Citizens Bancorp of Virginia (CZBT) 10-Q 2009 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______

FORM 10-Q

_______

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009

or

oTransition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number: 0-50576

CITIZENS BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

Virginia (State of incorporation or organization)	20-0469337 (I.R.S. Employer Identification No.)
126 South Main Street Blackstone, VA 23824 (434) 292-7221 (Address and telephone number of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller Reporting Company x

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:2,375,330 shares of Common Stock as of November 6, 2009.

FORM 10-Q

For the Period Ended September 30, 2009

INDEX

Part I.    Financial Information

Page No.

Item 1. Financial Statements

Consolidated Balance Sheets 3

Consolidated Statements of Income 4

Consolidated Statements of Changes in Stockholders’ Equity 5

Consolidated Statements of Cash Flows 6

Notes to Interim Consolidated Financial Statements 7

Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations 21

Item 4. Controls and Procedures 36

Part II.    Other Information

Item 1. Legal Proceedings 37

Item 1A. Risk Factors 37

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 37

Item 3. Defaults upon Senior Securities 38

Item 4. Submission of Matters to a Vote of Security Holders 38

Item 5. Other Information 38

Item 6. Exhibits 38

Signatures 39

2

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

(Dollars in thousands, except share data)

		September 30,		December 31,
		2009		2008
Assets		(Unaudited)
Cash and due from banks	$	7,536	$	7,136
Interest-bearing deposits in banks		6,533		13,280
Federal funds sold		6,559		9,512
Securities available for sale, at fair market value		61,058		43,481
Restricted securities		1,189		1,161
Loans, net of allowance for loan losses of $2,377
and $2,167		214,305		210,879
Premises and equipment, net		7,623		7,759
Accrued interest receivable		1,802		1,742
Other assets		9,029		9,236
Other real esate owned		1,417		957
Total assets	$	317,051	$	305,143
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing	$	33,386	$	40,288
Interest-bearing		225,518		208,853
Total deposits	$	258,904	$	249,141
FHLB advances		11,000		11,000
Other borrowings		5,304		5,183
Accrued interest payable		976		1,155
Accrued expenses and other liabilities		2,590		2,322
Total liabilities	$	278,773	$	268,801
Stockholders' Equity
Preferred stock, $0.50 par value; authorized 1,000,000 shares;
none outstanding	$	0	$	0
Common stock, $0.50 par value; authorized 10,000,000 shares;
issued and outstanding, 2,377,030 in 2009 and		1,189		1,196
2,390,980 in 2008
Retained earnings		38,053		37,198
Accumulated other comprehensive loss		(964)		(2,052)
Total stockholders' equity	$	38,278	$	36,342
Total liabilities and stockholders' equity	$	317,051	$	305,143

See accompanying Notes to Interim Consolidated Financial Statements.

3

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share data)

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2009		2008		2009		2008
Interest and Dividend Income
Loans, including fees	$	3,520	$	3,667	$	10,528	$	10,975
Investment securities:
Taxable		407		371		1,139		1,150
Tax-exempt		143		136		419		394
Federal Funds sold		8		1		16		8
Other		46		34		150		121
Total interest and dividend income	$	4,124	$	4,209	$	12,252	$	12,648
Interest Expense
Deposits	$	1,221	$	1,374	$	3,757	$	4,496
Other borrowings		60		60		175		170
Total interest expense	$	1,281	$	1,434	$	3,932	$	4,666
Net interest income	$	2,843	$	2,775	$	8,320	$	7,982
Provision for loan losses		200		20		425		55
Net interest income after provision
for loan losses	$	2,643	$	2,755	$	7,895	$	7,927
Noninterest Income
Service charges on deposit accounts	$	309	$	368	$	910	$	1,065
Net gain on sales of securities		0		0		15		20
Net gain on sales of loans		10		23		58		87
Income from bank owned life insurance		70		80		211		231
ATM fee income		141		131		409		380
Other		99		109		266		265
Total noninterest income	$	629	$	711	$	1,869	$	2,048
Noninterest Expense
Salaries and employee benefits	$	1,282	$	1,266	$	3,915	$	3,857
Net occupancy expense		143		155		429		439
Equipment expense		143		158		431		471
FDIC deposit insurance		87		10		242		24
Other		576		636		1,685		1,813
Total noninterest expense	$	2,231	$	2,225	$	6,702	$	6,604
Income before income taxes		1,041		1,241		3,062		3,371
Income taxes		284		331		830		918
Net income	$	757	$	910	$	2,232	$	2,453
Earnings per share, basic & diluted	$	0.32	$	0.38	$	0.94	$	1.01

See accompanying Notes to Interim Consolidated Financial Statements.

4

Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2009 and 2008

(Dollars in thousands)

						Accumulated
						Other
						Compre-
						hensive		Compre-
		Common		Retained		Income		hensive
		Stock		Earnings		(Loss)		Income		Total
Balance at December 31, 2007	$	1,217	$	36,416	$	(303)			$	37,330
Comprehensive income:
Net Income		-		2,453		-	$	2,453		2,453
Other comprehensive income, net of taxes
Unrealized gains (losses) on securities
available for sale, net of deferred taxes		-		-		(786)		(786)		(786)
Less: reclassification adjustment, net of
taxes of $7		-		-		(13)		(13)		(13)
Other comprehensive income (loss)								(799)
Total comprehensive income		-		-		-	$	1,654		-
Effects of changing the pension plan
measurement date pursuant to FASB
statement No. 158, net of tax		-		(38)		-				(38)
Shares repurchased		(17)		(494)		-				(511)
Cash dividends declared ($0.51 per share)		-		(1,231)		-				(1,231)
Balance at September 30, 2008	$	1,200	$	37,106	$	(1,102)				37,204
Balance at December 31, 2008	$	1,196	$	37,198	$	(2,052)			$	36,342
Comprehensive Income:
Net income		-		2,232		-	$	2,232		2,232
Other comprehensive income, net of taxes
Unrealized gains on securities available
for sale, net of deferred taxes		-		-		1,098		1,098		1,098
Less: reclassification adjustment for
gain on sale of securities, net of
taxes of $5		-		-		(10)		(10)		(10)
Total other comprehensive income							$	1,088
Total comprehensive income		-		-		-	$	3,320		-
Share repurchased		(7)		(164)		-				(171)
Cash dividends declared ($0.51 per share)		-		(1,213)		-				(1,213)
Balance at September 30, 2009	$	1,189	$	38,053	$	(964)			$	38,278

See accompanying Notes to Interim Consolidated Financial Statements.

5

Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)		Nine Months Ended
		September 30,
		2009		2008
Cash Flows from Operating Activities
Net Income	$	2,232	$	2,453
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		458		466
Provision for loan losses		425		55
Net (gain) on sales of loans		(58)		(87)
Origination of loans held for sale		(4,359)		(6,341)
Proceeds from sales of loans		4,417		6,428
Net (gain) on sales and calls of securities		(15)		(20)
Net amortization of securities		150		37
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(60)		133
(Increase) in other assets		(354)		(437)
(Decrease) in accrued interest payable		(179)		(566)
Increase in accrued expenses and other liabilities		268		603
Net cash provided by operating activities	$	2,925	$	2,724
Cash Flows from Investing Activities
Activity in available for sale securities:
Calls and sales	$	16,405		12,298
Maturities and prepayments		7,014		9,706
Purchases		(39,482)		(18,205)
Purchase of restricted securities		(28)		(264)
Net (increase) in loans		(4,311)		(3,734)
Purchases of land, premises and equipment		(323)		(325)
Net cash (used in) investing activities	$	(20,725)	$	(524)
Cash Flows from Financing Activities
Net increase (decrease) increase in deposits	$	9,763	$	(2,150)
Net increase in other borrowings		121		4,968
Repurchase of common stock		(171)		(511)
Dividends paid		(1,213)		(1,231)
Net cash provided by financing activities	$	8,500	$	1,076
Net (decrease) increase in cash and cash equivalents	$	(9,300)	$	3,276
Cash and Cash Equivalents
Beginning of period		29,928		14,115
End of period	$	20,628	$	17,391
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	4,111		5,232
Income Taxes	$	960	$	959
Supplemental Disclosures of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans	$	460	$	1,107
Unrealized gains (losses) on securities available for sale	$	1,649	$	(1,210)

