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, 2012

¨	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). x 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 2, 2012, the number of outstanding shares of registrant’s common stock, par value $1.00 per share, was: 30,824,726.

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Consolidated Balance Sheets – September 30, 2012 (unaudited) and December 31, 2011		3

	Consolidated Statements of Income (unaudited) – Three and nine months ended September 30, 2012 and 2011		4

	Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months ended September 30, 2012 and 2011		5

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Nine months ended September 30, 2012 and 2011		6

	Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2012 and 2011		7

	Notes to Consolidated Financial Statements (unaudited)		8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		51

ITEM 4.	CONTROLS AND PROCEDURES		52

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		54

ITEM 1A.	RISK FACTORS		54

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		54

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		54

ITEM 4.	MINE SAFETY DISCLOSURES		54

ITEM 5.	OTHER INFORMATION		54

ITEM 6.	EXHIBITS		54

SIGNATURES			55

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share and per share data)


	(Unaudited) September 30, 2012		(Audited) December 31, 2011
Assets
Cash and due from banks	$	29,620	$	31,569
Interest bearing deposits in other banks		213,973		51,000

Cash and cash equivalents		243,593		82,569
Investment securities, available-for-sale, at fair value		545,143		593,064
Investment securities, held-to-maturity, at amortized cost (fair value of $34,431)		—		31,892
Restricted investments, at cost		11,272		11,214
Loans held-for-sale		19,330		18,485
Loans, net of allowance for loan losses of $41,288 and $48,729		2,102,588		2,120,291
Premises and equipment, net		10,511		11,413
Accrued interest receivable		9,541		10,007
Other real estate owned, net of valuation allowance of $5,287 and $6,517		14,089		8,925
Bank-owned life insurance		14,176		14,017
Other assets		34,499		36,641

Total assets	$	3,004,742	$	2,938,518

Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing demand deposits	$	390,692	$	337,937
Savings and interest-bearing demand deposits		1,174,789		1,173,568
Time deposits		647,075		780,653

Total deposits	$	2,212,556	$	2,292,158
Securities sold under agreement to repurchase		409,320		263,273
Other borrowed funds		—		25,000
Trust preferred capital notes		66,762		66,570
Accrued interest payable		2,131		2,418
Other liabilities		2,445		5,328
Commitments and contingent liabilities		—		—

Total liabilities	$	2,693,214	$	2,654,747

Stockholders’ Equity
Preferred stock, net of discount, $1.00 par value per share, 1,000,000 shares authorized, Series A; $1,000 stated value; 71,000 issued and outstanding at September 30, 2012 and December 31, 2011	$	68,621	$	67,195
Common stock, $1.00 par value per share, 50,000,000 shares authorized, 31,824,756 issued and outstanding at September 30, 2012, including 110,215 in unvested shares and 30,263,672 issued and outstanding at December 31, 2011, including 49,998 in unvested shares		31,715		30,214
Surplus		117,905		111,042
Warrants		8,520		8,520
Retained earnings		79,258		60,999
Accumulated other comprehensive income, net		5,509		5,801

Total stockholders’ equity	$	311,528	$	283,771

Total liabilities and stockholders’ equity	$	3,004,742	$	2,938,518

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012		2011
Interest and dividend income:
Interest on loans, including fees	$	29,820		$	31,456		$	90,868	$	95,144
Interest and dividends on investment securities:
Taxable		2,232			3,185			7,328		9,177
Tax-exempt		574			593			1,748		1,777
Dividend on restricted investments		105			95			310		287
Interest on deposits in other banks		132			21			257		21
Federal funds sold		—			53			—		152

Total interest and dividend income	$	32,863		$	35,403		$	100,511	$	106,558

Interest expense:
Interest on deposits	$	4,261		$	6,485		$	13,668	$	20,178
Interest on securities sold under agreement to repurchase		1,017			965			3,068		2,859
Interest on other borrowed funds		242			272			779		806
Interest on trust preferred capital notes		975			952			2,932		3,015

Total interest expense	$	6,495		$	8,674		$	20,447	$	26,858

Net interest income	$	26,368		$	26,729		$	80,064	$	79,700
Provision for loan losses		3,111			3,933			12,267		11,210

Net interest income after provision for loan losses	$	23,257		$	22,796		$	67,797	$	68,490

Non-interest income:
Service charges on deposits	$	882		$	839		$	2,638	$	2,430
Non-deposit investment services commissions		211			340			705		1,053
Gain on sale of mortgage loans held-for-sale		1,082			744			2,913		1,799
Gain on sale of investment securities available-for-sale		2,056			—			5,976		503
Total other-than-temporary impairment losses on investment securities		—			—			—		(3,107	)
Portion of loss recognized in other comprehensive income		—			—			—		2,375

Net impairment losses on investment securities		—			—			—		(732	)
Increase in surrender value of bank-owned life insurance		50			58			159		544
Other income		444			(41	)		704		75

Total non-interest income	$	4,725		$	1,940		$	13,095	$	5,672

Non-interest expense:
Salaries and employee benefits	$	7,493		$	6,591		$	22,517	$	19,676
Premises and equipment expenses		2,380			2,293			7,142		7,006
FDIC insurance		660			864			2,488		3,394
(Gain) loss on other real estate owned		(141	)		546			1,566		1,022
Other real estate owned expenses		322			277			902		616
Franchise tax expense		935			780			2,435		2,326
Data processing expenses		664			652			1,992		1,942
Other operating expenses		2,899			2,890			8,354		7,881

Total non-interest expense	$	15,212		$	14,893		$	47,396	$	43,863

Income before provision for income taxes	$	12,770		$	9,843		$	33,496	$	30,299
Provision for income taxes		4,284			3,277			11,148		9,931

Net income	$	8,486		$	6,566		$	22,348	$	20,368

Effective dividend on preferred stock	$	1,364			1,349		$	4,090		4,012

Net income available to common stockholders	$	7,122		$	5,217		$	18,258	$	16,356

Earnings per common share, basic	$	0.22		$	0.18		$	0.58	$	0.55
Earnings per common share, diluted	$	0.21		$	0.17		$	0.54	$	0.53

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)


	Three Months Ended Sept. 30,					Nine Months Ended Sept. 30,
	2012			2011		2012			2011
Net Income	$	8,486		$	6,566	$	22,348		$	20,368
Other Comprehensive Income (loss):
Unrealized net gains on investment securities available-for-sale, net of tax ⁽¹⁾		1,772			2,287		1,929			7,862
Reclassification adjustment for transfer of investment securities from held-to-maturity to available-for-sale, net of tax of $895 in 2012		—			—		1,663			—
Reclassification adjustment for gains on sale of investment securities, net of tax ⁽²⁾		(1,336	)		—		(3,884	)		(327	)
Reclassification adjustment for impairment loss on investment securities, net of tax $256 in 2011		—			—		—			476

Total Other Comprehensive Income (Loss)		436			2,287		(292	)		8,011

Total Comprehensive Income	$	8,922		$	8,853	$	22,056		$	28,379

(1)	Net of tax of $954 and $1,232 for the three months ended September 30, 2012 and 2011, respectively and $1,039 and $4,230 for the nine months ended September 30, 2012 and 2011, respectively.

(2)	Net of tax of $(720) for September 30, 2012, and $(2,092) and $(176) for the nine months ended September 30, 2012 and 2011, respectively.

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)


	Preferred Stock		Common Stock		Surplus		Warrants		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, January 1, 2011	$	65,445	$	28,954	$	105,056	$	8,520	$	39,208		$	(1,589	)	$	245,594
Net income										20,368						20,368
Other comprehensive income													8,011			8,011
Capital common stock issued		—		426		2,075		—		—			—			2,501
Stock options/warrants exercised		—		322		976		—		—			—			1,298
Stock option expense		—		—		436		—		—			—			436
Discount on preferred stock		1,349		—		—		—		(1,349	)		—			—
Dividend on preferred stock		—		—		—		—		(2,662	)		—			(2,662	)

Balance, September 30, 2011	$	66,794	$	29,702	$	108,543	$	8,520	$	55,565		$	6,422		$	275,546

Balance, January 1, 2012	$	67,195	$	30,214	$	111,042	$	8,520	$	60,999		$	5,801		$	283,771
Net income		—		—		—		—		22,348			—			22,348
Other comprehensive (loss)		—		—		—		—		—			(292	)		(292	)
Capital common stock issued		—		426		1,968		—		—			—			2,394
Stock options/warrants exercised		—		1,075		4,479		—		—			—			5,554
Stock option expense		—		—		416		—		—			—			416
Discount on preferred stock		1,426		—		—		—		(1,426	)		—			—
Dividend on preferred stock		—		—		—		—		(2,663	)		—			(2,663	)

Balance, September 30, 2012	$	68,621	$	31,715	$	117,905	$	8,520	$	79,258		$	5,509		$	311,528

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

VIRGINIA COMMERCE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	22,348		$	20,368
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,665			1,645
Provision for loan losses		12,267			11,210
Stock based compensation expense		416			436
Deferred tax expense		982			6,420
Accretion of trust preferred securities discount		192			192
Amortization of premiums and accretion of security discounts, net		6,127			1,236
Loans originated for sale		(146,770	)		(103,656	)
Sales of loans		148,498			97,801
(Gain) loss on sale of loans		(2,573	)		(1,560	)
Loss on sale/valuation of OREO		1,566			637
Gain on sale of investment securities available-for-sale		(5,976	)		(503	)
Impairment loss on investment securities		—			732
Changes in other assets and other liabilities: Decrease (increase) in accrued interest receivable		466			(255	)
Decrease in other assets		1,158			8,809
Increase (decrease) in other liabilities		(2,883	)		38
Decrease in accrued interest payable		(287	)		(171	)

Net Cash Provided By Operating Activities	$	37,196		$	43,379

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans	$	(4,300	)	$	35,125
Purchase of investment securities available-for-sale		(334,067	)		(325,168	)
Proceeds from principal payments, calls and maturities on investment securities available-for-sale		256,274			129,019
Proceeds from principal payments, calls and maturities on investment securities held-to-maturity		1,873			4,063
Sale of investment securities available-for-sale		155,133			12,645
(Purchase) redemption of FHLB stock		(58	)		396
Purchase of premises and equipment		(763	)		(1,087	)
Proceeds from sale of other real estate owned		3,006			12,365

Net Cash Provided By (Used In) Investing Activities	$	77,098		$	(132,642	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and savings accounts	$	53,976		$	110,830
Net (decrease) increase in time deposits		(133,578	)		10,908
Net increase in securities sold under agreement to repurchase		146,047			48,926
Proceeds from exercise of stock options and warrants		5,554			1,298
Net proceeds from issuance of common stock		2,394			2,501
Repayment of other borrowed funds		(25,000	)		—
Dividend paid on preferred stock		(2,663	)		(2,662	)

Net Cash Provided By Financing Activities	$	46,730		$	171,801

Net Increase In Cash and Cash Equivalents		161,024			82,538
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	$	82,569		$	47,387

CASH AND CASH EQUIVALENTS – END OF PERIOD	$	243,593		$	129,925

Supplemental Disclosure of Cash Flow Information:
Income taxes paid	$	10,840		$	3,348
Interest paid		20,734			27,029
Supplemental Schedule of Noncash Investing Activities:
Unrealized (loss) gain on available-for-sale securities	$	(3,008	)	$	12,321
Unrealized gain on securities transferred from held-to-maturity to available-for-sale		2,558			—
OREO transferred from loans		14,634			6,214
Loans made on the disposition of OREO		4,898			3,540

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 consolidated balance sheets as of September 30, 2012 and December 31, 2011, the consolidated statements of income for the three and nine months ended September 30, 2012 and 2011, consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2012 and 2011, and consolidated statements of changes in stockholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011. These statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2011. In preparing these consolidated financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these consolidated 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, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or any other period. Reclassifications of prior years’ amounts are made whenever necessary to conform to the current years’ presentation.

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.

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 the FASB guidance, the Company groups its financial assets and financial liabilities and certain non-financial assets 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.

An asset or liability’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:

Investment securities available-for-sale : Investment 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 consider observable market data (Level 2).

