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 fifty-nine 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 twenty-three (23) securities that had unrealized losses for 12 months or more as of June 30, 2009 totaling $2.5 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 $872 thousand and $691 thousand for the six months ended June 30, 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 and noninterest income on an operating basis below in our discussions of operations. 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 loss for the second quarter of 2009 was $326 thousand, or a net loss available to common shareholders of $785 thousand, or $0.03 per diluted common share. Those results compare to net income of $6.1 million, or diluted earnings per share of $0.27 during the same period in the prior year, and a net loss to common shareholders of $298 thousand or $0.01 per diluted common share recognized for the first quarter of 2009. The results for the second quarter of 2009 were impacted by a provision for loan losses totaling $6.5 million that approximated net charge-offs of $6.9 million for the period, and compares to a provision for loan losses of $7.75 million during the first quarter of 2009 and $2.8 million for the same quarter in the prior year. Additionally, second quarter 2009 results were reduced by a special assessment from the FDIC totaling $1.3 million.

The Company's loss for the six month period ended June 30, 2009 was $180 thousand, or a net loss available to common shareholders of $1.1 million, or $0.05 per diluted common share. Those results compare to net income of $8.2 million, or diluted earnings per share of $0.44 during the same period in the prior year. Similar to the three month period, the results for the fist six months of 2009 were impacted by an increased provision for loan losses totaling $14.3 million that approximated net charge-offs of $9.8 million for the period, and compares to a provision for loan losses of $3.8 million during the first six months of 2008. Additionally, the results for the six month period in 2009 were also reduced by a $3.1 million increase in total FDIC assessment expense when compared to the same period in the prior year.

Net Interest Income

Net interest income, on a tax-equivalent basis and excluding the effects of purchase accounting amortization, amounted to $22.0 million for both the first and second quarters of 2009 and compare to $25.3 million for the second quarter of 2008. The core net interest margin, adjusted to exclude the effect of purchasing accounting amortization, was 3.24% for the second quarter of 2009, compared to 3.36% for the first quarter 2009 and 3.69% for the second quarter of 2008. Including the effects of purchase accounting adjustments, the net interest margin was 3.34% for the second quarter 2009, compared to 3.52% for the first quarter 2009 and 4.37% for the second quarter of 2008.

Net interest income, on a tax-equivalent basis and excluding the effects of purchase accounting amortization, amounted to $44.0 million for the first six months of 2009 and compares to $45.8 million for first half of 2008. The core net interest margin, adjusted to exclude the effect of purchasing accounting amortization, was 3.30% for the first six months of 2009, compared to 3.94% for the first half of 2008. Including the effects of purchase accounting adjustments, the net interest margin was 3.43% for the first six months of 2009, compared to 4.08% for the first half of 2008.

The compression noted for both the three and six month periods continues to be yield driven, with the average yield on earning assets decreasing 30 basis points to 5.29% as compared to 5.59% for the first quarter of 2009 and down 122 basis points compared to the same quarter in 2008. Contributing factors include a relatively high level of fixed rate re-pricing in the loan portfolio, the impact of an increasing amount of loans in nonaccrual status and a higher level of short term liquidity in the balance sheet. The cost of interest bearing liabilities contracted 14 basis points from 2.45% during the first quarter of 2009 to 2.31% during the second quarter of 2009 and down 22 basis points compared to the same quarter in 2008, but remained much less sensitive to repricing when compared to interest earning assets. Irrespective of the effects related to the merger of equals transaction consummated in the first quarter of 2008, the comparisons of the six month periods mirror those discussed above for the quarterly results.

Factors impacting the net interest margin for the remainder of the year include the acceleration of liability repricing and improvement of cost of funds associated with reduced wholesale funding, higher amounts of CD repricing. Additionally, loan yields are expected to continue to be negatively impacted by the short-term rate reductions with loan growth remaining minimal due to market conditions, and the positive effects of amortizing the purchase adjustments will continue to lessen.

