- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

Commission file number 000-28635

VIRGINIA COMMERCE BANCORP, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA

54-1964895

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5350 LEE HIGHWAY, ARLINGTON, VIRGINIA 22207

(Address of principal executive offices) (Zip Code)

703-534-0700

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

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

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

As of November 12, 2010, the number of outstanding shares of registrant’s common stock, par value $1.00 per share, was: 28,893,186.

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Consolidated Balance Sheets – September 30, 2010 (unaudited) and December 31, 2009		3

	Consolidated Statements of Operations (unaudited) – Three and nine months ended September 30, 2010 and 2009		4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Nine months ended September 30, 2010 and 2009		5

	Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2010 and 2009		6

	Notes to Consolidated Financial Statements (unaudited)		7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		37

ITEM 4.	CONTROLS AND PROCEDURES		38

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		38

ITEM 1A.	RISK FACTORS		38

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		38

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		39

ITEM 4.	(REMOVED AND RESERVED)		39

ITEM 5.	OTHER INFORMATION		39

ITEM 6.	EXHIBITS		39

SIGNATURES			40

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

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


	(Unaudited) September 30, 2010		(Audited) December 31, 2009
Assets
Cash and due from banks	$	34,520	$	25,211
Federal funds sold		113,250		—
Investment securities (fair value: 2010, $384,734; 2009, $349,836)		380,915		348,585
Restricted stocks, at cost		11,752		11,751
Loans held-for-sale		14,175		6,492
Loans, net of allowance for loan losses of $62,776 in 2010 and $65,152 in 2009		2,178,034		2,210,064
Bank premises and equipment, net		12,224		13,794
Accrued interest receivable		10,617		10,537
Other real estate owned, net of valuation allowance of $6,001 in 2010 and $9,067 in 2009		24,395		28,499
Other assets		66,121		70,364

Total assets	$	2,846,003	$	2,725,297

Liabilities and Stockholders’ Equity
Deposits
Demand deposits	$	269,703	$	239,604
Savings and interest-bearing demand deposits		1,223,748		985,152
Time deposits		830,027		1,004,571

Total deposits	$	2,323,478	$	2,229,327
Securities sold under agreement to repurchase and federal funds purchased		178,632		176,729
Other borrowed funds		25,000		25,000
Trust preferred capital notes		66,249		66,057
Accrued interest payable		3,173		4,014
Other liabilities		2,459		5,302
Commitments and contingent liabilities		—		—

Total liabilities	$	2,598,991	$	2,506,429

Stockholders’ Equity
Preferred stock, net of discount, $1.00 par, 1,000,000 shares authorized, Series A; $1,000 stated value; 71,000 issued and outstanding in 2010 and 2009	$	65,082	$	63,993
Common stock, $1.00 par, 50,000,000 shares authorized, issued and outstanding 2010, 28,893,186 including 9,335 in unvested restricted stock issued; 2009, 26,744,545		28,884		26,745
Surplus		104,693		96,588
Warrants		8,520		8,520
Retained earnings		35,918		22,671
Accumulated other comprehensive income, net		3,915		351

Total stockholders’ equity	$	247,012	$	218,868

Total liabilities and stockholders’ equity	$	2,846,003	$	2,725,297

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of dollars except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Interest and dividend income:
Interest and fees on loans	$	33,997		$	33,707		$	100,138		$	100,336
Interest and dividends on investment securities:
Taxable		3,131			3,366			9,722			10,523
Tax-exempt		554			426			1,456			1,177
Dividend on restricted stocks		91			97			267			265
Interest on federal funds sold		59			27			137			59

Total interest and dividend income	$	37,832		$	37,623		$	111,720		$	112,360

Interest expense:
Deposits	$	8,113		$	11,649		$	25,972		$	39,076
Securities sold under agreement to repurchase and federal funds purchased		1,023			1,022			3,022			2,477
Other borrowed funds		272			272			806			806
Trust preferred capital notes		1,243			1,276			3,702			3,840

Total interest expense	$	10,651		$	14,219		$	33,502		$	46,199

Net interest income	$	27,181		$	23,404		$	78,218		$	66,161
Provision for loan losses		5,100			49,000			13,538			80,813

Net interest income (loss) after provision for loan losses	$	22,081		$	(25,596	)	$	64,680		$	(14,652	)

Non-interest income (charges):
Service charges and other fees	$	841		$	893		$	2,555		$	2,683
Non-deposit investment services commissions		222			165			529			444
Fees and net gains on loans held-for-sale		908			615			1,737			2,374
Loss on other real estate owned		(713	)		(9,085	)		(2,691	)		(9,085	)
Gain on sale of securities		—			—			139			—
Impairment loss on securities (1)		—			(280	)		(1,519	)		(418	)
Other		1,134			119			1,359			198

Total non-interest income (charges)	$	2,392		$	(7,573	)	$	2,109		$	(3,804	)

Non-interest expense:
Salaries and employee benefits	$	6,253		$	5,645		$	18,239		$	17,260
Occupancy expense		2,414			2,466			7,534			7,670
FDIC insurance		1,312			1,304			3,953			4,100
Franchise tax expense		720			775			2,155			2,325
Data processing		553			598			1,806			1,774
Other operating expense		3,346			2,134			8,428			6,402

Total non-interest expense	$	14,598		$	12,922		$	42,115		$	39,531

Income (loss) before taxes	$	9,875		$	(46,091	)	$	24,674		$	(57,987	)
Provision (benefit) for income taxes		2,917			(16,204	)		7,676			(20,507	)

Net income (loss)	$	6,958		$	(29,887	)	$	16,998		$	(37,480	)

Effective dividend on preferred stock		1,250			1,251			3,752			3,288

Net income (loss) available to common stockholders	$	5,708		$	(31,138	)	$	13,246		$	(40,768	)

Earnings (loss) per common share, basic	$	0.21		$	(1.17	)	$	0.49		$	(1.53	)
Earnings (loss) per common share, diluted	$	0.20		$	(1.17	)	$	0.46		$	(1.53	)

(1)

Loss on securities available-for-sale in 2010 consists of additional other-than-temporary impairment losses since December 31, 2009, of $(760) thousand of which $(1.5) million was recognized as a loss of earnings and a gain of $759 thousand was recognized in other comprehensive income. In 2009, $(418) thousand in other-than-temporary impairment was recognized against earnings and $(274) thousand in other comprehensive loss.

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2010 and 2009

(In thousands of dollars)

(Unaudited)


	Preferred Stock		Common Stock		Surplus		Warrants		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, January 1, 2009	$	62,541	$	26,575	$	95,840	$	8,520	$	60,535		$	(724	)				$	253,287
Comprehensive Loss:
Net (loss)										(37,480	)				$	(37,480	)		(37,480	)
Other comprehensive income:
reclassification adjustment for impairment loss on securities (net of tax of $146)													272			272			272

unrealized holding gains arising during the period (net of tax of $794)													1,475			1,475			1,475

Total comprehensive loss															$	(35,733	)

Stock options exercised		—		121		51		—		—			—						172
Stock option expense		—		—		468		—		—			—						468
Discount on preferred stock		1,089		—		—		—		(1,089	)		—						—
Dividend on preferred stock		—		—		—		—		(2,200	)		—						(2,200	)

Balance, September 30, 2009	$	63,630	$	26,696	$	96,359	$	8,520	$	19,766		$	1,023					$	215,994


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

Total comprehensive income															$	20,562

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


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

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	16,998		$	(37,480	)
Adjustments to reconcile net income (loss) to net cash provided (used in) by operating activities:
Depreciation and amortization		1,983			2,048
Provision for loan losses		13,538			80,813
Stock based compensation expense		493			468
Deferred tax benefit		(2,593	)		(15,474	)
Accretion of trust preferred securities discount		192			193
Amortization of premiums and accretion of security discounts, net		287			305
Origination of loans held-for-sale		(110,046	)		(156,341	)
Sales of loans		103,801			161,038
Gain on sale of loans		(1,437	)		(761	)
Loss on other real estate owned		2,691			9,085
Gain on sale of securities		(139	)		—
Impairment loss on securities		1,519			418
Changes in other assets and other liabilities: (Increase) decrease in accrued interest receivable		(80	)		234
Decrease (increase) in other assets		6,330			(43,686	)
Decrease in other liabilities		(3,683	)		(4,943	)

Net Cash Provided By (Used In) Operating Activities	$	29,854		$	(4,083	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans	$	18,491		$	38,020
Purchase of securities available-for-sale		(194,166	)		(183,250	)
Purchase of securities held-to-maturity		—			(11,350	)
Proceeds from principal payments on securities available-for-sale		40,262			39,186
Proceeds from principal payments on securities held-to-maturity		7,566			7,497
Proceeds from sale of securities held-to-maturity		8,717			—
Proceeds from calls and maturities of securities available-for-sale		106,852			104,597
Proceeds from calls and maturities of securities held-to-maturity		2,252			1,293
Purchase of bank premises and equipment		(413	)		(1,458	)

