Xenith Bankshares (XBKS) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 000-53380

Xenith Bankshares, Inc.

(Exact name of registrant as specified in its charter)

Virginia	80-0229922
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One James Center 901 E. Cary Street, Suite 1700 Richmond, Virginia	23219
(Address of principal executive offices)	(Zip Code)

(804) 433-2200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 past 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  ¨

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  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

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

5,846,928 shares of Common Stock, par value $1.00 per share, were outstanding at July 31, 2010.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4T.	Controls and Procedures	35
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
SIGNATURES		38

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2010 AND DECEMBER 31, 2009

(Unaudited)

	June 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents
Cash and due from banks	$	13,024,684		$	35,203,187
Federal funds sold		572,000			—
Total cash and cash equivalents		13,596,684			35,203,187
Securities available for sale, at fair value		65,469,900			36,846,737
Loans, net of allowance for loan losses, 2010 $489,909; 2009 $0		119,875,925			102,049,697
Bank premises and equipment, net		6,880,749			6,980,689
Other real estate owned		795,681			463,700
Goodwill and other intangible assets, net		10,610,427			10,670,427
Accrued interest receivable		794,524			976,908
Deferred tax asset		3,241,150			3,679,400
Other assets		6,219,959			4,719,958
Total assets	$	227,484,999		$	201,590,703
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Demand and money market	$	48,986,898		$	22,316,474
Savings		3,624,769			3,295,930
Time		95,649,935			88,535,230
Total deposits		148,261,602			114,147,634
Accrued interest payable		478,592			505,297
Federal funds purchased and borrowed funds		25,001,002			31,260,151
Other liabilities		1,743,177			1,605,588
Total liabilities		175,484,373			147,518,670
Shareholders’ equity
Common stock, $1.00 par value, 100,000,000 shares authorized as of June 30, 2010 and December 31, 2009; 5,846,928 issued and outstanding as of June 30, 2010 and December 31, 2009		5,846,928			5,846,928
Additional paid-in capital		57,734,520			57,614,520
Accumulated deficit		(12,499,666	)		(9,457,569	)
Accumulated other comprehensive income, net		918,844			68,154
Total shareholders’ equity		52,000,626			54,072,033
Total liabilities and shareholders’ equity	$	227,484,999		$	201,590,703

See notes to unaudited financial statements.

1

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)

FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

	(Successor)			(Successor)			(Predecessor)
	Xenith Bankshares, Inc. June 30, 2010			Xenith Bank [In Organization] June 30, 2009			First Bankshares, Inc. June 30, 2009
Interest income
Interest and fees on loans	$	1,990,619		$	—		$	1,647,202
Interest on securities		592,401			—			617,230
Interest on federal funds sold		21,989			—			601
Total interest income		2,605,009			—			2,265,033
Interest expense
Interest on deposits		252,031			—			774,907
Interest on time certificates of $100,000 and over		100,927			—			223,001
Interest on federal funds purchased and borrowed funds		156,080			—			153,806
Total interest expense		509,038			—			1,151,714
Net interest income		2,095,971			—			1,113,319
Provision for loan losses		470,000			—			600,000
Net interest income (loss) after provision for loan losses		1,625,971			—			513,319
Noninterest income
Service charges on deposit accounts		33,930			—			72,388
Gains on sales of investments		1,756			—			14,750
Other		45,108			—			39,024
Total noninterest income		80,794			—			126,162
Noninterest expense
Compensation and benefits		1,864,380			770,238			538,456
Occupancy		344,248			248,120			81,647
FDIC insurance		71,308			—			114,200
Bank franchise taxes		105,000			—			30,000
Technology		504,434			60,647			119,106
Communications		57,526			30,619			8,110
Insurance		73,524			18,776			10,800
Professional fees		238,055			180,503			673,147
Travel		51,200			17,821			11,404
Supplies		57,393			8,690			30,825
Other expenses		279,931			15,847			110,801
Total noninterest expense		3,646,999			1,351,261			1,728,496
(Loss) before income tax expense		(1,940,234	)		(1,351,261	)		(1,089,015	)
Income tax expense (benefit)		—			—			(370,600	)
Net (loss)		(1,940,234	)		(1,351,261	)		(718,415	)
Other comprehensive (loss), net of income tax expense:
Net unrealized gain on securities available for sale		569,235			—			129,931
Comprehensive (loss)	$	(1,370,999	)	$	(1,351,261	)	$	(588,484	)
Per share data (Basic and Diluted):	$	(0.33	)	$	—		$	(0.32	)

See notes to unaudited financial statements.

2

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

	(Successor)			(Successor)			(Predecessor)
	Xenith Bankshares, Inc. June 30, 2010			Xenith Bank [In Organization] June  30, 2009			First Bankshares, Inc. June 30, 2009
Interest income
Interest and fees on loans	$	3,548,759		$	—		$	3,312,040
Interest on securities		1,062,121			—			1,304,103
Interest on federal funds sold		22,289			—			1,512
Total interest income		4,633,169			—			4,617,655
Interest expense
Interest on deposits		719,507			—			1,571,702
Interest on time certificates of $100,000 and over		—			—			451,280
Interest on federal funds purchased and borrowed funds		303,142			—			300,969
Total interest expense		1,022,649			—			2,323,951
Net interest income		3,610,520			—			2,293,704
Provision for loan losses		510,000			—			640,000
Net interest income (loss) after provision for loan losses		3,100,520			—			1,653,704
Noninterest income
Service charges on deposit accounts		64,400			—			142,676
Gains on sales of investments		101,076			—			232,161
Other		93,441			—			65,959
Total noninterest income		258,917			—			440,796
Noninterest expense
Compensation and benefits		3,597,491			1,355,548			1,056,594
Occupancy		681,547			511,106			165,223
FDIC insurance		141,312			—			148,333
Bank franchise taxes		210,000			—			64,000
Technology		751,016			119,501			252,794
Communications		96,620			50,388			15,544
Insurance		118,924			35,176			21,600
Professional fees		484,797			412,507			806,619
Travel		93,420			29,721			23,602
Supplies		106,453			20,467			59,921
Other expenses		414,354			25,253			152,727
Total noninterest expense		6,695,934			2,559,667			2,766,957
(Loss) before income tax expense		(3,336,497	)		(2,559,667	)		(672,457	)
Income tax (benefit)		(294,400	)		—			(228,300	)
Net (loss)		(3,042,097	)		(2,559,667	)		(444,157	)
Other comprehensive (loss), net of income tax expense:
Net unrealized gain (loss) on securities available for sale		850,690			—			(404,730	)
Comprehensive (loss)	$	(2,191,407	)	$	(2,559,667	)	$	(848,887	)
Per share data (Basic and Diluted):	$	(0.52	)	$	—		$	(0.20	)

See notes to unaudited financial statements.

3

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

	(Successor)			(Successor)			(Predecessor)
	Xenith Bankshares, Inc. June 30, 2010			Xenith Bank [In Organization] June  30, 2009			First Bankshares, Inc. June 30, 2009
Cash flows from operating activities
Net (loss) income	$	(3,042,097	)	$	(2,559,667	)	$	(444,157	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
Depreciation and amortization		416,686			241,034			164,942
Net amortization of investment securities		77,086			—			24,151
Accretion of purchase accounting adjustments		(809,441	)		—			—
Gains on sales of investments		(101,076	)		—			(232,161	)
Stock-based compensation		120,000			205,000
Provision for loan losses		510,000			—			640,000
Change in operating assets and liabilities
Accrued interest receivable		182,384			—			21,024
Deferred tax (benefit) expense		145,000			—			(178,479	)
Other assets		(1,991,981	)		104,238			(181,977	)
Accrued interest payable		(26,705	)		—			3,286
Other liabilities		186,053			119,799			309,509
Net cash (used in) provided by operating activities		(4,334,091	)		(1,889,596	)		126,138
Cash flows from investing activities
Proceeds from maturities and calls of available-for-sale securities		27,284,098			—			12,363,820
Purchase of available-for-sale securities		(54,739,331	)		—			(3,475,000	)
Net proceeds from the sale of FHLB stock		—			—			315,300
Net increase (decrease) in loans		(17,846,787	)		—			2,422,892
Net purchases of premises and equipment		(365,210	)		(1,190,509	)		(16,287	)
Net cash (used in) provided by investing activities		(45,667,230	)		(1,190,509	)		11,610,725
Cash flows from financing activities
Net increase (decrease) in demand deposits and savings accounts		34,653,968			—			95,814
Net increase in time deposits								(670,295	)
Net (decrease) in federal funds purchased and borrowed funds		(6,259,150	)		—			(11,007,339	)
Capital contributions		—			4,631,600			—
Net cash provided by (used in) financing activities		28,394,818			4,631,600			(11,581,820	)
Net (decrease) in cash & cash equivalents		(21,606,503	)		1,551,495			155,043
Cash and cash equivalents
Beginning of period		35,203,187			280,201			5,192,961
End of period	$	13,596,684		$	1,831,696		$	5,348,004
Supplementary Disclosure of Cash Flow Information
Cash Payments for:
Interest	$	302,943		$	—		$	—

See notes to unaudited financial statements.

