Xenith Bankshares 10Q 2011 Q2 Quarterly report

Xenith Bankshares (XBKS) Inactive 10-Q2011 Q2 Quarterly report

Content analysis

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, 2011

¨	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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act) Yes ¨ No x

The number of shares of Common Stock, par value $1.00 per share, outstanding at August 5, 2011 was 10,446,928.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1	Financial Statements		3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3	Quantitative and Qualitative Disclosures About Market Risk		40

Item 4	Controls and Procedures		40

PART II—OTHER INFORMATION

Item 1	Legal Proceedings		40

Item 1A	Risk Factors		40

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		40

Item 3	Defaults Upon Senior Securities		40

Item 5	Other Information		40

Item 6	Exhibits		41

SIGNATURES			42

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2011 AND DECEMBER 31, 2010


(in thousands, except share data)	(Unaudited) June 30, 2011			December 31, 2010
Assets
Cash and cash equivalents
Cash and due from banks	$	16,369		$	10,745
Federal funds sold		2,909			1,456

Total cash and cash equivalents		19,278			12,201
Securities available-for-sale, at fair value		62,320			58,890
Loans, net of allowance for loan and lease losses, 2011 - $2,986; 2010 - $1,766		180,675			151,380
Premises and equipment, net		6,240			6,450
Other real estate owned		—			1,485
Goodwill and other intangible assets, net		14,049			14,109
Accrued interest receivable		871			821
Other assets		5,162			5,865

Total assets	$	288,595		$	251,201

Liabilities and Shareholders' equitiy
Deposits
Demand and money market	$	103,371		$	70,030
Savings		3,637			3,461
Time		94,943			101,648

Total deposits		201,951			175,139
Accrued interest payable		406			454
Federal funds purchased and borrowed funds		20,000			25,000
Other liabilities		1,418			1,819

Total liabilities		223,775			202,412

Shareholders' equity
Preferred stock, $1.00 par value, 25,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $1.00 par value, 100,000,000 shares authorized as of June 30, 2011 and December 31, 2010; 10,446,928 and 5,846,928 issued and outstanding as of June 30, 2011 and December 31, 2010, respectively		10,447			5,847
Additional paid-in capital		70,870			57,715
Accumulated deficit		(17,931	)		(15,374	)
Accumulated other comprehensive income, net of tax		1,434			601

Total shareholders' equity		64,820			48,789

Total liabilities and shareholders' equity	$	288,595		$	251,201

See notes to unaudited consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED JUNE 30, 2011 AND JUNE 30, 2010

(Unaudited)


(in thousands, except per share data)	June 30, 2011			June 30, 2010
Interest income
Interest and fees on loans	$	2,827		$	1,991
Interest on securities		519			614

Total interest income		3,346			2,605

Interest expense
Interest on deposits		236			252
Interest on time deposits of $100,000 and over		121			101
Interest on federal funds purchased and borrowed funds		128			156

Total interest expense		485			509

Net interest income		2,861			2,096
Provision for loan and lease losses		510			470

Net interest income after provision for loan and lease losses		2,351			1,626

Noninterest income
Service charges on deposit accounts		52			34
Net loss on sale of OREO		(76	)		—
Gain on sales of investment securities		27			2
Other		45			45

Total noninterest income		48			81

Noninterest expense
Compensation and benefits		2,105			1,864
Occupancy		337			332
FDIC insurance		87			71
Bank franchise taxes		90			105
Technology		328			504
Communications		54			58
Insurance		46			74
Professional fees		297			238
Travel		49			51
Supplies		21			57
OREO expenses		11			12
Other expenses		57			281

Total noninterest expense		3,482			3,647

Loss before income tax		(1,083	)		(1,940	)
Income tax expense (benefit)		—			—

Net loss		(1,083	)		(1,940	)
Other comprehensive loss:
Net unrealized gain on securities available-for-sale, net of tax		573			569

Comprehensive loss	$	(510	)	$	(1,371	)

Per share data (basic and diluted):	$	(0.11	)	$	(0.33	)

See notes to unaudited consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND JUNE 30, 2010

(Unaudited)


(in thousands, except per share data)	June 30, 2011			June 30, 2010
Interest income
Interest and fees on loans	$	5,612		$	3,549
Interest on securities		1,000			1,084

Total interest income		6,612			4,633

Interest expense
Interest on deposits		418			323
Interest on time deposits of $100,000 and over		292			396
Interest on federal funds purchased and borrowed funds		275			303

Total interest expense		985			1,022

Net interest income		5,627			3,611
Provision for loan and lease losses		1,480			510

Net interest income after provision for loan and lease losses		4,147			3,101

Noninterest income
Service charges on deposit accounts		97			64
Net loss on sale of OREO		(15	)		—
Gain on sales of investment securities		27			101
Other		85			93

Total noninterest income		194			258

Noninterest expense
Compensation and benefits		4,191			3,597
Occupancy		693			663
FDIC insurance		158			141
Bank franchise taxes		150			210
Technology		613			751
Communications		119			97
Insurance		76			119
Professional fees		509			485
Travel		77			93
Supplies		54			106
OREO expenses		94			19
Other expenses		164			413

Total noninterest expense		6,898			6,695

Loss before income tax		(2,557	)		(3,336	)
Income tax (benefit)		—			(294	)

Net loss		(2,557	)		(3,042	)
Other comprehensive loss:
Net unrealized gain on securities available-for-sale, net of tax		833			851

Comprehensive loss	$	(1,724	)	$	(2,191	)

Per share data (basic and diluted):	$	(0.32	)	$	(0.52	)

See notes to unaudited consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Unaudited)


(in thousands)	June 30, 2011			June 30, 2010
Cash flows from operating activities
Net loss	$	(2,557	)	$	(3,042	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		557			417
Net amortization of securities available-for-sale		273			77
Accretion of acquisition accounting adjustments		(1,377	)		(809	)
Gain on sales of investment securities		(27	)		(101	)
Share-based compensation expense		73			120
Gain on sales of fixed assets		(9	)		—
Net loss on sale of OREO		15			—
Provision for loan and lease losses		1,480			510
Change in operating assets and liabilities
Accrued interest receivable		(50	)		182
Deferred tax expense		—			145
Other assets		890			(1,992	)
Accrued interest payable		(48	)		(27	)
Other liabilities		(402	)		186

Net cash used in operating activities		(1,182	)		(4,334	)

Cash flows from investing activities
Proceeds from maturities, calls and sales of securities		9,410			27,284
Purchase of securities		(12,253	)		(54,739	)
Net proceeds from sale of OREO		2,350			—
Purchase of FRB and FHLB stock		(185	)		—
Net increase in loans		(30,819	)		(17,847	)
Proceeds from sale of premises and equipment		9
Purchases of premises and equipment		(288	)		(365	)

Net cash used in investing activities		(31,776	)		(45,667	)

Cash flows from financing activities
Net increase in demand and savings deposits		33,517			34,654
Net decrease in time deposits		(6,165	)		—
Net decrease in federal funds purchased and borrowed funds		(5,000	)		(6,259	)
Proceeds from issuance of common stock		17,683			—

Net cash provided by financing activities		40,035			28,395

Net increase (decrease) in cash and cash equivalents		7,077			(21,606	)
Cash and cash equivalents
Beginning of period		12,201			35,203

End of period	$	19,278		$	13,597

Supplementary Disclosure of Cash Flow Information
Cash Payments for:
Interest	$	1,572		$	303

See notes to unaudited consolidated financial statements.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

Note 1. Organization

General

Xenith Bankshares, Inc. (“Xenith Bankshares” or “the company”) is a bank holding company for Xenith Bank (“the Bank”), a Virginia-based institution headquartered in Richmond, Virginia. As of June 30, 2011, the company, through the Bank, operates five full-service branches: one branch in Tysons Corner, Virginia, one branch in Richmond, Virginia and three branches in Suffolk, Virginia.