Net Cash (Used In) Investing Activities	$	(10,439	)	$	(5,465	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	94,151		$	62,662
Net increase (decrease) in repurchase agreements and Federal funds purchased		1,904			(2,428	)
Net proceeds from issuance of capital stock		9,751			172
Dividend paid on preferred stock		(2,662	)		(2,200	)

Net Cash Provided By Financing Activities	$	103,144		$	58,206


Net Increase In Cash and Cash Equivalents		122,559			48,658
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	$	25,211		$	33,515

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	147,770		$	82,173


Supplemental Schedule of Noncash Investing Activities:
Unrealized gain (loss) on securities	$	5,483		$	(1,851	)
Tax benefits on stock options exercised		61			—
Other real estate owned transferred from loans		4,202			37,918
Supplemental Disclosure of Cash Flow Information:
Taxes Paid	$	10,256		$	—
Interest Paid		34,344			49,311

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

VIRGINIA COMMERCE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	General

The accompanying unaudited consolidated financial statements of Virginia Commerce Bancorp, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications consisting of a normal and recurring nature considered necessary to present fairly the financial positions as of September 30, 2010 and December 31, 2009, the results of operations for the three and nine months ended September 30, 2010 and 2009, and statements of cash flows and stockholders’ equity for the nine months ended September 30, 2010 and 2009. These statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2009. In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no material subsequent events to be disclosed at this time.

Operating results for the three and nine month periods ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, or any other period.

Fair Value Measurements

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

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

Fair Value Hierarchy

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

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

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

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

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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

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

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis for September 30, 2010 and December 31, 2009, respectively:


			Fair Value Measurements at September 30, 2010 Using
(in thousands) Description	Balance as of September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities	$	342,061	$	—	$	342,061	$	—

			Fair Value Measurements at December 31, 2009 Using
(in thousands) Description	Balance as of December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities	$	291,521	$	—	$	291,521	$	—

At September 30, 2010 and December 31, 2009, the Company did not have any liabilities measured at fair value on a recurring basis.

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

Loans held for sale : Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the

Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the periods ended September 30, 2010, and December 31, 2009. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Operations.

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

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

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for September 30, 2010 and December 31, 2009, respectively:


			Carrying value at September 30, 2010
(in thousands) Description	Balance as of September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans	$	109,686	$	—	$	92,927	$	16,759
Foreclosed Assets	$	24,395	$	—	$	24,395	$	—


			Carrying value at December 31, 2009
(in thousands) Description	Balance as of December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans	$	121,109	$	—	$	96,798	$	24,311
Foreclosed Assets	$	28,499	$	—	$	28,499	$	—

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

Cash and Short-Term Investments

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

Securities

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

Loans Held-for-Sale

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

Loan Receivables

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

Deposits and Borrowings

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

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Financial Instruments

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

At September 30, 2010 and December 31, 2009, the fair value of loan commitments and stand-by letters of credit were deemed immaterial, and therefore, are not included in the table below.

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


	September 30, 2010				December 31, 2009
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and short-term investments	$	147,770	$	147,770	$	25,211	$	25,211
Securities		380,915		384,734		348,585		349,836
Restricted stock		11,752		11,752		11,751		11,751
Loans held-for-sale		14,175		14,175		6,492		6,492
Loan receivables		2,178,034		2,201,953		2,210,064		2,227,593
Accrued interest receivable		10,617		10,617		10,537		10,537


	September 30, 2010				December 31, 2009
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial liabilities:
Deposits	$	2,323,478	$	2,275,321	$	2,229,327	$	2,202,714
Securities sold under agreements to repurchase and federal funds purchased		178,632		199,718		176,729		200,146
Other borrowed funds		25,000		25,587		25,000		25,683
Trust preferred capital notes		66,249		81,802		66,057		82,651
Accrued interest payable		3,173		3,173		4,014		4,014

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

2.	Investment Securities

Amortized cost and fair value of the securities available-for-sale and held-to-maturity as of September 30, 2010 and December 31, 2009, are as follows (dollars in thousands):


September 30, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available-for-sale:
U.S. Government Agency obligations	$	272,265	$	7,384	$	(18	)	$	279,631
Pooled trust preferred securities		5,964		—		(4,766	)		1,198
Obligations of states and political subdivisions		57,811		3,425		(4	)		61,232

	$	336,040	$	10,809	$	(4,788	)	$	342,061

Held-to-maturity:
U.S. Government Agency obligations	$	7,047	$	366	$	—		$	7,413
Obligations of state and political subdivisions		31,807		3,485		(32	)		35,260

	$	38,854	$	3,851	$	(32	)	$	42,673

December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available-for-sale:
U.S. Government Agency obligations	$	242,129	$	6,004	$	(999	)	$	247,134
Pooled trust preferred securities		7,241		—		(5,211	)		2,030
Obligations of states and political subdivisions		41,610		873		(126	)		42,357

	$	290,980	$	6,877	$	(6,336	)	$	291,521

Held-to-maturity:
U.S. Government Agency obligations	$	12,323	$	430	$	—		$	12,753
Obligations of state and political subdivisions		44,741		821		—			45,562

	$	57,064	$	1,251	$	—		$	58,315

The amortized cost of securities pledged as collateral for repurchase agreements, certain public deposits, and other purposes were $235.8 million and $252.7 million at September 30, 2010 and December 31, 2009, respectively.

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

Provided below is a summary of all securities which were in an unrealized loss position at September 30, 2010 and December 31, 2009, that were evaluated for other-than-temporary impairment, and deemed to not have an other-than-temporary impairment. Presently, the Company does not intend to sell any of these securities, will not be required to sell these securities, and expects to recover the entire amortized cost of all the securities. For U.S. Government Agency obligations and obligations of states/political subdivisions, the unrealized losses result from market or interest rate risk, while the unrealized losses pertaining to the pooled trust preferred securities are due to both performance and credit ratings, as well as interest rate risk.


At September 30, 2010	Less Than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale:
U.S. Government Agency obligations	$	7,086	$	(18	)	$	—	$	—		$	7,086	$	(18	)
Pooled trust preferred securities		—		—			1,198		(4,766	)		1,198		(4,766	)
Obligations of states/political subdivisions		1,007		(4	)		—		—			1,007		(4	)

	$	8,093	$	(22	)	$	1,198	$	(4,766	)	$	9,291	$	(4,788	)


Held-to maturity:
Obligations of states/political subdivisions	$	1,468	$	(32	)	$	—	$	—		$	1,468	$	(32	)

At December 31, 2009	Less Than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale:
U.S. Government Agency obligations	$	70,876	$	(999	)	$	—	$	—		$	70,876	$	(999	)
Pooled trust preferred securities		—		—			2,030		(5,211	)		2,030		(5,211	)
Obligations of states/political subdivisions		8,182		(57	)		2,031		(69	)		10,213		(126	)

	$	79,058	$	(1,056	)	$	4,061	$	(5,280	)	$	83,119	$	(6,336	)

As of September 30, 2010, the Company had three pooled trust preferred securities that were deemed to be other-than-temporarily impaired (“OTTI”) based on a present value analysis of expected future cash flows. These securities had a fair value of $538 thousand and a cumulative other-than-temporary impairment loss of $5.9 million, of which $2.6 million has been recognized in other comprehensive loss, and $3.3 million has been recognized in earnings (in prior periods). The following table provides further information on these three securities as of September 30, 2010 (in thousands):


Security	Class		Current Moody’s Ratings (Lowest Assigned Rating)		Par Value		Book Value/ Fair Value		Unrealized Loss		Current Defaults and Deferrals		% of Current Defaults and Deferrals to Current Collateral			Excess Sub (1)			Estimated Incremental Defaults Required to Break Yield (2)		Cumulative Other Comprehensive Loss (3)		Amount of OTTI Related to Credit Loss (3)
PreTSL VI		Mezz		Caa1	$	525	$	243	$	282	$	33,000		81	%		-49.8	%		BROKEN	$	125	$	157
PreTSL X		B-1		Ca		2,048		182		1,866		220,595		46	%		-100.0	%		BROKEN		696		1,170
PreTSL XXVI		C-2		C		3,859		113		3,746		293,500		30	%		-100.0	%		BROKEN		1,733		2,013

Total					$	6,432	$	538	$	5,894											$	2,554	$	3,340

(1)

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

(2)

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

(3)

Pre-tax.

As of September 30, 2010, the Company had one pooled trust preferred security that was deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The security had a fair value of $660 thousand. The following table provides further information on this security as of September 30, 2010 (in thousands):


Security	Class		Current Moody’s Ratings (Lowest Assigned Rating)		Par Value		Book Value/ Fair Value		Unrealized Loss		Current Defaults and Deferrals		% of Current Defaults and Deferrals to Current Collateral			Excess Sub (1)			Estimated Incremental Defaults Required to Break Yield (2)		Cumulative Other Comprehensive Loss (3)		Amount of OTTI Related to Credit Loss (3)
PreTSL XXVII		B		Caa3	$	2,870	$	660	$	2,210	$	95,800		29	%		-34.1	%	$	60,500	$	2,210		—

(1)

(2)

(3)

Pre-tax.

