The following discussion provides management's analysis of the consolidated financial results of operations, financial condition, liquidity and capital resources of StellarOne Corporation ("StellarOne," or the "Company") and its affiliates. This discussion and analysis should be read in conjunction with the financial statements and footnotes appearing elsewhere in this report.

OVERVIEW

StellarOne Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. Currently, StellarOne is one of the largest independent commercial bank holding companies headquartered in the Commonwealth of Virginia. The Company's sole banking affiliate is StellarOne Bank headquartered in Christiansburg, Virginia. Additional affiliates of the Company include VFG Limited Liability Trust and FNB (VA) Statutory Trust II both of which are associated with the Company's subordinated debt issues and are not subject to consolidation. The Company collapsed all of its previous affiliates into StellarOne Bank on May 27, 2008. The organization has a network of sixty-one full-service financial centers, one loan production office, and sixty-six ATMs stretching from the New River Valley, Roanoke Valley, Shenandoah Valley and Central and North Central Virginia.

Critical Accounting Policies

General

The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("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 inherent losses in our loan portfolio. Actual losses could differ significantly from the historical factors that we use.

Investment Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The initial classification of securities is determined at the date of purchase.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers
(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and
(3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated increase in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. There are a total of nineteen (19) securities that had unrealized losses for 12 months or more as of March 31, 2009 totaling $1.9 million. StellarOne has the ability and intent to hold these securities for the time thought to be necessary to recover its cost, and does not consider them to be other-than-temporarily impaired.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have been incurred, but not realized through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company's banking subsidiary conducts an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. When a loan has been identified as impaired, a specific reserve may be established based on management's calculation of the loss embedded in the individual loan. Loans meeting the criteria for impairment are segregated for analysis from performing loans within the portfolio. In addition to impairment testing, the banking subsidiary has a ten point grading system for each non-homogeneous loan in the portfolio. Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, overall portfolio quality including delinquency rates and commercial real estate loan concentrations. The total of specific reserves required for impaired classified loans and the calculated reserves by loan category are then used to compute an estimated range of losses which is then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision for loan losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Goodwill

The Company has adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $438 thousand and $161 thousand for the three months ended March 31, 2009 and 2008, respectively.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Stock-Based Compensation

The Company has a stock-based employee compensation plan under which nonqualified stock options may be granted periodically to certain employees. The Company's stock options typically have an exercise price equal to at least the fair value of the stock on the date of grant, and vest based on continued service with the Company for a specified period, generally five years. The Company has adopted SFAS 123 (R), which requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

FASB Statement No. 123 (R), "Share-Based Payment" SFAS 123 (R) also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.

Non-GAAP Financial Measures

This report refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income excluding gains or losses on securities, fixed assets and foreclosed assets. Additionally we refer and define core margin below. These are non-GAAP financial measures that we believe provide investors with important information regarding our operational efficiency and margin production. Such information is not in accordance with GAAP and should not be construed as such. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The Company, in referring to its net income, is referring to income under GAAP.

Results of Operations

The Company's earnings for the first quarter of 2009 were $146 thousand, or a net loss available to common shareholders of $298 thousand, or $0.01 per diluted common share. Those results compare to net income of $2.1 million, or diluted earnings per share of $0.14 during the same period in the prior year, and reflect improvement on a linked quarter basis to the net loss to common shareholders of $898 thousand or $0.04 per diluted common share for the fourth quarter of 2008. The results for the first quarter of 2009 included a provision for loan losses of $7.8 million related primarily to increased specific reserves within the residential real estate development portfolio.

Net Interest Income

Core net interest margin was down $1.7 million or 6.9% compared to $23.7 million for the fourth quarter of 2008 and up $4.0 million or 22.5% when compared to $18.0 million for the same quarter in 2008. Including the effect of purchase accounting adjustments, net interest income amounted to $23.1 million for the first quarter of 2009, down $557 thousand or 2.4% compared to $23.7 million for the fourth quarter of 2008. The core net interest margin, was 3.36% for the first quarter, compared to 3.55% for the fourth quarter 2008 and down 39 basis points compared to 3.75% for the same quarter in 2008. Including the effects of purchase accounting adjustments, the net interest margin was 3.52% for the quarter, compared to 3.80% for the fourth quarter of 2008 and 3.75% for the first quarter of 2008.

The compression noted continues to be yield driven, with the average yield on earning assets decreasing 44 basis points to 5.59% as compared to 6.03% for the fourth quarter of 2008. The pricing structure for approximately 36% of the company's loan portfolio continues to be tied to the LIBOR and Prime rate indices. Both of these indices declined significantly during the fourth quarter of 2008 and the first quarter of 2009 and are much lower when compared to the first quarter of 2008. This has triggered a lower rate of return on the company's variable rate loan products resulting in decreased yield. In addition, reversal of interest accruals associated with the increase in nonperforming loans had an impact of approximately 3 basis points on loan yields for the period. The cost of interest bearing liabilities contracted 16 basis points from 2.61% during the fourth quarter of 2008 to 2.45% during the first quarter of 2009, but remained much less sensitive to repricing when compared to interest earning assets.