4

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(Unaudited)

	Common Stock		Additional Paid- in Capital		Accumulated (Deficit)			Accumulated Other Comprehensive Income		Total Shareholders’ Equity
Balances at December 31, 2009	$	5,846,928	$	57,614,520	$	(9,457,569	)	$	68,154	$	54,072,033
Net loss		—		—		(3,042,097	)		—		(3,042,097	)
Stock-based compensation				120,000							120,000
Change in net unrealized gain on available-for-sale securities, net of deferred income tax expense of $293,250		—		—		—			850,690		850,690
Balances at June 30, 2010	$	5,846,928	$	57,734,520	$	(12,499,666	)	$	918,844	$	52,000,626

See notes to unaudited financial statements.

5

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2010

Note 1. Organization

General

Xenith Bankshares, Inc. is a bank holding company for Xenith Bank, a Virginia-based institution headquartered in Richmond, Virginia. The Company, through the Bank, operates four full-service branches: one in Richmond, Virginia and three in Suffolk, Virginia. The Bank does business as SuffolkFirst Bank at its current locations in Suffolk, Virginia. The Company anticipates converting a loan production office in Tysons Corner, Virginia, to a full service branch in the third quarter of 2010.

Background

Effective December 22, 2009 (the “Merger Date”), First Bankshares, Inc. (“First Bankshares”) and Xenith Corporation completed the merger of Xenith Corporation with and into First Bankshares (the “Merger”), with First Bankshares being the surviving entity in the Merger. At the effective time of the Merger, First Bankshares amended its articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the Merger, SuffolkFirst Bank, a wholly-owned subsidiary of the combined company, changed its name to Xenith Bank.

Although the Merger was structured as a merger of Xenith Corporation with and into First Bankshares, with First Bankshares being the surviving entity for legal purposes, Xenith Corporation was treated as the acquirer for accounting purposes. Accordingly, the assets and liabilities of First Bankshares were recorded at their fair value on December 22, 2009.

From its inception on February 19, 2008 until the completion of the Merger on December 22, 2009, Xenith Corporation (formerly Xenith Bank [In Organization]) had no substantial operations. Accordingly, since Xenith Corporation’s operating activities prior to the Merger were insignificant relative to those of First Bankshares, management believes that First Bankshares is the Company’s predecessor. However, as mentioned above, Xenith Corporation is treated as the acquirer for accounting purposes. Management reached this conclusion based upon an evaluation of facts and circumstances, including the historical life of First Bankshares, the historical level of operations of First Bankshares, the purchase price paid for First Bankshares and the fact that the combined company’s operations, revenues and expenses after the Merger are most similar in all respects to those of First Bankshares’ historical periods. Accordingly, the consolidated statements of operations and comprehensive income and cash flows of First Bankshares for the period ended June 30, 2009 have been presented. However, due to the adjustments to the basis of assets and liabilities as a result of the acquisition method of accounting, the financial statements of the successor and predecessor are not directly comparable. The Merger was accounted for using the acquisition method of accounting.

Unless otherwise stated herein or the context otherwise requires, references herein to “the Company,” “successor,” “we,” “our” and “us” at and for the quarterly period ended June 30, 2010 and at the year ended December 31, 2009 are to Xenith Bankshares and its wholly-owned subsidiary, Xenith Bank, and references to “the Bank” are to Xenith Bank. Unless otherwise stated herein or the context otherwise requires, references herein to “the Company,” “predecessor,” “we,” “our” and “us” for the quarterly period ended June 30, 2009 are to First Bankshares and its wholly-owned subsidiary, SuffolkFirst Bank, and references to “the Bank” are to SuffolkFirst Bank.

Note 2. Basis of Presentation

The consolidated statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. Xenith Bank [in Organization] for the six months ended June 30, 2009 represents the operations of Xenith Corporation before the Merger. All significant intercompany accounts have been eliminated.

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America for interim period reporting, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial positions at June 30,

6

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

2010 and December 31, 2009, the results of operations for the three and six months ended June 30, 2010 and 2009, the statements of cash flows for the six months ended June 30, 2010 and 2009 and changes in shareholders’ equity for the six months ended June 30, 2010. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year ending December 31, 2010. The unaudited consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported total assets, cash flows, shareholders’ equity, or net income.

Note 3. Securities

The book value and fair values at June 30, 2010 were as follows:

	June 30, 2010
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Securites Available for Sale:
U.S. agencies	$	6,993,054	$	38,170	$	—		$	7,031,224
Mortgage-backed securities
- Fixed rate		40,550,053		1,000,451		—			41,550,504
- Variable rate		5,610,750		227,910		—			5,838,660
Collateralized mortgage obligations		8,666,641		213,120		—			8,879,761
Trust preferred securities		2,257,409		—		(87,659	)		2,169,750
Total securities available for sale	$	64,077,907	$	1,479,651	$	(87,659	)	$	65,469,900

The book value and fair values at December 31, 2009 were as follows:

	December 31, 2009
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Securities Available for Sale:
U.S. agencies	$	17,700,601	$	116,508	$	(6,667	)	$	17,810,442
Mortgage-backed securities
- Fixed rate		4,983,564		37,086		(20,540	)		5,000,110
- Variable rate		7,102,185		64,279		(6,174	)		7,160,290
Municipals
- Taxable		2,111,980		—		(38,700	)		2,073,280
- Tax exempt		535,600		—		(985	)		534,615
Trust preferred securities		4,262,500		5,500		—			4,268,000
Total securities available for sale	$	36,696,430	$	223,373	$	(73,066	)	$	36,846,737

7

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

At June 30, 2010 and December 31, 2009, the Bank had securities with a book value of $27.2 million and $20.5 million, respectively that were pledged as collateral against borrowings.

The following table shows the book value and fair value of securities for which the book value exceeded 10% of shareholders’ equity at June 30, 2010:

	Book Value		Fair Value		Book Value as a Percentage of Shareholders’ Equity
U.S. agencies
- Federal National Mortgage Association		6,993,054		7,031,224	13.45	%
Collateralized Mortgage Obligations
- Government National Mortage Association		5,821,499		5,934,079	11.20	%
Mortgage-backed securities
- Federal National Mortgage Association		31,366,932		32,108,081	60.32	%
- Federal Home Loan Mortgage Corporation		14,596,380		15,078,148	28.07	%
Total securities	$	58,777,865	$	60,151,532

The following tables show the unrealized losses and related fair values in the Company’s securities portfolio, with the information aggregated by investment category and by the length of time that individual securities have been in continuous unrealized loss positions, as of June 30, 2010 and December 31, 2009:

	June 30, 2010
	Less than 12 months				More than 12 months					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. agencies	$	—	$	—	$	—	$	—		$	—	$	—
Mortgage-backed securities
- Fixed rate		—		—		—		—		$	—	$	—
Trust preferred securities		—		—		2,169,750		(87,659	)		2,169,750		(87,659	)
Total impaired securities	$	—	$	—	$	2,169,750	$	(87,659	)	$	2,169,750	$	(87,659	)

8

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

	December 31, 2009
	Less than 12 months					More than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S Agencies	$	15,763,328	$	(236,672	)	$	—	$	—		$	15,763,328	$	(236,672	)
Mortgage-backed securities
- Variable rate		54,115		(184	)		—		—			54,115		(184	)
Trust preferred securities		—		—			4,268,000		(254,787	)		4,268,000		(254,787	)
Total impaired securities	$	15,817,443	$	(236,856	)	$	4,268,000	$	(254,787	)	$	20,085,443	$	(491,643	)

The unrealized loss positions at June 30, 2010 were directly related to interest rate movements as management believes there is minimal credit risk exposure in these investments. At June 30, 2010, the Bank held two preferred securities with an aggregate book value of $2.3 million. Of this total, one of the preferred securities in the amount of $1.1 million had a split rating of Baa3 by Moody’s Investors Service, Inc. and BB by Standard and Poor’s Rating Services. All other securities are investment grade. There were no investments with unrealized loss positions of less than 12 months duration at June 30, 2010. Securities with losses of one year or greater duration totaled $2.2 million and included two preferred securities. Because we do not intend to sell these investments and it is more likely than not that we will not be required to sell these investments before a recovery of unrealized losses, we do not consider these investments to be other-than-temporarily impaired at June 30, 2010 and no impairment has been recognized.