Background

First Bankshares, Inc. (“First Bankshares”) was incorporated in Virginia on March 4, 2008 and was the holding company for SuffolkFirst Bank, a community bank founded in the City of Suffolk, Virginia in 2002.

On December 22, 2009, 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. The merger was completed in accordance with the terms of an agreement of merger and related plan of merger, dated May 12, 2009, as amended. 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. 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 banking charter, did not engage in any banking business, and had no substantial operations.

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 in the consolidated financial statements of Xenith Bankshares. The merger was accounted for applying the acquisition method of accounting.

On April 4, 2011, the company completed the issuance and sale of 4,000,000 shares of common stock at a public offering price of $4.25 per share pursuant to an effective registration statement filed with the Securities and Exchange Commission. On April 14, 2011, the company completed the issuance and sale of an additional 600,000 shares of common stock in connection with the over-allotment option granted to the underwriters of the offering. Net proceeds, after the underwriters’ discount and expenses, were $17.7 million.

On July 29, 2011, the Bank acquired select loans totaling approximately $59 million and related assets associated with the Richmond, Virginia branch office (“the Branch”) of Paragon Commercial Bank, a North Carolina banking corporation (“Paragon”), and assumed select deposit accounts totaling approximately $76 million and certain related liabilities associated with the Branch (the “Paragon Transaction”). The Paragon Transaction was completed in accordance with the terms of the Amended and Restated Purchase and Assumption Agreement, dated as of July 25, 2011 (the “Paragon Agreement”), between the Bank and Paragon. Under the terms of the Paragon Agreement, Paragon retains the real and personal property associated with the Branch office, and subject to receipt of required regulatory approvals, the Branch office will be closed.

Also on July 29, 2011, Xenith acquired substantially all of the assets and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (“the FDIC”) is acting as court-appointed receiver of VBB. The VBB Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement, dated as of July 29, 2011 (the “VBB Agreement”), among the FDIC, Receiver for VBB, the FDIC and the Bank.

Based upon a preliminary closing with the FDIC as of July 29, 2011, the Bank acquired total assets of approximately $93 million, including approximately $70 million in loans. The Bank also agreed to assume liabilities of approximately $87 million, including approximately $77 million in deposits. These amounts are estimates and, accordingly, are subject to adjustments based upon final settlement with the FDIC. The VBB Acquisition was completed without any shared-loss agreement.

The effective dates of the Paragon Transaction and the VBB Acquisition occurred after June 30, 2011. These transactions are further discussed in Note 13. Subsequent Events.

Note 2. Basis of Presentation

The consolidated financial statements include the accounts of Xenith Bankshares and its wholly-owned subsidiary, Xenith Bank. All significant intercompany accounts have been eliminated.

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) 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, 2011 and December 31, 2010, the results of operations for the three and six months ended June 30, 2011 and 2010, and the

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

statements of cash flows for the three and six months ended June 30, 2011 and 2010. The results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011. 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, 2010.

In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications have no effect on previously reported total assets, liabilities, shareholders’ equity or net loss.

All dollar amounts included in the tables in these notes are in thousands.

Note 3. Restrictions of Cash

To comply with Federal Reserve regulations, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirements for the weeks closest to June 30, 2011 and December 31, 2010 were $532 thousand and $460 thousand, respectively.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

Note 4. Securities

The following tables present the book value and fair value of available-for-sale securities for the dates stated:


	June 30, 2011
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Mortgage-backed securities
- Fixed rate	$	48,110	$	1,117	$	(12	)	$	49,215
- Variable rate		3,084		166		—			3,250
Collateralized mortgage obligations		6,569		169		—			6,738
Agency notes/bonds—fixed rate		1,999		3		—			2,002
Trust preferred securities		1,124		—		(9	)		1,115

Total securities available-for-sale	$	60,886	$	1,455	$	(21	)	$	62,320


	December 31, 2010
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Mortgage-backed securities
- Fixed rate	$	43,446	$	298	$	—		$	43,744
- Variable rate		5,035		469		(232	)		5,272
Collateralized mortgage obligations		7,555		131		(45	)		7,641
Trust preferred securities		2,253		—		(20	)		2,233

Total securities available-for-sale	$	58,289	$	898	$	(297	)	$	58,890

At June 30, 2011 and December 31, 2010, the company had securities with a fair value of $25.4 million and $26.8 million, respectively, pledged as collateral against borrowings and public deposits.

The following table presents the book value and fair value of securities for which the book value exceeded 10% of shareholders’ equity as of the date stated:


	June 30, 2011
	Book Value		Fair Value		Book Value as a Percentage of Shareholders’ Equity
Mortgage-backed securities
- Federal National Mortgage Association	$	38,403	$	39,243		59.2	%
- Federal Home Loan Mortgage Corporation		12,790		13,222		19.7	%

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

The following tables present fair values and the related unrealized losses 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 the dates stated. The number of loss securities in each category is also noted.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011


	June 30, 2011
			Less than 12 months					More than 12 months				Total
	Number		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities
- Fixed rate		2	$	3,744	$	(12	)	$	—	$	—	$	3,744	$	(12	)
Trust preferred securities		1		1,115		(9	)		—		—		1,115		(9	)

Total securities		3	$	4,859	$	(21	)	$	—	$	—	$	4,859	$	(21	)

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011


	December 31, 2010
			Less than 12 months					More than 12 months				Total
	Number		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities
- Fixed rate		4	$	10,301	$	(232	)	$	—	$	—	$	10,301	$	(232	)
Collateralized mortgage obligations		1		2,708		(45	)		—		—		2,708		(45	)
Trust preferred securities		2		2,233		(20	)		—		—		2,233		(20	)

Total securities		7	$	15,242	$	(297	)	$	—	$	—	$	15,242	$	(297	)

At June 30, 2011, the company held interests in one trust preferred security with a book value and fair value of $1.1 million. The trust preferred security 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. The unrealized loss positions at June 30, 2011 were directly related to interest rate movements and management believes there is minimal credit risk exposure in these investments. There is no intent to sell investments that are in an unrealized loss position at June 30, 2011, and it is more likely than not that the company will not be required to sell these investments before a recovery of unrealized losses. These investments are not considered to be other-than-temporarily impaired at June 30, 2011; therefore, no impairment has been recognized.