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


(in thousands)
Amount recognized through December 31, 2009	$	1,821
Additions:
Initial credit impairments		—
Subsequent credit impairments		1,519

Amount recognized through September 30, 2010	$	3,340

Management has evaluated each of these securities for potential impairment under ASC 325 “Investments-Other” and the most recently issued related guidance, and has reviewed each of the issues’ collateral participants’ most recent earnings, capital and loan loss reserve levels, and non-performing loan levels to estimate a future deferral and default rate in basis points for the remaining life of each security. As of September 30, 2010, we used 50 basis points for PreTSL VI and X, 75 basis points for PreTSL XXVI, and 25 basis points for PreTSL XXVII in expected deferrals and defaults as a percentage of remaining collateral for future periods. In performing a detailed present value cash flow analysis for each security, the deferral and default rate was treated the same. If this analysis results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, a credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed used discount rates equal to the credit spread at the time of purchase for each security and then added the current 3-month LIBOR spot rate. The analysis also assumed 15% recoveries on deferrals after two years and prepayments of 1% per year on each security. As of September 30, 2010, there were 2 out of 5 performing banks in PreTSL VI, 36 out of 57 in PreTSL X, 43 out of 67 in PreTSL XXVI, and 26 out of 42 in PreTSL XXVII.

Our investment in Federal Home Loan Bank (“FHLB”) stock totaled $6.0 million at September 30, 2010. FHLB stock is generally viewed as a long-term investment and as a restricted security, which is carried at cost, because there is no market for the stock, other than FHLBs or member institutions. Therefore, when evaluating FHLB stock

for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess stock in 2010, in light of the FHLB’s consistent payment of dividends in 2010 and consistent net income since the quarter ended June 30, 2009, we do not consider this investment to be other-than-temporarily impaired at September 30, 2010, and no impairment has been recognized. FHLB stock is shown in restricted stocks on the Consolidated Balance Sheets and is not part of the available-for-sale securities portfolio.

Loans

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


	September 30, 2010		December 31, 2009
	(Dollars in thousands)
Commercial	$	207,909	$	238,327
Real estate-one to four family residential:
Closed end first and seconds		288,318		271,501
Home equity lines		134,159		135,233

Total real estate-one-to-four family residential	$	422,477	$	406,734
Real estate-multifamily residential		86,896		66,799
Real estate-non-farm, non-residential:
Owner Occupied		476,812		452,776
Non-owner occupied		662,695		673,169

Total Real estate-non-farm, non-residential	$	1,139,507	$	1,125,945
Real estate-construction:
Residential-Owner Occupied		15,152		15,161
Residential-Builder		174,896		224,855
Commercial		185,444		188,276

Total Real estate-construction:	$	375,492	$	428,292
Farmland		2,410		2,675
Consumer		9,794		10,368

Total loans	$	2,244,485	$	2,279,140
Less unearned income		3,675		3,924
Less allowance for loan losses		62,776		65,152

Loans, net	$	2,178,034	$	2,210,064

4.	Allowance for Loan Losses

An analysis of the allowance for loan losses for the nine months ended September 30, 2010, and the year ended December 31, 2009 is shown below (dollars in thousands):


	September 30, 2010			December 31, 2009
Allowance, at beginning of period	$	65,152		$	36,475
Provision charged against income		13,538			81,913
Recoveries added to reserve		3,711			1,377
Losses charged to reserve		(19,625	)		(54,613	)

Allowance, at end of period	$	62,776		$	65,152

In performing a specific reserve analysis on all impaired loans as of September 30, 2010, current third party appraisals were used with respect to approximately 75% of impaired loans to assist with the evaluation of collateral values for the purpose of establishing specific reserves. When a loan is identified as impaired and collateral dependent, a current evaluation of collateral value via third party appraisal or other valuation methodology is conducted within the calendar quarter of identification when possible, but not less than 90 days after identification. Charge-offs and specific reserves are established upon determination of collateral value. During the interim between identification of an impaired loan and receipt of a current appraisal of the related collateral, specific reserves are established based upon interim methodologies including discounted cash flow analysis, tax assessment values and review of market comparables. In general, variances between charge-offs and fair value of collateral is limited to estimates of projected costs of sale. Costs of sale are estimated at 10% of value. Partially charged-off loans remain non-performing until such time as a viable restructuring plan is developed. Upon execution of a forbearance agreement including modified terms, an impaired loan will be re-classified from non-performing to a troubled debt restructuring, but will continue to be identified as impaired until the loan performs under the modified terms for the remainder of the calendar year in which it was restructured, but not less than 90 days. As noted above, in the majority of cases, external appraisals are used to establish fair value of the related collateral. In the interim prior to receipt of a current appraisal or in those situations where a current appraisal is not deemed practical or necessary, discounted cash flow analysis, tax assessment values, review of market comparables and other methodologies are used to establish fair value. Impaired loans which do not have a specific reserve are those loans which have been identified to have sufficient collateral coverage, based upon the fair value of collateral, to repay the entire principal balance due from collateral liquidation.

There were $979 thousand and $3.8 million in loans past due 90 days or more and still accruing interest at September 30, 2010 and December 31, 2009, respectively, that were not classified as impaired loans.

Information about impaired loans and specific reserve allowances as of and for September 30, 2010 and December 31, 2009, is as follows (dollars in thousands):


	September 30, 2010		December 31, 2009
Non-accrual loans for which a specific allowance has been provided	$	28,592	$	34,572
Non-accrual loans for which no specific allowance has been provided		28,426		31,237
Other impaired loans for which a specific allowance has been provided		112,416		117,384
Other impaired loans for which no specific allowance has been provided		96,882		54,438

Total impaired loans	$	266,316	$	237,631

Allowance provided for impaired loans, included in the allowance for loan losses	$	32,519	$	30,847

5.	Earnings (Loss) Per Common Share

The following shows the weighted average number of shares used in computing earnings (loss) per common share and the effect on the weighted average number of shares of diluted potential common stock. As of September 30, 2010, and 2009, there were 4,413,473 and 5,506,993 anti-dilutive stock options and warrants outstanding, respectively.


	Three Months Ended									Nine Months Ended
	September 30, 2010				September 30, 2009					September 30, 2010				September 30, 2009
			Per				Per					Per				Per
			Share				Share					Share				Share
	Shares		Amount		Shares		Amount			Shares		Amount		Shares		Amount
Basic (loss) earnings per share		27,599,007	$	0.21		26,694,898	$	(1.17	)		27,159,404	$	0.49		26,691,490	$	(1.53	)
Effect of dilutive securities:
Stock options		1,294,962				—					1,326,847				—

Diluted (loss) earnings per share		28,893,969	$	0.20		26,694,898	$	(1.17	)		28,486,251	$	0.46		26,691,490	$	(1.53	)

6.	Stock Compensation Plan

At September 30, 2010, the Company had two stock-based compensation plans, the 1998 Stock Option Plan and the 2010 Equity Plan. The 2010 Equity Plan replaced the 1998 Stock Option Plan and as such no further options may be granted under the 1998 Stock Option Plan. Included in salaries and employee benefits expense for the three months ended September 30, 2010 and 2009 is stock-based compensation expense of $161 thousand and $153 thousand, respectively. Included in salaries and employee benefits expense for the nine months ended September 30, 2010 and 2009 is stock-based compensation expense of $493 thousand and $468 thousand, respectively. For all periods presented, stock-based compensation expense is based on the estimated fair value of 840,878 options granted between January 2006 and September 2010, as adjusted, amortized on a straight-line basis over a five year requisite service period. As of September 30, 2010, there was $1.1 million remaining of total unrecognized compensation expense related to these option awards which will be recognized over the remaining requisite service periods.

The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2010 and 2009:


	2010	2009
Expected volatility	32.21	30.59
Expected dividends	0.00%	0.00%
Expected term (in years)	7.2	7.2
Risk-free rate	3.17% to 3.50	2.14% to 3.32

Stock option plan activity for the nine months ended September 30, 2010, is summarized below:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2010		1,926,859		$	7.84
Granted		72,485			5.84
Exercised		(226,666	)		1.67
Forfeited		(34,943	)		10.56

Outstanding at September 30, 2010		1,737,735		$	8.50		4.3 years	$	—
Exercisable at September 30, 2010		1,352,766		$	8.37		3.3 years	$	—

The total value of in-the-money options exercised during the nine months ended September 30, 2010 was $571 thousand.