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis for September 30, 2012 and December 31, 2011, respectively (dollars in thousands):


			Carrying value at September 30, 2012
Description	Balance as of September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investment securities available-for-sale
U.S. Government Treasury obligations	$	15,000	$	—	$	15,000	$	—
U.S. Government Agency obligations	$	429,416	$	—	$	429,416	$	—
Pooled trust preferred securities	$	358	$	—	$	358	$	—
Obligations of states and political subdivisions	$	100,369	$	—	$	100,369	$	—


			Carrying value at December 31, 2011
Description	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Investment securities available-for-sale
U.S. Government Agency obligations	$	523,987	$	—	$	523,987	$	—
Pooled trust preferred securities	$	456	$	—	$	456	$	—
Obligations of states and political subdivisions	$	68,621	$	—	$	68,621	$	—

At September 30, 2012 and December 31, 2011, 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, 2012, and December 31, 2011. Gains and losses on the sale of loans are recognized in fees and net gains on loans held-for-sale on the Consolidated Statements of Income.

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, personal or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. An impaired loan that is collateralized by cash is considered Level 1. 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 or 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 Income.

Other Real Estate Owned / Foreclosed Assets: Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at the lesser of carrying 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 other real estate owned. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for September 30, 2012 and December 31, 2011, respectively (dollars in thousands):


			Carrying value at September 30, 2012
Description	Balance as of September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	79,273	$	707	$	50,649	$	27,917
Other real estate owned	$	14,089	$	—	$	9,050	$	5,039


			Carrying value at December 31, 2011
Description	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	83,207	$	750	$	74,078	$	8,379
Other real estate owned	$	8,925	$	—	$	4,257	$	4,668

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the nine months ended September 30, 2012, were as follows (dollars in thousands):


	Carrying value at September 30, 2012
	Impaired Loans			Other Real Estate Owned
Balance - January 1, 2012	$	8,379		$	4,668
Decrease in carrying value (included in earnings)		(185	)		—
Transfers into Level 3		26,361			909
Transfers out of Level 3		(6,638	)		(538	)

Balance – September 30, 2012	$	27,917		$	5,039

At September 30, 2012 and December 31, 2011, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2012 (dollars in thousands):


	Quantitative information about Level 3 Fair Value Measurements for September 30, 2012
Assets	Fair Value	Valuation Technique(s)	Unobservable input	Range
Impaired loans		Discounted appraised value	Selling cost		5% - 10	%
			Discount for lack of marketability and age of appraisal		0% - 35	%
		Discounted cash flow	Discount for expected levels of future cash flows		10% - 25	%
Other real estate owned		Discounted appraised value	Selling cost		5% - 10	%
			Discount for lack of marketability and age of appraisal		0% - 20	%

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 these short-term instruments, including interest-bearing deposits in other banks, the carrying amount is a reasonable estimate of fair value.

Investment 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.

Bank-Owned Life Insurance

Bank-owned life insurance represents insurance policies on officers, directors and past employees of the Bank. The cash values of the policies are estimates using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates the fair value.

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 non-interest-bearing demand, 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, 2012 and December 31, 2011, the fair value of loan commitments and stand-by letters of credit were deemed immaterial, and therefore, are not included in the table below.

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.

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


			Fair Value Measurements as of September 30, 2012, using
(Dollars in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Level 1		Level 2		Level 3
Financial assets:
Cash and short-term investments	$	243,593	$	243,593	$	—	$	—
Investment securities		545,143		—		545,143		—
Restricted stock		11,272		—		11,272		—
Loans held-for-sale		19,330		—		19,330		—
Loan receivables		2,102,588		707		2,212,737		27,917
Bank-owned life insurance		14,176		14,176		—		—
Accrued interest receivable		9,541		—		9,541		—

Financial liabilities:
Deposits	$	2,212,556	$	—	$	2,200,613	$	—
Securities sold under agreement to repurchase		409,320		350,401		75,000		—
Other borrowed funds		—		—		—		—
Trust preferred capital notes		66,762		—		67,407		—
Accrued interest payable		2,131		—		2,131		—


			Fair Value Measurements as of December 31, 2011, using
(Dollars in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			Level 1		Level 2		Level 3
Financial assets:
Cash and short-term investments	$	82,569	$	82,569	$	—	$	—
Investment securities		624,956		—		627,495		—
Restricted stock		11,214		—		11,214		—
Loans held-for-sale		18,485		—		18,485		—
Loan receivables		2,120,291		750		2,114,199		8,379
Bank-owned life insurance		14,017		14,017		—		—
Accrued interest receivable		10,007		—		10,007		—

Financial liabilities:
Deposits	$	2,292,158	$	—	$	2,311,842	$	—
Securities sold under agreement to repurchase		263,273		206,145		75,000		—
Other borrowed funds		25,000		—		25,733		—
Trust preferred capital notes		66,570		—		103,680		—
Accrued interest payable		2,418		—		2,418		—

2.	Investment Securities

Amortized cost and fair value of the investment securities available-for-sale and held-to-maturity as of September 30, 2012, and December 31, 2011, are as follows (dollars in thousands). As of March 31, 2012, the Company transferred its held-to-maturity investment portfolio with an amortized cost of $30.0 million and a fair value of $32.5 million, to its available-for-sale investment portfolio.


September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available-for-sale:
U.S. Government treasury obligations	$	15,000	$	—	$	—		$	15,000
U.S. Government agency obligations	$	422,637		7,347		(568	)		429,416
Pooled trust preferred securities		5,646		—		(5,288	)		358
Obligations of states and political subdivisions		93,384		7,035		(50	)		100,369

Total Investment securities available-for-sale	$	536,667	$	14,382	$	(5,906	)	$	545,143


December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Available-for-sale:
U.S. Government agency obligations	$	514,961	$	9,455	$	(429	)	$	523,987
Pooled trust preferred securities		5,526		56		(5,126	)		456
Obligations of states and political subdivisions		63,652		4,997		(28	)		68,621

Total Investment securities available-for-sale	$	584,139	$	14,508	$	(5,583	)	$	593,064

Held-to-maturity:
U.S. Government agency obligations	$	3,763	$	253	$	—		$	4,016
Obligations of state and political subdivisions		28,129		2,286		—			30,415

Total Investment securities held-to-maturity	$	31,892	$	2,538	$	—		$	34,431

The amortized cost of securities pledged as collateral for repurchase agreements, certain public deposits, and other purposes was $434.8 million and $392.8 million at September 30, 2012 and December 31, 2011, 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, 2012, and December 31, 2011, 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, does not expect to be required to sell these securities, and expects to recover the adjusted amortized cost of all the securities. For U.S. Government Agency obligations and obligations of states and 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 liquidity discounts, performance and credit ratings, as well as interest rate risk.


At September 30, 2012	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	$	67,026	$	(568	)	$	—	$	—		$	67,026	$	(568	)
Pooled trust preferred securities		—		—			358		(5,288	)		358		(5,288	)
Obligations of states and political subdivisions		3,870		(50	)		—		—			3,870		(50	)

	$	70,896	$	(618	)	$	358	$	(5,288	)	$	71,254	$	(5,906	)


At December 31, 2011	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	$	74,594	$	(429	)	$	—	$	—		$	74,594	$	(429	)
Pooled trust preferred securities		—		—			306		(5,126	)		306		(5,126	)
Obligations of states and political subdivisions		313		(10	)		512		(18	)		825		(28	)

	$	74,907	$	(439	)	$	818	$	(5,144	)	$	75,725	$	(5,583	)

As of September 30, 2012, the Company had two 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. The following table provides further information on these securities as of September 30, 2012 (dollars in thousands):


Security	Class		Moody’s Ratings (Lowest Assigned Rating)	Book Value		Market 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 X		B-1	C	$	542	$	13	$	529	$	168,795		40.5	%		-47.0	%		BROKEN	$	529		—
PreTSL XXVI		C-2	C		2,167		13		2,154	$	265,500		29.5	%		-21.1	%		BROKEN		2,154		—

Total				$	2,709	$	26	$	2,683											$	2,683	$	—

(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 credit losses recorded in 2012.

Trust preferred security, PreTSL VI, was redeemed in third quarter 2012 resulting in a gain of $436 thousand.

As of September 30, 2012, 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 market value of $332 thousand. The following table provides further information on this security as of September 30, 2012 (in thousands):


Security	Class		Moody’s Ratings (Lowest Assigned Rating)		Book Value		Market 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		Cc	$	2,937	$	332	$	2,605	$	86,800		26.7	%		0.1	%	$	—	$	2,605	$	—

(1)

(2)

(3)	Pre-tax credit losses recorded in 2012.

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, 2011	$	4,200
Additions:
Initial credit impairments		—
Subsequent credit impairments		—

Amount recognized through September 30, 2012	$	4,200

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. For the quarter ending September 30, 2012, we used a consistent 75 basis points for all PreTSL securities, X, XXVI and XXVII, for expected deferrals and defaults as a percentage of remaining performing collateral for future periods. In performing a detailed present value cash flow analysis for each security, the deferral rate was treated the same. If this analysis results in a present value of expected cash flows that is less than the book value 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 forward interest rate curve. The analysis also assumed 15% recoveries on deferrals after two years and prepayments of 1% per year on each security. As of September 30, 2012, performing issuers included 33 out of 50 issuers in PreTSL X, 46 out of 69 issuers in PreTSL XXVI, and 34 out of 49 issuers in PreTSL XXVII.

Our investment in Federal Home Loan Bank (“FHLB”) stock totaled $6.0 million at September 30, 2012. 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.

Loans

Major classifications of loans, excluding loans held-for-sale, are summarized at September 30, 2012, and December 31, 2011, as follows (dollars in thousands):


	September 30, 2012		December 31, 2011
Commercial	$	229,951	$	252,382
Real estate-one-to-four family residential:
Permanent first and second		280,150		246,420
Home equity loans and lines		118,646		126,530

Total real estate –one-to-four family residential	$	398,796	$	372,950
Real estate-multi-family residential		86,842		76,506
Real estate-non-farm, non-residential:
Owner-occupied		467,255		460,773
Non-owner-occupied		691,462		672,137

Total real estate-non-farm, non-residential	$	1,158,717	$	1,132,910
Real estate-construction:
Residential		155,770		151,117
Commercial		105,137		175,300

Total real estate-construction	$	260,907	$	326,417
Consumer		7,141		8,592
Farmland		4,889		2,573

Total Loans	$	2,147,243	$	2,172,330

Less unearned income		3,367		3,310
Less allowance for loan losses		41,288		48,729

Loans, net	$	2,102,588	$	2,120,291

Classes of loans by risk rating as of September 30, 2012, excluding loans held-for-sale, are summarized as follows (dollars in thousands):


Internal Risk Rating Grades	Pass		Watch		Special Mention		Substandard		Doubtful		Total Loans
Commercial	$	163,539	$	28,262	$	14,710	$	21,630	$	1,810	$	229,951
Real estate-one-to-four family residential:
Permanent first and second		231,543		14,590		11,252		22,651		114		280,150
Home equity loans and lines		108,153		2,737		1,968		4,243		1,545		118,646

Total real estate-one-to-four family residential	$	339,696	$	17,327	$	13,220	$	26,894	$	1,659	$	398,796
Real estate-multi-family residential		81,738		5,104		—		—		—		86,842
Real estate-non-farm, non-residential:
Owner-occupied		357,423		66,865		21,376		21,591		—		467,255
Non-owner-occupied		483,742		131,036		33,608		43,076		—		691,462

Total real estate-non-farm, non-residential	$	841,165	$	197,901	$	54,984	$	64,667	$	—	$	1,158,717
Real estate-construction:
Residential		81,656		18,262		18,095		37,757		—		155,770
Commercial		33,365		15,277		28,560		27,935		—		105,137

Total real estate-construction	$	115,021	$	33,539	$	46,655	$	65,692	$	—	$	260,907
Consumer		6,585		230		222		104		—		7,141
Farmland		1,000		3,889		—		—		—		4,889