See accompanying Notes to Interim Consolidated Financial Statements

6

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1. General

The Consolidated Balance Sheets at September 30, 2009 and December 31, 2008, the Consolidated Statements of Income for the three and nine months ended September 30, 2009 and September 30, 2008, and the Consolidated Changes in Stockholders’ Equity and Cash Flows for the nine months ended September 30, 2009 and 2008, were prepared in accordance with instructions for Form 10-Q, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. However, in the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position at September 30, 2009 and the results of operations for the three and nine months ended September 30, 2009 and 2008. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Citizens Bancorp of Virginia, Inc. Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for the three-month and nine-month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

Citizens Bancorp of Virginia, Inc. (the “Company”) is a one-bank holding company formed on December 18, 2003. The Company is the sole shareholder of its only subsidiary, Citizens Bank and Trust Company (the “Bank”). The Bank conducts and transacts the general business of a commercial bank as authorized by the banking laws of the Commonwealth of Virginia and the rules and regulations of the Federal Reserve System. The Bank was incorporated in 1873 under the laws of Virginia. Deposits are insured by the Federal Deposit Insurance Corporation. As of September 30, 2009 the Bank employed 113 full-time employees. The address of the principal offices for the Company and the main office of the Bank is 126 South Main Street, Blackstone, Virginia, and all banking offices are located within the Commonwealth of Virginia.

Note 2. Securities

Investment decisions are made by the Management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

7

Securities available for sale and restricted are summarized below:

		September 30, 2009
(Dollars in thousands)				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		(Losses)		Value
U.S. government and
federal agency	$	19,898	$	54	$	(34)	$	19,918
State and municipal		17,940		314		(122)		18,132
Mortgage-backed		22,344		535		(636)		22,243
Corporate		754		11		-		765
Securities available for sale	$	60,936	$	914	$	(792)	$	61,058
Federal Reserve Bank stock	$	43	$	-	$	-	$	43
Federal Home Loan Bank stock		1,033		-		-		1,033
Other securities		113		-		-		113
Restricted securities	$	1,189	$	-	$	-	$	1,189

		December 31, 2008
				Gross		Gross
(Dollars in thousands)		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		(Losses)		Value
U.S. government
and federal agency	$	8,670	$	37	$	-	$	8,707
State and municipal		16,905		78		(490)		16,493
Mortgage-backed		17,978		244		(1,382)		16,840
Corporate		1,455		-		(14)		1,441
	$	45,008	$	359	$	(1,886)	$	43,481
Federal Reserve Bank stock	$	43	$	-	$	-	$	43
Federal Home Loan Bank stock		1,005		-		-		1,005
Other securities		113		-		-		113
Restricted securities	$	1,161	$	-	$	-	$	1,161

8

The amortized cost and fair value of securities available for sale by contractual maturity at September 30, 2009 follows. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties.

		Amortized		Fair
		Cost		Value
Maturing within one year	$	928	$	940
Maturing after one year through five years		11,113		11,283
Maturing after five years through ten years		14,329		14,406
Maturing after ten years		12,222		12,186
Mortgage-backed securities		22,344		22,243
	$	60,936	$	61,058

Information pertaining to securities with gross unrealized losses at September 30, 2009 and December 31, 2008, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is summarized as follows:

		Less than 12 Months				12 Months or More
		Fair		Unrealized		Fair		Unrealized
September 30, 2009		Value		(Loss)		Value		(Loss)
		(Dollars in thousands)
U.S. government
and federal agency	$	6,025	$	(34)	$	-	$	-
State and municipal		2,384		(16)		2,627		(106)
Mortgage-backed		-		-		3,139		(636)
Total temporarily
impaired securities	$	8,409	$	(50)	$	5,766	$	(742)

		Less than 12 Months				12 Months or More
		Fair		Unrealized		Fair		Unrealized
December 31, 2008		Value		(Loss)		Value		(Loss)
		(Dollars in thousands)
U.S. government
and federal agency	$	-	$	-	$	-	$	-
State and municipal		8,945		(490)		-		-
Mortgage-backed		5,038		(924)		1,094		(459)
Corporate		1,441		(14)		-		-
Total temporarily
impaired securities	$	15,424	$	(1,428)	$	1,094	$	(459)

The unrealized losses in the investment portfolio as of September 30, 2009 are considered temporary and are a result of general market fluctuations that occur daily and which have been more volatile since the current economic recession began. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the intent of the Bank to sell the security, (2) whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and (3) whether the Bank expects to recover the securities entire amortized cost basis regardless of the Bank’s intent to sell the security.

9

In the Company’s Form 10-K report for December 31, 2008, management disclosed that two collateralized mortgage obligations, also referred to as CMOs, were downgraded in the fourth quarter of 2008 to a split rating of AAA minus and BB. These CMO securities continue to show some credit stress as the underlying loans’ delinquencies continue to grow. As of September 30, 2009, the Company has three private label CMO securities, out of a total of five securities that are rated below investment grade by one or more of the credit rating agencies. All three of the securities continue to provide monthly principal and interest payments to the Company and the Bank. Outside consultants continue to provide periodic stress testing of these three securities, the results of which do not indicate a loss as of the reporting date. The Company’s Chief Financial Officer monitors each security for any potential indication of impairment and he is reporting the status of each security to the Board of Directors, regularly. Credit stress-testing results provided with payment history and delinquency data through August 2009 indicate that under severe and prolonged economic conditions the security tranches that are owned by the Company and the Bank do not show any permanent impairment of the securities as of September 30, 2009.

The Bank’s investment in Federal Home loan Bank (“FHLB”) stock totaled $1.033 million at September 30, 2009. FHLB stock is generally viewed as a long term investment and as a restricted investments security which is carried at cost, because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Federal Home Loan Bank of Atlanta omitted its first quarter dividend for 2009 and resumed paying dividends for the second quarter of 2009. Despite the FHLB’s temporary suspension of cash dividend payments and repurchases of excess capital stock in 2009, the Bank does not consider this investment to be other than temporarily impaired at September 30, 2009 and no impairment has been recognized.

Note 3. Loans

The loan portfolio was composed of the following:

(Dollars in thousands)		September 30,		December 31,
		2009		2008
Real estate loans:
Commercial	$	66,949	$	58,714
Residential 1-4 family		106,329		101,750
Construction		12,553		16,321
Total real estate loans	$	185,831	$	176,785
Commercial loans		15,658		19,859
Consumer loans		15,193		16,402
Total loans	$	216,682	$	213,046
Less: allowance for loan losses		2,377		2,167
Loans, net	$	214,305	$	210,879

10

Note 4. Allowance for Loan Losses, Impaired Loans, and Non-accrual Loans

The following is a summary of transactions in the allowance for loan losses:

		Nine Months Ended
(Dollars in thousands, except % data)		September 30,
		2009		2008
Balance at the beginning of period	$	2,167	$	1,950
Provision for loan losses		425		55
Loans charged off		(248)		(124)
Recoveries of loans previously charged off		33		127
Balance at the end of the period	$	2,377	$	2,008
Ratio of allowance for loan losses to end of period
loans, net of deferred fees		1.10%		0.94%
Ratio of net charge-offs (recoveries) to average
loans net of deferred fees1		0.13%		0.00%
1 Net charge-offs are on an annualized basis.