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

                                                                For the Three Months Ended June 30,
                                                                            (unaudited)
                                                  2009                                                      2008
                                                 Interest                                                  Interest
Dollars in thousands       Average Balance        Inc/Exp        Average Rates       Average Balance        Inc/Exp        Average Rates

Assets
Loans receivable, net     $       2,291,735     $    31,801                5.57 %   $       2,288,804     $    39,329                6.91 %
Investment securities
Taxable                             230,102           2,624                4.51 %             307,571           3,500                4.50 %
Tax exempt                           97,122           1,496                6.09 %              95,604           1,531                6.34 %
Total investments                   327,224           4,120                4.98 %             403,175           5,031                4.94 %

Interest bearing
deposits                             51,966              31                0.24 %               3,943               9                0.90 %
Federal funds sold                   58,560              20                0.14 %              63,198             340                2.13 %
                                    437,750           4,171                3.77 %             470,316           5,380                4.53 %

Total earning assets              2,729,485     $    35,972                5.29 %           2,759,120     $    44,709                6.51 %

Total nonearning assets             283,599                                                   290,706

Total assets              $       3,013,084                                         $       3,049,826

Liabilities and
Stockholders' Equity
Interest-bearing
deposits
Interest checking         $         524,408     $     1,255                0.96 %   $         497,074     $       505                0.41 %
Money market                        275,534           1,047                1.52 %             191,406             817                1.71 %
Savings                             191,788             420                0.88 %             211,158           1,755                3.33 %
Time deposits:
Less than $100,000                  794,180           5,926                2.99 %             769,415           5,664                2.95 %
$100,000 and more                   305,297           2,712                3.56 %             364,876           3,717                4.09 %
Total interest-bearing
deposits                          2,091,207          11,360                2.18 %           2,033,929          12,458                2.46 %

Federal funds purchased
and securities sold
under agreements to
repurchase                              464               3                2.56 %               7,919               5                0.25 %
Federal Home Loan Bank
advances and other
borrowings                          170,067           1,553                3.61 %             236,759           1,634                2.73 %
Subordinated debt                    32,991             343                4.11 %              32,991             466                5.59 %
Commercial paper                          -               -                 N/A                23,821             156                2.59 %

                                    203,522           1,899                3.69 %             301,490           2,261                2.97 %

Total interest-bearing
liabilities                       2,294,729          13,259                2.31 %           2,335,419          14,719                2.53 %

Total
noninterest-bearing
liabilities                         327,425                                                   347,080

Total liabilities                 2,622,154                                                 2,682,499
Stockholders' equity                390,930                                                   367,327

Total liabilities and
stockholders' equity      $       3,013,084                                         $       3,049,826


Net interest income
(tax equivalent)                                $    22,713                                               $    29,990
Average interest rate
spread                                                                     2.97 %                                                    3.98 %
Interest expense as
percentage of average
earning assets                                                             1.95 %                                                    2.14 %
Net interest margin                                                        3.34 %                                                    4.37 %

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

                                                     For the Six Months Ended June 30,
                                                                (unaudited)
                                            2009                                          2008
                            Average        Interest       Average         Average        Interest       Average
Dollars in thousands        Balance        Inc/Exp         Rates          Balance        Inc/Exp         Rates

Assets
Loans receivable, net     $ 2,288,118     $   64,400           5.69 %   $ 1,958,566     $   66,628           6.84 %
Investment securities
Taxable                       228,873          5,382           4.68 %       255,090          6,468           5.02 %
Tax exempt                     90,414          2,801           6.16 %        89,971          1,838           4.04 %
Total investments             319,287          8,183           5.10 %       345,061          8,306           4.76 %

Interest bearing
deposits                       50,885             40           0.16 %         2,214             12           1.07 %
Federal funds sold             38,046             43           0.22 %        44,910            523           2.29 %
                              408,218          8,266           4.03 %       392,185          8,841           4.46 %