Total	$	1,548,744	$	286,252	$	129,791	$	178,987	$	3,469	$	2,147,243

Classes of loans by risk rating as of December 31, 2011, excluding loans held-for-sale, are summarized as follows (dollars in thousands):


Internal Risk Rating Grades	Pass		Watch		Special Mention		Substandard		Doubtful		Total Loans
Commercial	$	172,457	$	51,935	$	1,506	$	22,178	$	4,306	$	252,382
Real estate-one-to-four family residential:
Permanent first and second		195,786		16,726		7,004		26,904		—		246,420
Home equity loans and lines		111,800		4,937		1,441		6,105		2,247		126,530

Total real estate-one-to-four family residential	$	307,586	$	21,663	$	8,445	$	33,009	$	2,247	$	372,950
Real estate-multi-family residential		71,756		4,274		—		476		—		76,506
Real estate-non-farm, non-residential:
Owner-occupied		357,480		62,766		21,777		18,750		—		460,773
Non-owner-occupied		481,584		111,779		31,361		47,413		—		672,137

Total real estate-non-farm, non-residential	$	839,064	$	174,545	$	53,138	$	66,163	$	—	$	1,132,910
Real estate-construction:
Residential		70,323		30,546		12,984		37,264		—		151,117
Commercial		63,520		59,217		27,395		25,168		—		175,300

Total real estate-construction	$	133,843	$	89,763	$	40,379	$	62,432	$	—	$	326,417
Consumer		8,169		233		119		71		—		8,592
Farmland		2,573		—		—		—		—		2,573

Total	$	1,535,448	$	342,413	$	103,587	$	184,329	$	6,553	$	2,172,330

Loan risk-ratings for the Bank are defined as follows:

Pass. Loans to persons or entities with a strong to acceptable financial condition, adequate collateral margins, adequate cash flow to service long-term debt, adequate liquidity and sound net worth. These entities are profitable now, with projections indicating continued profitability into the foreseeable future. Closely held corporations or businesses where a majority of the profits are withdrawn by the owners or paid in dividends are included in this rating category. Overall, these loans are basically sound.

Watch. These loans are characterized by greater than average risk. Borrowers may have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class may include inadequate credit or financial information. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited.

Special Mention. Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the asset or in the institution’s credit position at some future date. Other assets especially mentioned (“OAEMs”) are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard. A loan classified as substandard has a well-defined weakness and is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Distinct loss potential, while existing in the aggregate amount of substandard loans, does not necessarily exist in individual assets that are rated substandard.

Doubtful. A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status and have a defined work-out strategy.

Loss. Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.

As of September 30, 2012 and December 31, 2011, there were $324 thousand and $166 thousand, respectively, in checking account overdrafts that were reclassified on the consolidated balance sheets as loans.

4.	Allowance for Loan Losses

An analysis of the allowance for loan losses for the nine months ended September 30, 2012, and the year ended December 31, 2011 is shown below:


Allowance for Loan Losses - By Segment (Dollars in thousands) For the nine months ended September 30, 2012	Commercial			Non-Farm, Non-Res. Real Estate			Real Estate Construction			Consumer			Real Estate One-to-Four Family Residential			Real Estate Multi- Family Residential			Farmland		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	10,378		$	12,554		$	15,161		$	245		$	9,724		$	608		$	59	$	—	$	48,729
Charge-offs		(5,904	)		(6,388	)		(5,593	)		(292	)		(3,612	)		—			—		—		(21,789	)
Recoveries		929			43			487			34			470			118			—		—		2,081
Provision		(1,072	)		8,398			1,246			250			3,457			(75	)		63		—		12,267

Ending Balance	$	4,331		$	14,607		$	11,301		$	237		$	10,039		$	651		$	122	$	—	$	41,288

Ending Balance:
Individually evaluated for impairment	$	558		$	3,815		$	4,034		$	53		$	5,256		$	—		$	—	$	—	$	13,716
Collectively evaluated for impairment		3,773			10,792			7,267			184			4,783			651			122		—		27,572

Financing Receivables:
Ending Balance	$	229,951		$	1,158,717		$	260,907		$	7,141		$	398,796		$	86,842		$	4,889	$	—	$	2,147,243

Ending Balance:
Individually evaluated for impairment		23,440			79,554			65,693			104			30,910			—			—		—		199,701
Collectively evaluated for impairment		206,511			1,079,163			195,214			7,037			367,886			86,842			4,889		—		1,947,542


Allowance for Loan Losses - By Segment (Dollars in thousands) For the year ended Dec. 31, 2011	Commercial			Non-Farm, Non-Res. Real Estate			Real Estate Construction			Consumer			Real Estate One-to-Four Family Residential			Real Estate Multi- Family Residential			Farmland			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	9,972		$	16,453		$	26,584		$	373		$	8,337		$	619		$	63		$	41		$	62,442
Charge-offs		(2,357	)		(9,188	)		(16,631	)		(156	)		(3,577	)		—			—			—			(31,909	)
Recoveries		672			431			2,005			38			201			—			—			—			3,347
Provision		2,091			4,858			3,203			(10	)		4,763			(11	)		(4	)		(41	)		14,849

Ending Balance	$	10,378		$	12,554		$	15,161		$	245		$	9,724		$	608		$	59		$	—		$	48,729

Ending Balance:
Individually evaluated for impairment	$	5,351		$	2,991		$	6,786		$	52		$	5,508		$	—		$	—		$	—		$	20,688
Collectively evaluated for impairment		5,027			9,563			8,375			193			4,216			608			59			—			28,041

Financing Receivables:
Ending Balance	$	252,382		$	1,132,910		$	326,417		$	8,592		$	372,950		$	76,506		$	2,573		$	—		$	2,172,330

Ending Balance:
Individually evaluated for impairment		26,484			70,464			67,083			71			35,659			476			—			—			200,237
Collectively evaluated for impairment		225,898			1,062,446			259,334			8,521			337,291			76,030			2,573			—			1,972,093

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans 90 days or more past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on non-accrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across our loan portfolio.

Included in certain loan categories in the following impaired loans table are troubled debt restructurings (“TDRs”) that were classified as impaired. A TDR loan is a loan that has been restructured with a modification that could include interest rate modification, deferral of interest or principal or an extension of term. At September 30, 2012, the Company had $10.8 million in real estate construction, $22.6 million in non-farm/non-residential, $6.9 million in commercial and $4.6 million in real estate permanent one-to-four- family that were TDR modifications and considered impaired. Included in this amount of $44.9 million, the Bank had TDRs that were performing in accordance with their modified terms of $44.8 million at September 30, 2012, and the Bank had TDRs of $0.1 million that were not performing in accordance with their modified terms, but were still accruing interest, at September 30, 2012.

Information about past due loans and impaired loans as of September 30, 2012 and December 31, 2011, is as follows (dollars in thousands):


Non-Accrual and Past Due by Class September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current ⁽¹⁾		Total Loans		90+ Days Past Due and Still Accruing		Non- Accrual Loans
Commercial	$	214	$	807	$	2,368	$	3,389	$	226,562	$	229,951	$	—	$	3,443
Real estate-one-to-four family residential:
Permanent first and second		1,908		87		3,117		5,112		275,038		280,150		—		5,689
Home equity loans and lines		633		—		1,577		2,210		116,436		118,646		—		2,576

Total real estate-one-to-four family residential	$	2,541	$	87	$	4,694	$	7,322	$	391,474	$	398,796	$	—	$	8,265
Real estate-multi-family residential		—		—		—		—		86,842		86,842		—		—
Real estate-non-farm, non-residential:
Owner-occupied		289		7,117		1,540		8,946		458,309		467,255		—		1,804
Non-owner-occupied		3,397		683		4,731		8,811		682,651		691,462		—		4,731

Total real estate-non-farm, non-residential	$	3,686	$	7,800	$	6,271	$	17,757	$	1,140960	$	1,158,717	$	—	$	6,535
Real estate-construction:
Residential		—		74		15,009		15,083		140,687		155,770		—		10,510
Commercial		930		—		5,360		6,290		98,847		105,137		—		16,679

Total real estate-construction	$	930	$	74	$	20,369	$	21,373	$	239,534	$	260,907	$	—	$	27,189
Consumer		13		—		—		13		7,128		7,141		—		18
Farmland		—		—		—		—		4,889		4,889		—		—

Total Loans	$	7,384	$	8,768	$	33,702	$	49,854	$	2,097,389	$	2,147,243	$	—	$	45,450

(1)	For the purposes of this table, loans 1-29 days past due are included in the balance of “Current” loans.


Non Accrual and Past Due by class December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current ⁽¹⁾		Total Loans		90+ Days Past Due and Still Accruing		Non- Accrual Loans
Commercial	$	176	$	1,222	$	3,384	$	4,782	$	247,600	$	252,382	$	—	$	5,005
Real estate-one-to-four family residential:
Permanent first and second		582		2,966		3,306		6,854		239,566		246,420		71		3,912
Home equity loans and lines		335		240		2,605		3,180		123,350		126,530		250		3,142

Total real estate-one-to-four family residential	$	917	$	3,206	$	5,911	$	10,034	$	362,916	$	372,950	$	321	$	7,054
Real estate-multi-family residential		—		—		476		476		76,030		76,506		—		476
Real estate-non-farm, non-residential:
Owner-occupied		24		984		909		1,917		458,856		460,773		—		1,999
Non-owner-occupied		262		5,801		—		6,063		666,074		672,137		—		—

Total real estate-non-farm, non-residential	$	286	$	6,785	$	909	$	7,980	$	1,124,930	$	1,132,910	$	—	$	1,999
Real estate-construction:
Residential		600		161		10,384		11,145		139,972		151,117		—		18,479
Commercial		—		—		5,505		5,505		169,795		175,300		—		5,505

Total real estate-construction	$	600	$	161	$	15,889	$	16,650	$	309,767	$	326,417	$	—	$	23,984
Consumer		105		—		11		116		8,476		8,592		11		18
Farmland		—		—		—		—		2,573		2,573		—		—

Total Loans	$	2,084	$	11,374	$	26,580	$	40,038	$	2,132,292	$	2,172,330	$	332	$	38,536

(1)	For the purposes of this table, loans 1-29 days past due are included in the balance of “Current” loans.


Impaired Loans as of September 30, 2012	Recorded Investment (Bank Balance)		Unpaid Principal Balance (Customer Balance)		Related Allowance		Quarterly Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	20,882	$	20,918	$	—	$	19,346	$	628
Real estate-one-to-four family residential:
Permanent first and second		7,642		7,940		—		6,828		222
Home equity loans and lines		1,978		1,978		—		1,085		35
Real estate-multi-family residential		—		—		—		—		—
Real estate-non-farm/non-residential:
Owner-occupied		12,472		12,573		—		12,329		400
Non-owner-occupied		27,489		27,517		—		18,257		593
Real estate construction:
Residential		20,910		20,976		—		18,506		601
Commercial		15,320		15,399		—		19,273		626
Consumer		19		19		—		10		—

With an allowance recorded:
Commercial	$	2,558	$	2,558	$	558	$	5,561	$	181
Real estate-one-to-four family residential:
Permanent first and second		17,671		17,675		3,531		19,233		624
Home equity loans and lines		3,619		3,701		1,725		5,824		189
Real estate-multi-family residential		—		—		—		—		—
Real estate-non-farm/non-residential:
Owner-occupied		9,757		9,757		1,487		7,352		239
Non-owner-occupied		29,836		29,836		2,328		35,951		1,167
Real estate construction:
Residential		16,848		16,855		3,666		14,961		486
Commercial		12,615		12,642		368		14,147		459
Consumer		85		89		53		79		3

Total :
Commercial	$	23,440	$	23,476	$	558	$	24,907	$	809
Real estate-one-to-four family residential		30,910		31,294		5,256		32,969		1,070
Real estate multi-family residential		—		—		—		—		—
Real estate non-farm/non-residential		79,554		79,683		3,815		73,889		2,399
Real estate-construction		65,693		65,872		4,034		66,886		2,171
Consumer		104		108		53		89		3