(Remainder of page left blank, intentionally)

11

Impaired loans and non-performing assets summary:

		September 30,		December 31,
(Dollars in thousands, except % data)		2009		2008
Total impaired loans	$	6,207	$	912
Impaired loans with a valuation allowance	$	2,459	$	865
Valuation allowance		(458)		(218)
Impaired loans, net of allowance	$	2,001	$	647
Impaired loans without a valuation allowance	$	3,748	$	47
Average investment in impaired loans	$	6,276	$	1,119
Interest income recognized on impaired loans	$	358	$	57
Non-accrual loans excluded from the impairment
disclosure	$	1,972	$	669
Non-performing assets:
Non-accrual loans	$	4,331	$	1,115
Loans past due 90 days or more and still accruing		108		241
Total non-performing loans		4,439		1,356
Foreclosed property		1,417		957
Total non-performing assets	$	5,856	$	2,313
Ratio of non-performing assets to loans, net of
deferred loan fees, at end of period		2.73%		1.10%
Ratio of loans past due 90 days or more and still
accruing to loans, net of deferred loan fees		0.05%		0.11%
Ratio of allowance for loan losses to nonperforming
loans1		53.50%		159.81%
1 The Company defines nonperforming loans as total non-accrual loans and loans 90 days or more
past due and still accruing.

A further discussion of the Company’s Allowance for Loan Losses appears later in this report in the Management Discussion and Analysis segment under the section titled, “Financial Condition and Statement of Operations.”

(Remainder of page left blank, intentionally)

12

Note 5.FHLB Advances

At September 30, 2009 and December 31, 2008, the Company had outstanding advances totaling $11 million with the Federal Home Loan Bank of Atlanta, detailed below.

		September 30,		December 31,
(Dollars in thousands)		2009		2008
Fixed rate advance, at 1.39% maturing December 11, 2009	$	6,000	$	6,000
Five-year / two-year convertible advance at 2.47%
maturing February 5, 2013		5,000		5,000
	$	11,000	$	11,000

Note 6. Other Borrowings

Other borrowings consist of $5.3 million and $5.2 million in short-term borrowings as of September 30, 2009 and December 31, 2008, respectively. These balances are from deposit balances outstanding in the Investments Sweeps Account product, which is an overnight repurchase agreement product, not insured by the FDIC, but guaranteed by the Bank with securities of the US Government and Federal Agencies. This product is offered to commercial customers only.

Note 7. Earnings Per Share

The weighted average number of shares used in computing earnings per share was 2,377,151 shares for the three months ended September 30, 2009, 2,408,336 shares for the three months ended September 30, 2008, 2,382,456 shares for the nine months ended September 30, 2009 and 2,419,073 for the nine months ended September 30, 2008.

Note 8. Defined Benefit Pension Plan

The components of Net Periodic Benefit Cost for the nine months ended September 30, 2009 were as follows:

	Nine Months Ended
		September 30,
(Dollars in thousands)		2009		2008
Service cost	$	225	$	246
Interest Cost		186		177
Expected return on plan assets		(168)		(231)
Amortization of prior service cost		(72)		(72)
Amortization of net actuarial loss		93		54
Net periodic benefit cost	$	264	$	174

The pension plan has a fiscal year ending September 30, providing the Company the flexibility as to the plan year in which it makes pension plan contributions. The defined benefit pension liability is computed at every December 31, only. The Company made its required 2009 fiscal year contribution to the pension plan in December 2008 in the amount of $253,411. The Company anticipates making the 2010 contribution by December 31, 2009. The Company estimates this contribution to be approximately $250,000.

13

Note 9.Fair Value Measurements

Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting Standards Codification 820 Fair Value Measurements and Disclosures, (formerly SFAS No. 107) excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company in estimating fair value disclosures for financial instruments used the following methods and assumptions:

Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values.

Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Restricted securities: The carrying value of restricted stock approximates fair value based on the redemption provisions of the respective entity.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses based upon interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings: The carrying amounts of federal funds purchased and other short term borrowings maturing within 90 days approximate their fair values. Fair values for Federal Home Loan Bank advances are estimated based upon current advance rates for the remaining term of the advance.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. At

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September 30, 2009 and December 31, 2008, the fair value of loan commitments and standby letters of credit was deemed to be immaterial.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:

		September 30, 2009				December 31, 2008
		Carrying		Fair		Carrying		Fair
		Amount		Value		Amount		Value
				(in thousands)
Financial assets:
Cash and cash equivalents	$	20,628	$	20,628	$	29,928	$	29,928
Securities available for sale		61,058		61,058		43,481		43,481
Restricted securities		1,189		1,189		1,161		1,161
Loans, net		214,305		214,335		210,879		212,015
Accrued interest receivable		1,802		1,802		1,742		1,742
Financial Liabilities:
Deposits	$	258,904	$	254,347	$	249,141	$	250,217
Other borrowings		16,304		16,489		16,183		16,146
Accrued interest payable		976		976		1,154		1,154

The Company assumes interest rate risk as part of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent possible to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Accounting Standards Codification 820Fair Value Measurements and Disclosures, (formerly known as SFAS No. 157), defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

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         Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

				Fair Value Measurements at Sept. 30, 2009 Using
				Quoted Prices
(Dollars in thousands)				in Active		Significant
				Markets for		Other		Significant
		Balance as of		Identical		Observable		Unobservable
		September 30,		Assets		Inputs		Inputs
Description		2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities available
for sale	$	61,058	$	0	$	61,058	$	0

Loans held for sale

Loans held for sale which is required to be measured in a lower of cost or fair value. Under Accounting Standards Codification 820 (formerly SFAS No. 157), market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial intermediaries. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At September 30, 2009, the Company had no loans held for sale.

Impaired loans

Accounting Standards Codification 310-40-35 Troubled Debt Restructuring by Creditors, Subsequent Measurement (formerly SFAS No. 114) applies to impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. See Note 4 for details.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of Accounting Standards Codification 310-40.

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				Fair Value Measurements at Sept. 30, 2009 Using
				Quoted Prices
(Dollars in thousands)				in Active		Signigicant
				Markets for		Other		Significant
		Balance as of		Identical		Observable		Unobservable
		September 30,		Assets		Inputs		Inputs
Description		2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired Loans, net of
valuation allowance	$	2,001	$	0	$	0	$	2,001
Other real estate owned		1,417		0		0		1,417

Note 10. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” which is now superseded by Accounting Standards Codification 820 Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The Company adopted ASC 820 on January 1, 2008. The FASB approved a one-year deferral for the implementation of the Statement for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted the provisions of ASC 820 for nonfinancial assets and liabilities as of January 1, 2009 without a material impact on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” which is now superseded by Accounting Standards Codification (ASC) 805 Business Combinations. The Standard significantly changed the financial accounting and reporting of business combination transactions. ASC 805 establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of ASC 805 to have a material impact on its consolidated financial statements, at this time.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” which is now superseded by ASC 805 Business Combinations. ASC 805 addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The ASC 805 is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of ASC 805 to have a material impact on its consolidated financial statements.

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In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” which is now superseded by ASC 820 Fair Value Measurements and Disclosures. ASC 820 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. Earlier adoption is permitted for periods ending after March 15, 2009. The Company does not expect the adoption of ASC 820 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” which is now superseded by ASC 825 Financial Instruments.

