | Statement Regarding Computation of Per Share  Earnings See Note 9 to the Consolidated Financial Statements                                                                                                                                                                                        |
| 21          |       | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                    |
| 23          |       | Consent of Yount, Hyde & Barbour, PC,  Independent Registered Public Accounting Firm                                                                                                                                                                                                          |
| 31.1        |       | Certification of Peter A. Converse, Chief Executive  Officer                                                                                                                                                                                                                                      |
| 31.2        |       | Certification of William K. Beauchesne, Treasurer  and Chief Financial Officer                                                                                                                                                                                                                    |
| 32.1        |       | Certification of Peter A. Converse, Chief Executive  Officer                                                                                                                                                                                                                                      |
| 32.2        |       | Certification of William K. Beauchesne, Treasurer  and Chief Financial Officer                                                                                                                                                                                                                    |

 

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(1)   Incorporated by reference to the same numbered exhibit to theCompany’s Annual Report on Form 10-KSB for the year ended December 31, 1999.

(2)   Not filed in accordance with the provisions of Item 601(b)(4)(iii)of Regulation S-K. Virginia Commerce Bancorp, Inc. agrees to provide a copy ofthese documents to the Commission upon request.

(3) Incorporated by reference to exhibit 4 to theCompany’s Registration Statement on Form S-8 (No. 333-109079).

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|        | VIRGINIA COMMERCE BANCORP, INC. |
|--------|---------------------------------|
|   |                            |   |   |   |
|   |                            |   |   |   |
|   | By:                             | /s/ Peter A. Converse |   |   |   |
|   |                            | Peter A. Converse, Chief Executive Officer |
|        |                                 |  |  |  |  |

 

Dated:  March 14, 2007

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
| Name                            | ** ** | **Capacity**                                 | ** **                              | **Date** |
|---------------------------------|------------|----------------------------------------------|-----------------------------------------|----------|
|                            |       |                                         |                                    |     |
| /s/ Leonard  Adler              |       |                                         | Director                                |     | March 14, 2007 |
| Leonard Adler                   |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ Michael G.  Anzilotti       |       |                                         | Director, President                     |     | March 14, 2007 |
| Michael G.  Anzilotti           |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ Peter A.  Converse          |       |                                         | Director, Chief Executive Officer       |     | March 14, 2007 |
| Peter A.  Converse              |       | (Principal Executive Officer)                |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ W. Douglas  Fisher          |       |                                         | Chairman of the Board of Directors      |     | March 14, 2007 |
| W. Douglas  Fisher              |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ David M.  Guernsey          |       |                                         | Vice Chairman of the Board of Directors |     | March 14, 2007 |
| David M.  Guernsey              |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ Robert H.  L’Hommedieu |       |                                         | Director                                |     | March 14, 2007 |
| Robert H.  L’Hommedieu     |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ Norris E.  Mitchell         |       |                                         | Director                                |     | March 14, 2007 |
| Norris E.  Mitchell             |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ Arthur L.  Walters          |       |                                         | Vice Chairman of the Board of Directors |     | March 14, 2007 |
| Arthur L.  Walters              |       |                                         |                                    |     |
|                            |       |                                         |                                    |     |
| /s/ William K.  Beauchesne      |       |                                         | Treasurer and Chief Financial Officer   |     | March 14, 2007 |
| William K.  Beauchesne          |       | (Principal Financial and Accounting Officer) |                                    |     |

 

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