Total Impaired Loans	$	199,701	$	200,433	$	13,716	$	198,738	$	6,452


Impaired Loans as of December 31, 2011	Recorded Investment (Bank Balance)		Unpaid Principal Balance (Customer Balance)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	11,020	$	11,039		—	$	17,536	$	789
Real estate-one-to-four family residential:
Permanent first and second		4,802		4,944		—		11,273		507
Home equity loans and lines		325		330		—		4,503		202
Real estate-multi-family residential		476		485		—		238		11
Real estate-non-farm/non-residential:
Owner-occupied		15,853		15,949		—		25,992		1,169
Non-owner-occupied		25,232		25,232		—		29,601		1,331
Real estate construction:
Residential		16,494		16,496		—		15,268		687
Commercial		22,140		22,140		—		21,580		970
Consumer		—		—		—		11		—

With an allowance recorded:
Commercial	$	15,464	$	15,478	$	5,351	$	12,533	$	564
Real estate-one-to-four family residential:
Permanent first and second		22,696		22,701		3,421		16,602		747
Home equity loans and lines		7,836		7,881		2,087		6,667		300
Real estate-multi-family residential		—		—		—		—		—
Real estate-non-farm/non-residential:
Owner-occupied		3,543		3,543		582		5,444		245
Non-owner-occupied		25,836		25,835		2,409		29,147		1,311
Real estate construction:
Residential		20,770		20,795		6,035		30,297		1,362
Commercial		7,679		7,694		751		18,850		848
Consumer		71		74		52		110		5

Total :
Commercial	$	26,484	$	26,517	$	5,351	$	30,069	$	1,352
Real estate-one-to-four family residential		35,659		35,856		5,508		39,045		1,756
Real estate multi-family residential		476		485		—		238		11
Real estate non-farm, non-residential		70,464		70,559		2,991		90,184		4,055
Real estate-construction		67,083		67,125		6,786		85,995		3,867
Consumer		71		74		52		121		5

Total Impaired Loans	$	200,237	$	200,616	$	20,688	$	245,650	$	11,046

In performing a specific reserve analysis on all impaired loans as of September 30, 2012, current third party appraisals, evaluations or tax assessed values 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. Other loans predominately representing smaller individual balances were evaluated based upon current tax assessed values or estimated liquidation value of business assets. 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 within 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 a TDR until the loan performs under the modified terms for the remainder of the calendar year in which it was restructured, but not less than six months for minimum measurement period. The loan will remain impaired for purposes of specific reserve analysis until fully repaid.

Information about new troubled debt restructurings during the three and nine months ended September 30, 2012, is as follows (dollars in thousands):

Troubled Debt Restructurings (TDRs)

New TDRs by Loan Type

As of September 30, 2012


	7/1/2012 to 9/30/2012						1/1/2012 to 9/30/2012
Loan Type:	# of Loans		Balance at Restructure		Balance at 9/30/2012		# of Loans		Balance at Restructure		Balance at 9/30/2012
Commercial		—		—		—		1	$	—	$	—
Real estate-one-to-four family residential:
Permanent first and seconds		2		804		804		6		2,690		2,688
Home equity loans and lines		—		—		—		—		—		—

Total real estate-one-to-four family residential:		2	$	804	$	804		6	$	2,690	$	2,688
Real estate-multi-family residential		—		—		—		—		—		—
Real estate-non-farm, non-residential:
Owner-occupied		—		—		—		—		—		—
Non-owner-occupied		1		8,000		8,000		1		8,000		8,000

Total real estate-non-farm, non-residential:		1	$	8,000	$	8,000		1	$	8,000	$	8,000
Real estate-construction:
Residential		—		—		—		—		—		—
Commercial		—		—		—		—		—		—

Total real estate-construction:		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Farmland		—		—		—		—		—		—

Total Loans		3	$	8,804	$	8,804		8	$	10,690	$	10,688

Troubled Debt Restructurings (TDRs)

New TDRs by Type of Restructure

As of September 30, 2012


	7/1/2012 to 9/30/2012						1/1/2012 to 9/30/2012
Type of Restructure:	# of Loans		Balance at Restructure		Balance at 9/30/2012		# of Loans		Balance at Restructure		Balance at 9/30/2012
Interest-only conversion		—		—		—		1		70		70
Rate reduction		3		8,804		8,804		5		9,275		9,275
Extended amortization		—		—		—		—		—		—
Deferment of principal or interest payable		—		—		—		—		—		—
Combination *		—		—		—		2		1,345		1,343
Other		—		—		—		—		—		—

Total Loans		3	$	8,804	$	8,804		8	$	10,690	$	10,688

*	Represents a combination of any of the above restructure types.

Information about troubled debt restructurings within the prior twelve months that defaulted during the three and nine months ended September 30, 2012, is as follows (dollars in thousands):

Troubled Debt Restructurings (TDRs)

TDRs Restructured Within Prior 12 Months that Defaulted in Selected Periods

As of September 30, 2012


	Defaults occurring in 3rd Quarter 2012 (7/1/2012 – 9/30/2012)						Defaults occurring Year-to-date (1/1/2012 – 9/30/2012)
Loan Type:	# of Loans		Balance at Restructure		Balance at 9/30/2012		# of Loans		Balance at Restructure		Balance at 9/30/2012
Commercial		3	$	753	$	380		3		753	$	380
Real estate-one-to-four family residential:
Permanent first and seconds		—		—		—		—		—		—
Home equity loans and lines		—		—		—		—		—		—

Total real estate-one-to-four family residential:		—		—		—		—		—		—
Real estate-multi-family residential		—		—		—		—		—		—
Real estate-non-farm, non-residential:
Owner-occupied		—		—		—		—		—		—
Non-owner-occupied		—		—		—		—		—		—

Total real estate-non-farm, non-residential:		—		—		—		—		—		—
Real estate-construction:
Residential-owner-occupied		—		—		—		—		—		—
Residential-builder		—		—		—		—		—		—
Commercial		—		—		—		—		—		—

Total real estate-construction:		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Consumer		—		—		—		—		—		—

Total Loans		3	$	753	$	380		3	$	753	$	380

5.	Earnings Per Common Share

The following shows the weighted average number of shares used in computing earnings per common share and the effect on the weighted average number of shares of dilutive potential common stock. As of September 30, 2012, and 2011, there were 974,122 and 3,556,728 anti-dilutive stock options outstanding, respectively.


	Three Months Ended								Nine Months Ended
	September 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
			Per				Per				Per				Per
			Share				Share				Share				Share
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount
Basic earnings per share		31,824,656	$	0.22		29,746,581	$	0.18		31,713,132	$	0.58		29,557,306	$	0.55
Effect of dilutive securities:
Stock options		1,926,033				1,120,281				1,932,276				1,099,183

Diluted earnings per share		33,750,689	$	0.21		30,866,862	$	0.17		33,645,408	$	0.54		30,656,489	$	0.53

6.	Stock Compensation Plan

At September 30, 2012, the Company had two stock-based compensation plans, the 1998 Stock Option Plan and the Company’s 2010 Equity Plan (the “2010 Plan”). The 2010 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 nine months ended September 30, 2012 and 2011 is $416 thousand and $436 thousand, respectively, of stock-based compensation expense which is based on the estimated fair value of 920,376 options granted between January 2007 and September 2012, as adjusted for stock dividends, and 121,421 restricted stock grants, amortized on a straight-line basis over a five year requisite service period. As of September 30, 2012, there was $1.5 million of total unrecognized compensation expense related to restricted stock grants and stock 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 2012 and 2011:


	2012	2011
Expected volatility	33.68%	32.21%
Expected dividends	0.00%	0.00%
Expected term (in years)	7.2	7.2
Risk-free rate	1.10% to 1.44%	2.33% to 2.81%

Stock option plan activity for the nine months ended September 30, 2012, is summarized below:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2012		1,696,117	$	8.95
Granted		84,750		8.59
Exercised		206,266		3.13
Forfeited		29,763		8.64

Outstanding at September 30, 2012		1,544,838	$	9.71		4.20 years	$	2,161
Exercisable at September 30, 2012		1,204,644	$	10.52		3.16 years	$	1,443

The total value of in-the-money options exercised during the nine months ended September 30, 2012 was $944 thousand.

Restricted stock awards generally vest in equal installments over five years. The compensation expense associated with these awards is based on the grant date fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period.

A summary of the non-vested restricted stock activity under the 2010 Plan for the nine months ended September 30, 2012 is summarized below:


	Number of Shares		Weighted- Average Grant Date Fair Value
Non-vested at the beginning of year		49,998	$	5.93
Granted		71,423		8.89
Vested		11,206		5.92
Forfeited		—		—

Non-vested at end of the period		110,215	$	7.67

We recognized share-based compensation expense associated with shares of restricted stock of $119 thousand for the nine months ended September 30, 2012.

7.	Capital Requirements

A comparison of the September 30, 2012 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		17.55	%		8.00	%		—
Bank		17.06	%		8.00	%		10.00	%

Tier 1 Risk-Based Capital:
Company		16.29	%		4.00	%		—
Bank		15.81	%		4.00	%		6.00	%

Leverage Ratio:
Company		12.27	%		4.00	%		—
Bank		12.00	%		4.00	%		5.00	%

8.	Other Borrowed Funds and Lines of Credit

The Bank maintains a $452.3 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, 2012, the carrying value of these qualifying loans totaled approximately $250.1 million and the amount of available credit using this collateral was $159.4 million. Advances on credit facility in excess $143.6 million, but limited to $308.7 million, require pledging of additional assets, including other types of loans and investment securities. The Bank had $25.0 million in advances outstanding as of December 31, 2011. On September 21, 2012, the $25.0 million advance matured. The Bank has additional short-term lines of credit totaling $47.0 million with nonaffiliated banks at September 30, 2012, 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, which as of November 2, 2012, was 4.03%. 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 had a fixed rate of interest of 6.19% until February 23, 2011, at which time they converted to a floating rate, adjusted quarterly, of 142 basis points over three month LIBOR, which as of November 2, 2012, was 1.85%. These securities became 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 stockholders, and from most purchases, redemptions or acquisitions of the Company’s common stock.

Under currently applicable capital standards, 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. For additional information see “Management’s Discussion and Analysis – Capital” in Item 2 of this quarterly report on Form 10-Q.

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, 2012, 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.

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

Unless the context otherwise requires, the terms “we”, “us” and “our” refer to Virginia Commerce Bancorp, Inc. and its subsidiaries on a consolidated basis. The following discussion and analysis, the purpose of which is to provide investors and others with information that we believe to be necessary for an understanding of our current financial condition, changes in financial condition and results of operations, should be read in conjunction with the consolidated financial statements, notes and other information contained in this report.

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 asset growth, the deposit portfolio and expected future changes in the deposit portfolio, the net interest margin, liquidity, our investment securities portfolio, capital position, our plans regarding and expected future levels of our non-performing assets, business opportunities in our markets, strategic initiatives to capitalize on those opportunities and general economic conditions. When we use words such as “may,” “will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases, you should consider them as identifying forward-looking statements. These forward-looking statements are not guarantees of future performance. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results may differ materially from those indicated herein.

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

•

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;

•

changes in rates of deposit and loan growth;

•

balances of risk-sensitive assets to risk-sensitive liabilities;

•

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, 2011.

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 accounting principles generally accepted in the United States, or “GAAP”. However, this quarterly report on Form 10Q 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 measures should be used in conjunction with results presented in accordance with GAAP.