Note 4. Loans

The following table presents the Company’s composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans as of June 30, 2010 and December 31, 2009:

	June 30, 2010					December 31, 2009
	Amount			Percent of Total		Amount		Percent of Total
Commercial real estate	$	38,023,650		31.59	%	$	34,978,917	34.28	%
Commercial and industrial		56,654,016		47.07	%		43,467,134	42.59	%
Residential real estate		21,810,348		18.12	%		22,061,275	21.62	%
Consumer		3,855,273		3.20	%		1,523,660	1.49	%
Overdrafts		22,391		0.02	%		18,711	0.02	%
Total loans		120,365,678		100.00	%		102,049,697	100.00	%
Allowance for loan losses		(489,909	)				—
Total loans, net of allowance for loan losses	$	119,875,769				$	102,049,697

9

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

Activity in the allowance for loan losses was as follows as of June 30, 2010 and 2009, and December 31, 2009:

	(Successor) June 30, 2010			(Successor) December  31, 2009			(Predeccesor) June 30, 2009
Balance at beginning of period	$	—		$	1,687,283		$	1,687,283
Charge-offs:
Commercial real estate		—			133,267			133,267
Commercial and industrial		3,905			187,065			—
Residential real estate		50,685			214,352			—
Consumer		1,674			4,953			4,965
Total charge-offs		56,264			539,637			138,232
Recoveries:
Commercial real estate		—			18,954			—
Commercial and industrial		36,058			31,644			—
Consumer		115			1,110			1,122
Total recoveries		36,173			51,708			1,122
Net charge-offs		20,091			487,929			137,110
Allowance, net of charge-offs and recoveries		(20,091	)		1,199,354			1,550,173
Additions to the allowance for loan losses		510,000			5,500,646			640,000
Allowance after additions		489,909			6,700,000			2,190,173
Purchase accounting adjustment		—			(6,700,000	)		—
Balance at end of period	$	489,909		$	—		$	2,190,173

The carrying amount of acquired loans at December 22, 2009 (the Merger Date) consisted of purchased performing loans and purchased impaired loans as detailed in the following table:

	Purchased Performing Loans		Purchased Impaired Loans		Total Loans
Commercial real estate	$	28,473,495	$	6,505,422	$	34,978,917
Commercial and industrial		42,262,056		1,205,078		43,467,134
Residential real estate		22,061,275		—		22,061,275
Consumer		1,523,660		—		1,523,660
Overdrafts		18,711		—		18,711
Total loans	$	94,339,197	$	7,710,500	$	102,049,697

10

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

The following table presents the purchased loans receivable at the Merger Date. The remaining fair value adjustment for credit and interest rates as of June 30, 2010 and December 31, 2009 was $7.1 million and $7.6 million, respectively.

	Purchased Performing Loans			Purchased Impaired Loans			Total Loans
Contractually required principal payments receivable	$	94,339,197		$	7,710,500		$	102,049,697
Fair value adjustment for credit and interest rates		(4,071,024	)		(3,569,244	)		(7,640,268	)
Fair value of purchased performing loans receivable		90,268,173			4,141,256			94,409,429

The outstanding balance of purchased impaired loans was $7.7 million as of June 30, 2010 and December 31, 2009, respectively.

As of December 31, 2009, the allowance for loan losses was $0 as a result of purchase accounting adjustments related to the Merger. The provision expense of $510 thousand for the six months ended June 30, 2010 includes a provision of $35 thousand for credit deterioration of the purchased loan portfolio.

Note 5. Goodwill and Other Intangible Assets

The Company follows Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350Goodwill and Other Intangible Asset, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this statement require an impairment review at least annually and more frequently if certain impairment indicators are evident. The Company will test for impairment of goodwill and intangible assets on an annual basis beginning in 2010.

As part of the purchase price allocation for the acquisition of First Bankshares on December 22, 2009, the Company recorded $9.4 million in goodwill. Core deposit intangible assets are being amortized over a 10-year period.

Goodwill and intangible assets are presented in the following table as of June 30, 2010 and December 31, 2009:

	June 30, 2010		December  31, 2009
Amortizable core deposit intangibles:
Gross Carrying Value	$	1,240,000	$	1,240,000
Accumulated Amortization		60,000		—
Net Carrying Value	$	1,180,000	$	1,240,000
Unamortizable goodwill
Carrying Value	$	9,430,427	$	9,430,427

11

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

A reconciliation of the excess consideration paid by Xenith Corporation over First Bankshares’ net assets acquired in the Merger (“goodwill”) is as follows:

Costs to acquire First Bankshares:
Issuance of Xenith Corporation common stock	$	15,758,196
Cash consideration paid		5,251,804
Total consideration to acquire First Bankshares		21,010,000
First Bankshares’ net assets at fair value:
First Bankshares shareholders’ equity at December 22, 2009		12,611,140
Adjustments to reflect assets acquired at fair value:
Net loans		(900,000	)
Other real estate owned		(100,000	)
Premises and equipment		(500,000	)
Core deposit intangibles		1,240,000
Deferred tax assets		1,491,332
Adjustments to reflect liabilities acquired at fair value:
Interest-bearing deposits		(2,132,000	)
Other		(130,899	)
Adjusted identifiable net assets acquired		11,579,573
Total Goodwill	$	9,430,427

Note 6. Deposits

A summary of deposit accounts as of June 30, 2010 and December 31, 2009 was as follows:

	June 30, 2010		December  31, 2009
Noninterest-bearing demand deposits	$	15,148,144	$	14,646,206
Interest-bearing:
NOW and money market accounts		33,838,754		7,670,269
Savings deposits		3,624,769		3,295,930
Time deposits of $100,000 or more		42,731,185		37,127,448
Other time deposits		52,918,750		51,407,781
Total deposit accounts	$	148,261,602	$	114,147,634

12

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

Note 7. (Loss) Income per Share

The following is a summary of the basic and diluted (loss) income per share calculation for the three month and six month periods ended June 30, 2010 and 2009. The loss per share for the three months and six months ended June 30, 2010 did not include 94,493 stock options and 563,760 stock warrants, because, in each case, the exercise price of the stock options and warrants, as applicable, was higher than the market price for the Company’s common stock. There were no stock options that were dilutive as of June 30, 2009.

	(Successor)			(Predecessor)
	For the Three Months Ended June 30,
	2010			2009
Net (loss)	$	(1,940,234	)	$	(718,415	)
Weighted average number of shares outstanding		5,846,928			2,276,298
(Loss) income per share, basic	$	(0.33	)	$	(0.32	)
(Loss) income per share, assuming dilution	$	(0.33	)	$	(0.32	)
	(Successor)			(Predecessor)
	For the Six Months Ended June 30,
	2010			2009
Net (loss)	$	(3,042,097	)	$	(444,157	)
Weighted average number of shares outstanding		5,846,928			2,276,298
(Loss) income per share, basic	$	(0.52	)	$	(0.20	)
(Loss) income per share, assuming dilution	$	(0.52	)	$	(0.20	)

13

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

Note 8. Stock Option Plans

The Company has two share-based compensation plans. The 2003 Stock Incentive Plan was for directors, officers, and employees of First Bankshares. Of the 137,500 shares of common stock available for granting stock options, approximately 94,000 options were granted to First Bankshares directors and key employees under the plan and are fully vested. The options are exercisable for shares of the Company’s common stock.

In connection with the Merger, Xenith Bankshares assumed the Xenith Corporation 2009 Stock Incentive Plan, which was subsequently amended and restated to become the Amended and Restated Xenith Bankshares, Inc. 2009 Stock Incentive Plan (the “2009 Plan”). An aggregate of 258,000 options to purchase shares of Xenith Corporation common stock outstanding at the effective time of the Merger, which had been granted under the Xenith Corporation 2009 Stock Incentive Plan, were converted into an aggregate of 224,460 options to purchase shares of Xenith Corporation common stock based on the Exchange Ratio at an exercise price of $11.49 per share (in excess of the fair market value on the date of conversion). On December 22, 2009, the Compensation and Governance Committee of the Board of Directors (the “Committee”), pursuant to authority delegated to it by the Board of Directors, granted an aggregate of 8,700 options to purchase shares of the Company’s common stock at an exercise price of $11.49 per share (in excess of the fair market value on the date of grant). These options have a 10-year term and will vest in three equal installments on each anniversary of the completion of the Merger. In the first quarter of 2010, the Committee granted 7,500 and 5,000 options to purchase shares of the Company’s common stock at an exercise price of $7.00 per share and $11.49 per share, respectively (in excess of the fair market value on the date of grant). Those options have a 10- year term and will vest in three equal annual installments beginning on the date of grant. There were no options granted in the second quarter of 2010.