Note 5. 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 the dates stated:


	June 30, 2011						December 31, 2010
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	81,845			44.56	%	$	68,045			44.43	%
Commercial real estate		74,208			40.41	%		57,035			37.24	%
Residential real estate		22,646			12.33	%		23,337			15.24	%
Consumer		4,950			2.70	%		4,715			3.08	%
Overdrafts		12			0.00	%		14			0.01	%

Total loans		183,661			100.00	%		153,146			100.00	%
Allowance for loan and lease losses		(2,986	)					(1,766	)

Total loans, net of allowance	$	180,675					$	151,380

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

The following table presents the company’s loans by regulatory risk ratings classification and by loan type as of the dates stated. As defined by the Federal Reserve, “special mention” loans are defined as having potential weaknesses that deserve management’s close attention; “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any; and “doubtful” loans have all the weaknesses inherent in substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not categorized as special mention, substandard or doubtful are classified as “pass”.


	June 30, 2011
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Commercial and industrial	$	78,460	$	1,563	$	1,479	$	343	$	81,845
Commercial real estate		66,426		4,787		2,585		410		74,208
Residential real estate		21,866		486		294		—		22,646
Consumer		4,941		5		4		—		4,950
Overdrafts		12		—		—		—		12

Total loans	$	171,705	$	6,841	$	4,362	$	753	$	183,661


	December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Commercial and industrial	$	63,743	$	2,029	$	1,901	$	372	$	68,045
Commercial real estate		45,466		6,290		4,739		540		57,035
Residential real estate		22,687		506		144		—		23,337
Consumer		4,634		81		—		—		4,715
Overdrafts		14		—		—		—		14

Total loans	$	136,544	$	8,906	$	6,784	$	912	$	153,146

The following table presents the purchased loans receivable at the date of the merger and the fair value adjustment recorded immediately following the merger:


	Purchased Performing Loans			Purchased Impaired Loans			Total Loans
Contractually required principal payments receivable	$	101,979		$	7,711		$	109,690
Fair value adjustment for credit and interest rates		(4,071	)		(3,569	)		(7,640	)

Fair value of purchased loans receivable	$	97,908		$	4,142		$	102,050

The fair value adjustment was comprised of a credit and interest rate adjustment of $7.6 million. The remaining fair value adjustment for credit and interest rates as of June 30, 2011 and December 31, 2010 was $2.5 million and $3.8 million, respectively.

As of June 30, 2011, the outstanding balance of loans identified as impaired at the date of the merger that remains outstanding was $897 thousand.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

The following table presents the allowance for loan and lease loss activity, by loan category, as of the dates stated:


	June 30, 2011		December 31, 2010
Balance at beginning of period	$	1,766	$	—
Charge-offs:
Commercial and industrial		—		—
Commercial real estate		250		200
Residential real estate		50		52
Consumer		4		1
Overdrafts		7		15

Total charge-offs		311		268

Recoveries:
Commercial and industrial		42		—
Commercial real estate		8		43
Residential real estate		—		—
Consumer		—		—
Overdrafts		1		1

Total recoveries		51		44

Net charge-offs		260		224

Allowance, net of charge-offs and recoveries		1,506		(224	)
Additions to the allowance for loan and lease losses		1,480		1,990

Allowance after additions		2,986		1,766
Balance at end of period	$	2,986	$	1,766

The allowance for loan and lease losses at December 22, 2009, the merger date, was $6.7 million. Immediately following the merger, the allowance was reduced to $0 due to adjustments attributable to the acquisition method of accounting. There were no adjustments to the allowance for the period December 23, 2009 through December 31, 2009.

The following table presents the allowance for loan and lease losses and the amount independently and collectively evaluated for impairment by loan type and loans in each category to total loans as of the dates stated:


	June 30, 2011
	Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Balance at end of period applicable to:
Commercial and industrial	$	934	$	285	$	649
Commercial real estate		1,798		—		1,798
Residential real estate		233		—		233
Consumer		21		—		21

Total allowance for loan and lease losses	$	2,986	$	285	$	2,701

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011


	December 31, 2010
	Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Balance at end of period applicable to:
Commercial and industrial	$	470	$	110	$	360
Commercial real estate		1,106		250		856
Residential real estate		164		—		164
Consumer		26		—		26

Total allowance for loan and lease losses	$	1,766	$	360	$	1,406

At June 30, 2011, there was one commercial and industrial loan in the amount of $890 thousand classified as impaired. An allowance of $285 thousand was recorded at June 30, 2011 related to this loan. At December 31, 2010, there was one commercial and industrial loan in the amount of $890 thousand classified as impaired with an allowance of $110 thousand and one commercial real estate loan in the amount of $1.3 million classified as impaired with an allowance of $250 thousand.

The following table presents the age analysis of loans past due as of the dates stated:


	June 30, 2011
	30-89 days Past Due		Greater than 90 Days		Total Past Due
Commerical and industrial	$	738	$	1,098	$	1,836
Commercial real estate		1,422		2,146		3,568
Residential real estate		657		—		657
Consumer		13		4		17

Total	$	2,830	$	3,248	$	6,078


	December 31, 2010
	30-89 days Past Due		Greater than 90 Days		Total Past Due
Commerical and industrial	$	1,063	$	389	$	1,452
Commercial real estate		311		2,449		2,760
Residential real estate		248		—		248
Consumer		1		3		4

Total	$	1,623	$	2,841	$	4,464

The following table presents nonaccrual loans and other real estate owned (“OREO”) as of the dates stated. As of June 30, 2011, there were no loans past due 90 days or more for which interest is accruing.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011


	June 30, 2011		December 31, 2010
Commercial and industrial	$	1,098	$	389
Commercial real estate		2,146		2,449
Residential real estate		—		—
Consumer		4		3

Nonaccrual loans	$	3,248	$	2,841
Other real estate owned		—		1,485

Total nonperforming assets	$	3,248	$	4,326

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

Note 6. Goodwill and Other Intangible Assets

As part of the purchase price allocation for the acquisition of First Bankshares on December 22, 2009, the company recorded $13.0 million in goodwill and $1.2 million of core deposit intangibles. Core deposit intangible assets are being amortized over a 10-year period on a straight-line basis. The following table presents goodwill and other intangible assets as of the dates stated:


	June 30, 2011			December 31, 2010
Amortizable core deposit intangibles:
Gross carrying value	$	1,240		$	1,240
Accumulated amortization		(180	)		(120	)

Net carrying value	$	1,060		$	1,120

Unamortizable goodwill:
Carrying value	$	12,989		$	12,989

Total goodwill and other intangible assets, net	$	14,049		$	14,109

Note 7. Deposits

The following table presents a summary of deposit accounts as of the dates stated:


	June 30, 2011		December 31, 2010
Noninterest-bearing demand deposits	$	22,679	$	22,800
Interest-bearing:
Demand and money market		80,692		47,230
Savings deposits		3,637		3,461
Time deposits of $100,000 or more		40,785		47,516
Other time deposits		54,158		54,132

Total deposits	$	201,951	$	175,139

Note 8. 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. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes resulting in temporary differences. 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. These differences will result in deductible or taxable amounts in a future year(s) when the reported amounts of assets or liabilities are recovered or settled. Deferred tax assets and liabilities are stated at tax rates expected to be in effect in the
year(s) the differences reverse.