Adjusted operating earnings is a non-GAAP financial measure that reflects net income available to common stockholders excluding impairment loss on securities, realized gains and losses on sale of securities, and death benefits received from bank-owned life insurance. These excluded items are difficult to predict and we believe that adjusted operating earnings provides the Company and investors with a valuable measure of the Company’s operational performance and a valuable tool to evaluate the Company’s financial results. Calculation of adjusted operating earnings for the three months ended September 30, 2012, September 30, 2011, and June 30, 2012 is as follows:


	Three Months Ended September 30,					Three Months Ended June 30,
(Dollars in thousands, except per share data)	2012			2011		2012
Net Income Available to Common Stockholders	$	7,122		$	5,217	$	6,357
Adjustments to net income:
Realized gain on sale of securities		(2,056	)		—		(1,328	)
Death benefits received from bank-owned life insurance		—			—		—
Net tax effect adjustment		720			—		465

Adjusted Operating Earnings	$	5,786		$	5,217	$	5,494

Earnings per common share-diluted	$	0.21		$	0.17	$	0.19
Adjustments to earnings per common share-diluted
Realized gain on sale of securities, net tax affect	$	0.04			—	$	0.03

Adjusted operating earnings per common share-diluted	$	0.17		$	0.17	$	0.16

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 excluding impairment loss on securities, realized gains and losses on sale of securities, and death benefits received from bank-owned life insurance. 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, 2012, and September 30, 2011, is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
Summary Operating Results:
Non-interest expense	$	15,212		$	14,893		$	47,396		$	43,863

Net interest income		26,368			26,729			80,064			79,700

Non-interest income		4,725			1,940			13,095			5,672
Impairment loss on securities		—			—			—			732
Gain on sale of securities		(2,056	)		—			(5,976	)		(503	)
Death benefits received from bank owned life insurance		—			—			—			(361	)

Adjusted non-interest income	$	2,669		$	1,940		$	7,119		$	5,540

Total net interest income and non-interest income, adjusted (1)	$	29,037		$	28,669		$	87,183		$	85,240
Efficiency Ratio, adjusted		51.8	%		51.3	%		53.7	%		50.8	%

(1)	Tax Equivalent Income of $29,397 for the three months ended September 30, 2012 and $88,274 for the nine months ended September 30, 2012. Tax Equivalent Income of $29,048 for the three months ended September 30, 2011 and $86,394 for the nine months ended September 30, 2011.

The tangible common equity ratio is a non-GAAP financial measure representing the ratio of tangible common equity to tangible assets. Tangible common equity and tangible assets are non-GAAP financial measures derived from GAAP-based amounts. We calculate tangible common equity for the Company by excluding the balance of intangible assets and $68.6 million outstanding preferred stock, net of unamortized discount, issued to the U.S. Treasury from total stockholders’ equity as of September 30, 2012. We calculate tangible assets by excluding the balance of intangible assets from total assets. We had no intangible assets for the periods presented. We believe that this is consistent with the treatment by regulatory agencies, which exclude intangible assets from the calculation of regulatory capital ratios. Accordingly, we believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our capital position and ratios. However, these non-GAAP financial measures are supplemental and are not substitutes for an analysis based on a GAAP measure. As other companies may use different calculations for non-GAAP measures, our presentation may not be comparable to other similarly titled measures reported by other companies. Calculation of the Company’s tangible common equity ratio as of September 30, 2012, and December 31, 2011, is as follows:


	As of September 30,			December 31,
(Dollars in thousands)	2012			2011
Tangible common equity:
Total stockholders’ equity	$	311,528		$	283,771

Less:
Outstanding TARP senior preferred stock		68,621			67,195
Intangible assets		—			—

Tangible common equity	$	242,907		$	216,576

Total tangible assets	$	3,004,742		$	2,938,518

Tangible common equity ratio		8.08	%		7.37	%

Additional Information

Our common stock is listed for quotation on the Global Select Market of The NASDAQ Stock Market under the symbol “VCBI.” Additional information can be found through our website at www.vcbonline.com by selecting “About VCB/Investor Relations/SEC Filings”. Electronic copies of our 2011 Annual Report on Form 10-K are available free of charge by visiting the “SEC Filings” section of our website. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available. These reports are posted as soon as reasonably practicable after they are electronically filed with the SEC.

Where we have included website addresses in this report, such as our website address, we have included those addresses as inactive textual references only. Except if specifically incorporated by reference into this report, information on those websites is not part hereof.

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, 2012, 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, real estate-one-to-four family residential, real estate-

multi-family residential, real estate-non-farm, non-residential, real estate-construction, consumer, and farmland). 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 and Allowance for Loan Losses” 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 stockholder-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 (the “2010 Plan”), which is also stockholder-approved and replaces the 1998 Plan, permits the grant of share-based awards in the form of stock options, stock appreciation rights, restricted and unrestricted stock, performance units, options and other awards to its directors, officers and employees for up to 1.5 million shares of common stock. To date, the Company has granted stock options and restricted stock under the 2010 Plan. The Company also has option awards outstanding under the 1998 Plan, but since May 2, 2010, the effective date of the 2010 Plan, no new awards can be granted under the 1998 Plan. The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted.

Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant, generally vest in equal annual installments 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. Restricted stock awards generally vest in equal installments over 5 years. The compensation expense associated with these awards is based on the grant date fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized ratably over the requisite service period. 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 Income in accordance with accounting guidance. See Note 2 to the Consolidated Financial Statements for additional information regarding our securities and related impairment testing.

Results of Operations

Summary Financial Results

Net Income and Adjusted Operating Earnings

For the nine months ended September 30, 2012, the Company recorded net income of $22.3 million. After an effective dividend of $4.1 million to the U.S. Treasury on preferred stock, the Company reported net income available to common stockholders of $18.3 million, or $0.54 per diluted common share, compared to net income available to common stockholders of $16.4 million, or $0.53 per diluted common share for the first nine months of 2011. The Company recorded net income available to common stockholders of $7.1 million, or $0.21 per diluted common share, for the quarter ending September 30, 2012, compared to $5.2 million, or $0.17 per diluted common share, in the third quarter of 2011.

Adjusted operating earnings (a non-GAAP measure) for the three months ended September 30, 2012, were $5.8 million, compared to $5.2 million in the prior year. The year-over-year increase in adjusted operating earnings is primarily due to lower provisioning for loan losses of $822 thousand and increased non-interest income of $729

thousand, after non-interest income is adjusted to exclude the impact of realized gains on sale of securities, partially offset by increased non-interest expenses of $319 thousand, decreased net interest income of $361 thousand, and $287 thousand in increased provision for income taxes. The Company calculates adjusted operating earnings by excluding impairment losses on securities, realized gains and losses on sale of securities and death benefits received from bank-owned life insurance, from net income available to common stockholders.

Net Interest Income

Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings. Net interest income is the most significant component of our total revenue. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. Net interest income for the third quarter of 2012, of $26.4 million declined $361 thousand, or 1.4%, over the same quarter last year. Net interest income for the nine months ended 2012, of $80.1 million was up $364 thousand, or 0.5%, from $79.7 million for the nine months ended September 30, 2011. The net interest margin decreased 23 basis points from 3.85% for the three months ended September 2011, to 3.62% for the same period in 2012 and also decreased from 3.95% for the nine months ended 2011, to 3.74% for the same period in 2012. The year-over-year decrease in third quarter and year-to-date net interest margin was primarily driven by lower average yielding loan and investment security assets, the impact of which was partially offset by a lower cost of average interest-bearing liabilities. For year-to-date 2012 compared to the same period in 2011, average loan yields declined 26 basis points, from 5.86% to 5.60%, and average investment security yields declined 115 basis points, from 3.41% to 2.26%, while rates on average interest-bearing deposits declined 40 basis points, from 1.37% to 0.97%. Management anticipates the net interest margin will range between 3.60% and 3.70% during the fourth quarter of 2012.

Interest and dividend income decreased $2.5 million on average total interest-earnings assets of $2.94 billion for the three months ended September 30, 2012, compared to interest and dividend income generated by average total interest-earnings assets of $2.79 billion for the same period in 2011. The decline in interest and dividend income is mostly attributable to lower yielding average loan and investment security assets being generated in the current low interest rate environment.

Interest expense decreased $2.2 million on an average total interest-bearing liability balance of $2.31 billion for the quarter ended September 30, 2012, compared to interest expense on an average total interest-bearing liability balance of $2.26 billion for the same period in 2011. The average rate paid on total interest-bearing liabilities was 1.12% for the third quarter of 2012, as compared to 1.18% for the second quarter of 2012, and 1.52% for the third quarter of 2011.

The following tables provide a comparative average balance sheet and net interest income analysis for the three and nine months ended September 30, 2012, as compared to the same period in 2011. Average rates are presented on a fully taxable-equivalent (FTE) basis, using a statutory Federal tax rate of 35% for 2012 and 2011.


	Three Months Ended September 30,
	2012								2011
(Dollars in thousands)	Average Balance			Interest Income- Expense		Average Yields /Rates			Average Balance			Interest Income- Expense		Average Yields /Rates
Assets
Investment securities ⁽¹⁾	$	550,210		$	2,806		2.26	%	$	524,271		$	3,778		3.11	%
Restricted investments		11,272			105		3.68	%		11,561			95		3.26	%
Loans, net of unearned income ⁽²⁾		2,176,109			29,820		5.46	%		2,147,176			31,456		5.83	%
Interest-bearing deposits in other banks		200,966			132		0.26	%		34,887			21		0.23	%
Federal funds sold		—			—		0.00	%		75,900			53		0.27	%

Total interest-earning assets	$	2,938,557		$	32,863		4.50	%	$	2,793,795		$	35,403		5.08	%
Other assets		82,555								82,006

Total Assets	$	3,021,112							$	2,875,801

Liabilities and Stockholders’ Equity
Interest-bearing deposits:
NOW accounts	$	380,623		$	357		0.37	%	$	317,245		$	527		0.66	%
Money market accounts		242,896			248		0.41	%		221,202			559		1.00	%
Savings accounts		569,339			585		0.41	%		655,941			1,452		0.88	%
Time deposits		665,193			3,071		1.84	%		779,997			3,947		2.01	%

Total interest-bearing deposits	$	1,858,051		$	4,261		0.91	%	$	1,974,385		$	6,485		1.30	%
Securities sold under agreement to repurchase ⁽³⁾		365,235			1,017		1.11	%		192,823			965		1.99	%
Other borrowed funds		22,282			242		4.25	%		25,000			272		4.25	%
Trust preferred capital notes		66,727			975		5.72	%		66,471			952		5.60	%

Total interest-bearing liabilities	$	2,312,295		$	6,495		1.12	%	$	2,258,679		$	8,674		1.52	%
Noninterest-bearing demand deposits and other liabilities		401,460								346,155

Total liabilities	$	2,713,755							$	2,604,834
Stockholders’ equity		307,357								270,967

Total liabilities and stockholders’ equity	$	3,021,112							$	2,875,801

Interest rate spread							3.38	%							3.56	%
Net interest income and margin				$	26,368		3.62	%				$	26,729		3.85	%
Ratio of average interest-earning assets to average interest-bearing liabilities		127.1	%							123.7	%

(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.

(2)	Loans placed on non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $2.0 million and $1.0 million for the three months ended September 30, 2012, and 2011, respectively.

(3)

The securities sold under agreement to repurchase related to customers had an average balance of $290.2 million at an average rate of 0.23% for the three months ended September 30, 2012, and $117.8 million at an average rate of 0.38% for the same period 2011. Also included are wholesale agreements with an average balance of $75.0 million at an average rate of 4.52% for the three months ended September 31, 2012, and $75.0 million at an average rate of 4.51% for the same period for 2011.