Stock options are recorded at fair value as of the date of grant. Stock-based employee compensation costs were $60,000 and $0 for the three months ended June 30, 2010 and 2009, respectively, and $120,000 and $0 for the six months ended June 30, 2010 and 2009, respectively.

Note 9. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

14

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

Under the guidance in ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter and, based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. However, the Company expects changes in classifications between levels will be rare.

Available for Sale Securities:

Available for sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relaying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other Real Estate Owned:

The Company does not record other real estate owned on a recurring basis. Other real estate owned is measured at the asset’s fair value less costs for disposal. The Company estimates fair value at the asset’s liquidation value less disposal costs using management’s assumptions, which are based on current market analysis or recent appraisals.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

15

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest. The methodology for measuring the fair value of other financial assets and financial liabilities that are not measured at fair value on a recurring or nonrecurring basis are discussed below.

Loans:

For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. The loan portfolio was marked to fair market value as of December 22, 2009 as a result of the Merger. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

Impaired Loans:

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Deposit Liabilities:

The balance of demand deposits, NOW accounts, and money market and savings deposits reflects the fair value payable on demand to the accountholder. Deposit liabilities were marked to fair market value as of December 22, 2009 as a result of the Merger.

Short-Term Borrowings:

The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance-Sheet Financial Instruments:

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

As of June 30, 2010 and December 31, 2009, the fair value of loan commitments and stand-by letters of credit was immaterial.

16

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

Assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2010 are included in the table below:

			Fair Value Measurements as of June 30, 2010  Using
	Balance		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs Level 2)		Significant Unobservable Inputs (Level 3)
Assets Measured on a Recurring Basis:
Available for Sale securities	$	65,469,900	$	—	$	65,469,900	$	—
Assets Measured on a Non Recurring Basis:
Other real estate owned, Balance at 12/31/09	$	463,700		—		—	$	463,700
Additions		331,981		—		—		331,981
Other real estate owned, Balance at 6/30/10	$	795,681					$	795,681

The carrying amounts and approximate fair values of the Company’s financial instruments were as follows at June 30, 2010 and December 31, 2009:

	June 30, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets
Cash and due from banks	$	13,024,684	$	13,024,684	$	35,203,187	$	35,203,187
Federal funds sold		572,000		572,000		—		—
Securities available for sale		65,469,900		65,469,900		36,846,737		36,846,737
Other investments		3,371,200		3,371,200		2,278,752		2,278,752
Loans [1]		119,910,925		119,910,925		102,049,697		102,049,697
Accrued interest receivable		794,524		794,524		976,908		976,908
Total financial assets	$	203,143,233	$	203,143,233	$	177,355,281	$	177,355,281
Financial Liabilities
Federal funds purchased	$	—	$	—	$	1,552,000	$	1,552,000
Other borrowed funds
- Short-term borrowings		1,002		1,002		4,708,151		4,708,151
- Long-term borrowings		25,000,000		25,771,675		25,000,000		25,000,000
Deposits [2]		148,261,602		148,261,602		114,147,634		114,147,634
Accrued interest payable		478,592		478,592		505,297		505,297
Total financial liabilities	$	173,741,196	$	174,512,871	$	145,913,082	$	145,913,082

[1] The majority of the loan balance was marked to market at December 22, 2009 (the Merger Date) and therefore the carrying value approximates the market value.

[2] The growth in deposits from December 31, 2009 to June 30, 2010 ($34.1 million) was offered at market rates. The remaining balance of deposits was marked to market at December 22, 2009 (the Merger Date) and therefore the carrying value approximates the market value.

17

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

Fair value estimates are made at a specific point in time and are based on relevant market information, as well as information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets, premises and equipment, and other real estate owned. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Note 10. Accounting Pronouncements

Accounting Standards Update (“ASU”) Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements” (“ASU 820”) which amends ASC 820-10 –ASU 820 requires new disclosure (i) of significant transfers in and out of Levels 1 and 2 with reasons for the transfers; and (ii) activity in Level 3 fair value measurements, including purchases, sales, issuances, and settlements on a gross basis. In addition, the reporting entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about inputs and valuation techniques used to measure fair value of both recurring and nonrecurring fair value measurements. The ASU includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (ASC 715-20). These amendments change the terminology from major categories of assets to classes of assets and provide a cross reference to ASC 820-10 on how to determine appropriate class to present fair value disclosures. ASU 820 is effective for interim and annual periods beginning after December 15, 2009, except disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. ASU 820 requires additional disclosures only and will not have an impact on the Company’s consolidated financial statements.

ASC 860 -Accounting for Transfers of Financial Assets (“Topic 860”) - Topic 860 is a revision to preceding guidance and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. In December 2009, the FASB issuedASU No. 2009-16 — Transfers and Servicing — Accounting for Transfers of Financial Assets (“ASU 2009 -16”). This update formally codifies FASB Statement No. 166,Accounting for Transfers of Financial Assets and provides a revision for Topic 860 to require more information about transfers of financial assets. This statement and update became effective for interim and annual reporting periods beginning January 1, 2010. The adoption of this statement and update did not have a material impact on the Company’s consolidated financial statements.

ASU No. 2010-06 — Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). This update provides amendments to Subtopic 820-10,Fair Value Measurements and Disclosures, that require new disclosures for transfers in and out of Levels 1 and 2, and for activity in Level 3 fair value

18

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements - (Continued)

June 30, 2010

measurements. In addition, ASU 2010-06 provides amendments that clarify existing disclosures relating to the level of disaggregation and inputs and valuation techniques. Fair value measurement disclosures should be provided for each class of assets and liabilities, and disclosures should be made about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring measurements that fall in either Level 2 or Level 3. The new disclosures and clarification of existing disclosures are effective for interim and annual reporting. ASU No. 2010-6 requires additional disclosures only and will not have an impact on the Company’s consolidated financial statements.

ASU No. 2010-20 — Disclosures about Credit Quality and Allowance for Credit Losses.The FASB issued new guidance intended to provide users of financial statements with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This guidance will become effective for the reporting periods ending on or after December 15, 2010. The Company is still evaluating the impact that this guidance will have on the Company’s financial position and operating results.

19

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

BUSINESS OVERVIEW

Effective December 22, 2009, First Bankshares, Inc. (“First Bankshares”) and Xenith Corporation completed the merger of Xenith Corporation with and into First Bankshares (the “Merger”), with First Bankshares being the surviving entity in the Merger. At the effective time of the Merger, First Bankshares amended its articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the Merger, SuffolkFirst Bank, a wholly-owned subsidiary of the combined company, changed its name to Xenith Bank.

Although the Merger was structured as a merger of Xenith Corporation with and into First Bankshares, with First Bankshares being the surviving entity for legal purposes, Xenith Corporation was treated as the acquirer for accounting purposes. Accordingly, the assets and liabilities of First Bankshares were recorded at their fair value on December 22, 2009.

From its inception on February 19, 2008 until the completion of the Merger on December 22, 2009, Xenith Corporation (formerly Xenith Bank [In Organization]) had no substantial operations. Accordingly, since Xenith Corporation’s operating activities prior to the Merger were insignificant relative to those of First Bankshares, management believes that First Bankshares is the Company’s predecessor. However, as mentioned above, Xenith Corporation is treated as the acquirer for accounting purposes. Management reached this conclusion based upon an evaluation of facts and circumstances, including the historical life of First Bankshares, the historical level of operations of First Bankshares, the purchase price paid for First Bankshares and the fact that the combined company’s operations, revenues and expenses after the Merger are most similar in all respects to those of First Bankshares’ historical periods. Accordingly, the consolidated statements of operations and comprehensive income and cash flows of First Bankshares for the period ended June 30, 2009 have been presented. However, due to the adjustments to the basis of assets and liabilities as a result of the acquisition method of accounting, the financial statements of the successor and predecessor are not directly comparable.

20

Unless otherwise stated herein or the context otherwise requires, references herein to “the Company,” “successor,” “we,” “our” and “us” at and for the quarterly period ended June 30, 2010 and at the year ended December 31, 2009 are to Xenith Bankshares and its wholly-owned subsidiary, Xenith Bank, and references to “the Bank” are to Xenith Bank. Unless otherwise stated herein or the context otherwise requires, references herein to “the Company,” “predecessor,” “we,” “our” and “us” for the quarterly period ended June 30, 2009 are to First Bankshares and its wholly-owned subsidiary, SuffolkFirst Bank, and references to “the Bank” are to SuffolkFirst Bank.

Xenith Bankshares, Inc. is a bank holding company for Xenith Bank, a Virginia-based banking institution headquartered in Richmond, Virginia. The Company, through the Bank, operates four full-service branches: one in Richmond, Virginia and three in Suffolk, Virginia. The Bank continues to do business as SuffolkFirst Bank at its current locations in Suffolk, Virginia. The Company anticipates converting a loan production office in Tysons Corner, Virginia, to a full service branch in the third quarter of 2010.