At June 30, 2011, net deferred tax assets were $7.6 million, for which a full valuation allowance is recorded, based primarily on the fact that the company experienced cumulative losses over the past three years. Future realization of the tax benefit of existing deductible temporary differences and net operating loss carryforwards is dependent on the company generating sufficient future taxable income within the carryforward period, which under current law is 20 years.

Note 9. Loss per Share

The following table summarizes basic and diluted loss per share calculations for the periods stated. The loss per share calculations for the three and six months ended June 30, 2011 does not include shares of common stock issuable upon the exercise of 433,688 of outstanding stock options or upon the exercise of 563,760 outstanding warrants to purchase shares of common stock, because the exercise of the stock options and warrants would be anti-dilutive.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011


	For the Three Months Ended June 30,
	2011			2010
Net loss	$	(1,083	)	$	(1,940	)
Weighted average number of shares outstanding		10,229			5,847
Loss per share, basic	$	(0.11	)	$	(0.33	)

Loss per share, diluted	$	(0.11	)	$	(0.33	)


	For the Six Months Ended June 30,
	2011			2010
Net loss	$	(2,557	)	$	(3,042	)
Weighted average number of shares outstanding		8,050			5,847
Loss per share, basic	$	(0.32	)	$	(0.52	)

Loss per share, diluted	$	(0.32	)	$	(0.52	)

Note 10. Commitment and Contingencies

In the normal course of business, the Bank has commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the loan agreements. These commitments have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additionally, the Bank issues letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. Management believes the credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

The following table presents unfunded commitments outstanding as of the date stated:


	June 30, 2011
Commercial lines of credit	$	27,731
Construction loans
- Commercial		14,933
- Residential		1,037
Home equity lines of credit		5,828
Consumer and overdraft protection		679
Letters of credit		2,758

Total commitments	$	52,966

Note 11. 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.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

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. 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 relying 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:

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.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

Cash, Cash Equivalents and Accrued Interest:

The carrying value for cash and cash equivalents and accrued interest approximates fair value.

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.

Performing 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. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

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, 2011, substantially all of the 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.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

Deposit Liabilities:

The balance of demand, money market and savings deposits approximates the fair value payable on demand to the accountholder.

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 at the company’s current incremental borrowing rates for similar types of borrowing arrangements. Fair value of long-term borrowings are estimated using discounted cash flow analysis using interest rates currently offered for borrowings with similar terms.

Other Commitments:

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 or “settlement date”.

The following tables present assets measured at fair value on a recurring and nonrecurring basis as of the dates stated:


			Fair Value Measurements as of June 30, 2011 Using
	June 30, 2011 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:
Securities available for sale	$	62,320	$	—	$	62,320	$	—
Assets measured on a nonrecurring basis:
Impaired loans		3,248		—		—		3,248
Other real estate owned		—		—		—		—


			Fair Value Measurements as of December 31, 2010 Using
	December 31, 2010 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:
Securities available for sale	$	58,890	$	—	$	58,890	$	—
Assets measured on a nonrecurring basis:
Impaired loans		2,841		—		—		2,841
Other real estate owned		1,485		—		—		1,485

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2011

The following table presents the carrying amounts and approximate fair values of the company’s financial assets and liabilities as of the dates stated:


	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets
Cash and due from banks	$	16,369	$	16,369	$	10,745	$	10,745
Federal funds sold		2,909		2,909		1,456		1,456
Securities available for sale		62,320		62,320		58,890		58,890
Other investments		3,217		3,217		3,141		3,141
Loans, net		180,675		181,183		151,380		152,020
Accrued interest receivable		871		871		821		821

Financial Liabilities
Federal funds purchased	$	—	$	—	$	—	$	—
Long-term borrowings		20,000		20,606		25,000		25,693
Deposits		201,951		202,285		175,139		175,919
Accrued interest payable		406		406		454		454

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 instruments or other assets. These estimates do not reflect any premium or discount that could result from offering for sale the company’s entire holdings of a particular financial instrument at one time. 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 12. Accounting Pronouncements

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments clarify guidance on whether a restructuring constitutes a troubled debt restructuring. Pursuant to this amendment, the creditor must separately conclude that both of the following exist (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Management is currently evaluating the impact that this accounting standard could have on the company’s consolidated financial statements.

Note 13. Subsequent Events

Under the terms of the Paragon Agreement, Paragon made a cash payment to the Bank in the amount of $17.3 million (subject to adjustment as provided in the Paragon Agreement), which represents the excess of approximately all of the liabilities assumed at a premium of 3.92%, over approximately all of the assets acquired at a discount of 3.77%. A final allocation of the consideration transferred in the Paragon Transaction is not complete.

Also on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The FDIC is acting as court-appointed receiver of VBB. The VBB Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement, dated as of July 29, 2011 (the “VBB Agreement”), among the FDIC, Receiver for VBB, the FDIC and the Bank.

Based upon a preliminary closing with the FDIC as of July 29, 2011, the Bank acquired total assets of approximately $93 million, including approximately $70 million in loans. The Bank also assumed liabilities of approximately $87 million, including approximately $77 million in deposits. These amounts are estimates and, accordingly, are subject to adjustments based upon final settlement with the FDIC. The VBB Acquisition was completed without any shared-loss agreement.

Under the terms of the VBB Agreement, the Bank received a discount of approximately $23.8 million on the net assets and did not pay a deposit premium. The Bank also received an initial cash payment from the FDIC in the amount of $17.8 million based on the difference between the discounted net assets and the difference between the assets acquired and the liabilities assumed (subject to adjustment as provided in the VBB Agreement). A final allocation of the consideration transferred in the VBB Acquisition is not complete.

The Paragon Transaction and VBB Acquisition provide strategic and financial growth while leveraging the Bank’s existing infrastructure.

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

The following is management’s discussion and analysis of the company’s consolidated financial condition, changes in financial condition, results of operations, liquidity, cash flows and capital resources. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q (“Form 10-Q”) 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, 2010 (“2010 Form 10-K”). The data presented at June 30, 2011 and for the three- and six-month periods ended June 30, 2011 is derived from unaudited interim financial statements and include, in the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the data for such period.

All references to “Xenith Bankshares”, “our company”, “we”, “our” or “us” are to Xenith Bankshares, Inc. and its wholly-owned subsidiary, Xentith Bank, collectively. All references to “the Bank” are to Xenith Bank.

All dollar amounts included in the tables in this discussion and analysis are in thousands.