	Nine Months Ended September 30,
	2012								2011
(Dollars in thousands)	Average Balance			Interest Income- Expense		Average Yields /Rates			Average Balance		Interest Income- Expense			Average Yields /Rates
Assets
Investment securities ⁽¹⁾	$	581,381		$	9,076		2.26	%	$	458,694	$	10,954			3.41	%
Restricted investments		11,254			310		3.68	%		11,616		287			3.30	%
Loans, net of unearned income ⁽²⁾		2,172,353			90,868		5.60	%		2,176,604		95,144			5.86	%
Interest-bearing deposits in other banks		132,897			257		0.26	%		12,125		21			0.23	%
Federal funds sold		—			—		—			74,906		152			0.27	%

Total interest-earning assets	$	2,897,885		$	100,511		4.68	%	$	2,733,945	$	106,558			5.27	%
Other assets		75,569								87,199

Total Assets	$	2,973,454							$	2,821,144

Liabilities and Stockholders’ Equity
Interest-bearing deposits:
NOW accounts	$	354,154		$	972		0.37	%	$	320,380	$	1,775			0.74	%
Money market accounts		227,301			704		0.41	%		198,605		1,543			1.04	%
Savings accounts		599,799			2,001		0.45	%		672,553		4,965			0.99	%
Time deposits		710,515			9,991		1.88	%		780,310		11,895			2.04	%

Total interest-bearing deposits	$	1,891,769		$	13,668		0.97	%	$	1,971,848	$	20,178			1.37	%
Securities sold under agreement to repurchase ⁽³⁾		321,871			3,068		1.27	%		181,226		2,859			2.11	%
Other borrowed funds		24,088			779		4.25	%		25,000		806			4.25	%
Trust preferred capital notes		66,663			2,932		5.78	%		66,409		3,015			5.99	%

Total interest-bearing liabilities	$	2,304,391		$	20,447		1.19	%	$	2,244,483	$	26,858			1.60	%
Noninterest-bearing demand deposits and other liabilities		369,169								316,829

Total liabilities	$	2,673,560							$	2,561,312
Stockholders’ equity		299,894								259,832

Total liabilities and stockholders’ equity	$	2,973,454							$	2,821,144

Interest rate spread							3.49	%							3.67	%
Net interest income and margin				$	80,064		3.74	%			$	79,700			3.95	%
Ratio of average interest-earning assets to average interest-bearing liabilities		125.8	%									121.8	%

(1)

(2)	Loans placed on non-accrual status are included in the average balances. Net loan fees and late charges included in interest income on loans totaled $3.7 million and $3.0 million for the nine months ended September 30, 2012, and 2011, respectively.

(3)

The securities sold under agreement to repurchase related to customers had an average balance of $246.9 million at an average rate of 0.29% for the nine months ended September 30, 2012, and $106.2 million at an average rate of 0.42% for the same period 2011. Also included are wholesale agreements with an average balance of $75.0 million at an average rate of 4.52% for the nine months ended September 31, 2012, and $75.0 million at an average rate of 4.52% for the same period for 2011.

Provision for Loan Losses and Allowance for Loan Losses

Provisions for loan losses were $3.1 million for the quarter ended September 30, 2012, compared to $3.9 million in the same period in 2011, with total net charge-offs of $8.5 million for the three months ended September 30, 2012, versus $7.7 million in the third quarter of 2011. For the nine months ended September 30, 2012, provisions for loan losses totaled $12.3 million, compared to $11.2 million for the prior year period, with 2012 year-to-date net charge-offs amounting to $19.7 million, compared to $24.2 million in the first nine months of 2011. The increase in non-performing assets of $4.3 million between September 30, 2011 and September 30, 2012, coupled with the decrease in the allowance for loan losses of $8.1 million in the same period, contributed to the allowance for loan losses to non-performing loans coverage ratio declining to 90.8% at September 30, 2012, compared to 108.6% at September 30, 2011. The allowance for loan loss to non-performing loans coverage ratio decreased from 125.4% at December 31, 2011, to 90.8% at September 30, 2012, primarily related to charge-offs of loans with a specific reserve during the first nine months of 2012. Net charge-off declined by $4.5 million for the nine months ended 2012, compared to the same period in 2011, was primarily due to net charge-offs in the real estate-construction loan portfolio decreasing $8.2 million, from $13.3 million in 2011 to $5.1 million in 2012.

Total non-performing assets and loans 90+ days past due increased from $47.8 million as of December 31, 2011, to $59.5 million at September 30, 2012. Total non-performing loans and loans 90+ past due have increased $11.7 million between December 31, 2011 and September 30, 2012, total non-performing assets and loans 90+ days past due have increased $3.7 million over the last twelve months from $55.9 million at September 30, 2011. As of September 30, 2012, allowance for loan losses represented 1.92% of total loans, down from 2.24% and 2.30% at December 31, 2011 and September 30, 2011, respectively. The decreases in allowance for loan losses as a percentage of total loans from December 31, 2011 and September 30, 2011, to September 30, 2012, is primarily due to charge-offs incurred during the first nine months of 2012 that were supported by specific reserves in the allowance for loan losses during 2011. 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, 2012. 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:


	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011			Twelve Months Ended December 31, 2011
	(Dollars in thousands)
Allowance, at beginning of period	$	48,729		$	62,442		$	62,442
Provision charged against income		12,267			11,210			14,849
Recoveries:
Consumer loans		34			13			38
Commercial		929			497			2,637
Real estate loans		1,118			294			672

Total Recoveries	$	2,081		$	804		$	3,347
Losses charged to reserve:
Consumer loans		(292	)		(103	)		(156	)
Commercial loans		(5,904	)		(2,056	)		(29,396	)
Real estate loans		(15,593	)		(22,892	)		(2,357	)

Total loans charged to reserve	$	(21,789	)	$	(25,051	)	$	(31,909	)
Net charge-offs		(19,708	)		(24,247	)		(28,562	)

Allowance, at end of period	$	41,288		$	49,405		$	48,729

Ratio of net charge-offs to average total loans outstanding during period		0.91	%		1.11	%		1.31	%
Allowance for loan losses to total loans		1.92	%		2.30	%		2.24	%

The following schedule provides a breakdown of the allowance for loan loss by loan type:


(Dollars in thousands)	September 30, 2012		September 30, 2011		December 31, 2011
Allocation of the allowance for loan losses:
Real estate –mortgage	$	25,297	$	25,143	$	22,886
Real estate – construction		11,423		15,517		15,220
Commercial		4,331		8,408		10,378
Consumer		237		333		245
Unallocated		—		4		—

Total	$	41,288	$	49,405	$	48,729

For a more detailed allocation of the allowance for loan losses, including general and specific allowances for each segment of the loan portfolio, see Note 4 to the Consolidated Financial Statements.

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, 2012, total non-performing assets and loans 90+ days past due and still accruing interest increased by $11.7 million, from $47.8 million at December 31, 2011, to $59.5 million at September 30, 2012. As a result, the ratio of non-performing assets and loans 90+ days past due and still accruing to total assets increased from 1.63% of total assets at December 31, 2011, to 1.98% of total assets at September 30, 2012. The increase during the first nine months of 2012 in non-performing assets and loans 90+ days past due and still accruing as a percent of total assets was primarily due to increased non-performing assets in the Company’s real estate construction and real estate non-farm, non-residential segments of the loan portfolio and increased OREO balances. In particular, non-accrual

commercial real estate construction loans have increased $11.2 million from December 31, 2011 to September 30, 2012, partially offset by a decline of $8.0 million in non-accrual residential real estate construction loans over the same period. 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 TDRs, performing in accordance with their modified terms, decreased from $160.2 million at December 31, 2011, to $140.2 million at September 30, 2012. 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.

Included in the loan portfolio at September 30, 2012, are loans classified as TDRs, totaling $44.9 million, a 14.1% decrease from $52.3 million at December 31, 2011. The net reduction in TDRs consisted of $18.6 million in total reductions to TDRs which were offset by $11.2 million in additions to TDRs. Reductions to TDRs were comprised of note and collateral sales of $5.9 million, upgrades to performing status of reviewable TDRs of $5.9 million, principal payments of $1.2 million, downgrades to non-performing status of $2.4 million and charge-offs of $3.2 million. 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. The Company does not report any non-accrual loans as troubled debt restructurings. 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 (or OREO) include properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt. OREO, net of allowance, increased from $8.9 million at December 31, 2011, to $14.1 million at September 30, 2012, primarily due to foreclosure on collateral notes and real estate from a seasoned business that became insolvent following several years of reduced cash flows related to the recession. 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. 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 as of the dates indicated consisted of the following:


(Dollars in thousands)	September 30, 2012			September 30, 2011			December 31, 2011
Non-accrual loans:
Commercial	$	3,443		$	5,486		$	5,005
Real estate-one-to-four family residential:
Permanent first and second		5,689			1,960			3,912
Home equity loans and lines		2,576			3,051			3,142

Total real estate-one-to-four family residential	$	8,265		$	5,011		$	7,054
Real estate-multi-family residential		—			486			476
Real estate-non-farm, non-residential:
Owner-occupied		1,804			3,689			1,999
Non-owner-occupied		4,731			3,878			—

Total real estate-non-farm, non-residential	$	6,535		$	7,567		$	1,999
Real estate-construction:
Residential		10,510			20,181			18,479
Commercial		16,679			6,083			5,505

Total real estate-construction	$	27,189		$	26,264		$	23,984
Consumer		18			22			18

Total non-accrual loans	$	45,450		$	44,836		$	38,536
OREO		14,089			10,377			8,925

Total non-performing assets	$	59,539		$	55,213		$	47,461

Loans 90+ days past due and still accruing:
Commercial	$	—		$	89		$	—
Real estate-one-to-four family residential:
Permanent first and second		—			—			71
Home equity loans and lines		—			—			250

Total real estate-one-to-four family residential	$	—		$	—		$	321
Real estate-multi-family residential		—			—			—
Real estate-non-farm, non-residential:
Owner-occupied		—			—			—
Non-owner-occupied		—			—			—

Total real estate-non-farm, non-residential	$	—		$	—		$	—
Real estate-construction:
Residential		—			—			—
Commercial		—			574			—

Total real estate-construction	$	—		$	574		$	—
Consumer		—			—			11

Total loans 90+ days past due and still accruing	$	—		$	663		$	332
Total non-performing assets and loans 90+ days past due	$	59,539		$	55,876		$	47,793

	September 30, 2012			September 30, 2011			December 31, 2011
Non-performing assets
to total loans:		2.77	%		2.57	%		2.18	%
to total assets:		1.98	%		1.88	%		1.62	%
Non-performing assets and loans 90+ days past due loans
to total loans:		2.77	%		2.60	%		2.20	%
to total assets:		1.98	%		1.90	%		1.63	%
Allowance for loan losses to total loans		1.92	%		2.30	%		2.24	%
Allowance for loan losses to non-performing loans		90.84	%		108.58	%		125.37	%

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 unemployment levels. Overall, as of September 30, 2012, $27.2 million, or 59.8%, of non-performing loans represented acquisition, development and construction (“ADC”) loans, $6.5 million, or 14.4%, represented non-farm, non-residential loans, $8.3 million, or 18.2%, represented loans on one-to-four family residential properties, and $3.4 million, or 7.6%, represented commercial and industrial (“C&I”) loans. There was no interest actually received on non-accrual loans in nine months ended September 30, 2011 or 2012. The Company continues to pursue an aggressive campaign to further reduce non-performing assets and other impaired loans and is implementing and executing various disposition strategies on an ongoing basis. 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, 2012
Residential, Acquisition, Development and Construction By County/Jurisdiction of Origination: (Dollars in thousands)	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge- offs as a % of Outstandings
District of Columbia	$	7,935		5.1	%	$	495		0.3	%		—
Montgomery, MD		—		—			—		—			—
Prince Georges, MD		9,276		6.0	%		4,389		2.8	%		1.8	%
Other Counties in MD		2,714		1.7	%		195		0.1	%		0.1	%
Arlington/Alexandria, VA		32,397		20.8	%		—		—			-0.3	%
Fairfax, VA		28,555		18.3	%		—		—			0.2	%
Culpeper/Fauquier, VA		2,284		1.5	%		200		0.1	%		—
Fredericksburg, VA		2,288		1.5	%		2,288		1.5	%		0.9	%
Loudoun, VA		15,437		9.9	%		279		0.2	%		0.2	%
Prince William, VA		11,854		7.6	%		—		—			—
Spotsylvania, VA		349		0.2	%		—		—			—
Stafford, VA		37,088		23.8	%		2,664		1.7	%		—
Other Counties in VA		3,168		2.0	%		—		—			—
Outside VA, D.C. & MD		2,425		1.6	%		—		—			—