ASC 825-10-65 Transition and Open Effective Date Information provides transition guidance related to FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. These pronouncements require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, APB Opinion No. 28, “Interim Financial Reporting,” which is now superseded by ASC 270 “Interim Reporting” to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of ASC 825 or ASC 270 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” which is now superseded by ASC 320 Investments – Debt and Equity Securities. ASC 320-10-65 amends other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The ASC 320-10-65 does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. ASC 320-10-65 is effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of ASC 320-10-65 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB 111). SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.” SAB 111 maintains the SEC Staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” which is now superseded by ASC 855 Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of ASC 855 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”. SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a report entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial

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performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810 Consolidation). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 is effective for interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – replacement of FASB Statement No. 162” (ASC 105 Generally Accepted Accounting Principles). SFAS 168 establishes the FASB Accounting Standards Codification which will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective immediately. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (ASC 470 Debt). EITF Issue No. 09-1 clarifies how an entity should account for an own-share lending arrangement that is entered into in contemplation of a convertible debt offering. EITF Issue No. 09-1 is effective for arrangements entered into on or after June 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of EITF Issue No. 09-1 to have a material impact on its consolidated financial statements.

In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current U.S. GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05), “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05 amends Subtopic 820-10, Fair Value Measurements and Disclosures – Overall, and provides clarification for the fair value measurement of liabilities. ASU 2009-05 is effective for the first reporting period including interim period beginning after issuance. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (ASU 2009-12), “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU 2009-12 provides guidance on estimating the fair value of alternative investments. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of ASU 2009-12 to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after

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December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, “Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers.” Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal control over financial reporting with their annual report until the fiscal year ending on or after June 15, 2010.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of

                    Operations

Management’s discussion and analysis provides the reader with additional information that is helpful in gaining a greater understanding of the Company’s operating results, liquidity, capital resources and financial condition.This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to the Interim Consolidated Financial Statements included in this quarterly report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Results of operations for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of results that may be attained for any future period.

Recent Developments

The effect of the ongoing economic recession is seen as taking an increasingly deeper cut into the economic fabric of not only our region, but of the national economy. Unemployment is rising. Consumers, uncertain about job stability, are holding back on spending and preferring to pay down the large sums of household debt that have accumulated over the last few years. Inventories of unsold new homes are competing with large numbers of foreclosed residences for the limited number of buyers. Commercial real estate vacancies are rising and property values are declining. With this economic backdrop, the Bank is seeing an increasing number of its customers struggling to remain current on their loan payments, this is especially true among commercial customers. The Bank has seen a reduction in new loan production during the third quarter and it is anticipated that new loan production will remain weak in the fourth quarter of 2009.

The Bank’s ratio of non-performing assets to total loans at September 30, 2009 was 2.73%; this is unchanged from the ratio at June 30, 2009. The September 30, 2009 ratio is an increase of 148% from the 1.10% at December 31, 2008. The total of nonperforming assets as of September 30, 2009 was $5.856 million, an increase of $3.543 million from the total of $2.313 million at December 31, 2008. The net increase of $3.083 million was due to increases in non-accrual loans totaling $3.216 million and a reduction in loans past due 90 days or more and still accruing of $133 thousand. The remainder of the change in the nine month period was $460 thousand and represents additions to Other Real Estate Owned.

Impaired loans increased $5.295 million from December 31, 2008 to September 30, 2009. Of this increase management determined that $3.701 million of the impaired loans did not require a valuation allowance as of September 30, 2009. Management, using the methodology described in the Allowance for Loan Losses found in the Critical Accounting Policies section, determined that the remaining $1.594 million increase in impaired loans required a valuation allowance of $240 thousand. In total, Management provided $425 thousand to the Allowance for Loan Losses for the first nine months of 2009, $200 thousand of this total coming just in the third quarter. The Allowance of Loan Losses as a percentage of total loans was 1.10% at September 30, 2009 as compared to 1.02% at December 31, 2008. Management provides more detail discussion on loan quality and the provision for loan losses later in this report, in the Financial Condition and Results of Operations section.

An indication that the customers are moving funds to safer havens and postponing purchases can be seen in the continue growth of deposits to $258.9 million at September 30, 2009 as compared to $256.3 million and $249.1 million at June 30, 2009 and December 31, 2008, respectively. The $9.8 million growth in deposits since December 31, 2009 represents a growth rate of 3.93% and is indicative of a trend that began during the later part of 2008.

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The Federal Deposit Insurance Corporation announced on August 26, 2009 that it would extend the Transaction Account Guarantee Program (TAG) to June 30, 2010. The Bank participates in the TAG Program which provides for full deposit insurance coverage on non-interest bearing transaction accounts and NOW accounts that pay an interest rate of 0.5% or less; regardless of the balance in the account. The Bank expects to incur additional deposit insurance premiums of 10 basis points for account balances in excess of $250,000, for the remainder of 2009 and an annualized premium of 15 basis points for the first six months of 2010.

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CRITICAL ACCOUNTING POLICIES

General

The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to Interim Consolidated Financial Statements and Management's discussion and analysis are, to a large degree, dependent upon the accounting and reporting policies of the Company. The Company’s accounting and reporting polices are in accordance with generally accepted accounting principals within the United States of America and with general practices within the banking industry. The selection and application of these accounting policies by Management involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is a discussion of those accounting policies that Management believes are the most important to the portrayal and understanding of the Company’s financial condition and results of operations. The Critical Accounting Policies require Management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable likelihood.

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the systems are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; the loan grading system; and the general economic environment.

The Company evaluates various loans individually for impairment as required by ACS 310 (formerly SFAS No. 114), Receivables. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by Management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by Accounting Standards Codification 450-20 Loss Contingencies (formerly SFAS No. 5). Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The allowance for loan losses is determined by using estimates of historical losses by category for all loans; with the exception of “criticized loans”. Criticized loans are determined as a result of management evaluating and risk grading individual delinquent loans. Management may assign an estimated amount of reserve for criticized loans if there is the likelihood that not all of the loan amounts due will be collected based upon the most current information concerning the financial condition of the debtors and guarantors as well as the current evaluations of collateral

23

value. The evaluation of criticized loans as to the need and adequacy of any reserves is performed at least quarterly or more frequently if conditions affecting certain loans should change. The impact of environmental factors such as the local and regional economic conditions, attributes of certain loan categories and other relevant matters are considered in estimating the allowance for loan losses and these factors are reviewed at least quarterly in order to capture any indications of worsening or improving environmental factors.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.

The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which the amount may be material to the consolidated financial statements.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Balance Sheet

Total assets for the Company increased to $317.1 million at September 30, 2009 compared to $305.1 million at December 31, 2008, representing an increase of $12.0 million or 3.93%.

Total net loans at September 30, 2009 were $214.3 million, an increase of $3.4 million from the December 31, 2008 amount of $210.9 million. For the three months ended September 30, 2009, $14.2 million in loans were originated, a 40.5% decline as compared to $23.9 million for the three months ended September 30, 2008. When comparing the nine months ended September 30, 2009 and 2008, loan originations were $49.0 million and $66.0 million, respectively, which is a 25.8% decline year-over-year. The decline in loan origination activity in the third quarter of 2009 was expected given the economic recession. Businesses and consumers are approaching any new lending opportunities cautiously, often choosing to refinance and consolidate existing loan balances to take advantage of the lower rate environment.

Gross loan balances at September 30, 2009 as compared to December 31, 2008 indicated that during the first nine months of 2009 net loan growth was seen in farmland and real estate secured loans which increased $11.9 million from December 31, 2008, while commercial and consumer loans had a net decline of $4.3 million and the Allowance for Loan Losses showed a net increase of $210 thousand from year-end.

Management is maintaining loan pricing and underwriting standards during these difficult economic times. Refusing to relax these standards is critical towards maintaining loan quality and may result in a slower growth rate of the loan portfolio. As a well-capitalized community bank, it is Management’s goal to continue to be a source of credit for commercial businesses, farmers, and consumers during any economic environment. Gross loans as a percent of total assets were 68.3% at September 30, 2009, as compared to 69.8% at December 31, 2008.