BUSINESS OVERVIEW

Xenith Bankshares is a Virginia corporation that is the bank holding company for Xenith Bank, which is a Virginia banking corporation organized and chartered pursuant to the laws of the Commonwealth of Virginia and a member of the Federal Reserve. The Bank is a full-service, locally-managed commercial bank specifically targeting the banking needs of middle market and small businesses, local real estate developers and investors, private banking clients and select retail banking clients, which we refer to as our target customers. We are geographically focused on the Washington, D.C.-Arlington-Alexandria, Richmond and Virginia Beach-Norfolk-Newport News metropolitan statistical area, which we refer to as our target markets. As of June 30, 2011, the Bank conducts its principal banking activities through its five branches, with one branch located in Tysons Corner, Virginia, one branch located in Richmond, Virginia and three branches located in Suffolk, Virginia. We acquired the three branches located in Suffolk, Virginia in the merger with First Bankshares, Inc., the parent company of its wholly-owned subsidiary SuffolkFirst Bank. SuffolkFirst Bank opened its first branch in Suffolk, Virginia in 2003 under the name of SuffolkFirst Bank. All of the former SuffolkFirst Bank branches operate under the name Xenith Bank. As of June 30, 2011, we had total assets of $288.6 million, total loans, net of the allowance for loan and lease losses, of $180.7 million, total deposits of $202.0 million and shareholders’ equity of $64.8 million.

Our services and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial and retail banking products, including commercial and industrial loans, commercial and residential real estate loans, and select consumer loans. We also offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, and Internet banking and bill pay service. We do not engage in any activities other than banking activities.

The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on interest-bearing 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 non-

interest income include service charges on deposit accounts, fees from loan originations, gains on the sale of securities, and other miscellaneous income. Deposits and Federal Home Loan Bank borrowed funds are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits.

Merger of First Bankshares, Inc. and Xenith Corporation

First Bankshares, Inc. (“First Bankshares”) was incorporated in Virginia on March 4, 2008, and was the holding company for SuffolkFirst Bank, a community bank founded in the City of Suffolk, Virginia in 2002.

On December 22, 2009, First Bankshares and Xenith Corporation, a Virginia corporation, completed the merger of Xenith Corporation with and into First Bankshares (“the merger”), with First Bankshares being the surviving entity in the merger. The merger was completed in accordance with the terms of an agreement of merger and related plan of merger, dated as of May 12, 2009, as amended. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank.

Acquisitions

On July 29, 2011, the Bank acquired select loans totaling approximately $59 million and related assets associated with the Richmond, Virginia branch office (“the Branch”) of Paragon Commercial Bank, a North Carolina banking corporation (“Paragon”), and assumed select deposit accounts totaling approximately $76 million and certain related liabilities associated with the Branch (“the Paragon Transaction”). The Paragon Transaction was completed in accordance with the terms of the Amended and Restated Purchase and Assumption Agreement, dated as of July 25, 2011 (“the Paragon Agreement”), between the Bank and Paragon. Under the terms of the Paragon Agreement, Paragon retains the real and personal property associated with the Branch office and, subject to receipt of required regulatory approvals, the Branch office will be closed.

Also on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (“FDIC”) is acting as court-appointed receiver of VBB. The VBB Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement, dated as of July 29, 2011 (the “VBB Agreement”), among the FDIC, Receiver for VBB, the FDIC and the Bank.

The effective dates of the Paragon Transaction and the VBB Acquisition occurred after June 30, 2011. The impact of these transactions on our results of operations, financial condition, liquidity and capital resources is not discussed in Management’s Discussion and Analysis presented herein.

Industry Conditions

In the second quarter of 2011, the economic recovery continued at a moderate pace, however slower than was expected earlier in the year. Recent labor market indicators have been weaker than anticipated. The monthly unemployment rate, as published by the Bureau of Labor Statistics, climbed to 9.2% in the second quarter of 2011 after dropping below 9.0% in the first quarter of 2011. The slowing of the recovery is due in part to higher food and energy prices, as well as supply chain disruptions associated with weather-related disruptions. Household spending and business investment in equipment and software have shown some expansion. Although, Freddie Mac reported that existing home sales in the first four months of 2011 were up approximately 5% from the average pace of 2010, in line with projections for the year, the housing market remains depressed.

On June 22, 2011, the Federal Open Market Committee (“FOMC”) publicly stated that it expects the pace of recovery to pick up over the coming quarters and the unemployment rate to resume a gradual decline. The FOMC also reaffirmed that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” The FOMC also stated that it is maintaining its existing policy of reinvesting principal payments from its securities holdings. On June 30, 2011, the FOMC completed its purchase of $600 billion in long-term Treasury securities, in line with expectations.

On August 5, 2011, days after U.S. lawmakers agreed to raise the debt ceiling through 2012, Standard and Poor’s downgraded the U.S. government’s credit rating from AAA to AA+. As the downgrade is unprecedented, it is uncertain how it will impact the equity and debt markets, as well as the economy as a whole. In an August 9, 2011 release, the FOMC stated it now expects a somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased. The FOMC stated it would keep the target range for the federal funds rate at 0 to ¼ percent. It stated conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Regulatory reform continued during the quarter, as regulatory agencies proposed and finalized rules mandated by the Dodd-Frank Act. The rules that became effective on April 1, 2011 require us to base our deposit insurance assessment calculation on our total average assets less average tangible equity, rather than domestic deposits. In addition, the FDIC revised the overall pricing

structure for large banks, resulting in assessment rates being affected by specific risk characteristics. We are actively evaluating these and future regulatory and legislative developments so that we will be in a position to adapt our business at the appropriate time.

Outlook

We believe we are well positioned to take advantage of competitive opportunities. We believe that we will benefit from (1) our capital base, which we believe will allow us 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) our advantageous market locations in our target markets, (3) our variety of banking services and products, and (4) our experienced management team and board of directors.

We intend to execute our business strategy by focusing on developing long-term relationships with our target customer base through a team of bankers with significant experience in our target markets.

In our continuing evaluation of our business strategy, we believe properly priced acquisitions can complement our organic growth. We may seek to acquire additional financial institutions or branches or assets of those institutions. Although our principal acquisition focus will be to expand our presence in our target markets, we may also expand into new markets or lines of business or offer new services or products. We are continually evaluating potential acquisitions to determine what is in the best interest of our company. Our goal in making these decisions is to maximize shareholder value.

Critical Accounting Policies

Our accounting policies are fundamental to an understanding of our consolidated financial position and consolidated results of operations. We believe that our accounting and reporting policies are in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) 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 or results of operations or both our consolidated financial position and results of operations.

We consider a policy critical if (1) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate, and (2) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that our most critical accounting policy relates to the allowance for loan and lease losses, which reflects the estimated losses resulting from the inability of borrowers to make required loan payments. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, adjustments to our estimates would be made and additional provisions for loan and lease losses could be required, which could have a material adverse impact on our results of operations and financial condition. Further discussion of the estimates used in determining the allowance for loan and lease losses is contained in the discussion under “— Allowance for Loan and Lease Losses” below.

Our critical accounting policies are discussed in detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies” and “Summary of Significant Accounting Policies” in the notes to the consolidated financial statements in our 2010 Form 10-K. Since December 31, 2010, there have been no changes in these policies that have had or could reasonably expected to have a material impact on our results of operations or financial condition.