7.	Capital Requirements

A comparison of the September 30, 2010 capital ratios of the Company and its wholly-owned subsidiary, Virginia Commerce Bank (the “Bank”), with the minimum regulatory guidelines is as follows:


	Actual Capital			Minimum Capital Requirements			Minimum to be “Well-Capitalized” Under Prompt Corrective Action Provisions
Total Risk-Based Capital:
Company		14.21	%		8.00	%		—
Bank		13.80	%		8.00	%		10.00	%

Tier 1 Risk-Based Capital:
Company		12.96	%		4.00	%		—
Bank		12.55	%		4.00	%		6.00	%

Leverage Ratio:
Company		10.84	%		4.00	%		—
Bank		10.52	%		4.00	%		5.00	%

8.	Other Borrowed Funds and Lines of Credit

The Bank maintains a $423.7 million line of credit with the FHLB of Atlanta. The interest rate and term of each advance from the line is dependent upon the advance and commitment type. Advances on the line are secured by all of the Bank’s qualifying first liens and home equity lines-of-credit on one-to-four unit single-family dwellings. As of September 30, 2010, the book value of these qualifying loans totaled approximately $234.6 million and the amount of available credit using this collateral was $132.8 million. Advances on the line of credit in excess of this amount require pledging of additional assets, including other types of loans and investment securities. As of September 30, 2010 and December 31, 2009, the Bank had $25.0 million in advances outstanding that mature on September 21, 2012, but are callable by the FHLB on any quarterly interest payment date. The Bank has additional short-term lines of credit totaling $47.0 million with nonaffiliated banks at September 30, 2010, on which there were no amounts outstanding.

9.	Trust Preferred Capital Notes

On December 19, 2002, the Company completed a private placement issuance of $15.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust II) which issued $470 thousand in common equity to the Company. These securities bear a floating rate of interest, adjusted semi-annually, of 330 basis points over six month LIBOR, currently 4.04%. These securities have been callable at par since December 30, 2007, on any semi-annual interest payment date, but have not been redeemed to date. On December 20, 2005, the Company completed a private placement of $25.0 million of trust preferred securities through a newly formed, wholly-owned, subsidiary trust (VCBI Capital Trust III) which issued $774 thousand in common equity to the Company. These securities bear a fixed rate of interest of 6.19% until February 23, 2011, at which time they convert to a floating rate, adjusted quarterly, of 142 basis points over three month LIBOR. These securities are callable at par beginning February 23, 2011.

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

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

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

10.

Preferred Stock and Warrant

On December 12, 2008, the Company entered into a Letter Agreement (“Agreement”) with the United States Department of the Treasury (“Treasury”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, whereby the Company issued and sold to the Treasury 71,000 shares of fixed rate cumulative perpetual preferred stock with a par value of $1.00 and a liquidation amount of $1,000 per share, for a total price of $71.0 million. In addition, the Treasury received a warrant to purchase 2,696,203 shares of the Company’s common stock at an exercise price of $3.95 per share. Subject to certain restrictions, the preferred stock and the warrant are transferable by the Treasury. The allocated carrying values at September 30, 2010, of the preferred stock and the warrant, based on their relative fair values, were $62.5 million and $8.5 million, respectively.

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

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

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

Cautionary Note Regarding Forward-Looking Statements

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

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

—

adverse governmental or regulatory policies may be enacted;

—

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

—

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

—

adverse effects may be caused by changes to credit quality;

—

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

—

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

—

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

—

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

Other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements are discussed under “Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 31, 2009 and quarterly reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010.

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

Non-GAAP Presentations

The Company prepares its financial statements under GAAP. However, this management’s discussion and analysis also refers to certain non-GAAP financial measures that we believe, when considered together with GAAP financial measures, provide investors with important information regarding our operational performance. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

Core operating earnings is a non-GAAP financial measure that reflects net income excluding taxes, loan loss provisions, losses on other real estate owned (“OREO”) and impairment losses on securities from net income. For the three months ended September 30, 2010, the Company is also excluding from net income $1.0 million in bank-owned life insurance death benefits received. These excluded items are difficult to predict and we believe that core operating earnings provides the Company and investors with a valuable measure of the performance of the Company’s operational performance and a valuable tool to evaluate the Company’s financial results. Calculation of core operating earnings for the three months ended September 30, 2010 and September 30, 2009 is as follows:


	Three Months Ended September 30,
(Dollars in thousands)	2010			2009

Net Income (loss)	$	6,958		$	(29,887	)
Adjustments to net income (loss):
Provision for loan losses		5,100			49,000
Loss on other real estate owned		713			9,085
Impairment loss on securities		—			280
Provision (benefit) for income taxes		2,917			(16,204	)
Death benefits received from bank owned life insurance		(1,045	)		—

Core Operating Earnings	$	14,643		$	12,274

The adjusted efficiency ratio is a non-GAAP financial measure that is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income before losses on other real estate owned. We believe that this measure provides investors with important information about our operating efficiency. Comparison of our adjusted efficiency ratio with those of other companies may not be possible because other companies may calculate the adjusted efficiency ratio differently. Calculation of the adjusted efficiency ratio for the three months and nine months ended September 30, 2010 and September 30, 2009 is as follows:


(Dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Summary Operating Results:
Non-interest expense	$	14,598		$	12,922		$	42,115		$	39,531

Net interest income		27,181			23,404			78,218			66,161
Non-interest income		2,392			(7,573	)		2,109			(3,804	)
Losses on other real estate owned		713			9,085			2,691			9,085
Total	$	30,286		$	24,916		$	83,018		$	71,442

Efficiency Ratio, adjusted		48.2	%		51.9	%		50.7	%		55.3	%

General

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

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

Critical Accounting Policies

For the period ended September 30, 2010, there were no changes in the Company’s critical accounting policies as reflected in the Company’s most recent annual report.

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

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

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

The Company’s 1998 Stock Option Plan (the “1998 Plan”), which is shareholder-approved, permitted the grant of share options to its directors and officers for up to 2.3 million shares of common stock. The Company’s 2010 Equity Plan, which is also shareholder-approved and replaces the 1998 Plan, permits the grant of share options and other awards for up to 1.5 million shares of common stock to directors and officers. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest based on 5 years of continuous service and have 10-year contractual terms. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that currently uses historical volatility of the Company’s stock based on a 7.2 year expected term, before exercise, for the options granted, and a risk-free interest rate based on the United States Department of the Treasury (the “Treasury”) curve in effect at the time of the grant to

estimate total stock-based compensation expense. This amount is then amortized on a straight-line basis over the requisite service period, currently 5 years, to salaries and benefits expense. See Note 6 to the Consolidated Financial Statements for additional information regarding the plans and related expense.

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

Results of Operations

For the three months ended September 30, 2010, the Company recorded net income of $7.0 million. After an effective dividend of $1.3 million to the Treasury on preferred stock, the Company reported net income to common stockholders of $5.7 million, or $0.20 per diluted common share, compared to a net loss to common stockholders of $31.1 million, or $1.17 per diluted common share, in the third quarter of 2009. For the nine months ended September 30, 2010, the Company reported net income to common stockholders of $13.2 million, or $0.46 per diluted common share, compared to a net loss to common stockholders of $40.8 million, or $1.53 per diluted common share, for the same period in 2009. Earnings improvement for both the three- and nine-month periods were attributable to lower provisions for loan losses and a higher net interest margin. Core operating earnings for the three months ended September 30, 2010, were $14.6 million, up $2.3 million, or 18.7%, compared to $12.3 million for the three months ended September 30, 2009. The Company calculates core operating earnings by excluding taxes, provisions for loan losses, losses on other real estate owned and impairment losses on securities from net income. In the current three-month period, the Company is also excluding from net income $1.0 million in bank-owned life insurance death benefits received.

Total assets increased $120.7 million, or 4.4%, from $2.73 billion at December 31, 2009, to $2.85 billion at September 30, 2010, as total deposits grew $94.2 million, or 4.2%, from $2.23 billion to $2.32 billion. Loans, net of allowance for loan losses, were down $32.0 million, or 1.4%, with one-to-four family residential real estate loans up $15.7 million, or 3.9%, non-farm, non-residential real estate loans up $13.6 million, or 1.2%, real estate construction loans down $52.8 million, or 12.3%, and commercial loans down $30.4 million, or 12.8%. Year-to-date loan production has been negatively impacted by lower economic activity and demand for credit in both the business and consumer sectors, a reallocation of lending personnel to problem loan identification and resolution and a strategic decision to restrict acquisition, development and construction lending and an increased emphasis on deposit generation and non-credit products. Lending efforts are being focused on building greater market share in commercial lending, especially in sectors forecast for growth, such as government contract lending, professional practices and associations and select service industries, with strategic hiring, marketing campaigns and calling efforts.