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Investment securities increased to $61.1 million at September 30, 2009, or 19.3% of total assets, which is an increase of $17.6 million from $43.5 million at December 31, 2008. The increase in the investment portfolio from year-end can be attributed to the investment of funds held in interest bearing accounts with correspondent banks and a rise in deposit account balances. At September 30, 2009 the investment portfolio had an unrealized gain of $80 thousand net of Federal income taxes, as compared to an unrealized loss of $1.0 million, net of Federal income taxes, at December 31, 2008. The investment securities of both the Company and the Bank at September 30, 2009 were held as “available for sale”.

Interest bearing deposits in other banks decreased by $6.7 million at September 30, 2009 to $6.6 million as compared to $13.3 at December 31, 2008. Federal funds sold decreased $2.9 million to $6.6 million at September 30, 2009 from $9.5 million at December 31, 2008. The Company’s liquidity on hand at September 30, 2009 as represented by cash, due from banks, interest bearing deposits in banks and federal funds sold was $20.6million or 6.5% of total assets which is $9.3 million lower than $29.9 million or 9.8% of total assets at December 31, 2008.

Allowance for Loan Losses

The allowance for loan losses at September 30, 2009 was $2.377 million compared to $2.167 million at December 31, 2008. The allowance for loan losses, as a percentage of total outstanding loans, increased to 1.10% at September 30, 2009 from 1.02% at December 31, 2008. The Company charged off $248 thousand in loans, recovered $33 thousand from previous write-offs, and provided an additional $425 thousand to the allowance during the nine months ended September 30, 2009.

Management’s methodology for estimating the appropriate level of the allowance for loan losses is based upon bank regulatory guidance and generally accepted accounting principles for maintaining adequate reserves against loan losses. Periodically, management does classify certain loans and provides specific reserves for these loans when it is determined that negative conditions affecting the customer have occurred and will expose the Bank to a potential loss on a given loan(s). The Company had $4.331 million in non-accruing loans at September 30, 2009, or 2.00% of gross loans compared to $1.115 million at December 31, 2008, or 0.53% of gross loans, a net increase of $3.216 million. At June 30, 2009, non-accruing loans were reported at $3.857 million, which represents a net increase of $474 thousand of non-accruing loans in the third quarter ended September 30, 2009. Management continues to work aggressively with debtors to resolve delinquencies and mitigate potential repossession or foreclosure of collateral, however these resolution efforts may become more difficult without an economic resurgence.

Management’s calculation of the allowance for loan losses consists of three main segments, 1- estimating future loan losses by loan category using the Bank’s historical average net losses for each category, 2- the impact of various environmental factors such as the decline in real estate value, unemployment, the volume of past due loans, etc., and 3- classified/impaired loans are individually evaluated for probable loss based upon what the Bank could recover from liquidating collateral and from individual guarantors on the loan. While the calculation methodology does provide a degree of consistency in estimating an appropriate allowance for loan losses from period to period, changes in the status of various credits between periods does result in an unavoidable variance between the computed allowance and the booked allowance. Consideration is given to managing this variance to within acceptable limits when determining the amount of provision to be booked. Loans classified as loss, doubtful, substandard or special mention are adequately reserved for at the report date and are not expected to have a material impact beyond what has been reserved. Specific reserves for impaired loans will be adjusted should material changes occur to a loan’s collateral value or if there is any further deterioration

25

of the credit. Management is closely monitoring any potential indication of credit deterioration, beyond the classified loans currently reported. The allowance for loan losses increased from 1.02% of gross loans at December 31, 2008 to 1.10% of gross loans at September 30, 2009 as a result of bringing the booked allowance in line with the computed allowance requirements.

Management believes the allowance for loan losses is adequate to cover credit losses inherent in the loan portfolio at September 30, 2009.

Bank policy requires an annual review of those economic factors to determine if adjustments to the calculations are needed. Due to the speed and magnitude of the slowing economy, management is performing these reviews quarterly. Management reviewed external economic factors which are a component of the allowance calculation during the third quarter of 2009. Management continues to work at improving the status of criticized credits for which the Bank maintains significant reserves. These efforts include the addition of more collateral and/or the collection of payments which serve to improve these credits. For a more detailed discussion of Management’s analysis of the allowance for loan losses, please see the “Allowance for Loan Losses” discussion above under the section heading of “Critical Accounting Policies”.

Deposits

Total deposits of $258.9 million at September 30, 2009 represented an increase of $9.8 million from $249.1 million at December 31, 2008. Total certificates of deposit at September 30, 2009 were $131.8 million, down $15.5 million from $147.3 million at December 31, 2008. Overall customer behavior appears to be that customers have been moving their funds to safer havens such as FDIC-insured institutions as opposed to investing in the stock market. However, they appear to prefer easy access to their funds which money market and savings accounts offer as compared to time deposit accounts; especially since the rates offered for short-term time deposits are not significantly different than money market rates.

Non-interest bearing deposits totaled $33.4 million at September 30, 2009, which is a 17.1% decrease from $40.3 million at December 31, 2008. Interest-bearing deposits accounted for 87.1% of total deposits at September 30, 2009 and 83.8% at December 31, 2008. Management continues to adhere to its deposit pricing plan that has helped minimize the negative impact of falling interest rates on the Bank’s net interest margin. Management’s goals continue to be on growing low-cost deposit account balances which is another strategy that has assisted in managing the overall interest cost of deposit accounts.

Borrowings

Borrowings include overnight repurchase agreements from commercial customers that utilize the Business Investment Sweeps product and long-term advances from the Federal Home Loan Bank of Atlanta (the “FHLB”). A secondary source of other borrowings would be overnight advances from lines of credit established with correspondent banks. For additional details on borrowing sources, see the “Liquidity” section later in this report. At September 30, 2009 the Company had total borrowings of $16.3 million that consisted of $5.3 million in overnight repurchase agreements and outstanding advances with the FHLB of $11.0 million. This is compared to $16.2 million in borrowings at December 31, 2008.

Stockholders’ Equity

Stockholders’ equity was $38.3 million at September 30, 2009 compared to $36.3 million at December 31, 2008. The book value per common share was $16.10 at September 30, 2009 compared to $15.20 at December 31, 2008. On July 10, 2009, shareholders were paid a quarterly dividend of $0.17 per share. On September 24, 2009, the Board of Directors approved a cash dividend of $0.17 per share, or $404 thousand, payable to shareholders on October 14,

26

2009. Total average outstanding shares for the first nine months of 2009 were 2,382,456 shares as compared to the average outstanding shares of 2,412,954 shares for the year ended December 31, 2008.

The Board of Directors and Management recognize the intrinsic value of the Company. The banking industry as a whole has seen stock prices decline since 2007 due in part to the investment community’s concern about the overall financial strength of the banking industry, including such areas as interest margin compression, losses due to subprime lending, the decline in housing and commercial real estate values and the indications that the national economy may be significantly impacted by an extended recession.

The Board reauthorized the stock repurchase plan on August 20, 2009, effective September 1, 2009 until November 30, 2009. The plan’s term is for a three month period or until 20,000 shares are purchased within a particular authorized period; whichever occurs first. The plan is renewable every three months, at the discretion of the Board of Directors. The renewal of the stock repurchase plan will be considered at the November 19, 2009 Board of Directors meeting.

The change in Accumulated Other Comprehensive Income at September 30, 2009 versus December 31, 2008 was a result of the change in net unrealized losses on available for sale securities. At September 30, 2009, the Company had an unrealized gain on available for sale securities of $80 thousand, net of income taxes; an increase of $1.088 million from the unrealized loss of $1.008, net of income taxes at December 31, 2008. At September 30, 2009 and December 31, 2008, the Accumulated Other Comprehensive Income included $1.044 million in unfunded pension liability, net of income taxes. The unfunded pension liability is recomputed as of each December 31, only.

Net Income

For the nine months ended September 30, 2009 the Company reported net income of $2.232 million as compared to $2.453 million for the same period in 2008 which is a decrease of $221 thousand. Income per basic and diluted share was $0.94 for the nine months ended September 30, 2009 as compared to $1.01 per basic and diluted share for the period ended September 30, 2008.