RESULTS OF OPERATIONS

Net Loss

For the three months ended June 30, 2011, we reported a net loss of $1.1 million, compared to a net loss of $1.9 million for the three months ended June 30, 2010. For the six months ended June 30, 2010, we reported a net loss of $2.6 million, compared to a net loss of $3.0 million for the six months ended June 30, 2010. Lower losses for both the three- and six-month periods ended June 30, 2011 compared to the same periods in 2010 were primarily driven by greater net interest income, partially offset by a higher provision for loan and lease losses, due to loan growth, in the six-month period ended June 30, 2011.

The following table presents net loss and net loss per share information for the periods stated. On April 4, 2011 and April 14, 2011, common shares outstanding increased 4,000,000 and 600,000, respectively, as a result of the completion of our underwritten public offering of shares of our common stock on April 4, 2011 and the related exercise of the underwriters of their over-allotment option on April 14, 2011.


	For the Three Months Ended June 30,
	2011			2010
Net loss	$	(1,083	)	$	(1,940	)

Loss per share, basic and diluted	$	(0.11	)	$	(0.33	)


	For the Six Months Ended June 30,
	2011			2010
Net loss	$	(2,557	)	$	(3,042	)

Loss per share, basic and diluted	$	(0.32	)	$	(0.52	)

Net Interest Income

For the three months ended June 30, 2011, net interest income was $2.9 million compared to $2.1 million for the three months ended June 30, 2010. As presented in the table below, net interest margin for the three-month period ended June 30, 2011 was 4.35%, a 16 basis point decrease from the same period in 2010. Net interest margin is defined as the percentage of net interest income to average interest-earning assets. Higher net interest income was primarily due to higher average loan balances and lower rates paid on time deposits, partially offset by lower rates earned on investments and higher average savings deposit balances. Lower net interest margin in the three-month period ended June 30, 2011 compared to the same period of 2010 is the result of lower accretion from acquisition accounting adjustments. Excluding the effect of acquisition accounting adjustments, net interest margin increased 50 basis points to 3.50% for the three-month period ended June 30, 2011 from 3.00% for the same period in 2010. Average interest-earning assets and related interest income increased $77.1 million and $740 thousand, respectively, for the three-month period ended June 30, 2011 compared to the same period in 2010. Average interest-bearing liabilities increased $52.7 million; however, related interest expense declined $24 thousand for the three-month period ended June 30, 2011 compared to the same period in 2010. Yields on interest-earning assets decreased 51 basis points to 5.09%, while costs of interest-bearing liabilities declined 41 basis points to 0.98% when comparing the three-month period ended June 30, 2011 to the same period in 2010.

For the six months ended June 30, 2011, net interest income was $5.6 million compared to $3.6 million for the six months ended June 30, 2010. As presented in the table below, net interest margin for the six months ended June 30, 2011 was 4.58%, a 56 basis point increase from the same period ended June 30, 2010. Excluding the effect of acquisition accounting adjustments, net interest margin for the six months ended June 30, 2011 was 3.46%, a 59 basis point increase from 2.87% for the same period in 2010. Contributing to higher net interest income and net interest margin was higher average loan balances and lower rates paid on time deposits, partially offset by lower yields on investments and higher average balances of savings deposits. Average interest-earning assets and related interest income increased $66.2 million and $2.0 million, respectively, for the six-month period ended June 30, 2011 compared to the same period in 2010. Average interest-bearing liabilities increased $50.0 million; however, related interest expense declined $37 thousand for the six-month period ended June 30, 2011 compared to the same period in 2010. Yields on interest-earning assets increased 22 basis points to 5.38%, while costs of interest-bearing liabilities declined 42 basis points to 1.04% when comparing the six-month period ended June 30, 2011 to the same period in 2010.

Our acquired loan portfolio was discounted to fair value (for expected credit losses and for interest rates) immediately following the merger. The total performing loan discount of $4.1 million at the date of the merger is being recognized into interest income over the estimated remaining life of the loans. The performing loan discount accretion was $292 thousand and $429 thousand, respectively, for the three-month periods ended June 30, 2011 and June 30, 2010. The performing loan discount accretion was $836 thousand and $489 thousand, respectively, for the six-month periods ended June 30, 2011 and June 30, 2010. The effect of this accretion on net interest margin was 44 basis points and 93 basis points, respectively, for the three-month periods ended June 30, 2011 and June 30, 2010. The effect of this accretion on net interest margin was 68 basis points and 54 basis points, respectively, for the six-month periods ended June 30, 2011 and June 30, 2010. Acquired time deposits were also adjusted to fair value at the date of the merger for interest rates. The total adjustment at the date of the merger was $2.1 million and is being amortized as a reduction of interest expense over a two-year period. The effect of this amortization is a decrease in interest expense of $270 thousand for the three-month periods ended June 30, 2011 and June 30, 2010, and $540 thousand for the six-month periods ended June 30, 2011 and June 30, 2010. The effect of this adjustment on net interest margin was 41 basis points and 58 basis points, respectively, for the three-month periods ended June 30, 2011 and June 30, 2010 and 44 basis points and 60 basis points, respectively, for the six-month periods ended June 30, 2011 and June 30, 2010.

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


	Average Balances, Income and Expenses, Yields and Rates As of and For the Three Months Ended June 30,
																	2011 vs. 2010
	Average Balances (1)						Yield / Rate						Income /Expense (7), (8)				Increase			Change due to (2)
	2011			2010			2011			2010			2011		2010		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	653		$	1,244			0.00	%		0.00	%	$	—	$	—	$	—
Investments / Interest-earning deposits		83,097			70,232			2.50	%		3.50	%		519		614		(95	)		(195	)		100
Loans, gross (3)		179,400			114,533			6.30	%		6.95	%		2,827		1,991		836			(201	)		1,037

Total interest-earning assets		263,150			186,009			5.09	%		5.60	%		3,346		2,605		741			(396	)		1,137

Noninterest-earning assets:
Cash and due from banks		2,821			2,829
Premises and fixed assets		6,273			6,796
Other assets		18,394			22,496
Allowance for loan and lease losses		(2,766	)		(195	)

Total noninterest-earning assets		24,722			31,926

Total assets	$	287,872		$	217,935

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	5,392		$	20,681			0.21	%		0.81	%	$	3	$	42	$	(39	)	$	(19	)	$	(20	)
Savings deposits		69,300			3,738			0.95	%		0.43	%		164		4		160			10			150
Time deposits		103,933			93,430			0.73	%		1.31	%		190		307		(117	)		(148	)		31
Federal funds purchased and borrowed funds		20,158			28,278			2.54	%		2.21	%		128		156		(28	)		22			(49	)

Total interest-bearing liabilities		198,783			146,127			0.98	%		1.39	%		485		509		(23	)		(135	)		112

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		24,651			14,177
Other liabilities		1,560			5,021

Total noninterest-bearing liabilities		26,211			19,198

Shareholders’ equity		62,879			52,610

Total liabilities and shareholders’ equity	$	287,872		$	217,935

Interest rate spread (4)								4.11	%		4.21	%
Net interest income (5)													$	2,861	$	2,096	$	764		$	(261	)	$	1,025

Net interest margin (6)								4.35	%		4.51	%

(1)	Average balances are computed on a daily basis.