We are strategically focused on the Virginia business, real estate and private banking communities, as well as select retail markets. We believe that continued consolidation in the banking industry has left many customers in these segments underserved, thereby creating the need in the market for a new generation of sophisticated banking that Xenith Bank provides. Our new banking model combines the reliability and lending power of larger, traditional institutions with the technology, expertise and flexibility required in today’s dynamic market.

We believe that the current banking landscape in Virginia has evolved to create a significant opportunity for serving middle-market commercial enterprises with complex financial needs. The Virginia market resembles a “barbell” with a few large national and super-regional banking organizations (greater than $10 billion in assets) controlling the majority of deposits and with smaller banks (less than $1 billion in assets), which represent the vast majority of banks in Virginia, controlling a small percentage of deposits. We believe that while larger financial institutions generally offer comprehensive products and services, they often lack the consistent relationship focus desired by our targeted middle-market customers. We also believe that, while community banks offer more consistent relationship focus than larger financial institutions, these banks’ smaller legal lending limits and fewer resources are better oriented for a retail and small business focus.

Following the Merger, we believe that the Company is uniquely positioned to take advantage of current economic conditions and competitive opportunities. We believe that the combined Company will benefit from the Bank’s (1) capital base, which we believe will allow it to compete effectively with both the larger, more established super-regional and national banks, as well as the smaller, locally managed community banks operating in our target markets, (2) advantageous market locations, (3) proposed service capabilities and (4) experienced management team and board of directors.

We intend to execute our business strategy by focusing on developing long term relationships with our targeted customer base and by employing a team of bankers with significant experience in the markets we intend to serve.

Additional information is available on the Company’s website at www.xenithbank.com. The information contained on or that can be accessed through the Company’s website is not a part of and not incorporated into this Quarterly Report on Form 10-Q.

The shares of the Company are listed on the NASDAQ Capital Market under the symbol “XBKS.”

The following discussion is intended to assist readers in understanding and evaluating our financial condition and results of operations. This review should be read in conjunction with our financial statements and accompanying notes included in Part I, Item 1, “Financial Statements” in this Quarterly Report and Part II, Item 8, “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Annual Report”). The data presented for the three and six months ended June 30, 2010 and 2009 are derived from our unaudited interim financial statements and include, in the opinion of management, all adjustments, consisting only of normal reoccurring accruals, necessary to present fairly the data for such periods.

21

Basis of Comparison

The discussion of results of operations reflects a comparison of the Company for the three month and six months ended June 30, 2010 versus results of operations pre-Merger (predecessor) for the three month and six months ended June 30, 2009. No adjustments are needed to the amounts for the predecessor to comply with Article 11 pro forma presentation, as purchase accounting adjustments impacting the statement of operations are deemed to be immaterial. The results of operations for Xenith Bank [In Organization] for the six month period ended June 30, 2009, are not discussed as we do not believe it to be a meaningful comparison in explaining the historical financial performance of the Company due to limited operations pre-acquisition as noted above.

RESULTS OF OPERATIONS

Overview

The primary source of our revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Interest-earning assets include loans, available-for-sale securities, and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of noninterest income include service charges on deposit accounts, fees on loan origination, gains on the sale of securities, and other miscellaneous income.

For the three months ended June 30, 2010, our net loss was $1.9 million, compared to a net loss of $0.7 million for the three months ended June 30, 2009. For the six months ended June 30, 2010, our net loss was $3.0 million, compared to a net loss of $.4 million for the six months ended June 30, 2009. The Company’s loss for both the three and six month period ended June 30, 2010 was primarily driven by higher noninterest expenses related to the development of our infrastructure and banking platform that will support the Bank’s growth, partially offset by lower credit costs.

The following is earnings per share information for the periods stated:

	(Successor)			(Predecessor)
	For the Three Months Ended June 30,
	2010			2009
(Loss) per share, basic and diluted	$	(0.33	)	$	(0.32	)
	(Successor)			(Predecessor)
	For the Six Months Ended June 30,
	2010			2009
(Loss) per share, basic and diluted	$	(0.52	)	$	(0.20	)

22

Net Interest Income

For the three months ended June 30, 2010, net interest income was $2.1 million compared to $1.1 million for the three months ended June 30, 2009. The increase is due principally to higher average volume of loans and securities, the accretion of fair value adjustments from acquisition accounting and declines in costs of interest-bearing liabilities. The net interest margin increased 180 basis points to 4.51% at June 30, 2010 from 2.71% at June 30, 2009. The net interest margin is defined as the percentage of net interest income to average earning assets. The net interest margin increase was mainly due to the accretion of fair value market adjustments of acquired loans and decreases in the cost of interest-bearing liabilities. Average interest-earning assets and related interest income increased $21.8 million and $340 thousand, respectively. Average interest-bearing liabilities increased $4 million with related interest expense declining $642 thousand. Costs of interest-bearing liabilities declined 185 basis points to 1.39% while yields on interest-earning assets increased .08 basis points to 5.60%. Improvements in the cost of funds were principally a result of accretion of fair value adjustments from acquisition accounting, and declining costs on certificates of deposit (higher rate certificates of deposit matured and re-priced at lower rates).

For the six months ended June 30, 2010, net interest income was $3.6 million compared to $2.3 million for the six months ended June 30, 2009. The increase is due principally to higher average volume of loans and securities, the accretion of fair value adjustments from acquisition accounting and declines in costs of interest-bearing liabilities. The net interest margin increased 128 basis points to 4.02% at June 30, 2010 from 2.74% at June 30, 2009. The net interest margin increase was mainly due to the accretion of fair value market adjustments of acquired loans and decreases in the cost of interest-bearing liabilities. Average interest-earning assets and related interest income increased $11.8 million and $8 thousand, respectively. Average interest-bearing liabilities decreased $6 million with related interest expense declining $1.3 million. Costs of interest-bearing liabilities declined 173 basis points to 1.46% while yields on interest-earning assets decreased 35 basis points to 5.16%. Improvements in the cost of funds were principally a result of accretion of fair value adjustments from acquisition accounting, and declining costs on certificates of deposit (higher rate certificates of deposit matured and re-priced at lower rates).

During the three and six months ended June 30, 2010, the impact of acquisition accounting fair value accretion on net interest margin was $699 thousand and $1.03 million, respectively.

The acquired loan portfolio of the Company was marked-to-market with a fair value discount to market rates (the discount represents expected credit losses and comparison to market rate adjustments). The total performing loan discount of $4.1 million is being recognized into interest income over the estimated remaining life of the loans. The performing loan accretion of the discount was $429 thousand for the three months ended June 30, 2010 and $489 thousand for the six months ended June 30, 2010.

The following tables provide a detailed analysis of the effective yields and rates on interest-earning assets and interest-bearing liabilities for the periods presented. The average balances and other statistical data used in this table were calculated using daily average balances.

23

Average Balances, Income and Expenses, Yields and Rates

	Three Months June 30, 2010
	(Successor)			(Predecessor)							(Successor)		(Predecessor)		2010 vs. 2009
	Average Balances at June 30 [1]						Yield / Rate				Income / Expense [6], [7]				Increase (Decrease)			Change due to
(Dollars in Thousands)	2010			2009			2010		2009		2010		2009					Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	1,244		$	1,498		7.07	%	0.27	%	$	22	$	1	$	21		$	23		$	(2	)
Investments / Interest-earning deposits		70,232			47,890		3.37	%	5.15	%		592		617		(25	)		(263	)		238
Loans, net [2]		114,533			114,861		6.95	%	5.74	%		1,991		1,647		344			349			(5	)
Total interest-earning assets		186,009			164,249		5.60	%	5.52	%		2,605		2,265		340			109			231
Noninterest-earning assets:
Cash and due from banks		2,829			2,932
Premises and fixed assets		6,796			5,466
Other assets		22,496			2,796
Allowance for loan losses		(195	)		(1,651	)
Total noninterest-earning assets		31,926			9,543
Total assets	$	217,935		$	173,792
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	20,681		$	7,013		0.81	%	0.17	%	$	42	$	6	$	36		$	22		$	17
Savings deposits		3,738			3,525		0.43	%	0.51	%		4		9		(5	)		(1	)		0
Time deposits		93,430			106,575		1.31	%	1.84	%		307		982		(675	)		(132	)		(52	)
Federal funds purchased and borrowed funds		28,278			25,030		2.21	%	1.23	%		156		154		2			65			14
Total interest-bearing liabilities		146,127			142,143		1.39	%	3.24	%		509		1,151		(642	)		(46	)		(21	)
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		14,177			13,616
Other liabilities		5,021			1,359
Total noninterest-bearing liabilities		19,198			14,975
Shareholders’ equity		52,610			16,674
Total liabilities and shareholders’ equity	$	217,935		$	173,792
Interest rate spread [3]							4.21	%	2.28	%
Net interest income [4]											$	2,096	$	1,114	$	982		$	155		$	251
Net interest margin [5]							4.51	%	2.71	%

[1] Average balances are computed on a daily basis.