Total deposit growth of $94.2 million during the nine months ended September 30, 2010 included an increase in demand deposits of $30.1 million, or 12.6%, from $239.6 million at December 31, 2009, to $269.7 million at September 30, 2010, an increase in savings and interest-bearing demand deposits of $238.6 million, or 24.2%, and a decrease in time deposits of $174.5 million, or 17.4%. The majority of the Bank’s deposits are attracted from individuals and businesses in the Northern Virginia and the Metropolitan Washington, D.C. area. The increases in demand deposits are primarily due to successful deposit gathering efforts led by the Company’s team of eight business development officers who are focused on acquisition and retention of commercial operating funds, cash management services and other related cross-sales. The increases in savings and interest-bearing demand deposits were due primarily to success with the Company’s MEGA Savings and MEGA Checking account products as well as its Premier Interest Checking for non-profits. The declines in time deposits are reflective of lower loan volume requiring lower levels of funding, and strategic pricing of certificates of deposits relative to both the competitive market and the Company’s pricing on interest-bearing transaction accounts. The proportionate share of time deposits to total deposits has declined from a peak of 67.2% at year-end 2008, to 45.1% at December 31, 2009, and to 35.7% as of September 30, 2010. Brokered certificates of deposit represent $30.0 million of total time deposits, or 1.3% of total deposits, at September 30, 2010.

As noted, for the nine months ended September 30, 2010, the Company recorded net income to common stockholders of $13.2 million as compared to a net loss of $40.8 million for the nine months ended September 30, 2009, as net interest income increased $12.1 million, or 18.2%, non-interest income increased $5.9 million, and non-interest expense rose $2.6 million, or 6.5%, and provisions for loan losses were down $67.3 million. The Company’s annualized return on average assets and return on average equity were 0.81% and 9.92% for the current nine month period compared to a negative 1.83% and a negative 20.36% for the nine months ended September 30, 2009.

For the three months ended September 30, 2010, the Company recorded net income to common stockholders of $5.7 million compared to a net loss of $31.1 million for the same period in 2009 as net interest income rose $3.8 million, or 16.1%, non-interest income increased $10.0 million, or 131.6%, non-interest expense increased $1.7 million, or 13.0%, and provisions for loan losses were down $43.9 million, or 89.6%. The return on average assets and return on average equity were 0.97% and 11.66% for the three months ended September 30, 2010, compared to negative 4.34% and negative 49.33% for the same period in 2009.

On September 29, 2010, the Company issued 1,904,766 shares of its common stock at a price of $5.25 per share in a registered direct placement with several institutional investors for total gross proceeds of $10.0 million. In addition, the Company issued to the investors warrants exercisable for shares of common stock, which, if fully exercised, would provide an additional $11.4 million in gross proceeds to the Company. The warrants each have an exercise price of $6.00 per share, which represents a 14.3% premium to the offering price of the shares of common stock sold in the registered direct placement. The Series A warrants, exercisable for a total of 952,383 shares of common stock, are exercisable for a period of seven months following the closing date. The Series B warrants, also exercisable for a total of 952,383 shares of common stock, are exercisable for a period of twelve months following the closing date.

Stockholders’ equity increased $28.1 million, or 12.9%, from $218.9 million at December 31, 2009, to $247.0 million at September 30, 2010, with $9.3 million in net proceeds from the above referenced stock issuance, net income to common stockholders of $13.2 million, a $3.6 million increase in other comprehensive income related to the investment securities portfolio, and $969 thousand in proceeds and tax benefits related to the exercise of options by company directors and officers, and stock option expense credits. As a result of these changes the Company’s Tier 1 capital ratio increased from 11.48% at December 31, 2009, to 12.96% at September 30, 2010, and its total qualifying capital ratio increased from 12.73% to 14.21%.

Net Interest Income

Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. Net interest income of $27.2 million for the third quarter of 2010 was up $3.8 million, or 16.1% over the same quarter last year, due primarily to an increase in the net interest margin from 3.52% in the third quarter of 2009 to 3.96% for the current three-month period. Year-to-date net interest income of $78.2 million was up 18.2%, compared to $66.2 million in 2009. The year-over-year increases in the net interest margin were driven by lower deposit costs due to significant reductions in the level of time deposits, and increased levels of demand deposits and lower rate interest-bearing transaction accounts. As a result, the average cost of interest-bearing deposits fell from 2.34% in the third quarter of 2009, to 1.57% in the third quarter of 2010, while the yield on interest-earning assets declined only fifteen basis points from 5.65% to 5.50% for the same periods.

The following tables show the average balance sheets for each of the three months and nine months ended September 30, 2010 and 2009. In addition, the amounts of interest earned on interest-earning assets, with related yields on a tax-equivalent basis, and interest expense on interest-bearing liabilities, with related rates, are shown. Loans placed on a non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $672 thousand and $1.3 million for the three months ended September 30, 2010 and 2009, respectively, and totaled $2.0 million and $3.0 million for the nine month periods.


	Three Months Ended September 30,
	2010							2009
(Dollars in thousands)	Average Balance		Interest Income- Expense		Average Yields /Rates			Average Balance		Interest Income- Expense		Average Yields /Rates
Assets
Securities(1)	$	382,399	$	3,685		4.04	%	$	327,690	$	3,792		4.78	%
Restricted Stock		11,752		91		3.06	%		11,752		97		3.29	%
Loans, net of unearned income		2,249,901		33,997		6.01	%		2,266,294		33,707		5.91	%
Interest-bearing deposits in other banks		379		—		0.11	%		89		—		0.09	%
Federal funds sold		103,072		59		0.23	%		48,725		27		0.21	%

Total interest-earning assets	$	2,747,503	$	37,832		5.50	%	$	2,654,550	$	37,623		5.65	%
Other assets		87,488							78,765

Total Assets	$	2,834,991						$	2,733,315


Liabilities and Stockholders’ Equity
Interest-bearing deposits:
NOW accounts	$	350,711	$	749		0.85	%	$	238,988	$	728		1.21	%
Money market accounts		157,157		447		1.13	%		162,353		593		1.45	%
Savings accounts		696,270		2,499		1.42	%		432,362		2,111		1.94	%
Time deposits		851,433		4,418		2.06	%		1,141,571		8,217		2.86	%

Total interest-bearing deposits	$	2,055,571	$	8,113		1.57	%	$	1,975,274	$	11,649		2.34	%
Securities sold under agreement to repurchase and federal funds purchased		183,564		1,023		2.21	%		192,538		1,022		2.11	%
Other borrowed funds		25,000		272		4.25	%		25,000		272		4.25	%
Trust preferred capital notes		66,217		1,243		7.35	%		65,962		1,276		7.57	%

Total interest-bearing liabilities	$	2,330,352	$	10,651		1.81	%	$	2,258,774	$	14,219		2.50	%
Demand deposits		255,484							219,456
Other liabilities		12,468							14,731

Total liabilities	$	2,598,304						$	2,492,961
Stockholders’ equity		236,687							240,354

Total liabilities and stockholders’ equity	$	2,834,991						$	2,733,315

Interest rate spread						3.69	%						3.15	%
Net interest income and margin			$	27,181		3.96	%			$	23,404		3.52	%

(1)

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


	Nine Months Ended September 30,
	2010							2009
(Dollars in thousands)	Average Balance		Interest Income- Expense		Average Yields /Rates			Average Balance		Interest Income- Expense		Average Yields /Rates
Assets
Securities(1)	$	361,101	$	11,178		4.25	%	$	326,009	$	11,700		4.73	%
Restricted Stock		11,752		267		3.03	%		11,534		265		3.07	%
Loans, net of unearned income		2,265,573		100,138		5.92	%		2,290,830		100,336		5.87	%
Interest-bearing deposits in other banks		204		—		0.09	%		89		—		0.11	%
Federal funds sold		79,399		137		0.23	%		39,197		59		0.20	%

Total interest-earning assets	$	2,718,029	$	111,720		5.53	%	$	2,667,659	$	112,360		5.66	%
Other assets		87,186							66,472

Total Assets	$	2,805,215						$	2,734,131


Liabilities and Stockholders’ Equity
Interest-bearing deposits:
NOW accounts	$	333,984	$	2,378		0.95	%	$	220,039	$	2,054		1.25	%
Money market accounts		153,121		1,418		1.24	%		157,718		1,743		1.48	%
Savings accounts		646,466		7,477		1.55	%		326,744		5,271		2.16	%
Time deposits		912,538		14,699		2.15	%		1,275,712		30,008		3.14	%

Total interest-bearing deposits	$	2,046,109	$	25,972		1.70	%	$	1,980,213	$	39,076		2.64	%
Securities sold under agreement to repurchase and federal funds purchased		183,627		3,022		2.20	%		188,575		2,477		1.76	%
Other borrowed funds		25,000		806		4.25	%		25,000		806		4.25	%
Trust preferred capital notes		66,154		3,702		7.38	%		65,898		3,840		7.68	%

Total interest-bearing liabilities	$	2,320,890	$	33,502		1.93	%	$	2,259,686	$	46,199		2.73	%
Demand deposits		241,767							213,942
Other liabilities		13,342							14,373

Total liabilities	$	2,575,999						$	2,488,001
Stockholders’ equity		229,216							246,130

Total liabilities and stockholders’ equity	$	2,805,215						$	2,734,131

Interest rate spread						3.60	%						2.93	%
Net interest income and margin			$	78,218		3.88	%			$	66,161		3.34	%

(1)

Allowance for Loan Losses / Provision for Loan Loss Expense

Provisions for loan losses were $5.1 million for the quarter ended September 30, 2010, compared to $49.0 million in the same period in 2009, with total net charge-offs of $4.7 million in the third quarter of 2010 versus $17.9 million for the same period a year ago. For the nine months ended September 30, 2010, provisions for loan losses totaled $13.5 million compared to $80.8 million for the prior year period, with 2010 year-to-date net charge-offs of $15.9 million significantly reduced from $47.2 million in the nine months ended September 30, 2009. The decrease in the provisions for loan losses in the three and nine months ended September 30, 2010 compared to the same periods of 2009 is primarily due to the continuing trend of declining net charge-offs and non-performing loans.

