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-seven 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.

During the quarter ended September 30, 2009, management revised its methodology and related policy for the evaluation of equity securities impairment in order to comply with related guidance under US Generally Accepted Accounting Principles (GAAP). Management has determined that other-than-temporary impairment exists and should be recorded if the fair value of an equity security represents (1) less than 70% of the book value of a security regardless of loss period or (2) if the loss period has been more than 18 months regardless of the fair value's relationship to carrying value. If either of these conditions do not exist, but management becomes aware of possible impairment outside of this scope, management will conduct additional research to determine if market price recoveries can reasonably be expected to occur within an acceptable forecast period. For purposes of this analysis, a near term recovery period has been defined as 3-6 months.

This change has been necessitated based on management's interpretations of SAB Topic 5M and related authoritative accounting guidance and discussions with the U.S. Securities and Exchange Commission ("SEC") regarding the consideration of impairment on equity securities. After revising the policy to conform with GAAP in October 2009, management applied the revised criteria to the Company's bank equities investments at September 30, 2009 and determined that it was appropriate to record an other-than-temporary impairment charge to the consolidated income statement of $1.9 million on a pre-tax basis during the third quarter of 2009 which is reflected in these consolidated financial statements. Misstatements in previously filed financial statements noted through applying our previous non-GAAP compliant policy compared to our revised policy were deemed to be immaterial.

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 eleven (11) securities that had unrealized losses for 12 months or more as of September 30, 2009 totaling $573 thousand. 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 at September 30, 2009.

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

Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. That annual assessment date is September 30. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Additionally, 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. 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 $1.3 million and $1.1 million for the nine months ended September 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 recognizes the associated compensation cost relating to share-based payment transactions in the consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

New awards to employees eligible for retirement prior to the award becoming fully vested are 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 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. 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 third quarter of 2009 was $8.9 million, or a net loss available to common shareholders of $9.4 million, or $0.41 per diluted common share. Those results compare to net income of $2.0 million, or diluted earnings per share of $0.09 during the same period in the prior year, and a net loss to common shareholders of $785 thousand or $0.03 per diluted common share recognized for the second quarter of 2009. The results for the third quarter of 2009 were impacted by a provision for loan losses totaling $20.1 million for the period, which compares to a provision for loan losses of $6.5 million during the second quarter of 2009 and $6.0 million for the same quarter in the prior year. Risk rating downgrades, increasing historical loss experience, the economic climate and other environmental factors necessitated the additional allowances. Additionally, results were impacted by a non-cash impairment charge of $1.9 million on a pretax basis associated with investments in bank equities.

The Company's loss for the nine month period ended September 30, 2009 was $9.1 million, or a net loss available to common shareholders of $10.4 million, or $0.46 per diluted common share. Those results compare to net income of $10.3 million, or diluted earnings per share of $0.51 during the same period in the prior year. Similar to the three month period, the results for the fist nine months of 2009 were impacted by an increased provision for loan losses totaling $34.3 million that approximated net charge-offs of $23.7 million for the period, and compares to a provision for loan losses of $9.8 million during the first nine months of 2008. Additionally, the results for the nine month period in 2009 were also reduced by a $3.6 million increase in total FDIC assessment expense when compared to the same period in the prior year and a non-cash impairment charge of $1.9 million associated with investments in bank equities recorded in the third quarter of 2009.

Net Interest Income

Net interest income, on a tax-equivalent basis amounted to $22.7 million for the third quarter, which compares to $22.7 for second quarter of this year, and $27.4 million for the same period in prior year. The net interest margin was 3.30% for the third quarter, compared to 3.34% for the second quarter of this year, and 4.06% for the third quarter of 2008. The average yield on earning assets decreased 18 basis points to 5.11% as compared to 5.29% for the second quarter of this year, which was substantially offset by improvement in the cost of interest bearing liabilities, which contracted 15 basis points from 2.31% during the second quarter to 2.16% during the third quarter of this year.

The re-pricing sensitivity of interest bearing liabilities accelerated relative to interest earning assets during the third quarter as a higher percentage of the CD portfolio repriced. This repricing relationship is expected to continue during the fourth quarter as net interest margin is anticipated to improve on a linked quarter basis.

The compression noted for both the three and nine month periods when compared to the same periods in 2008 continues to be yield driven, with the average yield on earning assets decreasing 119 basis points to 5.11% as compared to 6.30% for 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 47 basis points from 2.63% during the third quarter of 2008 to 2.16% during the third quarter of 2009, but remained much less sensitive to repricing when compared to interest earning assets. The margin compression noted when comparing the nine month periods is consistent with the items discussed above related to the quarterly comparisons.

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


                                                For the Three Months Ended September 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    $ 2,260,411     $   31,055           5.45 %   $ 2,279,282     $   37,744           6.59 %
Investment securities
Taxable                      232,267          2,311           3.89 %       256,426          3,155           4.81 %
Tax exempt                   111,982          1,710           5.98 %        86,908          1,366           6.15 %
Total investments            344,249          4,021           4.57 %       343,334          4,521           5.15 %

Interest bearing
deposits                      54,109             36           0.26 %           735              3           1.60 %
Federal funds sold            69,632             38           0.21 %        60,406            272           1.76 %
                             467,990          4,095           3.42 %       404,475          4,796           4.64 %

Total earning assets       2,728,401     $   35,150           5.11 %     2,683,757     $   42,540           6.30 %

Total nonearning
assets                       284,163                                       309,093

Total assets             $ 3,012,564                                   $ 2,992,850