[2] Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.

[3] Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

[4] Net interest income is interest income less interest expense.

[5] Net interest margin is net interest income expressed as a percentage of average earning assets.

[6] Interest income on loans includes $429 thousand in accretion of the fair market value adjustments related to the Merger.

[7] Interest expense on certificates of deposits includes $270 thousand in accretion of the fair market value adjustments related to the Merger.

24

Average Balances, Income and Expenses, Yields and Rates

	Six Months June 30, 2010
	(Successor)			(Predecessor)							(Successor)		(Predecessor)		2010 vs. 2009
	Average Balances at June 30 [1]						Yield / Rate				Income / Expense [6], [7]				Increase (Decrease)			Change due to
(Dollars in Thousands)	2010			2009			2010		2009		2010		2009					Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	1,219		$	1,510		3.61	%	0.26	%	$	22	$	2	$	20		$	11		$	(1	)
Investments / Interest-earning deposits		70,521			51,067		3.01	%	5.13	%		1,062		1,311		(249	)		(323	)		198
Loans, net [2]		107,862			115,190		6.58	%	5.75	%		3,549		3,312		237			231			(113	)
Total interest-earning assets		179,602			167,767		5.16	%	5.51	%		4,633		4,625		8			(80	)		84
Noninterest-earning assets:
Cash and due from banks		2,799			3,336
Premises and fixed assets		6,856			5,505
Other assets		20,061			2,438
Allowance for loan losses		(160	)		(1,665	)
Total noninterest-earning assets		29,556			9,614
Total assets	$	209,158		$	177,381
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	15,272		$	6,852		0.68	%	0.38	%	$	52	$	13	$	39		$	8		$	11
Savings deposits		3,661			3,318		0.49	%	1.03	%		9		17		(8	)		(5	)		1
Time deposits		93,225			107,513		1.41	%	3.71	%		658		1,993		(1,335	)		(576	)		(91	)
Federal funds purchased and borrowed funds		27,735			28,192		2.18	%	2.14	%		303		301		2			3			(2	)
Total interest-bearing liabilities		139,893			145,875		1.46	%	3.19	%		1,022		2,324		(1,302	)		(569	)		(82	)
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		14,057			13,515
Other liabilities		2,047			1,340
Total noninterest-bearing liabilities		16,104			14,855
Shareholders’ equity		53,161			16,651
Total liabilities and shareholders’ equity	$	209,158		$	177,381
Interest rate spread [3]							3.70	%	2.32	%
Net interest income [4]											$	3,611	$	2,301	$	1,310		$	489		$	166
Net interest margin [5]							4.02	%	2.74	%

[1] Average balances are computed on a daily basis.

[2] Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.

[3] Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

[4] Net interest income is interest income less interest expense.

[5] Net interest margin is net interest income expressed as a percentage of average earning assets.

[6] Interest income on loans includes $489 thousand in accretion of the fair market value adjustments related to the Merger.

[7] Interest expense on certificates of deposits includes $540 thousand in accretion of the fair market value adjustments related to the Merger.

25

Noninterest Income

Noninterest income decreased from $126 thousand for the three months ended June 30, 2009 to $81 thousand for the three months ended June 30, 2010. The decrease in noninterest income was due primarily to a decrease in service charges on deposit accounts of $38 thousand.

Noninterest income decreased from $441 thousand for the six months ended June 30, 2009 to $259 thousand for the six months ended June 30, 2010. The decrease in noninterest income was primarily due to a decrease of $78 thousand in service charges on deposit accounts and a decrease of $131 thousand in gains on sales of investments.

Noninterest Expense

Noninterest expense of the Company compared to First Bankshares is not directly comparable as the Company’s strategy and corresponding expense structure is substantially different. The Company’s expenses are higher in several areas, including compensation related to building our team and technology related to converting to a new vendor whose platform will support the Company’s strategy.

For the three months ended June 30, 2010, noninterest expense was $3.6 million compared to $1.7 million for the three months ended June 30, 2009. The increase in noninterest expense was the result of several factors, including an increase of $1.3 million in compensation and benefits expense, an increase of $263 thousand in occupancy expenses, an increase of $32 thousand in FDIC insurance and bank franchise taxes, and an increase of $385 thousand in technology expenses.

For the six months ended, noninterest expense was $6.7 million compared to $2.8 million for the six months ended June 30, 2009. The increase in noninterest expense was the result of several factors, including an increase of $2.5 million in compensation and benefits expense, an increase of $516 thousand in occupancy expenses, an increase of $138 thousand in FDIC insurance and bank franchise taxes, and an increase of $498 thousand in technology expenses.

Income Taxes

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable marginal tax rate. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Company’s financial statements.

The Company must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are not likely to be recovered, a valuation allowance must be recognized. The Company has determined that a valuation allowance of $3.3 million is required for deferred tax assets as of June 30, 2010 and December 31, 2009.

26

FINANCIAL CONDITION

Securities

The following tables present information about the securities portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010
	Book Value		Fair Value		Weighted Average Life	Weighted Average Yield
Securities Available for Sale:
U.S. agencies	$	6,993,054	$	7,031,224	.22 years	2.40	%
Mortgage-backed securities [1]
- Fixed rate		40,550,053		41,550,504	4.88 years	3.63	%
- Variable rate		5,610,750		5,838,660	10.26 years	3.36	%
Collateralized mortgage obligations [1]		8,666,641		8,879,761	2.63 years	2.75	%
Trust preferred securities		2,257,409		2,169,750	16.66 years	8.32	%
Total securities available for sale	$	64,077,907	$	65,469,900	4.95 years	3.52	%

[1] Weighted average life calculations are based on the current level of prepayments as of June 30, 2010

	December 31, 2009
	Book Value		Fair Value		Weighted Average Life	Weighted Average Yield
Securities Available for Sale:
U.S. agencies	$	17,700,601	$	17,810,442	13.07 years	5.16	%
Mortgage-backed securities [1]
- Fixed rate		4,983,564		5,000,110	1.97 years	5.47	%
- Variable rate		7,102,185		7,160,290	7.96 years	3.57	%
Municipals
- Taxable		2,111,980		2,073,280	8.08 years	6.32	%
- Tax exempt [2]		535,600		534,615	.92 years	5.64	%
Trust preferred securities		4,262,500		4,268,000	17.16 years	7.44	%
Total securities available for sale	$	36,696,430	$	36,846,737	10.71 years	5.25	%

[1] Weighted average life calculations are based on the current level of prepayments as of December 31, 2009

[2] Yields on tax exempt securities are calculated on a tax equivalent basis which converts the income on investments for which no income taxes were paid using the federal corporate income tax rate of 34% for December 31, 2009.

The reduction in the average life of the securities portfolio from December 31, 2009 to June 30, 2010, has also led to a reduction in the estimated volatility of the portfolio.

27

The following tables present a maturity analysis of the securities portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010
	Within 1 Year		Weighted Average Yield	After 1 Year Through 5 Years		Weighted Average Yield		After 5 Years Through 10 Years		Weighted Average Yield		After 10 Years		Weighted Average Yield		Total		Weighted Average Yield
Securities Available for Sale:
U.S. agencies	$	—	—	$	7,031,224	2.40	%	$	—	—		$	—	0.00	%	$	7,031,224	2.40	%
Mortgage-backed securities
- Fixed rate		—	—		—	—			—	—			41,550,504	3.63	%		41,550,504	3.63	%
- Variable rate		—	—		—	—			—	—			5,838,660	3.36	%		5,838,660	3.36	%
Collateralized Mortgage Obligations		—	—		—	—			—	—			8,879,761	2.75	%		8,879,761	2.75	%
Trust preferred securities		—	—		—	—			—	—			2,169,750	8.32	%		2,169,750	8.32	%
Total securities available for sale	$	—	—	$	7,031,224	2.40	%	$	—	—		$	58,438,675	3.66	%	$	65,469,900	3.52	%
	December 31, 2009
	Within 1 Year		Weighted Average Yield	After 1 Year Through 5 Years		Weighted Average Yield		After 5 Years Through 10 Years		Weighted Average Yield		After 10 Years		Weighted Average Yield		Total		Weighted Average Yield
Securities Available for Sale:
U.S. agencies	$	—	—	$	—	—		$	—	—		$	17,810,442	5.16	%	$	17,810,442	5.16	%
Mortgage-backed securities
- Fixed rate		—	—		—	—			—	—			5,000,110	5.47	%		5,000,110	5.47	%
- Variable rate [1]		—	—		—	—			—	—			7,160,290	3.57	%		7,160,290	3.57	%
Municipals
- Taxable		—	—		—	—			2,073,280	6.32	%		—	—			2,073,280	6.32	%
- Tax exempt [2]		—	—		—	—			—	—			534,615	5.64	%		534,615	5.64	%
Trust preferred securities		—	—		—	—			—	—			4,268,000	7.44	%		4,268,000	7.44	%
Total securities available for sale	$	—	—	$	—	—		$	2,073,280	6.32	%	$	34,773,457	5.25	%	$	36,846,737	5.25	%

[1] Includes $6,966,339 in variable rate mortgage-backed securities that reset within one to ten years.