(2)	Change in interest due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each.

(3)	Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.

(4)	Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

(5)	Net interest income is interest income less interest expense.

(6)	Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

(7)	Interest income on loans in 2011 and 2010 includes $292 thousand and $429 thousand, respectively, in accretion related to fair value adjustments related to the merger.

(8)	Interest expense on time deposits in 2011 and 2010 is reduced by $270 thousand related to fair value adjustments related to the merger.


	Average Balances, Income and Expenses, Yields and Rates As of and For the Six Months Ended June 30,
																	2011 vs. 2010
	Average Balances (1)						Yield / Rate						Income /Expense (7), (8)				Increase			Change due to (2)
	2011			2010			2011			2010			2011		2010		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	551		$	1,219			0.00	%		0.00	%	$	—	$	—	$	—
Investments / Interest-earning deposits		74,532			70,521			2.68	%		3.07	%		1,000		1,084		(84	)		(143	)		59
Loans, gross (3)		170,720			107,862			6.57	%		6.58	%		5,612		3,549		2,063			(3	)		2,066

Total interest-earning assets		245,803			179,602			5.38	%		5.16	%		6,612		4,633		1,979			(146	)		2,125

Noninterest-earning assets:
Cash and due from banks		2,577			2,799
Premises and fixed assets		6,329			6,856
Other assets		18,495			20,061
Allowance for loan and lease losses		(2,649	)		(160	)

Total noninterest-earning assets		24,752			29,556

Total assets	$	270,555		$	209,158

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	5,511		$	15,272			0.22	%		0.68	%	$	6	$	52	$	(46	)	$	(23	)	$	(22	)
Savings deposits		58,069			3,661			0.92	%		0.49	%		268		9		259			14			245
Time deposits		102,351			93,225			0.85	%		1.41	%		436		658		(222	)		(282	)		59
Federal funds purchased and borrowed funds		23,935			27,735			2.30	%		2.18	%		275		303		(28	)		15			(43	)

Total interest-bearing liabilities		189,866			139,893			1.04	%		1.46	%		985		1,022		(37	)		(276	)		239

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		22,890			14,057
Other liabilities		2,068			2,047

Total noninterest-bearing liabilities		24,958			16,104

Shareholders’ equity		55,731			53,161

Total liabilities and shareholders’ equity	$	270,555		$	209,158

Interest rate spread (4)								4.34	%		3.70	%
Net interest income (5)													$	5,627	$	3,611	$	2,016		$	130		$	1,886

Net interest margin (6)								4.58	%		4.02	%

(1)	Average balances are computed on a daily basis.

(2)	Change in interest due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each.

(3)	Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.

(4)	Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

(5)	Net interest income is interest income less interest expense.

(6)	Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

(7)	Interest income on loans in 2011 and 2010 includes $836 thousand and $489 thousand, respectively, in accretion related to fair value adjustments related to the merger.

(8)	Interest expense on time deposits in 2011 and 2010 is reduced by $540 thousand related to fair value adjustments related to the merger.

Noninterest Income

Noninterest income decreased from $81 thousand for the three months ended June 30, 2010 to $48 thousand for the three months ended June 30, 2011. This decrease was primarily due to a net loss on the disposition of other real estate owned, (“OREO”), partially offset by higher gains on sales of investment securities.

Noninterest income decreased from $258 thousand for the six months ended June 30, 2010 to $194 thousand for the six months ended June 30, 2011. This decrease was primarily due to lower gains on sales of investment securities in the 2011 period.

Noninterest Expense

For the three months ended June 30, 2011, noninterest expense was $3.5 million compared to $3.6 million for the three months ended June 30, 2010. Lower technology costs and other expenses in the 2011 period were partially offset by higher compensation and benefits costs in the same period. The Bank installed a new technology platform in the three-month period ended June 30, 2010.

For the six months ended June 30, 2011, noninterest expense was $6.9 million compared to $6.7 million for the six months ended June 30, 2010. Lower technology and other expenses in the 2011 period were partially offset by higher compensation and benefits expense. Higher compensation and benefits expenses have increased as we added personnel, including skilled bankers, to support our growth strategy.

Income Taxes

At June 30, 2011, net deferred tax assets were $7.6 million, for which a full valuation allowance was recorded, based primarily on the fact that we experienced cumulative losses over the past three years. Future realization of the tax benefit of existing deductible temporary differences and net operating loss carryforwards is dependent on the company generating sufficient future taxable income within the carryforward period, which under current law is 20 years.

FINANCIAL CONDITION

Securities

The following tables present information about our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated.


	June 30, 2011
	Book Value		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available-for-sale:
Mortgage-backed securities
- Fixed rate	$	48,110	$	49,215		4.62		3.31	%
- Variable rate		3,084		3,250		4.67		3.02	%
Agency notes/bonds—fixed rate		1,999		2,002		0.29		1.65	%
Collateralized mortgage obligations		6,569		6,738		3.27		3.47	%
Trust preferred securities		1,124		1,115		5.79		7.74	%

Total securities available-for-sale	$	60,886	$	62,320		4.35		3.33	%


	December 31, 2010
	Book Value		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available-for-sale:
Mortgage-backed securities
- Fixed rate	$	43,446	$	43,744		2.69		2.81	%
- Variable rate		5,035		5,272		11.14		3.40	%
Collateralized mortgage obligations		7,555		7,641		2.32		3.00	%
Trust preferred securities		2,253		2,233		5.16		7.48	%

Total securities available-for-sale	$	58,289	$	58,890		3.48		3.06	%

The following tables present a maturity analysis of our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated.


	June 30, 2011
	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:
Mortgage-backed securities
- Fixed rate	$	—		—	$	—		—		$	8,405		2.45	%	$	40,810		3.48	%	$	49,215		3.31	%
- Variable rate		—		—		—		—			—		—			3,250		3.02	%		3,250		3.02	%
Collateralized mortgage obligations		—		—		—		—			—		—			6,738		3.48	%		6,738		3.48	%
Agency notes/bonds—fixed rate		—		—		2,002		1.65	%		—		—			—		—			2,002		1.65	%
Trust preferred securities		—		—		—		—			—		—			1,115		7.74	%		1,115		7.74	%

Total securities available for sale	$	—		—	$	2,002		1.65	%	$	8,405		2.45	%	$	51,913		3.55	%	$	62,320		3.33	%


	December 31, 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:
Mortgage-backed securities
- Fixed rate	$	—		—	$	—		—	$	4,695		1.92	%	$	39,049		2.92	%	$	43,744		2.81	%
- Variable rate		—		—		—		—		—		—			5,272		3.40	%		5,272		3.40	%
Collateralized mortgage obligations		—		—		—		—		—		—			7,641		3.00	%		7,641		3.00	%
Trust preferred securities		—		—		—		—		—		—			2,233		7.48	%		2,233		7.48	%

Total securities available-for-sale	$	—		—	$	—		—	$	4,695		1.92	%	$	54,195		3.17	%	$	58,890		3.06	%

Loans

The following table provides the maturity analysis of our loan portfolio as of the date stated based on whether loans are variable-rate or fixed-rate loans:


	June 30, 2011
			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 and industrial (1)	$	36,235	$	19,767	$	5,300	$	25,067	$	18,536	$	910	$	19,446	$	80,747
Commercial real estate (2)		14,488		46,930		46		46,977		7,969		2,629		10,598		72,062
Residential real estate		5,584		6,397		1,709		8,106		4,493		4,478		8,971		22,662
Consumer (3)		926		3,405		—		3,405		598		—		598		4,930
Overdrafts		12		—		—		—		—		—		—		12

Total loans	$	57,245	$	76,499	$	7,056	$	83,555	$	31,595	$	8,017	$	39,613	$	180,413

(1)	Excludes $1,098 thousand in nonaccrual fixed-rate loans.