	$	155,770		100.0	%	$	10,510		6.7	%		2.9	%


	As of September 30, 2012
Commercial, Acquisition, Development and Construction By County/Jurisdiction of Origination: (Dollars in thousands)	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	$	—		—		$	—		—			—
Montgomery, MD		1,908		1.8	%		—		—			—
Prince Georges, MD		6,365		6.1	%		—		—			—
Other Counties in MD		2,127		2.0	%		—		—			—
Arlington/Alexandria, VA		10,278		9.8	%		521		0.5	%		—
Fairfax, VA		4,341		4.1	%		2,385		2.3	%		0.3	%
Culpeper/Fauquier, VA		2,975		2.8	%		2,975		2.8	%		0.1	%
Frederick, VA		2,000		1.9	%		—		—			—
Henrico, VA		—		—			—		—			—
Loudoun, VA		12,990		12.4	%		—		—			—
Prince William, VA		38,306		36.4	%		—		—			0.1	%
Spotsylvania, VA		1,700		1.6	%		—		—			—
Stafford, VA		17,669		16.8	%		9,963		9.5	%		—
Other Counties in VA		4,478		4.3	%		835		0.8	%		—
Outside VA, D.C. & MD		—		—			—		—			—

	$	105,137		100.0	%	$	16,679		15.9	%		0.5	%


	As of September 30, 2012
Non-Farm/Non-Residential By County/Jurisdiction of Origination: (Dollars in thousands)	Total Outstandings		Percentage of Total			Non-accrual Loans		Non-accruals as a % of Outstandings			Net charge- offs as a % of Outstandings
District of Columbia	$	84,482		7.3	%	$	—		—			—
Montgomery, MD		19,760		1.7	%		1,830		0.1	%		—
Prince Georges, MD		75,896		6.5	%		—		—			—
Other Counties in MD		49,532		4.2	%		—		—			0.2	%
Arlington/Alexandria, VA		183,261		15.8	%		—		—			—
Fairfax, VA		271,006		23.4	%		829		0.1	%		—
Culpeper/Fauquier, VA		3,330		0.3	%		2,079		0.2	%		—
Frederick, VA		7,726		0.7	%		—		—			—
Henrico, VA		21,828		1.9	%		—		—			—
Loudoun, VA		151,429		13.1	%		975		0.1	%		0.1	%
Prince William, VA		199,303		17.2	%		822		0.1	%		—
Spotsylvania, VA		10,125		0.9	%		—		—			—
Stafford, VA		19,574		1.7	%		—		—			0.2	%
Other Counties in VA		52,252		4.5	%		—		—			0.1	%
Outside VA, D.C. & MD		9,213		0.8	%		—		—			—

	$	1,158,717		100.0	%	$	6,535		0.6	%		0.6	%

Total TDRs as of the dates indicated consisted of the following:


	September 30, 2012		September 30, 2011		December 31, 2011
	(Dollars in thousands)
Troubled debt restructurings:
Commercial	$	6,910	$	9,496	$	7,135
Real estate-one-to-four family residential:
Permanent first and second		4,585		4,199		3,974
Home equity loans and lines		—		—		—

Total real estate-one-to-four family residential	$	4,585	$	4,199	$	3,974
Real estate-multi-family residential		—		—		—
Real estate-non-farm, non-residential:
Owner-occupied		3,395		4,372		3,893
Non-owner-occupied		19,160		30,679		17,525

Total real estate-non-farm, non-residential	$	22,555	$	35,051	$	21,418
Real estate-construction:
Residential		3,622		7,027		4,207
Commercial		7,220		15,881		15,521

Total real estate-construction:	$	10,842	$	22,908	$	19,728
Consumer		—		32		9
Farmland		—		—		—

Total troubled debt restructurings	$	44,892	$	71,686	$	52,264

Included in this amount of $44.9 million, the Bank had TDRs that were performing in accordance with their modified terms of $44.8 million at September 30, 2012.

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 collectability 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, 2012, the Company had $1.51 billion, or 70.2%, 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, 2011, commercial real estate loans were $1.54 billion, or 70.7%, of total loans. Total construction loans of $260.9 million at September 30, 2012, represented 12.2% of total loans, loans secured by multi-family residential properties of $86.8 million represented 4.0% of total loans, and loans secured by non-farm, non-residential properties of $1.16 billion represented 54.0% of total loans.

Construction loans at September 30, 2012, included $145.3 million in loans to commercial builders of single family residential property and $10.5 million to individuals on single family residential property, together representing 7.3% of total loans. These loans are made to a number of unrelated entities and generally have a term of twelve to eighteen months. In addition, the Company had $105.1 million of construction loans on non-residential commercial property at September 30, 2012, representing 4.9% of total loans. Total construction loans of $260.9 million include $114.2 million in land acquisition and/or development loans on residential property and $51.7 million in land acquisition and/or development loans on commercial property, together totaling $165.9 million, or 7.7% 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, 2012, 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. In addition, the Bank has commercial loans of $230.0 million, or 10.7% of the Bank’s total loan portfolio, to businesses and organizations, including trade associations, professional corporations, community associations, government contractors, medical practitioners, property management companies, religious organizations and houses of worship, heavy equipment contractors and others primarily located in the Northern Virginia market. These commercial loans generally represent short term obligations to support working capital needs and/or term loans to finance the purchase of business assets.

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 institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s 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

Non-interest income represented 14.1% and 6.6% of total revenue for the nine months ended September 30, 2012, and September 30, 2011, respectively. Although interest income is our primary source of revenue, we remain committed to increasing non-interest income as a way to improve profitability and diversify our sources of revenue.

For the three months ended September 30, 2012, the Company recognized $4.7 million in non-interest income, compared to non-interest income of $1.9 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the Company recognized $13.1 million in non-interest income, compared to non-interest income of $5.7 million for the nine months ended September 30, 2011.

The following table presents the components of non-interest income for the three and nine months ended September 30, 2012, and 2011:


	Three Months Ended September 30,					Nine Months Ended September 30,					From the Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2012
(Dollars in thousands)	2012		2011			2012		2011			$ change			% change
Service charges on deposits	$	882	$	839		$	2,638	$	2,430		$	43			5.1	%
Non-deposit investment services commissions		211		340			705		1,053			(129	)		-37.9	%
Gains on loans held-for-sale		1,082		744			2,913		1,799			338			45.4	%
Gain on sale of securities available-for-sale		2,056		—			5,976		503			2,056			100.0	%
Impairment loss on securities, net		—		—			—		(732	)		—			—	%
Bank-owned life insurance		50		58			159		544			(8	)		13.8	%
Other income		444		(41	)		704		75			485			1,118.2	%

Total Non-Interest Income	$	4,725	$	1,940		$	13,095	$	5,672		$	2,785			143.6	%

Included in non-interest income for the third quarter of 2012, is a gain on sale of securities of $2.1 million, while the third quarter of 2011 did not include a gain or loss on sale of securities. For the nine months ended September 30, 2012, non-interest income included a gain on sale of securities of $6.0 million, while non-interest income for the nine months ended September 30, 2011, included an impairment loss on securities of $732 thousand, which was partially offset by a gain on sale of securities of $503 thousand as well as a bank-owned life insurance death benefit of $361 thousand. Excluding the gain on sale of securities available-for-sale, impairment loss on securities and bank-owned life insurance death benefits, non-interest income grew 37.6%, from $1.9 million for the three months ended September 30, 2011, to $2.7 million for the three months ended September 30, 2012, and grew 28.5%, from $5.5 million for the nine months ended September 30, 2011, to $7.1 million for the nine months ended September 30, 2012.

Fees and net gains on loans held-for-sale increased in the third quarter of 2012, on a year-over-year basis by $338 thousand, or 45.4%. The increase can be primarily attributed to higher volume of mortgage loans originated for sale in the secondary market, which was driven by lower interest rates on mortgage products during 2012. For the nine months ended September 30, 2012, fees and net gains on loans held-for-sale increased $1.1 million, or 61.9% compared to the nine months ended September 30, 2011. Mortgage loans held-for sale totaling $146.8 million were closed in the nine months ended 2012, as compared to $103.7 million to the same period for 2011.

Non-Interest Expense

For the three months ended September 30, 2012, the Company recognized $15.2 million in non-interest expense, compared to non-interest expense of $14.9 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the Company recognized $47.4 million in non-interest expense, compared to non-interest expense of $43.9 million for the nine months ended September 30, 2011. The following table presents the components of non-interest expense for the three and nine months ended September 30, 2012, and 2011:


	Three Months Ended September 30,					Nine Months Ended September 30,				From the Three Months Ended Sept 30, 2011 to the Three Months Ended Sept 30, 2012
(Dollars in thousands)	2012			2011		2012		2011		$ change			% change
Salaries and employee benefits expense	$	7,493		$	6,591	$	22,517	$	19,676	$	902			13.7	%
Premises and equipment expense		2,380			2,293		7,142		7,006		87			3.8	%
FDIC insurance		660			864		2,488		3,394		(204	)		-23.6	%
(Gain) loss on other real estate owned		(141	)		546		1,566		1,022		(687	)		-125.8	%
OREO expense		322			277		902		616		45			16.3	%
Franchise tax expense		935			780		2,435		2,326		155			19.9	%
Data processing expense		664			652		1,992		1,942		12			1.8	%
Other operating expense		2,899			2,890		8,354		7,881		9			0.3	%

Total Non-Interest Expense	$	15,212		$	14,893	$	47,396	$	43,863	$	319			2.1	%

The majority of the increase from the third quarter of 2011 to the third quarter of 2012, for the quarter ended September 30, 2012, was a $902 thousand increase to salaries and employee benefits, $87 thousand increase in occupancy expense, and $155 thousand increase in franchise tax, partially offset by a decrease of $642 on other real estate owned losses and $204 thousand in FDIC insurance. The increase in salaries and employee expense includes the impact of adding key personnel in our sales and support functions to support our continued growth and commissions paid to mortgage originators in connection with greater mortgage production sold into the secondary market. For the nine months ended September 30, 2012 salaries and employee benefits expenses were $22.5 million, compared to $19.7 million for the same period in 2011. The nine-month increase in salaries and employee benefits of $2.8 million was also due to adding key personnel in sales and support functions and greater commissions paid to mortgage originators.

Provision for Income Taxes

The Company’s income tax provisions are adjusted for non-deductible expenses and non-taxable income before applying the U.S. federal income tax rate of 35%. For the nine months ended September 30, 2012, the Company recorded an income tax provision of $11.1 million compared to a provision of $9.9 million for the same period in 2011. Our effective tax rate was 33.3% and 32.8% for the nine months ended September 30, 2012 and September 30, 2011, respectively. Our provision for income taxes was positively impacted by non-taxable income generated by the bank-owned life insurance earnings, and earnings from tax-exempt investment securities, which provided the greatest benefit to our effective tax rate.

Financial Condition

Total Assets

Total assets increased by $66.2 million, or 2.3%, to $3.00 billion at September 30, 2012, as compared to $2.94 billion at December 31, 2011. The increase was largely the result of an increase in cash and cash equivalents of $161.0 million, which offset a decrease in loans, net of allowance for loan losses, of $17.7 million and a decrease in investment securities of $79.8 million.

Cash and cash equivalents of $243.6 million at September 30, 2012, increased primarily due to the growth in funding provided by securities sold under agreement to repurchase. During the first nine months of 2012, securities sold under agreement to repurchase increased $146.0 million, or 55.5%, to $409.3 million at September 30, 2012. Securities sold under agreement to repurchase are entered into primarily with in-market commercial customers that generally maintain a full relationship with the Bank, in the form of lending facilities and other deposit products. We invest these funds in short-term liquid assets, such as interest-bearing deposits held at the Federal Reserve Bank, and investment securities available-for-sale to provide additional liquidity and incremental low-risk returns.

Investment Securities

Investment securities were $545.1 million representing a decrease of $79.8 million from December 31, 2011. During the third quarter of 2012, the Company sold $26.0 million of investment securities resulting in a $1.6 million realized gain on sale of securities, and PreTSL VI was redeemed resulting in a gain of $436 thousand. The purchase

of investment securities made during the third quarter were predominantly at a premium to book value in short-term, pass-through mortgage backed securities and collateralized mortgage obligations issued by government sponsored entities, with an average life of three to five and a half years. This strategy positions the Company with strong liquid assets to maintain a constant flow of funds to support future loan growth and to provide repricing opportunities if rates begin to rise over the next few years. We held 18.1% of our total assets in the investment security portfolio at September 30, 2012, compared to 21.3% at December 31, 2011. We expect the current level of investment securities as a percentage of total assets will decline over time as the mix between investment securities and loans will change due to anticipated growth in our loan portfolio.