[2] Yields on tax exempt securities are calculated on a tax equivalent basis.

Loans

See Note 4 to the consolidated financial statements for a summary of the loan receivable portfolio as of June 30, 2010 and December 31, 2009. Maturities of variable-rate and fixed-rate loans as of June 30, 2010 are shown in the table below:

	Maturity Analysis of the Loan Portfolio As of June 30, 2010
			Variable Rate						Fixed Rate
	Within 1 year		1 to 5 years		After 5 years		Total		1 to 5 years		After 5 years		Total		Total Maturities
Commercial real estate [1]	$	19,221,773	$	8,176,941	$	522,394	$	8,699,335	$	5,316,600	$	1,130,450	$	6,447,050	$	34,368,158
Commercial and industrial [2]		23,773,608		3,592,743		411,840		4,004,583		27,301,264		1,185,211		28,486,475		56,264,666
Residential real estate		4,285,594		5,863,555		1,423,647		7,287,202		4,454,763		5,782,789		10,237,552		21,810,348
Consumer [3]		3,008,076		42,701		—		42,701		757,469		23,555		781,024		3,831,801
Overdrafts		22,391		—		—		—		—		—		—		22,391
Total loans	$	50,311,442	$	17,675,940	$	2,357,881	$	20,033,821	$	37,830,096	$	8,122,005	$	45,952,101	$	116,297,364

[1] Excludes in $1,416,998 nonaccrual variable-rate loans and $2,238,494 in nonaccrual fixed-rate loans.

[2] Excludes $389,350 in nonaccrual fixed-rate loans.

[3] Excludes $23,472 in nonaccrual fixed-rate loans.

28

A certain degree of risk is inherent in the extension of credit. Management has established loan and credit policies and guidelines designed to control both the types and amounts of risks we take and to minimize losses. Such policies and guidelines include loan underwriting parameters, loan-to-value parameters, credit monitoring guidelines, adherence to regulation, and other prudent credit practices.

Loans secured by real estate comprised of 77% of our loan portfolio at June 30, 2010 and 88.5% at December 31, 2009. Residential real estate loans consist primarily of first and second mortgage loans on single family homes. Loan-to-value ratios for these loans are generally limited to 80%. Nonfarm, nonresidential loans are secured by business and commercial properties with loan-to-value ratios generally limited to 80%. The repayment of both residential and owner occupied commercial real estate loans depends primarily on the income and cash flows of the borrowers, with the real estate serving as a secondary or liquidation source of repayment.

Residential construction real estate loans generally consist of financing the construction of 1-4 family dwellings. As of June 30, 2010 and December 31, 2009, residential construction real estate loans totaled $1.3 million and $0.2 million, respectively.

Allowance for Loan Losses

The Allowance for Loan Losses consists of (1) a component for individual loan impairment recognized and measured pursuant to ASC Topic 310,Accounting by Creditors for Impairment of a Loan, and (2) components of collective loan impairment recognized pursuant to Topic 450,Accounting for Contingencies(“Topic 450”).We maintain specific reserves for individually impaired loans pursuant to Topic 310. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement.

Management determines the Allowance for Loan Losses based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for varying types of loans that we originate in our portfolio as well as loss history from banks across the country. In evaluating our loan portfolio, we also consider other factors, including general economic conditions, both nationally and regionally, local real estate markets, and the values of collateral securing our loan portfolio. These quantitative and qualitative factors and estimates may be subject to significant change. Increases to the Allowance for Loan Losses are made by charges to the provision for loan losses, which is reflected on the Consolidated Statements of Operations and Comprehensive Income (Loss). Loans deemed to be uncollectible are charged against the Allowance for Loan Losses, and recoveries of previously charged-off amounts are credited to the Allowance for Loan Losses.

The Bank considers information derived from its loan risk ratings; internal observable data related to trends within the loan portfolio, including credit quality and concentrations, aging of the portfolio, and external observable data related to industry and general economic trends; and any significant, relevant changes to the Bank’s policies and procedures. Each loan is assigned two “risk grades” at origination. Our risk grades are based on our assessment of our borrower’s financial capacity and collateral quality.

Although management uses various data and information sources to establish the Allowance for Loan Losses, future adjustments to the Allowance for Loan Losses may be necessary if economic conditions are substantially different from the assumptions used in making the valuations.

At December 22, 2009, prior to the Merger, the Allowance for Loan Losses was $6.7 million and reflected a 2009 provision expense of $5.5 million. At December 31, 2009, the Allowance for Loan Losses was reduced to $0 due to purchase accounting adjustments as a result of the Merger. For the three months and six months ended June 30, 2010, the Company recorded provision expense of $470 thousand and $510 thousand, respectively. For the three and six months ended June 30, 2009, the Company recorded a provision of $600 thousand and $640 thousand, respectively. The Allowance for Loan Losses as a percentage of total loans as of June 30, 2010 appears low (.41%), as the provision and subsequent allowance is primarily for new loan production since December 31, 2009, plus changes in credit quality related to the purchased loan portfolio.

29

See Note 4 to the consolidated financial statements for Allowance for Loan Losses activity as of June 30, 2010 and December 31, 2009.

A breakdown by loan category of the allocation of the Allowance for Loan Losses and the percent of loans in each category to total loans as of June 30, 2010 and December 31, 2009 are as follows:

	June 30, 2010				December 31, 2009
	Amount		Percent of loans in each category to total loans		Amount			Percent of loans in each category to total loans
Balance at end of period applicable to:
Commercial real estate	$	198,706	31.59	%	$	4,980,026		34.28	%
Commercial and industrial		276,240	47.07	%		1,245,830		42.59	%
Residential real estate		4,494	18.12	%		434,396		21.62	%
Consumer		10,469	3.22	%		39,748		1.51	%
Total allowance for loan losses		489,909	100.00	%		6,700,000		100.00	%
Purchase accounting adjustment		—				(6,700,000	)
Total allowance for loan losses, net of adjustment	$	489,909			$	—

Nonperforming Assets

Nonperforming Loans

It is our policy to discontinue accrual of interest income when a loan is 90 days past due as to interest and principal or when there is serious doubt as to collectability, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest.

Other Real Estate Owned

At June 30, 2010 and December 31, 2009, the Bank had $796 thousand and $464 thousand in other real estate owned (“OREO”) respectively, consisting of single family properties. Other real estate owned asset valuations are evaluated at least quarterly and any necessary write down to fair value is recorded as impairment.

30

The following table summarizes nonperforming assets at fair value as of June 30, 2010 and December 31, 2009:

	June 30, 2010			December 31, 2009
Nonaccrual loans	$	4,068,314		$	4,129,581
Other real estate owned		795,681			463,700
Total nonperforming assets	$	4,863,995		$	4,593,281
Loans 90 days or more past due and still accruing	$	—		$	—
Nonperforming assets as a percentage of total loans		4.04	%		4.50	%
Nonperforming assets as a percentage of total assets		2.14	%		2.28	%
Net charge-offs as a percentage of average loans		0.02	%		N/A
Allowance for loan losses as a percentage of total loans [1]		0.41	%		N/A
Allowance for loan losses to nonaccrual loans		12.04	%		N/A

[1] The ratio of .41% as of June 30, 2010 appears low, as the provision and subsequent allowance is primarily for new loan production since December 31, 2009, plus changes in credit quality related to the purchased loan portfolio.

Deposits

Deposits represent the primary source of funds and are comprised of demand deposits, savings deposits, and time deposits. Deposits at June 30, 2010 totaled $148.3 million, compared to deposits of $114.1 million at December 31, 2009, a 30.0% increase. The overall change in deposits is represented by an increase in demand and savings accounts of $26.5 million and an increase in time deposits of $7.1 million.