Stabilization of the margin will most likely occur late in the year, but modest compression of core margin is expected as the rate of improvement in the cost of funds slows, loan yields continue to be negatively impacted by the short-term rate reductions, loan growth remains minimal due to market conditions, and the positive effects of amortizing the purchase adjustments continue to lessen.

                             STELLARONE CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS



                                                        For the Three Months Ended March 31,
                                                                     (unaudited)
                                                     2009                                  2008
                                         Average     Interest    Average       Average     Interest    Average
Dollars in thousands                     Balance      Inc/Exp     Rates        Balance      Inc/Exp     Rates
Assets
Loans receivable, net                  $ 2,284,456   $  32,599      5.79 %   $ 1,627,999   $  27,300      6.73 %
Investment securities
Taxable                                    228,397       2,773      4.86 %       202,373       2,341      4.58 %
Tax exempt                                  83,630       1,305      6.24 %        84,337       1,287      6.04 %

Total investments                          312,027       4,078      5.23 %       286,710       3,628      5.01 %

Interest bearing deposits                   50,542           9      0.07 %           375           3      3.16 %
Federal funds sold                          17,307           9      0.21 %        17,396         183      4.16 %

                                           379,876       4,096      4.31 %       304,481       3,814      4.96 %


Total earning assets                     2,664,332   $  36,695      5.59 %     1,932,480   $  31,114      6.46 %


Total nonearning assets                    287,888                               167,740

Total assets                           $ 2,952,220                           $ 2,100,220


Liabilities and Stockholders' Equity
Interest-bearing deposits
Interest checking                      $   516,475   $   1,397      1.10 %   $   305,030   $   1,096      1.44 %
Money market                               235,150         830      1.43 %       131,175         665      2.03 %
Savings                                    188,399         410      0.88 %       127,065         338      1.07 %
Time deposits:
Less than $100,000                         762,657       6,060      3.22 %       513,723       5,298      4.14 %
$100,000 and more                          324,093       2,954      3.70 %       255,407       2,808      4.41 %

Total interest-bearing deposits          2,026,774      11,651      2.33 %     1,332,400      10,205      3.07 %

Federal funds purchased and
securities soldunder agreements to
repurchase                                     344           3      3.49 %         5,444          55      4.00 %
Federal Home Loan Bank advances and
other borrowings                           184,321       1,568      3.40 %       186,298       1,907      4.05 %
Subordinated debt                           32,991         357      4.33 %        24,426         467      7.56 %
Commercial paper                                -           -        N/A          74,261         479      2.55 %


                                           217,656       1,928      3.54 %       290,429       2,908      3.96 %

Total interest-bearing liabilities       2,244,430      13,579      2.45 %     1,622,829      13,113      3.23 %


Total noninterest-bearing
liabilities                                313,799                               257,072

Total liabilities                        2,558,229                             1,879,901
Stockholders' equity                       393,991                               220,319

Total liabilities and stockholders'
equity                                 $ 2,952,220                           $ 2,100,220


Net interest income (tax equivalent)                 $  23,116                             $  18,001

Average interest rate spread                                        3.14 %                                3.23 %
Interest expense as percentage of
average earning assets                                              2.07 %                                2.71 %
Net interest margin                                                 3.52 %                                3.75 %

Noninterest Income

On an operating basis, which excludes gains and losses from sale of assets (foreclosed assets, fixed assets and securities) total non-interest income amounted to 7.0 million for the first quarter of 2009, an increase of $523 thousand or 8.0% from $6.5 million for fourth quarter of 2009 and up $1.3 million compared to $5.7 million for the same quarter in the prior year. Mortgage banking revenue totaled $1.4 million for the first quarter, an increase of $814 thousand or greater than 100% compared to $610 thousand for the fourth quarter of 2008 and up $553 thousand when compared to $871 thousand for the same quarter in 2008. Wealth management revenues from trust and brokerage fees for the first quarter of 2009 were $1.0 million, or flat compared to $1.0 million in the fourth quarter of 2008 and down $206 thousand when compared to the first quarter of 2008. These revenues have remained suppressed during the last several quarters due to lower market valuations for assets under management. Despite revenue contraction, wealth management contributed earnings to the company during the first quarter. Additionally, mortgage operations also contributed to earnings despite thinner margins received on increased revenues driven by the current refinancing activity. Retail banking fee income amounted to $3.7 million for the first quarter, a decrease of $499 thousand or 11.9% compared to $4.2 million for the fourth quarter of 2008 and increased $1.1 million when compared to the same quarter in the prior year. The decrease on a linked quarter basis is a result of seasonality and less business days in the period while increases compared to 2008 are relate directly to the merger that was consummated in February of the prior year. Revenues from other miscellaneous income sources for the first quarter of 2009 were $591 thousand, up $266 thousand or 81.9% compared to $325 thousand for the fourth quarter of 2008, related principally to increases in merchant processing revenues.