Liabilities and
Stockholders' Equity
Interest-bearing
deposits
  Interest checking      $   536,184     $    1,276           0.94 %   $   507,990     $      439           0.34 %
  Money market               312,479          1,199           1.52 %       232,802          1,096           1.87 %
  Savings                    194,314            431           0.88 %       202,329          1,935           3.79 %
  Time deposits:
    Less than $100,000       713,888          5,070           2.82 %       754,557          6,014           3.16 %
    $100,000 and more        359,362          2,880           3.18 %       351,678          3,355           3.78 %
Total interest-bearing
deposits                   2,116,227         10,856           2.04 %     2,049,356         12,839           2.49 %

Federal funds
purchased and
securities sold under
agreements to
repurchase                       554              4           2.95 %           950              4           1.65 %
Federal Home Loan Bank
advances and other
borrowings                   145,000          1,321           3.56 %       194,799          1,795           3.61 %
Subordinated debt             32,991            293           3.48 %        32,991            481           5.71 %
Other borrowings                   -              -            N/A               6              1          65.22 %

                             178,545          1,618           3.55 %       228,746          2,281           3.90 %

  Total
interest-bearing
liabilities                2,294,772         12,474           2.16 %     2,629,780         15,120           2.63 %

  Total
noninterest-bearing
liabilities                  328,219                                       349,662

Total liabilities          2,622,991                                     2,979,442
Stockholders' equity         389,573                                       365,086

Total liabilities and
stockholders' equity     $ 3,012,564                                   $ 3,344,528


Net interest income
(tax equivalent)                         $   22,676                                    $   27,420
  Average interest
rate spread                                                   2.95 %                                        3.67 %
  Interest expense as
percentage of average
earning assets                                                1.81 %                                        2.24 %
  Net interest margin                                         3.30 %                                        4.06 %

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


                                                 For the Nine Months Ended September 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     $ 2,278,781     $  95,455           5.60 %   $ 2,066,251     $ 104,371           6.75 %
Investment securities
Taxable                       229,777         7,409           4.25 %       243,015         8,999           4.87 %
Tax exempt                     97,682         4,511           6.09 %        88,942         4,185           6.18 %
Total investments             327,459        11,920           4.80 %       331,957        13,184           5.22 %

Interest bearing
deposits                       51,972            80           0.20 %         1,651            16           1.27 %
Federal funds sold             48,691            78           0.21 %        50,113           795           2.07 %
                              428,122        12,078           3.72 %       383,721        13,995           4.79 %

Total earning assets        2,706,903     $ 107,533           5.31 %     2,449,972     $ 118,366           6.45 %

Total nonearning assets       285,949                                      269,254

Total assets              $ 2,992,852                                  $ 2,719,226

Liabilities and
Stockholders' Equity
Interest-bearing
deposits
  Interest checking       $   525,761     $   3,928           1.00 %   $   436,958     $   1,338           0.41 %
  Money market                274,671         3,076           1.50 %       185,302         2,578           1.85 %
  Savings                     191,522         1,261           0.88 %       180,276         4,731           3.50 %
  Time deposits:
    Less than $100,000        756,730        17,056           3.01 %       679,507        16,974           3.33 %
    $100,000 and more         329,713         8,547           3.47 %       324,088         9,880           4.06 %
Total interest-bearing
deposits                    2,078,397        33,868           2.18 %     1,806,131        35,501           2.62 %

Federal funds purchased
and securities sold
under agreements to
repurchase                        455            10           2.90 %         4,757            64           1.77 %
Federal Home Loan Bank
advances
 and other borrowings         166,319         4,441           3.52 %       205,461         5,334           3.41 %
Subordinated debt              32,991           992           3.97 %        30,146         1,411           6.15 %
Commercial paper                    -             -            N/A          32,554           635           2.56 %
Other borrowings                    -             -            N/A             459             7           2.00 %

                              199,765         5,443           3.59 %       273,377         7,451           3.58 %

  Total
interest-bearing
liabilities                 2,278,162        39,311           2.30 %     2,079,508        42,952           2.75 %

  Total
noninterest-bearing
liabilities                   323,199                                      321,968

Total liabilities           2,601,361                                    2,401,476
Stockholders' equity          391,491                                      317,750

Total liabilities and
stockholders' equity      $ 2,992,852                                  $ 2,719,226


Net interest income
(tax equivalent)                          $  68,222                                    $  75,414
  Average interest rate
spread                                                        3.01 %                                       3.70 %
  Interest expense as
percentage of
    average earning
assets                                                        1.94 %                                       2.34 %
  Net interest margin                                         3.37 %                                       4.11 %

Noninterest Income

On an operating basis, which excludes gains and losses from sales of assets, total non-interest income amounted to $7.7 million for the third quarter of 2009, a decrease of $550 thousand or 6.6% from $8.3 million for second quarter of this year, and an increase of $660 thousand or 9.31% from $7.1 million for the same period in prior year. Mortgage banking revenue totaled $1.8 million for the third quarter, a decrease of $300 thousand or 14.4% compared to $2.1 million for the second quarter of this year, and an increase of $1.2 million or over 100% compared to the third quarter of the prior year. The elevated level of secondary mortgage originations reflects the continuing favorable interest rate environment. Retail banking fee income amounted to $4.3 million for the third quarter, an increase of $216 thousand or 5.3% compared to $4.1 million for the second quarter of this year, 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 third quarter were $1.1 million or essentially flat compared to $989 thousand in the second quarter of this year. Revenues from this line of business remain suppressed due to lower market valuations for assets under management. Revenues from other miscellaneous income sources for the third quarter were $201 thousand, down $579 thousand or 74.2% compared to $780 thousand for the second quarter of this year. This . . .