The following table presents the average balances and rates paid, by deposit category, as of June 30, 2010 and December 31, 2009:

	June 30, 2010				December 31, 2009
	Amount		Rate		Amount		Rate
Noninterest-bearing demand deposits	$	14,176,636			$	14,032,483
Interest-bearing deposits:
Checking (NOW) accounts		6,124,170	0.20	%		4,667,838	0.19	%
Money market accounts		14,557,239	1.08	%		2,295,349	0.52	%
Savings accounts		3,738,078	0.50	%		3,432,598	0.76	%
Time deposits
Time deposits $100,000 or greater [1]		27,966,700	1.57	%		23,023,613	3.82	%
Time deposits less than $100,000		64,101,645	1.23	%		78,406,806	3.47	%
Time deposits valuation		1,361,473				52,570
Total time deposits		93,429,818	1.31	%		101,482,989	3.55	%
Total interest-bearing deposits		117,849,306	1.20	%		111,878,774	3.26	%
Total average deposits	$	132,025,942	1.07	%	$	125,911,257	2.90	%

[1] Includes brokered deposits.

31

Maturities of large denomination time deposits (equal or greater than $100,000) as of June 30, 2010 were as follows:

	Within 3 Months		3-6 Months		6-12 Months		Over 12 Months		Total		Percent of Total Deposits
Time deposits	$	9,474,998	$	10,748,616	$	10,368,685	$	12,138,886	$	42,731,185	28.82	%

Short-Term Borrowings

The following table summarizes the year-end balance, highest month-end balance, average balance and weighted average rate of short-term borrowings for each of the periods indicated:

	June 30, 2010								December 31, 2009
	Quarter End Balance		High Month End Balance		Average Balance		Weighted Average Rate		Year End Balance		High Month End Balance		Average Balance		Weighted Average Rate
Federal funds purchased	$	—	$	—	$	91,505	—		$	1,552,000	$	2,526,000	$	518,841	0.79	%
Other borrowings		—		4,700,000		3,278,022	2.07	%		4,700,000		12,000,000		3,472,329	0.53	%
Total short-term borrowings	$	—	$	4,700,000	$	3,369,527	2.07	%	$	6,252,000	$	14,526,000	$	3,991,170	0.57	%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand, and to achieve stated objectives (including working capital requirements). These events may occur daily or in other short-term intervals in the normal operation of business. Historical trends help management predict the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits, quality of assets, concentrations of business and industry, competition, and our overall financial condition. Our primary sources of liquidity are cash, due from banks, federal funds sold, and securities in our available-for-sale portfolio. We also have access to a credit line from our primary correspondent bank, in addition to an arrangement to borrow from the Federal Home Loan Bank in the aggregate of 30% of total assets and from the Federal Reserve under certain conditions. This credit line is available through our correspondent bank for short-term liquidity needs and is subject to prevailing interest rates. In management’s opinion, we maintain the ability to generate sufficient amounts of cash to cover normal requirements and any additional needs which may arise, within realistic limitations, for the foreseeable future.

Capital Adequacy

Capital management in a regulated financial services industry must properly balance return on equity to shareholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. The Bank’s capital management strategies have been developed to maintain its “well-capitalized” position.

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We are subject to various regulatory capital requirements administered by federal and other bank regulators. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. As of June 30, 2010, we had met all minimum capital adequacy requirements to which we are subject and are categorized as “well- capitalized.” Since June 30, 2010, there are no conditions or events that management believes have changed our status as “well-capitalized”.

The following tables show capital ratios and the minimum capital ratios required by our regulators. Dollar amounts are in thousands.

	June 30, 2010
Tier 1 capital:
Common stock	$	5,847
Additional paid-in capital		57,735
Retained earnings		(12,500	)
Accumulated other comprehensive income		919
Total bank equity capital		52,001
Net unrealized gain on available-for-sale securities		(919	)
Disallowed goodwill and other disallowed intangible assets		(10,610	)
Total Tier 1 capital	$	40,472
Tier 2 capital:
Allowance for loan losses [1]	$	490
Total risk-based capital	$	40,962
Average total assets for leverage capital purposes	$	207,325
Total risk-weighted assets	$	137,430

[1] Allowance for loan losses included in Tier 2 capital is limited to 1.25% of gross risk-weighted assets.

	June 30, 2010		Regulatory Minimum		Well Capitalized
Tier 1 leverage ratio	19.52	%	4.00	%	> 5.00%
Tier 1 risk-based capital ratio	29.45	%	4.00	%	> 6.00%
Total risk-based capital ratio	29.81	%	8.00	%	> 10.00%

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Interest Rate Sensitivity

Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of an organization. Our primary market risk is interest rate risk. Interest rate risk is inherent in banking because as a financial institution, we derive a significant amount of our operating revenue from “purchasing” funds (customer deposits and borrowings) at various terms and rates. These funds are invested into earning assets (loans, investments, etc.) at various terms and rates.

Interest rate risk is the exposure to fluctuations in our future earnings (earnings at risk) and value (market value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that re-price within a specific time period as a result of scheduled maturities and repayment and contractual interest rate changes.

The asset/liability goal of the Bank is to manage net interest margin optimally, while not exceeding policy limits. The balance sheet may be asset or liability sensitive at a given time. We intend to manage the Bank’s asset or liability sensitivity to maximize earnings and to minimize interest rate risk within policy limits.

Management strives to control the Bank’s exposure to interest rate volatility, and we operate under an Asset and Liability Management Policy approved by our Board of Directors. In addition, we emphasize the loan and deposit pricing characteristics that best meet our current view on the future direction of interest rates and use sophisticated analytical tools to support our asset and liability processes.

Off Balance Sheet Items

There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report.

CRITICAL ACCOUNTING POLICIES

We believe that our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position and/or results of operations.

Our accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Our accounting policies are discussed in detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and in Note 2 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” in the Annual Report. Since December 31, 2009, there have been no changes in these policies that have had a material impact on our results of operations or financial condition.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) which are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of operations or performance plans and objectives for future operations, projections of revenues and other financial items that are based on our beliefs as well as assumptions made by and information currently available to us. Also, when we use the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “may,” “will,” “should,” “would,” “could,” “project,”

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“predict,” or similar expressions, we are making forward-looking statements. Many possible events or factors could materially affect our future financial results and performance. This could cause our results or performance to differ materially from those expressed in our forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by our forward-looking statements include the following:

• those discussed and identified in our public filings with the Securities and Exchange Commission (the “SEC”);

• our ability to integrate our operations following the Merger in a timely and efficient manner;

• general economic or business conditions, which may be worse than expected and may cause further deterioration of asset values;

• exposure to counterparties in the financial industry;

• decisions regarding credit risk and levels of allowance for loan losses;

• our ability to enact our business strategy for the combined company;

• our ability to access funding to support our asset growth;

• our use of brokered deposits and any limitations imposed on our ability to do so by our regulators;

• our ability to manage growth;

• reduction of operating margins caused by changes in the interest rate environment;

• competition in our target markets;

• our dependence on key personnel;

• our dependence on technology;

• legislative or regulatory changes; and

• costs associated with compliance efforts and regulatory actions.

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will actually be achieved. We are under no duty to update any of the forward-looking statements to conform those statements to actual results. In evaluating these statements, you should consider various factors, including the risks outlined in Part I, Item 1A, “Risk Factors” in the Annual Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T. Controls and Procedures

Management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are

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effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in the Company’s internal control over financial reporting occurred during the fiscal quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. The Act includes a provision, effective July 21, 2010, to permanently exempt non-accelerated filers from complying with the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires an issuer to include in its annual report on Form 10-K an attestation report from the issuer’s independent registered public accounting firm on the issuer’s internal control over financial reporting. Non-accelerated filers were to have commenced complying with the requirements of Section 404(b) starting with their annual reports on Form 10-K for fiscal years ending on or after June 15, 2010. Since the Company is a non-accelerated filer, this Act will be applicable to the Company, and the Company will not be required to comply with the requirements of Section 404(b) in its annual report on Form 10-K for the fiscal year ending December 31, 2010.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by our liability insurance.

Item 1A. Risk Factors

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Part I, Item 1A, “Risk Factors” in the Annual Report describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in the Annual Report.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Index:

Exhibit No.	Description
31.1	Certification of CEO pursuant to Rule 13a-14(a)
31.2	Certification of CFO pursuant to Rule 13a-14(a)
32.1	CEO Certification pursuant to 18 U.S.C. § 1350
32.2	CFO Certification pursuant to 18 U.S.C. § 1350

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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.

	XENITH BANKSHARES, INC.
Date: August 13, 2010	/S/    T. GAYLON LAYFIELD, III
	T. Gaylon Layfield, III
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 13, 2010	/S/    THOMAS. W. OSGOOD
	Thomas W. Osgood
	Executive Vice President, Chief Financial Officer,
	Chief Administrative Officer and Treasurer
	(Principal Financial Officer)

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