Total non-performing assets and loans 90+ days past due declined from $123.5 million at September 30, 2009, to $82.4 million at September 30, 2010, and decreased $9.2 million sequentially from $91.6 million at June 30, 2010. As of September 30, 2010, the allowance for loan losses represented 2.80% of total loans, up slightly from 2.77% at June 30, 2010, with such allowance covering 108.2% of total non-performing loans. See “Risk Elements and Non-Performing Assets” later in this discussion for more information on non-performing assets and loans 90+ days past due and other impaired loans.

Management believes that the allowance for loan losses is adequate at September 30, 2010. However, there can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of possible changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, and the residential real estate market in particular, on a national basis or in the Company’s market area, or changes in the circumstances of particular borrowers.

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

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


(Dollars in thousands)	Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			Twelve Months Ended December 31, 2009

Allowance, at beginning of period	$	65,152		$	36,475		$	36,475
Provision charged against income		13,538			80,813			81,913
Recoveries:
Consumer loans		14			58			67
Commercial		2,469			253			739
Real estate one-to-four family residential:
Closed end first and seconds		23			42			42
Home equity lines		288			4			51
Real estate-nonfarm, nonresidential		54			—			149
Real estate-construction		863			205			329
Losses charged to reserve:
Consumer loans		(239	)		(242	)		(416	)
Commercial loans		(6,388	)		(15,603	)		(16,317	)
Real Estate one-to-four family residential:
Permanent first and second		(2,391	)		(1,447	)		(1,867	)
Home equity loans and liens		(365	)		(965	)		(1,516	)
Real estate-multi-family residential		—			—			—
Real estate-nonfarm, nonresidential		(2,883	)		(526	)		(2,108	)
Real estate-construction		(7,359	)		(28,953	)		(32,389	)

Net charge-offs		(15,914	)		(47,174	)		(53,236	)
Allowance, at end of period	$	62,776		$	70,114		$	65,152


Ratio of net charge-offs to average total loans outstanding during period		0.70	%		2.06	%		2.34	%
Allowance for loan losses to total loans		2.80	%		3.15	%		2.86	%

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


(Dollars in thousands)	September 30, 2010		September 30, 2009		December 31, 2009
Allocation of the allowance for loan losses:
Real estate – mortgage-general	$	11,414	$	12,791	$	14,669
Real estate – mortgage-specific		16,098		9,606		11,845
Real estate – construction-general		12,409		16,406		13,616
Real estate – construction-specific		12,877		17,538		13,341
Commercial-general		6,092		6,807		5,700
Commercial-specific		3,509		6,597		5,541
Consumer-general		223		253		320
Consumer-specific		154		116		120

Total	$	62,776	$	70,114	$	65,152

Risk Elements and Non-Performing Assets

Non-performing assets consist of non-accrual loans and OREO (foreclosed properties). For the nine months ended September 30, 2010, total non-performing assets and loans 90+ days past due and still accruing interest decreased by $15.7 million, from $98.1 million at December 31, 2009, to $82.4 million at September 30, 2010, and have declined $41.1 million from $123.5 million at September 30, 2009. As a result, the ratio of non-performing assets and loans 90+ days past due and still accruing to total assets decreased from 4.52% at September 30, 2009, to 2.90% at September 30, 2010, and decreased from 3.60% of total assets at December 31, 2009. Loans are placed in non-accrual status when in the opinion of management the collection of additional interest is unlikely or a specific loan meets the criteria for non-accrual status established by regulatory authorities. No interest is taken into income on non-accrual loans. A loan remains on non-accrual status until the loan is current as to both principal and interest or the borrower demonstrates the ability to pay and remain current, or both.

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

Other impaired loans, that are currently performing, and troubled debt restructurings, performing in accordance with their modified terms, increased from $171.8 million at December 31, 2009, to $209.3 million at September 30, 2010. These loans have been identified by the Company as having certain weaknesses as a result of the Company’s specific knowledge about the customer or recent credit events, and are classified as substandard and subject to impairment testing at each balance sheet date.

Troubled debt restructurings which represented $105.6 million of other impaired loans as of September 30, 2010, were up from $71.9 million at December 31, 2009, and from $31.8 million at September 30, 2009. These loans which have been provided concessions such as rate reductions, payment deferrals, and in some cases forgiveness of principal, are all on accrual status. If the loan was on non-accrual at the time of the concession it is the Company’s policy that it remain on non-accrual status and perform in accordance with the modified terms for a period of six months. All loans reported as troubled debt restructurings accrue interest. If a troubled debt restructuring is on non-accrual status, it is reported as a non-accrual asset and not as a troubled debt restructuring.

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

Total non-performing assets consist of the following:


(Dollars in thousands)	September 30, 2010		September 30, 2009		December 31, 2009

Non-accrual loans:
Commercial	$	5,176	$	9,792	$	6,929
Real estate-one-to-four family residential:
Closed end first and seconds		6,554		6,846		5,769
Home equity lines		724		781		420

Total Real estate-one-to-four family residential	$	7,278	$	7,627	$	6,189
Real estate-non-farm, non-residential:
Owner Occupied		5,251		9,703		8,600
Non-owner occupied		1,204		9,152		6,506

Total Real estate-non-farm, non-residential	$	6,455	$	18,855	$	15,106
Real estate-construction:
Residential-Owner Occupied		—		2,389		517
Residential-Builder		31,138		36,886		30,110
Commercial		6,861		9,457		6,911

Total Real estate-construction:	$	37,999	$	48,732	$	37,538
Consumer		110		187		47

Total Non-accrual loans		57,018	$	85,193	$	65,809
OREO		24,395		36,402		28,499

Total non-performing assets	$	81,413	$	121,595	$	94,308

Loans 90+ days past due and still accruing:
Commercial	$	149	$	150	$	3,797
Real estate-one-to-four family residential:
Closed end first and seconds		—		—		—
Home equity lines		369		—		—

Total Real estate-one-to-four family residential	$	369	$	—	$	—
Real estate multi-family residential		—		1,506		—
Real estate-non-farm, non-residential:
Owner Occupied		361		—		—
Non-owner occupied		—		249		—

Total Real estate-non-farm, non-residential	$	361	$	249	$	—
Real estate-construction:
Residential-Owner Occupied		—		—		—
Residential-Builder		—		—		26
Commercial		—	$	—		—

Total Real estate-construction:	$	—		—	$	26
Consumer		100		—		3

Total Loans past due 90 days and still accruing	$	979	$	1,905	$	3,826

Total non-performing assets and past due loans	$	82,392	$	123,500	$	98,134


(Dollars in thousands)	September 30, 2010			September 30, 2009			December 31, 2009

Non-performing assets
to total loans:		3.63	%		5.46	%		4.14	%
to total assets:		2.86	%		4.45	%		3.46	%
Non-performing assets and 90+ days past due loans
to total loans:		3.67	%		5.54	%		4.31	%
to total assets:		2.90	%		4.52	%		3.60	%
Allowance for loan losses to total loans		2.80	%		3.15	%		2.86	%
Allowance for loan losses to non-performing loans		108.24	%		80.50	%		93.56	%

Total allowance for loan losses	$	62,776		$	70,114		$	65,152
Total provisions for loan losses	$	13,538		$	80,813		$	81,913

Troubled debt restructurings:
Commercial	$	11,754		$	7,250		$	8,963
Real estate-one-to-four family residential:
Closed end first and seconds		4,704			3,804			5,465
Home equity lines		—			—			—

Total Real estate-one-to-four family residential	$	4,704		$	3,804		$	5,465
Real estate multi-family residential		—			—			1,598
Real estate-non-farm, non-residential:
Owner Occupied		23,498			3,668			3,730
Non-owner occupied		36,443			8,748			20,305

Total Real estate-non-farm, non-residential	$	59,941		$	12,416		$	24,035
Real estate-construction:
Residential-Owner Occupied		—			829			—
Residential-Builder		9,094			13,126			12,894
Commercial		20,074			—			18,855

Total Real estate-construction:	$	29,168		$	13,955		$	31,749
Consumer		50			—			75

Total troubled debt restructurings	$	105,617		$	37,425		$	71,885

Non-performing loans continue to be concentrated in residential and commercial construction and land development loans in outer sub-markets hardest hit by the residential downturn and commercial and consumer credits experiencing the after shocks in sub-contracting businesses and workforce employment. Overall, as of September 30, 2010, $38.0 million, or 65.5%, of non-performing loans represented acquisition, development and construction loans, $7.6 million, or 13.2%, represented loans on one-to-four family residential properties, $6.8 million, or 11.8%, represented non-farm, non-residential loans, and $5.3 million, or 9.2%, represented commercial and industrial loans. The Company would have recorded additional gross interest income of approximately $921 thousand for the quarter ended September 30, 2010 and $1.4 million for the quarter ended September 30, 2009, if non-accrual loans had been current throughout these periods. Interest actually received on non-accrual loans was $489 thousand in 2010 and $337 thousand in 2009. See Note 4 to the Consolidated Financial Statements for additional information regarding the Company’s non-performing loans.