The Company had an annualized return on average assets of .96% and an annualized return on average equity of 7.96% for the nine months ended September 30, 2009, as compared to an annualized return on average assets and average equity of 1.12% and 8.63%, respectively, for the same period in 2008.

For the three months ended September 30, 2009 the Company reported net income of $757 thousand as compared to $910 thousand for the same period in 2008, which is a decrease of $153 thousand. Income per basic and diluted share was $0.32 for the three months ended September 30, 2009 as compared to $0.38 per basic and diluted share for the period in 2008.

The year-to-year decrease in net income of $221 thousand is attributable to the following unfavorable factors:

• An increase in the provision for loan losses of $370 thousand.

• A decrease in noninterest income of $179 thousand.

• An increase of $218 thousand in deposit insurance expense.

27

These factors were partially offset by favorable results in:

• An increase of $338 thousand in net interest income.

• A decrease of $120 thousand in non-interest expense (excluding deposit insurance).

• A decrease in the effective income tax rate of 27.11% at September 30, 2009 from the effective rate of 27.23% at September 30, 2008.

Net Interest Income

Net interest income is the Company’s primary source of earnings and represents the difference between interest and fees earned on loans, investments and other earning assets and the interest expense paid on deposits and other interest bearing liabilities. The cost of funds represents interest expense on deposits and other borrowings. Non-interest bearing deposit accounts and capital are other components representing funding sources. Changes in the volume and mix of earning assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

For the three months ended September 30, 2009 net interest income was $2.843 million as compared to $2.775 million for the three months ended September 30, 2008, an increase of $68 thousand or 2.5%. Average loan balances for the third quarter were $217.1 million or $2.5 million less than the average balances for the second quarter ended June 30, 2009, and $2.2 million greater than the three months ended September 30, 2008. Loan yields for the third quarter of 2009 were 6.43% as compared to 6.49% for the quarter ended June 30, 2009, and the loan yield of 6.79% or 36 basis points lower, than the quarter ended September 30, 2008.

For the nine months ended September 30, 2009 net interest income was $8.320 million, which was $338 thousand more than $7.982 million for the same period in 2008. The average loan balances for the nine months ended September 30, 2009 were $216.9 million or $3.8 million greater than the nine months ended September 30, 2008 when the average loan balances were $213.1 million. The loan yield decreased 39 basis points to 6.49% for the nine months ended September 30, 2009 from 6.88% for the comparable period in 2008. The increase in average loan balances in the first nine months of 2009 helped to lessen the impact of the negative direction of key interest indexes used in setting most loan rates. The prime rate, as an example, is used as a basis of most commercial loans and commercial mortgages; therefore, variable rate loans tied to prime adjusted to lower levels during 2009 and loan pricing for renewing or new loans was also driven lower in comparison to loan rates in 2008. During most of 2009, management has expanded its practice of placing interest rate minimums (or “floors”) into all renewing loans. Many portfolio loans, including home equity lines of credit, already have interest rate floors within the note agreement; the actions taken in 2009 apply to vintage loans.

The average investment securities balance for the three months ended September 30, 2009 was $55.4 million which is $6.0 million greater than the average of $49.4 million for the second quarter of 2009. The tax equivalent yield for investment securities for the third quarter of 2009 was 4.52% or 14 basis points lower than the yield of 4.66% for the second quarter of 2009 and 52 basis points lower than the yield of 5.04% for the three months ended September 30, 2008.

The average investment securities balance for the first nine months of 2009 was $50.8 million or $2.3 million higher than the average of $48.5 million for the same period in 2008. The tax-equivalent yield on investment securities for the period in 2009 was 4.65% as compared to 4.90% for 2008, or a decrease of 25 basis points from the year-earlier period. The investment securities portfolio is experiencing the effects of the continued low interest rate environment and with some higher coupon rate securities being “called” by their issuers.

28

A portion of the liquidity generated by the Company’s investment securities portfolio was used to repurchase outstanding common shares under the stock repurchase plan described later in this Report under Part 2, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds.

The tax-equivalent yield on earning assets for the nine months ended September 30, 2009 was 5.84%, a decrease of 63 basis points from the yield of 6.47% reported in the comparable period of 2008. The decrease in the earning assets yield for the nine months ended September 30, 2009 as compared to the same period in 2008 is primarily the result of the reduction of short-term interest rates and its impact on new and re-pricing loans and the availability of investment securities with lower yields.

For the three months ended September 30, 2009 the average balance for interest bearing deposits was $224.9 million or $6.0 million greater than the $218.9 million for the three months ended June 30, 2009 and $22.8 million greater than the average balance of $202.1 million for the third quarter of 2008. The cost of interest bearing deposits for the third quarter of 2009 was 2.15% a decrease of 56 basis points from the 2.71% cost for the third quarter of 2008. The quarterly average cost of funds was 1.85% for the three months ended September 30, 2009 which compares favorably to the three months ended June 30, 2009 and the three months ended September 30, 2008 when the costs were 1.91% and 2.27%, respectively.

Average interest bearing deposits for the nine months ended September 30, 2009 was $219.3 million or $15.3 million more than the $204.0 million average balance for the nine months ended September 30, 2008. The increase in interest bearing deposits is attributable to customers seeking a safe haven for funds that are being withdrawn from stock and mutual funds, as well as a greater awareness by customers for the need to have full FDIC deposit insurance coverage during these recessionary times.

The cost of interest bearing deposits for the nine months ended September 30, 2009, expressed as a percentage, was 2.29% as compared to 2.94% for the same period of 2008, or a decrease of 65 basis points. Time deposit costs were 3.24% and 4.15% for the nine months ended September 30, 2009 and 2008, respectively, or a decrease of 91 basis points. During the first nine months of 2009 there were a large number of time deposit accounts that matured or renewed at much lower rates. The competition for time deposits in our markets, during this period, declined due to the fact that customers are looking for more liquid investment opportunities that are offering higher interest rates than time deposits. Management maintained its disciplined pricing strategy that helped to generally retain existing relationships and attract new deposits.

Average non-interest deposit balances for the nine months ended September 30, 2009 was $34.4 million or $920 thousand less than the $35.3 million for the same period of 2008. While a number of factors could be attributable to this decrease, the most likely scenarios include the fact that consumers and businesses are in the process of deleveraging themselves (paying down debt) and an increasing number of households that are facing reduced incomes due to reduced work schedules or layoffs and they are being forced to erode their savings to cover everyday living expenses. The cost of funds for the nine months ended September 30, 2009 was 2.23% or 66 basis points lower than 2.89% for the nine months ended September 30, 2008.

The net interest margin is net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin for the three months ended September 30, 2009 was 3.96% which is 32 basis points lower than the net interest margin for the quarter ended September 30, 2008 of 4.28%. The net interest margin decreased by 12 basis points to 4.00% for the nine months ended September 30, 2009 as compared to 4.12% for the same period in 2008.

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The table on the following page labeled “Average Balances, Interest Yields and Rates, and Net Interest Margin” presents the average balances and rates of the various categories of the Company’s assets and liabilities. Included in the table is a measurement of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest expense on the interest bearing liabilities. While net interest spread provides a quick comparison of earnings rates versus the cost of funds, Management believes that the interest margin provides a better measurement of performance. Investment securities’ income and yields are adjusted to reflect their tax equivalency.