Noninterest Expense

Non-interest expense for the first quarter of 2009 amounted to $22.2 million, or essentially flat when compared to the $22.1 million for the fourth quarter of 2008 and increased $3.2 million when compared to the same period in the prior year. FDIC insurance premiums increased $1.1 million when compared to the first quarter of 2008 and $462 thousand or 71.9% compared to the fourth quarter of 2008. Excluding the FDIC increase total noninterest expense decreased $292 thousand or 1.32% when compared to the fourth quarter of 2008. Reductions in compensation and benefits of $39 thousand and demand deposit account charge-offs of $442 thousand, offset by an uptick in professional fees of $340 thousand accounted for much of this decrease on a linked quarter basis. StellarOne's efficiency ratio was 73.70% for the first quarter of 2009, compared to 69.23% for the fourth quarter of 2008 and 80.41% for the first quarter of 2008. The quarter to quarter comparisons reflect the contraction in gross revenues for the period while comparisons to the same period in the prior year are not meaningful due to the merger activity in the first quarter of 2008.

Income Taxes

Income tax benefit for the first quarter of 2009 was $592 thousand resulting in an effective tax rate of 133.7% compared to $602 thousand, or 22.4%, for the first quarter of 2008. The significant increase in the effective tax rate for the first quarter of 2008 is a result of increased provisioning that has reduced pretax earnings to a level which is proportionately much smaller in relation to our permanent differences when compared to the same period in the prior year. Pretax results near the breakeven point tend to generate substantial shifts in the effective tax rate due to comparing a lower level of earnings or losses to a relatively steady level of permanent differences. Given the current economic environment and that elevated levels of provisioning are driving the effective rate; the effective rate for the first quarter of 2009 is within the estimated range of probable rates expected for the annualized period.

Asset Quality

StellarOne's ratio of non-performing assets as a percentage of total assets increased to 2.38% as of March 31, 2009, compared to 1.66% as of December 31, 2008. Annualized net charge-offs as a percentage of average loans receivable amounted to 0.51% for the first quarter of 2009, compared to 2.22% for the fourth quarter of 2008. Net charge-offs for the first quarter totaled $2.9 million and were down $9.7 million compared to the $12.6 million in net charge-offs recognized during the fourth quarter of 2008. The elevated nonperforming assets and the provision for loan losses were driven by continued deterioration in credits collateralized by residential development and construction lending and declining market conditions in general. The primary concentration of credit issues within our portfolio continue to arise from the residential development and construction loan segment at Smith Mountain Lake (SML). Of the total residential development and construction exposure of approximately $58.6 million at SML, approximately $25.3 million or 43% is now in non-performing assets and appropriately reserved for or charged off. This amount includes the largest SML relationship of $14.7 million, which was moved to nonaccrual status during the quarter and represents the primary increase in non-performing assets during the quarter.

StellarOne recorded a provision for loan losses of $7.8 million for the first quarter of 2009, a decrease of $3.2 million compared to the fourth quarter of 2008. The first quarter provision compares to net charge-offs of $2.9 million for the quarter, resulting in an increase in the allowance as a percentage of total loans to 1.56% at March 31, compared to 1.35% at December 31. While unable to predict the duration or severity of the current recession, StellarOne anticipates non-performing asset and net charge-off levels to remain elevated throughout 2009.

The following table provides information on asset quality statistics for the periods presented (In thousands):

                                                  March 31,         December 31,        March 31,
                                                     2009               2008               2008
                                                 (unaudited)                           (unaudited)
Non-accrual loans                                $     66,711      $       44,491      $     24,959
Troubled debt restructurings                              195                  -                789
Foreclosed assets                                       4,207               4,627             4,902
Loans past due 90 days accruing interest                  293                  -                327

Total non-performing assets                      $     71,406      $       49,118      $     30,977

Nonperforming assets to total assets                     2.38 %              1.66 %            0.99 %

Nonperforming assets to loans and foreclosed
property                                                 3.15 %              2.17 %            1.35 %

Allowance for loan losses as a percentage of
loans receivable                                         1.56 %              1.35 %            1.17 %

Allowance for loan losses as a percentage of
nonperforming assets                                    49.46 %             62.02 %           87.28 %

Annualized net charge-offs as a percentage of
average loans receiveable                                0.51 %              0.80 %            0.13 %

Liquidity and Capital Resources

Capital Resources

The management of capital in a regulated financial services industry must properly balance return on equity to stockholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Additionally, capital management must also consider acquisition opportunities that may exist, and the resulting accounting treatment. The Company's capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining its . . .