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


	As of September 30, 2010
Residential, Acquisition, Development and Construction By County/Jurisdiction of Origination:	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge- offs as a % of Outstandings
District of Columbia	$	4,517		2.4	%	$	—		—			—
Montgomery, MD		5,092		2.7	%		3,349		1.8	%		1.8	%
Prince Georges, MD		18,316		9.6	%		877		0.5	%		—
Other Counties in MD		3,682		1.9	%		1,576		0.8	%		0.7	%
Arlington/Alexandria, VA		32,849		17.3	%		4,611		2.4	%		—
Fairfax, VA		45,670		24.1	%		4,583		2.4	%		—
Culpeper/Fauquier, VA		4,449		2.3	%		3,695		1.9	%		0.8	%
Fredericksburg, VA		6,281		3.3	%		6,250		3.3	%		—
Loudoun, VA		30,215		15.9	%		770		0.4	%		—
Prince William, VA		7,571		4.0	%		1,063		0.6	%		—
Spotsylvania, VA		468		0.2	%		—		—			—
Stafford, VA		21,255		11.2	%		4,364		2.3	%		0.1	%
Other Counties in VA		8,128		4.3	%		—		—			0.1	%
Outside VA, MD & DC		1,555		0.8	%		—		—			—

	$	190,048		100.0	%	$	31,138		16.4	%		3.5	%

	As of September 30, 2010
Commercial, Acquisition, Development and Construction By County/Jurisdiction of Origination:	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge-offs (recoveries) as a % of Outstandings
District of Columbia	$	10,348		5.6	%	$	—		—			—
Montgomery, MD		1,371		0.7	%		—		—			—
Prince Georges, MD		12,493		6.7	%		—		—			—
Other Counties in MD		9,428		5.1	%		—		—			—
Arlington/Alexandria, VA		9,312		5.0	%		—		—			—
Fairfax, VA		22,385		12.1	%		—		—			-0.1	%
Culpeper/Fauquier, VA		3,020		1.6	%		—		—			—
Henrico, VA		843		0.5	%		—		—			—
Loudoun, VA		44,247		23.9	%		4,797		2.6	%		—
Prince William, VA		37,691		20.3	%		2,064		1.1	%		—
Spotsylvania, VA		2,712		1.5	%		—		—			—
Stafford, VA		29,702		16.0	%		—		—			—
Other Counties in VA		1,892		1.0	%		—		—			—
Outside VA, MD & DC		—		—			—		—			—

	$	185,444		100.0	%	$	6,861		3.7	%		-0.1	%

	As of September 30, 2010
Non-Farm/Non-Residential By County/Jurisdiction of Origination:	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge- offs as a % of Outstandings
District of Columbia	$	73,191		6.4	%	$	—		—			—
Montgomery, MD		41,701		3.7	%		—		—			0.1	%
Prince Georges, MD		54,056		4.7	%		1,099		0.1	%		—
Other Counties in MD		47,201		4.1	%		—		—			—
Arlington/Alexandria, VA		177,236		15.5	%		2,296		0.2	%		—
Fairfax, VA		275,798		24.2	%		—		—			—
Culpeper/Fauquier, VA		5,746		0.5	%		—		—			—
Frederick, VA		6,539		0.6	%		—		—			—
Henrico, VA		29,329		2.6	%		—		—			0.1	%
Loudoun, VA		107,812		9.5	%		1,500		0.1	%		0.1	%
Prince William, VA		210,918		18.5	%		1,334		0.1	%		—
Spotsylvania, VA		21,231		1.9	%		—		—			—
Stafford, VA		21,059		1.8	%		—		—			—
Other Counties in VA		57,652		5.1	%		226		0.1	%		—
Outside VA, MD & DC		10,038		0.9	%		—		—			—

	$	1,139,507		100.0	%	$	6,455		0.6	%		0.3	%

Concentrations of Credit Risk

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

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

At September 30, 2010, the Company had $1.60 billion, or 71.4%, of total loans concentrated in commercial real estate. Commercial real estate for purposes of this discussion includes all construction loans, loans secured by multi-family residential properties and loans secured by non-farm, non-residential properties. At December 31, 2009, commercial real estate loans were $1.62 billion, or 71.1%, of total loans. Total construction loans of $375.5 million at September 30, 2010, represented 16.7% of total loans, loans secured by multi-family residential properties of $86.9 million represented 3.9% of total loans, and loans secured by non-farm, non-residential properties of $1.1 billion represented 50.8%.

Construction loans at September 30, 2010 included $174.9 million in loans to commercial builders of single family residential property and $15.2 million to individuals on single family residential property, together representing 8.5% of total loans. These loans are made to a number of unrelated entities and generally have a term of twelve to eighteen months. In addition, the Company had $185.4 million of construction loans on non-residential commercial property at September 30, 2010, representing 8.3% of total loans. Total construction loans of $375.5 million include $130.4 million in land acquisition and/or development loans on residential property and $100.4 million in land acquisition and/or development loans on commercial property, together totaling $230.8 million, or 10.3% of total loans. Potential adverse developments in the Northern Virginia real estate market or economy, including substantial increases in mortgage interest rates, slower housing sales, and increased commercial property vacancy rates, could have an adverse impact on these groups of loans and the Bank’s income and financial position. At September 30, 2010, the Company had no other concentrations of loans in any one industry exceeding 10% of its total loan portfolio. An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

The Bank has established formal policies relating to the credit and collateral requirements in loan originations including policies that establish limits on various loan types as a percentage of total loans and total capital. Loans to purchase real property are generally collateralized by the related property with limitations based on the property’s appraised value. Credit approval is primarily a function of collateral and the evaluation of the creditworthiness of the individual borrower and guarantors and/or the individual project, to include an analysis of cash flows and secondary repayment sources.

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

Non-Interest Income (Charges)

For the three months ended September 30, 2010, the Company recognized $2.4 million in non-interest income, compared to a non-interest loss of $7.6 million for the three months ended September 30, 2009. For the nine months ended September 30, 2010, the Company recognized non-interest income of $2.1 million compared to a non-interest loss of $3.8 million for the same period in 2009. Non-interest income for the third quarter of 2010 includes $713 thousand in losses on other real estate owned, no impairment losses on securities, and $1.0 million in bank-owned life insurance death benefits received, while in the third quarter of 2009, non-interest income included $9.1 million in losses on other real estate owned and $280 thousand in impairment losses on securities. Non-interest income for the first nine months of 2010 includes $2.7 million in losses on other real estate owned and $1.5 million in impairment losses on securities compared, while in the first nine months of 2009, non-interest income included $9.1 million in losses on other real estate owned and $418 thousand in impairment losses on securities. Fees and net gains on loans held for sale increased $425 thousand during the third quarter of 2010 from the second quarter of 2010, and decreased by $637 thousand for the nine months ended September 30, 2010, from the same period last year.

Non-Interest Expense

Non-interest expense increased $1.7 million, or 13.0%, from $12.9 million in the third quarter of 2009, to $14.6 million in the third quarter of 2010, and was up $2.6 million, or 6.5%, from $39.5 million for the nine months ended September 30, 2009, to $42.1 million year-to-date 2010. Compared to the second quarter of 2010, non-interest expense was up $870 thousand. The majority of the year-over-year increases were due to higher legal and professional services expenses associated with the collection of non-performing loans and higher carrying expenses on other real estate owned. Despite these increases, higher levels of net interest income resulted in the efficiency ratio improving from 51.9% in the third quarter of 2009 to 48.2% in the third quarter of 2010.