The investment portfolio also contains three pooled trust preferred securities with a book value of $5.6 million, and a fair value of $358 thousand at September 30, 2012, for which the Company performs a quarterly analysis to determine whether any other than temporary impairment exists on the three pooled trust preferred securities. The analysis includes stress tests on the underlying collateral and cash flow estimates based on expected prepayments and on the current and projected future levels of deferrals and defaults within each pool. There has been no recorded impairment loss in the nine months ended September 30, 2012, compared to an impairment loss of $732 thousand for the same time period in 2011.

Loans

Loans, net of allowance for loan losses, decreased $17.7 million, or 0.8%, from $2.12 billion at December 31, 2011, to $2.10 billion at September 30, 2012. The most significant decrease in loans, net was $65.5 million, or 20.1%, in our real estate construction portfolio. The Company has significantly reduced its concentration in real estate construction loans, both residential and commercial, from 15.0% of total loans at December 31, 2011, to 12.2% at September 30, 2012. Loan growth has been favorable in our real estate non-farm, non-residential portfolio, real estate one-to-four family residential, and real estate multi-family residential increasing $25.8 million, $25.8 million, and $10.3 million, respectively, from December 31, 2011 to September 30, 2012. The orientation of loan generation efforts and loan mix is reflective of the continued focus on building greater market share in commercial lending and residential real estate lending, while limiting ADC lending and non-farm, non-residential real estate lending to select transactions in key markets with solid economic metrics.

Loans held-for-sale

Loans held-for-sale, which are originated by our mortgage division and intended for sale in the secondary market, increased $845 thousand, from $18.5 million at December 31, 2011, to $19.3 million at September 30, 2012. Loans sold to correspondent banks are subject to repurchase as a result of specific events outlined in the correspondent purchase agreements. The repurchase events, include but are not limited to, deficiencies in documentation standards, and defaults or pay-offs within a specified period of time. The Company did not maintain a reserve for repurchases at September 30, 2012, and December 31, 2011, and has historically experienced an insignificant amount of repurchases.

Deposits

Total deposits at September 30, 2012, were $2.21 billion, a decrease of $79.6 million, or 3.5%, from $2.29 billion at December 31, 2011. The decrease was driven by reductions in time deposits of $133.6 million or 17.1% while demand deposits increased $52.8 million, or 15.6%. The reduction in time deposits was intentional and resulted from a series of interest rate reductions that began in late 2011, and continued through the third quarter of 2012. As a result, the cost of total interest-bearing deposits declined from 1.30% for the quarter ended September 30, 2011, to 0.91% for the quarter ended September 30, 2012. The cost of total deposits declined from 1.11% for the quarter ended September 30, 2011, to 0.76% for the quarter ended September 30, 2012. The Company’s deposit mix continues to be heavily weighted in lower-cost noninterest-bearing demand deposits, savings and interest-bearing demand deposits, which comprised 70.8% of total deposits at September 30, 2012, compared to 65.9% at December 31, 2011.

Capital Levels and Stockholders’ Equity

Stockholders’ equity increased $27.8 million, or 9.8%, from $283.8 million at December 31, 2011, to $311.5 million at September 30, 2012, with approximately $7.3 million in net proceeds from the above referenced stock issuances, net income to common stockholders of $18.3 million for the first nine months of 2012, a $292 thousand decrease in other comprehensive income related to the investment securities portfolio, $1.4 million in the accretion

of the discount on preferred stock and $1.1 million in proceeds and tax benefits related to the exercise of options by the Company’s directors and officers, and stock option expense credits. The Company’s Tier 1 and total qualifying capital ratios are each up 174 basis points from December 31, 2011, to 16.29% and 17.55%, respectively, and its tangible common equity ratio is up 71 basis points to 8.08% at September 30, 2012.

Liquidity

The Company’s principal source of liquidity and funding is its customer 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, pricing and dollar amount of in-market customer deposits, use of wholesale funding such as Certificate of Deposit Account Registry Service (“CDARS”) reciprocal deposits, borrowing capacity at the FHLB, 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. On a monthly basis, the Asset/Liability Committee (“ALCO”) of the board of directors reviews a comprehensive liquidity analysis and updates the Company’s liquidity strategy as necessary.

The Company has taken a very prudent and disciplined approach to wholesale funding as a source of liquidity. Our successful strategy in gathering in-market customer deposits to fund loan growth has limited our reliance on wholesale funding. Wholesale funding sources include, but are not limited to, Federal funds, public funds (such as state and local municipalities), FHLB advances, securities sold under agreement to repurchase, and brokered deposits. We have set limits on the use of wholesale funding sources, which includes limiting brokered deposits to no more than $50.0 million maturing in any one-month and to no more than 10.0% of total deposits maturing within one-year.

As of September 30, 2012, and September 30, 2011, we did not have any brokered deposits, other than CDARS reciprocal deposits, on our balance sheet. CDARS reciprocal deposits are deposits that have been placed into a deposit placement service which allows us to place our customers’ funds in FDIC-insured time deposits at other banks and at the same time, receive an equal sum of funds from customers of other banks within the deposit placement service. CDARS reciprocal deposits of $55.1 million and $95.5 million are included in our time deposit portfolio and account for 2.5% and 4.2% of our total deposits at September 30, 2012, and December 31, 2011, respectively. Time deposits comprise approximately $647.1 million, or 29.3%, of our total deposit liabilities at September 30, 2012. At September 30, 2012 and 2011, we had customer securities sold under agreement to repurchase of $334.3 million and $126.7 million, respectively. We also had wholesale securities sold under agreement to repurchase of $75.0 million as of September 30, 2012 and 2011.

The Company measures total liquidity through cash and cash equivalents, investment securities available-for-sale, mortgage loans held-for-sale, other loans and investment securities maturing within one year, less securities pledged as collateral for repurchase agreements, public deposits and other purposes, and less any outstanding Federal funds purchased. These liquidity sources decreased $40.7 million, or 5.2%, from $781.2 million at December 31, 2011, to $740.5 million at September 30, 2012, primarily due to a $168.9 million increase in securities pledged as collateral for repurchase agreements, partially offset by a $163.0 million increase in interest-bearing deposit accounts at other banks. Additional sources of liquidity available to the Bank include the capacity to borrow funds through established short-term lines of credit with various correspondent banks and the Federal Home Loan Bank of Atlanta. See Note 8 to the Consolidated Financial Statements for further information regarding these additional liquidity sources.

It is our opinion that our liquidity position at September 30, 2012, is adequate to respond to fluctuations “on” and “off” balance sheet. In addition, we know of no trends, demands, commitments, events or uncertainties that may result in, or that are reasonably likely to result in our inability to meet anticipated or unexpected liquidity needs.

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 unfunded lines of credit, commitments to extend credit, standby letters of credit and financial guarantees, totaling $582.9 million and $539.2 million as of September 30, 2012, and December 31, 2011, respectively. These arrangements 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.

Unfunded lines of credit and commitments to extend credit amounted to $538.2 million at September 30, 2012, and $498.1 million at December 31, 2011, represent legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Unfunded lines of credit and commitments to extend credit were $478.9 million and $59.3 million, respectively, at September 30, 2012, and were $478.3 million and $19.8 million, respectively, at December 31, 2011. Commitments to extend credit 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, 2012, and December 31, 2011, the Company had $44.7 million and $41.1 million, respectively, in outstanding standby letters of credit.

Contractual Obligations

Since December 31, 2011, 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.

We are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on our financial condition and the consolidated financial statements. 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 securities, 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 interests issued to the Treasury under the Capital Purchase Program qualify as Tier 1 capital. Total risk-based capital consists of Tier 1 capital, qualifying subordinated debt, and a portion of the allowance for loan losses, and for the Company, a limited amount of excess restricted core capital elements. Risk-based capital ratios are calculated with reference to risk-weighted assets. The leverage ratio compares Tier 1 capital to total average assets. The Bank’s Tier 1 risk-based capital ratio was 15.81% at September 30, 2012, compared to 14.21% at December 31, 2011, and its total risk-based capital ratio was 17.06% at September 30, 2012, compared to 15.47% at December 31, 2011. These ratios are in excess of the minimum regulatory requirement of 4.00% and 8.00%, respectively. The Bank’s leverage ratio was 12.00% at September 30, 2012, compared to 11.40% at December 31, 2011, and in excess of the minimum regulatory requirement of 4.00%. The Company’s Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio was 16.29%, 17.55%, and 12.27%, respectively, at September 30, 2012, compared to 14.55%, 15.81%, and 11.61% at December 31, 2011. In addition the Company’s and the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the applicable banking regulations. The increases in these capital ratios are due to additional Tier 1 capital raised through exercise of warrants totaling $7.3 million, additional net income available to common stockholders of $18.3 million and an $84.5 million reduction in risk-weighted assets at September 30, 2012, compared to December 31, 2011.

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 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.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Reserve has revised the capital treatment of trust preferred securities 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, 2012, trust preferred securities represented 17.5% of the Company’s Tier 1 capital and 16.2% of its total risk-based capital. The Federal Reserve Board, acting in concert with the other federal banking regulatory agencies, has published proposed rules that, if adopted, would generally implement the Basel III capital standards upon bank holding companies greater than $500 million in total consolidated assets. Among other changes, the proposed rules to implement the Basel III capital standards would phase-out treatment of trust preferred securities as Tier 1 capital over a five-year implementation period. The Company anticipates that the Federal Reserve Board will adopt a final version of these proposed rules sometime in 2013. We will continue to monitor the impact that these regulations will have on our Company. 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 a Securities Purchase Agreement with the Treasury, pursuant to which the Company issued 71,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $71.0 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.

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 may 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 in 2008 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.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU

provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Company does not expect the adoption of ASU 2012-06 to have a material impact on its consolidated financial statements.

In April 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011, with prospective application. Early application is not permitted. The Company has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.

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.” 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 are made available 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. Given the current low interest rate environment, we limited the downward shock to 100 basis points. 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 all discounted to a measurement date.

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 when interest rates are shocked upward and downward from the base case. Given the current rate environment, we limited the downward change to 100 basis points. 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 captures the timing of the repricing of interest sensitive assets and interest sensitive liabilities as well as the degree of change (“beta”) in the interest rates of particular asset and liability products that occurs as interest rates move upward or downward. The model assumes that the composition of the interest sensitive assets and interest sensitive liabilities existing at September 30, 2012, 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, 2012:


Interest Rate Scenario	Sensitivity of Market Value of Portfolio Equity September 30, 2012 Market Value of Portfolio Equity Percent Change from Base			Sensitivity of Net Interest Income September 30, 2012 Net Interest Income Percent Change from Base
Up 200 bps		-5.0	%		+8.2	%
Up 300 bps		-12.7	%		+11.6	%
Down 100 bps		-0.8	%		-6.5	%

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 maintains a system of controls and procedures designed to ensure that information required to be disclosed in reports that the company files with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s management, with the participation of the Company’s Chief Executive Officer and 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, 2012, 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, 2011.

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. MINE SAFETY DISCLOSURES - None

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 By-laws 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)

3.4		Amendment to the Amended and Restated By-laws of Virginia Commerce Bancorp, Inc. (incorporated by reference to exhibit 3.4 to the Company’s Current Report on Form 8-K filed on January 28, 2011)

31.1		Certification of Peter A. Converse, President and Chief Executive Officer

31.2		Certification of Mark S. Merrill, Executive Vice President and Chief Financial Officer

32.1		Certification of Peter A. Converse, President and Chief Executive Officer

32.2		Certification of Mark S. Merrill, Executive Vice President and Chief Financial Officer

101		The following materials from Virginia Commerce Bancorp, Inc.’s quarterly report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

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 8, 2012	BY	/s/ Peter A. Converse
		Peter A. Converse, President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 8, 2012	BY	/s/ Mark S. Merrill
		Mark S. Merrill, Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)