(Remainder of this page left blank, intentionally)

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 Average Balances, Interest Yields and Rates, and Net Interest Margin

		Nine Months Ended September 30,
		2009					2008
		Average			Average		Average			Average
(Dollars in Thousands)		Balance		Interest	Yield/Rate		Balance		Interest	Yield/Rate
ASSETS:
Interest earning assets:
Interest bearing deposits with other banks and
other short-term investments	$	7,605	$	153	2.65%	$	3,367	$	58	2.30%
Loans (1)		216,873		10,528	6.49%		213,140		10,975	6.88%
Investment securities available for sale (2)		50,795		1,771	4.65%		48,537		1,810	4.90%
Federal funds sold		10,294		16	0.21%		459		8	2.29%
Total interest earning assets	$	285,567	$	12,468	5.84%	$	265,503	$	12,851	6.47%
Total average non-earning assets		27,255					27,786
Less: allowance for credit losses		2,246					1,998
Net average non-earning assets		25,009					25,788
TOTAL AVERAGE ASSETS	$	310,576				$	291,291
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest bearing liabilities:
Interest bearing demand	$	35,976	$	45	0.17%	$	34,054	$	42	0.16%
Savings		43,285		320	0.99%		33,717		221	0.88%
Time deposits		140,003		3,392	3.24%		136,219		4,233	4.15%
Other borrowings		15,978		175	1.46%		11,838		170	1.92%
Total interest bearing liabilities	$	235,242	$	3,932	2.23%	$	215,828	$	4,666	2.89%
Noninterest bearing liabilities:
Noininterest bearing demand		34,391					35,311
Other liabilities		3,451					2,307
Total noninterest bearing liabilities		37,842					37,618
Stockholders' equity		37,492					37,845
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY	$	310,576				$	291,291
Net interest income			$	8,536				$	8,184
Net interest spread					3.60%					3.58%
Net interest margin					4.00%					4.12%
(1) Includes Loans Held for Sale and average daily balance of non-accrual loans.
(2) Income and yield are reported on a tax equivalent basis assuming a federal tax rate of 34%.

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Provision for Loan Losses

The Bank recorded provision for loan losses for the third quarter ended September 30, 2009 of $200 thousand or $180 thousand more than the $20 thousand reported for the third quarter of 2008. The amount of provision taken in the first and second quarters of 2009 was $45 thousand and $180 thousand, respectively. The increase in provision for the second and third quarters coincides with the elevated level of criticized loans seen in this period. The level of non-performing assets did not materially change from June 30, 2009 to September 30, 2009 as the ratio of non-performing assets to total loans, net of deferred loan fees, at the end of each period, stood at 2.73%. Management’s evaluation of current criticized loans and the uncertainty of deteriorating collateral values and additional problem credits were the main reasons why the provision amounts for the second and third quarters of 2009 were as significant as they were in comparison to the provision for the first quarter of 2009.

The Bank recorded provision for loan losses in the first nine months of 2009 totaling $425 thousand as compared to $55 thousand for the same period of 2008, an increase of $370 thousand. The duration of this recession is impacting commercial customers that rely on a steady flow of commerce, particularly in the real estate and timber industries, to produce the cash flow needed in repaying their loans and for working capital purposes. Management is diligent in identifying problem credits as they arise and begins to work with borrowers with the intent of mitigating credit losses, collection and legal costs. While the growth of nonperforming loans in 2009 increased at a proportionally greater rate than the growth in the allowance for loan losses as a result of added provision, this is explained in the fact that management is fully cognizant of the financial condition of deteriorating problem loans. Management analyzes the Bank’s collateral position and probable future loss on any loan and provides specific reserves for those loans (as needed), prior to those loans actually becoming nonperforming loans. Therefore, when a loan becomes nonperforming, it is likely to already have an allowance provided for it without the need for additional provision during the same quarter when the loan moves to nonperforming status. Nonperforming loans are constantly under review for further deterioration of the customer’s credit or collateral position and management would provide additional provision as it is needed in future quarters. Barring any significant improvements in impaired loans during the fourth quarter ending December 31, 2009, management expects to be providing reserves to the allowance for loan losses at a similar or higher level than in the quarter ended September 30, 2009.

Non-interest Income

Non-interest income includes deposit fees, gains on the sales of securities, OREO and loans held for sale, and ATM fees. For the nine months ended September 30, 2009, non-interest income decreased 8.7% to $1.869 million compared to $2.048 million, or $179 thousand less than the same period in 2008. Revenue from the net gain on sale of securities is considered as non-recurring revenue, therefore non-interest income, excluding these items was $1.854 million for the nine months ended September 30, 2009 and $2.028 million for the same period in 2008; or a decrease of $174 thousand. Below is a representation of the changes to the significant components of non-interest income.

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		Three months ended					Nine months ended
(Dollars in thousands)		September 30,		September 30,	%		September 30,		September 30,	%
		2009		2008	Change		2009		2008	Change
Non-interest Income
Service charges on deposit accounts	$	309	$	368	-16.0%	$	910	$	1,065	-14.6%
Net gain on sales of loans		10		23	-56.5%		58		87	-33.3%
Net gain on sale of securities		-		-	0.0%		15		20	-25.0%
Income from bank owned life ins.		70		80	-12.5%		211		231	-8.7%
ATM fee income		141		131	7.6%		409		380	7.6%
Other income		99		109	-9.2%		266		265	0.4%
Total non-interest income	$	629	$	711	-11.5%	$	1,869	$	2,048	-8.7%

• Service charges on deposit accounts decreased 14.6% or $155 thousand chiefly due to the Bank’s revised policies regarding overdraft accounts and the continuing migration by customers to “totally free” checking products. The revised overdraft policies limited the daily amount of overdraft fees that a customer could be assessed, the automated closure of long-term overdrawn checking accounts, and providing customers’ information on overdraft fees charged to their account in the current cycle and for the year-to-date.

• Net gain on sales of loans decreased 56.5% for the quarter and 33.3% year-to-date primarily as a result of the slowdown in the number of secondary market loans being sold in 2009 over 2008.

• Net gain on sale of securities decreased 25.0% for the year-to-date. The investment portfolios are realizing gains in 2009 not from actual sales of securities but as a result of securities being called by issuers at par and therefore resulting in gains for the Company.

• ATM fee income increased 7.6% for the quarter and 7.6% or $29 thousand for the year-to-date as a result of increased ATM usage by the Bank’s customers and fees received from non-customers using the Bank’s ATMs.

• Other income decreased 9.2% in the quarter and .40% increase, or $1 thousand for the year-to-date primarily due to fees earned on banking-related services.

Non-interest Expense

Non-interest expense includes employee compensation and benefits-related costs, occupancy and equipment expense, data processing and other overhead costs. The mammoth increases in FDIC deposit insurance premiums seen so far in 2009 is the sole reason non-interest expenses for the quarter and year-to-date have increased when compared to the prior year. To better understand the cost efficiencies achieved by the Company a comparison of non-interest expenses exclusive of FDIC deposit insurance premiums indicates that for the quarter ended September 30, 2009 total non-interest expenses were $2.144 million. When compared to the same period in 2008, non-interest expenses were $2.215 million or $71 thousand greater in 2008 than in 2009. A similar year-to-date comparison, exclusive of deposit insurance premiums shows that for the nine months ended September 30, 2009 non-interest expenses were $6.460 million as compared to $6.580 million for the nine months ended September 30, 2008; or a reduction of $120 thousand from prior year costs.

Non-interest expenses, including deposit insurance premiums increased $6 thousand for the quarter ended September 30, 2009 as compared to the year-earlier period. For the nine months ended September 30, 2009, non-interest expenses increased $98 thousand to $6.702 million as compared to $6.604 million for the comparable period in 2008, or an increase of 1.5%.

