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 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 measure 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 losses 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 and six months ended June 30, 2012, June 30, 2011, is as follows:

                                                    Three Months Ended             Six Months Ended
(dollars in thousands)                                   June 30,                      June 30,
                                                    2012           2011           2012           2011
Net Income Available to Common Stockholders      $    6,357       $ 7,488       $ 11,136       $ 11,139
Adjustments to net income:
Impairment loss on securities                            -             -              -             732
Gain on sale of securities                           (1,328 )          -          (3,920 )         (503 )
Death benefits received from bank-owned life
insurance                                                -           (361 )           -            (361 )
Net tax effect adjustments                              465           126          1,372             46
Adjusted Operating Earnings                      $    5,494       $ 7,253       $  8,558       $ 11,053

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 losses 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 six months ended June 30, 2012, and June 30, 2011, is as follows:

                                                 Three Months Ended             Six Months Ended
(dollars in thousands)                                June 30,                      June 30,
                                                2012            2011           2012           2011
Summary Operating Results:
Non-interest expense                          $  15,557       $ 14,520       $ 32,184       $ 28,970
Net interest income                           $  26,917       $ 26,788       $ 53,696       $ 52,971
Non-interest income                               3,421          2,256          8,370          3,732
Impairment loss on securities                        -              -              -             732
Gain on sale of securities                       (1,328 )           -          (3,920 )         (503 )
Death benefits received from bank owned
life insurance                                       -            (361 )           -            (361 )

Adjusted non-interest income                  $   2,093       $  1,895       $  4,450       $  3,600
Total net interest income and non-interest
income,
adjusted (1)                                  $  29,010       $ 28,683       $ 58,146       $ 56,571
Efficiency Ratio, adjusted                         53.0 %         50.0 %         54.7 %         50.5 %

(1) Tax Equivalent Income of $29,376 for the three months ended June 30, 2012 and $58,878 for the six months ended June 30, 2012. Tax Equivalent Income of $29,071 for the three months ended June 30, 2011 and $57,347 for the six months ended June 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 outstanding preferred stock issued to the U.S. Treasury from total stockholders' equity. 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 June 30, 2012, and December 31, 2011 is as follows:

   (in thousands)                             As of June 30,        December 31,
                                                   2012                 2011
   Tangible common equity:
   Total stockholders' equity                $        303,294      $      283,771
   Less:
   Outstanding TARP senior preferred stock             68,146              67,195
   Intangible assets                                       -                   -

   Tangible common equity                    $        235,148      $      216,576
   Total tangible assets                     $      3,017,276      $    2,938,518
   Tangible common equity ratio                          7.79 %              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 June 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.

The 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 "Provision 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 six months ended June 30, 2012, the Company recorded net income of $13.9 million. After an effective dividend of $2.7 million to the U.S. Treasury on preferred stock, the Company reported net income available to common stockholders of $11.1 million, or $0.33 per diluted common share, compared to net income available to common stockholders of $11.1 million, or $0.36 per diluted common share for the first six months of 2011. The Company recorded net income available to common stockholders of $6.4 million, or $0.19 per diluted common share, for the quarter ending June 30, 2012 compared to $7.5 million, or $0.24 per diluted common share, in the second quarter of 2011.

Adjusted operating earnings (a non-GAAP measure) for the three months ended June 30, 2012, were $5.5 million, compared to $7.3 million. The year-over-year decrease is primarily due to higher provisioning for loan losses of $1.7 million and increased non-interest expenses of $1.0 million, partially offset by $700 thousand in reduced 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 second quarter of 2012, of $26.9 million was up $129 thousand, or 0.5%, over the same quarter last year. Net interest income for the six months ended 2012, of $53.7 million was up $725 thousand, or 1.4%, from $53.0 for the six months ended June 30, 2011. The net interest margin decreased 19 basis points from 3.99% for the three and six months ended 2011, to 3.80% for the same periods in 2012. The year-over-year decrease in the 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. Average loan yields declined 19 basis points, from 5.85% to 5.66%, and average investment security yields declined 125 basis points, from 3.49% to 2.24%, compared to interest-bearing deposits declining 41 basis points, from 1.36% to 0.95%. Management anticipates the net interest margin will range between 3.75% and 3.90% for the year.

Interest and dividend income decreased $2.0 million on average total interest-earnings assets of $2.89 billion for the three months ended June 30, 2012, compared to interest and dividend income generated by average total interest-earnings assets of $2.72 billion for the same period in 2011. The decline in interest and dividend income is mostly attributable to lower yielding average loan and security assets being generated in the current low interest rate environment.

Interest expense decreased $2.1 million on an average total interest-bearing liability balance of $2.30 billion for the quarter ended June 30, 2012, from an average total interest-bearing liability balance of $2.24 billion for the same period in 2011. The average rate paid on total interest-bearing liabilities was 1.18% for the second quarter of 2012, as compared to 1.58% for the second quarter of 2011.

The following tables provide a comparative average balance sheet and net interest income analysis for the three and six months ended June, 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 June 30,
                                                         2012                                           2011
                                                        Interest       Average                         Interest       Average
                                         Average         Income-       Yields /         Average         Income-       Yields /
(Dollars in thousands)                   Balance         Expense        Rates           Balance         Expense        Rates
Assets
Investment Securities (1)              $   589,230      $   3,038           2.24 %    $   443,906      $   3,723           3.49 %
Restricted investments                      11,272            104           3.73 %         11,658             96           3.31 %
Loans, net of unearned income (2)        2,165,893         30,427           5.66 %      2,180,131         31,765           5.85 %
Interest-bearing deposits in other
banks                                      120,593             74           0.25 %            498             -            0.05 %
Federal funds sold                              -              -              -            81,105             54           0.27 %

Total interest-earning assets          $ 2,886,988      $  33,643           4.74 %    $ 2,717,298      $  35,638           5.30 %
Other assets                                76,126                                         89,123

Total Assets                           $ 2,963,114                                    $ 2,806,421

Liabilities and Stockholders' Equity
Interest-bearing deposits:
NOW accounts                           $   354,559      $     318           0.36 %    $   322,378      $     595           0.74 %
Money market accounts                      222,898            221           0.40 %        196,946            515           1.05 %
Savings accounts                           602,095            644           0.43 %        669,476          1,597           0.96 %
Time deposits                              706,106          3,282           1.87 %        777,509          3,963           2.04 %

Total interest-bearing deposits        $ 1,885,658      $   4,465           0.95 %    $ 1,966,309      $   6,670           1.36 %
Securities sold under agreement to
repurchase                                 320,100          1,014           1.27 %        184,290            960           2.09 %
Other borrowed funds                        25,000            268           4.25 %         25,000            268           4.25 %
Trust preferred capital notes               66,660            979           5.80 %         66,406            952           5.67 %
. . .