Provision for Income Taxes

The Company’s income tax provisions are adjusted for non-deductible expenses and non-taxable income after applying the U.S. federal income tax rate of 35%. For the nine months ended September 30, 2010, the Company recorded an income tax provision of $7.7 million as compared to a benefit of $20.5 million for the same period in 2009. For the three months ended September 30, 2010, the Company recorded an income tax provision of $2.9 million as compared to a benefit of $16.2 million for the same period in 2009. The effects of non-deductible expenses and non-taxable income on the Company’s income tax provisions are minimal.

Liquidity

The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Considerations in managing the Company’s liquidity position include, but are not limited to, scheduled cash flows from existing loans and investment securities, anticipated deposit activity including the maturity of time deposits, and projected needs from anticipated extensions of credit. The Company’s liquidity position is monitored daily by management to maintain a level of liquidity that can efficiently meet current needs and is evaluated for both current and longer term needs as part of the asset/liability management process.

The Company measures total liquidity through cash and cash equivalents, securities available-for-sale, mortgage loans held-for-sale, other loans and investment securities maturing within one year, less securities pledged as collateral for repurchase agreements, public deposits and other purposes, and less any outstanding Federal funds purchased. These liquidity sources increased $145.9 million, or 23.7%, from $615.2 million at December 31, 2009, to $761.1 million at September 30, 2010, due to a $113.3 million increase in Federal funds sold and a $48.0 million increase in unpledged available-for-sale securities. Additional sources of liquidity available to the Bank include the capacity to borrow funds through established short-term lines of credit with various correspondent banks and the FHLB of Atlanta. See Note 8 to the Consolidated Financial Statements for further information regarding these additional liquidity sources.

Off-Balance Sheet Arrangements

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

Commitments to extend credit, which amounted to $492.4 million at September 30, 2010, and $453.3 million at December 31, 2009, represent legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. At September 30, 2010, and December 31, 2009, the Company had $30.1 million and $48.1 million, respectively, in outstanding standby letters of credit.

Contractual Obligations

Since December 31, 2009, there have been no significant changes in the Company’s contractual obligations.

Capital

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

Both the Company’s and the Bank’s capital levels continue to meet regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier 1 risk-based capital, total risk-based capital, and leverage ratios. Tier 1 capital consists of common and qualifying preferred stockholders’ equity, less goodwill, and for the Company includes certain minority interests relating to Bank subsidiary issued shares, and a limited amount of restricted core capital elements. Restricted core capital elements include qualifying cumulative preferred stock interests, certain minority interests in subsidiaries and qualifying trust preferred securities. All of the $71.0 million in preferred stock issued to the Treasury under the Capital Purchase Program qualify as Tier 1 capital. Total risk-based capital consists of Tier 1 capital, qualifying subordinated debt, and a portion of the allowance for loan losses, and for the Company, a limited amount of excess restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weighted assets. The leverage ratio compares Tier 1 capital to total average assets. The Bank’s Tier 1 risk-based capital ratio was 12.55% at September 30, 2010, compared to 11.41% at December 31, 2009, and its total risk-based capital ratio was 13.80% at September 30, 2010, compared to 12.66% at December 31, 2009. These ratios are in excess of the mandated minimum requirement of 4.00% and 8.00%, respectively. The Bank’s leverage ratio was 10.52% at September 30, 2010, compared to 10.23% at December 31, 2009. The Company’s Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 12.96%, 14.21%, and 10.84%, respectively, at September 30, 2010, compared to 11.48%, 12.73%, and 10.29%, respectively, at December 31, 2009. The increases in these capital ratios in 2010 are due to lower levels of risk-weighted assets, higher earnings and $9.3 million in net proceeds from the issuance of 1.9 million shares of common stock.

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

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

The Federal Reserve has revised the capital treatment of trust preferred securities. As a result, the capital treatment of trust preferred securities has been revised to provide that beginning in 2011, such securities can be counted as Tier 1 capital at the holding company level, together with other restricted core capital elements, up to 25% of total capital (net of goodwill), and any excess as Tier 2 capital, subject to limitation. At September 30, 2010, trust preferred securities represented 20.9% of the Company’s Tier 1 capital and 19.1% of its total risk-based capital. See Note 9 to the Consolidated Financial Statements for further information regarding trust preferred securities.

Capital Issuances. As noted above, during 2008, the Company accepted an investment by Treasury under the Capital Purchase Program. In connection with that investment, the Company entered into and consummated an Agreement with the Treasury, pursuant to which the Company issued 71,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $71.0 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Subject to approval by the Treasury after consultation with the Company’s and Bank’s federal regulators, the Company may, at its option, redeem the Series A Preferred Stock at the liquidation amount plus accrued and unpaid dividends. The Series A Preferred Stock is non-voting, except in limited circumstances. Prior to the third anniversary of issuance, unless the Company has redeemed all of the Series A Preferred Stock or the Treasury has transferred all of the Series A Preferred Stock to a third party, the consent of the Treasury will be required for the Company to commence paying a cash common stock dividend or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Agreement.

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

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

Recent Accounting Pronouncements

In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (“ASU”) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance relating to variable interest entities. The new guidance, which was issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” was adopted into Codification in December 2009 as ASC 810-10. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. ASC 810-10 is effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-04, “Accounting for Various Topics – Technical Corrections to Securities and Exchange Commission (“SEC”) Paragraphs.” ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements—subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures and require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-08, “Technical Corrections to Various Topics.” ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective

for both interim and annual reporting periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance roll-forward and modification disclosures, will be required for periods beginning after December 15, 2010. The Company is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.

On September 17, 2010, the SEC issued Release No. 33-9144, “Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis.” This interpretive release is intended to improve discussion of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, “Short-Term Borrowings Disclosure,” that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 28, 2010.

Internet Access To Company Documents

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Our short term interest rate sensitivity is managed through the use of a model that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The model assumes that the composition of interest sensitive assets and liabilities existing at September 30, 2010, remains constant over a two year period (base case) and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.

The following table provides an analysis of our interest rate risk as measured by the estimated change in MVPE and net interest income from the base case, resulting from instantaneous and sustained parallel shifts in interest rates as of September 30, 2010 (in thousands):


	Sensitivity of Market Value of Portfolio Equity September 30, 2010											Sensitivity of Net Interest Income September 30, 2010
	Market Value of Portfolio Equity											Net Interest Income					Net Interest Margin
Interest Rate Scenario	Amount		$ Change from Base			Percent			% of Total Assets			Amount		$ Change from Base			Percent			% Change from Base
Up 300 bps	$	236,801	$	(54,183	)		-18.62	%		8.22	%	$	206,746	$	8,695			3.71	%		4.39	%
Up 200 bps		258,918		(32,066	)		-11.02	%		8.99	%		204,711		6,660			3.67	%		3.36	%
Base Case		290,984		—			0.00	%		10.10	%		198,051		—			3.55	%		0.00	%
Down 100 bps		289,104		1,880			0.65	%		10.04	%		189,899		(8,152	)		3.41	%		-4.12	%

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

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Company’s periodic reports.

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

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS – None

Item 1A. RISK FACTORS

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2009 and the Company’s quarterly reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010.

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

(a)

Sales of Unregistered Securities. - None

(b)

Use of Proceeds.- Not Applicable.

(c)

Issuer Purchases of Securities. - None

Item 3. DEFAULTS UPON SENIOR SECURITIES - None

Item 4. (REMOVED AND RESERVED)

Item 5. OTHER INFORMATION

(a)

Required 8-K Disclosures. None

(b)

Changes in Procedures for Director Nominations by Securityholders. None

Item 6. EXHIBITS


Exhibit No.		Description

3.1		Articles of Incorporation of Virginia Commerce Bancorp, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006)
3.2		Articles of Amendment to the Articles of Incorporation relating to the Series A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 15, 2008)
3.3		Amended and Restated Bylaws of Virginia Commerce Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on July 27, 2007)
4.12		Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.12 to the Company’s Current Report on Form 8-K filed on September 28, 2010)
10.7		Letter Agreement, dated as of September 23, 2010, between Virginia Commerce Bancorp, Inc. and Rodman & Renshaw, LLC (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on September 28, 2010)
10.8		Securities Purchase Agreement, dated as of September 23, 2010, among Virginia Commerce Bancorp, Inc. and certain institutional purchasers (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on September 28, 2010)
31.1		Certification of Peter A. Converse, President and Chief Executive Officer
31.2		Certification of William K. Beauchesne, Treasurer and Chief Financial Officer
32.1		Certification of Peter A. Converse, President and Chief Executive Officer
32.2		Certification of William K. Beauchesne, Treasurer and Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Virginia Commerce Bancorp, Inc.
	(Registrant)

Date: November 12, 2010	BY	/s/ Peter A. Converse
	Peter A. Converse, President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 12, 2010	BY	/s/ William K. Beauchesne
	William K. Beauchesne, Treasurer and Chief Financial Officer
	(Principal Financial Officer)