33

Management’s strategy is to maintain strict controls over non-interest expenses, and these efforts are being realized with only moderate increases seen in non-interest expenses over the previous year. The following table outlines the changes in significant components:

		Three months ended					Nine months ended
(Dollars in thousands)		September 30,		September 30,	%		September 30,		September 30,	%
		2009		2008	Change		2009		2008	Change
Non-interest Expense
Salaries and employee benefits	$	1,282	$	1,266	1.3%	$	3,915	$	3,857	1.5%
Net occupancy expense		143		155	-7.7%		429		439	-2.3%
Equipment expense		143		158	-9.5%		431		471	-8.5%
FDIC Insurance		87		10	770.0%		242		24	908.3%
Data Processing		87		92	-5.4%		245		259	-5.4%
Other operating expense		489		544	-10.1%		1,440		1,554	-7.3%
Total non-interest expense	$	2,231	$	2,225	0.3%	$	6,702	$	6,604	1.5%

• Salaries and employee benefits increased 1.3% for the quarter and 1.5% or $58 thousand for the year-to-date primarily due to increases for cost of living salary adjustments.

• Net occupancy expense decrease 7.7% or $12 thousand for the quarter and decreased $10 thousand for the year-to-date primarily as a result of lower maintenance costs that were partially offset with slightly higher utilities costs.

• Equipment expense decreased $15 thousand for the quarter and $40 thousand for the year-to-date primarily as a result equipment replacement which reduced or eliminated the need for service contracts and lower equipment depreciation expense as equipment becomes fully depreciated.

• FDIC deposit insurance increased $77 thousand for the quarter and $218 thousand for the year-to-date primarily as a result of higher FDIC insurance premiums both for regular quarterly premiums, TAGP premium and the one-time special assessment to replenish the Deposit Insurance Fund due to bank failures, nationwide.

• Data processing expense decreased $5 thousand in the quarter and a decrease of $14 thousand year-to-date is mostly due concession obtained in the renegotiated contracts with the Bank’s core processing vendor and the network communications contract.

• Other operating expense decreased $55 thousand for the quarter and $114 thousand for the year-to-date namely due to decreases in renegotiated ATM contract terms, the significant reduction in courier service expenses due to the conversion to branch capture late in 2008 and recoveries from deposit account write-offs.

Liquidity

Liquidity represents an institution’s ability to meet present and future obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquidity is also defined as the Company’s ability to meet the borrowing and deposit withdrawal requirements of the customers of the Company in addition to meeting current and planned expenditures. The Company maintains its liquidity position through cash on hand, correspondent bank balances and investment in federal funds sold, by maintaining its investment portfolio in available for sale status and through the availability of borrowing lines at the FHLB, the Federal Reserve Bank of Richmond and other correspondent banks.

34

Federal funds lines of credit are maintained with four correspondent banks. As of September 30, 2009 the Bank has the following lines of credit available.

Federal Home Loan Bank of Atlanta	$	38,300,000
Community Bankers Bank		11,400,000
SunTrust		8,000,000
Federal Reserve Bank of Richmond		5,700,000
Total Off-Balance Sheet Borrowing Lines	$	63,400,000

The Company had $16.3 million in FHLB Advances and other borrowings at September 30, 2009, which represented a $121 thousand increase from $16.2 million at December 31, 2008. At September 30, 2009, FHLB Advances totaled $11.0 million, unchanged from year-end.

Other borrowings consisted of $5.3 million in short-term borrowings from balances outstanding in the Investment Sweeps Account product at September 30, 2009; at December 31, 2008 the balance of this product was $5.2 million. The Investment Sweeps Account is an overnight repurchase agreement product, not insured by FDIC, but guaranteed by the Bank with US Government and Federal Agency securities. This product is offered to commercial customers only.

The Company monitors its liquidity position on a regular basis and continuously adjusts its assets to maintain adequate liquidity levels. The Company has established satisfactory liquidity targets and reports its liquidity ratios to the Board of Directors on a monthly basis. The Company considers its sources of liquidity to be sufficient to meet its estimated needs.

Capital Resources

Stockholders’ equity at September 30, 2009 and December 31, 2008 was $38.3 million and $36.3 million, respectively. Total number of common shares outstanding was 2,377,030 shares at September 30, 2009 and 2,390,980 shares at December 31, 2008. The decrease of 13,950 shares represents the number of shares repurchased by the Company during the first three quarters of 2009 under the stock repurchase plan that the Board of Directors initiated in September 2007 and reauthorized on August 20, 2009. Additional information regarding the stock repurchase plan was discussed earlier in this report and is also discussed in Part 2, Item 2 entitled Unregistered Sales of Equity Securities and Use of Proceeds.

At September 30, 2009 the Company’s Tier 1 and total risk-based capital ratios were 19.5% and 20.7%, respectively, compared to 19.4% and 20.5% at December 31, 2008. The Company’s leverage ratio was 12.4% at September 30, 2009 compared to 13.0% at December 31, 2008. The Bank’s capital structure places it well above the regulatory capital requirements, which affords the Company the opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business.

FORWARD LOOKING STATEMENTS

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, (the “Exchange Act”) as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:

• changes in general economic and business conditions in our market area;

35

• level of market interest rates;

• risks inherent in making loans such as repayment risks and fluctuating collateral values;

• the value of securities held in the Company’s investment portfolio;

• successfully manage the Company’s growth and implement its growth strategies;

• the successful management of interest rate risk; including changes in interest rates and interest rate policies;

• rely on the Company’s Management team, including its ability to attract and retain key personnel;

• continue to attract low cost core deposits to fund asset growth;

• changes in banking regulations, generally accepted accounting principles and;

• compete with other banks and financial institutions and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

• the ability to rely on third party vendors that perform critical services for the Company;

• technology utilized by the Company;

• maintain expense controls and asset qualities as new branches are opened or acquired;

• demand, development and acceptance of new products and services;

• maintain capital levels adequate to support the Company’s growth; and

• plan for changing trends in customer profiles and behavior.

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.

Item 4. Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our Management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Company has concluded that these controls and procedures are effective. In addition, our Management, including our Chief Executive Officer and Chief Financial Officer, is also responsible for establishing and maintaining adequate internal control over financial reporting.

There was no change in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

36

Part II. Other Information

Item 1. Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

Item1A. Risk Factors

There are no material changes from any of the risk factors previously disclosed in the Company’s 2008 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Board of Directors voted to approve continuation of the common stock repurchase plan at their regularly scheduled meeting held on August 20, 2009. The renewed plan period was effective September 1, 2009 and expires November 30, 2009. Purchases under the plan are limited to an individual three-month total of 20,000 shares and the maximum per share price to be paid is $16.00. The stock repurchase plan was originally announced on August 20, 2007.

The Board of Directors reviews the results of the repurchase plan monthly. The continuation of the repurchase plan is evaluated by the Directors prior to the reauthorization of the repurchase plan for an additional 3-month period. The Company will consider whether or not it will repurchase additional shares based upon a number of factors including market conditions, the Company’s performance, and other strategic planning considerations.

The table below indicates the shares that were repurchased during the most recent fiscal quarter:

Common Stock Repurchase Plan Table

				Total number	Maximum number
				of shares	of shares that
	Total number		Average	purchased as	may yet be
	of shares		price paid	part of publicly	purchased
Period	purchased		per share	announced plan	under the plan
July 1 to
July 31, 2009	0	$	-	0	13,950
August 1 to
August 31, 2009	300		13.20	300	13,650
September 1 to
September 30, 2009	0		-	0	20,000
Total	300	$	13.20	300	20,000

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Item 3. Defaults upon Senior Securities

None outstanding.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CITIZENS BANCORP OF VIRGINIA, INC.

(Registrant)

Date: November 16, 2009 /s/ Joseph D. Borgerding

Joseph D. Borgerding

President and Chief Executive Officer

Date: November 16, 2009 /s/ Ronald E. Baron

Ronald E. Baron

Senior Vice President and Chief Financial Officer

39

EXHIBIT INDEX

Exhibit Number

31.1 Rule 13a-14(a) Certification of Principal Executive Officer

31.2 Rule 13a-14(a) Certification of Principal Financial Officer

32.1 Statement of Principal Executive Officer Pursuant to 18 U.S.C. ss.1350

32.2 Statement of Principal Financial Officer Pursuant to 18 U.S.C. ss.1350