Total earning assets        2,696,336     $   72,666           5.44 %     2,350,751     $   75,469           6.45 %

Total nonearning assets       286,494                                       228,856

Total assets              $ 2,982,830                                   $ 2,579,607

Liabilities and
Stockholders' Equity
Interest-bearing
deposits
Interest checking         $   520,463     $    2,652           1.03 %   $   401,052     $      898           0.45 %
Money market                  255,453          1,877           1.48 %       161,291          1,482           1.84 %
Savings                       190,103            830           0.88 %       169,115          2,796           3.32 %
Time deposits:
Less than $100,000            778,506         11,986           3.10 %       641,569         10,962           3.43 %
$100,000 and more             314,643          5,666           3.63 %       310,141          6,525           4.22 %
Total interest-bearing
deposits                    2,059,168         23,011           2.25 %     1,683,168         22,663           2.70 %

Federal funds purchased
and securities sold
under agreements to
repurchase                        405              7           3.44 %         6,681             60           1.78 %
Federal Home Loan Bank
advances and other
borrowings                    177,155          3,120           3.50 %       210,851          3,545           3.34 %
Subordinated debt              32,991            700           4.22 %        28,708            930           6.41 %
Commercial paper                    -              -            N/A          49,010            635           2.56 %

                              210,551          3,827           3.62 %       295,928          5,170           3.46 %

Total interest-bearing
liabilities                 2,269,719         26,838           2.38 %     1,979,096         27,833           2.81 %

Total
noninterest-bearing
liabilities                   320,650                                       306,688

Total liabilities           2,590,369                                     2,285,784
Stockholders' equity          392,461                                       293,823

Total liabilities and
stockholders' equity      $ 2,982,830                                   $ 2,579,607


Net interest income
(tax equivalent)                          $   45,828                                    $   47,636
Average interest rate
spread                                                         3.06 %                                        3.64 %
Interest expense as
percentage of average
earning assets                                                 2.01 %                                        2.37 %
Net interest margin                                            3.43 %                                        4.08 %

Noninterest Income

On an operating basis, which excludes gains and losses from sales of assets, total non-interest income amounted to $8.3 million for the second quarter of 2009, an increase of $1.3 million or 17.8% from $7.0 million for first quarter of 2009 and an increase of $574 thousand or 7.4% from $7.7 million for second quarter of 2008. Mortgage banking revenue totaled $2.1 million for the second quarter, an increase of $660 thousand or 46.4% compared to $1.4 million for the first quarter of 2009 and an increase of $726 thousand or 53.5% compared to $1.4 million for the second quarter of 2008. The increased originations are primarily a reflection of the favorable interest rate environment and have resulted in an increase in the earnings contribution from the mortgage line of business during the second quarter. Retail banking fee income amounted to $4.1 million for the second quarter, an increase of $402 thousand or 10.8% compared to $3.7 million for the first quarter of 2009 and an increase of $217 thousand or 5.6% compared to $3.9 million for the second quarter of 2008. These increases are largely a result of more NSF charge activity and a higher realization rate associated with these fees. Wealth management revenues from trust and brokerage fees for the second quarter of 2009 were $989 thousand or essentially flat compared to $1.0 million in the first quarter of 2009 and down $400 thousand or 28.8% compared to the second quarter of 2008. Revenues from this line of business remain suppressed due to lower market valuations for assets under management. Despite revenue contraction, wealth management contributed earnings to the company during both the first and second quarters of 2009. Revenues from other miscellaneous income sources for the second quarter of 2009 were $780 thousand, up $189 thousand or 32.0% compared to $591 thousand for the first quarter of 2009 and up $19 thousand or 2.5% compared to $761 thousand for the same quarter in 2008. The increase compared to the first quarter relates principally to seasonal insurance related revenues and was therefore comparative to the same period in the prior year.

On an operating basis for the six month period, which excludes gains and losses . . .