(2)	Excludes $2,146 thousand in nonaccrual variable-rate loans.

(3)	Excludes $4 thousand in nonaccrual fixed-rate loans.


	December 31, 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 and industrial (1)	$	35,446	$	13,895		376	$	14,271	$	15,876	$	1,078	$	16,954	$	66,671
Commercial real estate (2)		21,208		22,426		—		22,426		9,457		1,246		10,704		54,338
Residential real estate		6,508		4,053		582		4,635		7,953		4,241		12,194		23,337
Consumer (3)		712		3,055		1		3,056		912		14		926		4,694
Overdrafts		14		—		—		—		—		—		—		14

Total loans	$	63,887	$	43,430		959	$	44,389	$	34,198	$	6,580	$	40,777	$	149,053

(1)	Excludes $1,374 thousand in nonaccrual fixed-rate loans.

(2)	Excludes $2,697 thousand in nonaccrual variable-rate loans.

(3)	Excludes $20 thousand in nonaccrual fixed-rate loans.

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 regulations, and other prudent credit practices.

Loans secured by real estate were 66.5% of the loan portfolio at June 30, 2011 and 73.1% at December 31, 2010. Residential real estate loans consist primarily of first and second lien loans, including home equity lines and credit loans, secured by residential real estate located primarily in our target markets. Typically, our loan-to-value benchmark for these loans is at or below 80% at inception, with satisfactory debt-to-income ratios as well. Commercial real estate, or CRE, loans are secured by business and commercial properties. Typically, our loan-to-value benchmark for these loans is at or below 80% at inception, with satisfactory debt service coverage ratios as well. 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 source of repayment.

Allowance for Loan and Lease Losses

Our allowance for loan and lease losses consists of (1) a component for individual loan impairment recognized and measured pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, “Accounting by Creditors for Impairment of a Loan” (“Topic 310”), 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 we will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement.

We determine the allowance for loan and lease 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 similar types of loans that we originate in our portfolio, as well as loss history from banks in Virginia and across the country. In evaluating our loan portfolio, we consider qualitative factors, including general economic conditions, nationally, regionally and in our target 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 and lease losses are made by charges to the provision for loan and lease 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 and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses.

In assessing the adequacy of the allowance for loan and lease losses as of the end of a reporting period, we also evaluate our loan risk ratings. Each loan is assigned two “risk ratings” at origination. One risk rating is based on our assessment of the borrower’s financial capacity, and the other is based on our assessment of the quality of our collateral. In addition to our assessment of risk ratings, we also consider changes to our policies and procedures, internal observable data related to trends within the loan portfolio, such as concentrations and aging of the portfolio, and external observable data such as industry and general economic trends.

Although we use various data and information sources to establish our allowance for loan and lease losses, future adjustments to the allowance for loan and lease losses may be necessary, if conditions, circumstances or events are substantially different from the assumptions used in making the assessments.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan and lease losses. Such agencies may require us to recognize additions to the allowance for loan and lease losses based on their judgments of information available to them at the time of their examination.

As of December 22, 2009, prior to the merger, our allowance for loan and lease losses was $6.7 million. Immediately following the merger, the allowance for loan and lease losses was reduced to $0 due to adjustments attributable to the acquisition method of accounting. For the three months and six months ended June 30, 2011, we recorded provision expense of $510 thousand and $1.5 million, respectively. For the three and six months ended June 30, 2010, we recorded a provision of $470 thousand and $510 thousand, respectively. Our allowance for loan and lease losses as of June 30, 2011 is primarily for new loan production since the merger and changes in credit quality related to the purchased loan portfolio.

The following table presents the allowance for loan and losses by loan type and the percent of loans in each category to total loans for the dates stated:


	June 30, 2011					December 31, 2010
	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 and industrial	$	934		44.6	%	$	470		44.4	%
Commercial real estate		1,798		40.4	%		1,106		37.3	%
Residential real estate		233		12.3	%		164		15.2	%
Consumer		21		2.7	%		26		3.1	%

Total allowance for loan and lease losses	$	2,986		100.0	%	$	1,766		100.0	%

Nonperforming Assets

It is our policy to discontinue the accrual of interest income on nonperforming loans. We consider a loan as nonperforming when it is greater than 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. As of June 30, 2011 and December 31, 2010, there were no loans greater than 90 days past due with respect to principal and interest for which interest was accruing.

At June 30, 2011, we had no OREO assets. As of December 31, 2010, we had $1.5 million in OREO consisting of hotel/mixed use and single family properties resulting from foreclosure. OREO asset valuations are evaluated periodically, and any necessary write down to fair value is recorded as impairment. In the three- and six-month periods ended June 30, 2011, $76 thousand and $15 thousand, respectively, was recorded as a loss on the sale of OREO.

All of our nonperforming assets at June 30, 2011 were acquired in the merger, and their carrying values were adjusted to fair value immediately following the merger, in applying the acquisition method of accounting.

The following table summarizes our nonperforming assets as of the dates stated:


	June 30, 2011			December 31, 2010
Nonaccrual loans	$	3,248		$	2,841
Other real estate owned		—			1,485

Total nonperforming assets	$	3,248		$	4,326

Nonperforming assets as a percentage of total loans		1.80	%		2.82	%
Nonperforming assets as a percentage of total assets		1.13	%		1.72	%
Net charge-offs as a percentage of average loans		0.15	%		0.18	%
Allowance for loan and lease losses as a percentage of total loans		1.65	%		1.15	%
Allowance for loan and lease losses to nonaccrual loans		91.93	%		62.14	%

Deposits

Deposits represent our primary source of funds and are comprised of demand deposits, savings deposits and time deposits. Deposits at June 30, 2011 totaled $202.0 million compared to deposits of $175.1 million at December 31, 2010, an increase of 15.3%. Demand deposits, including money market accounts, increased $33.3 million, or approximately 47.6% over balances at December 31, 2010, while time deposits decreased $6.7 million, or approximately 6.6% from balances at December 31, 2010.

The following table presents the average balances and rates paid, by deposit category, as of the dates stated:


	June 30, 2011					December 31, 2010
	Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	22,890		—		$	16,564		—
Interest-bearing deposits:
Demand and money market		59,959		0.90	%		26,425		0.84	%
Savings accounts		3,620		0.50	%		3,537		0.50	%
Time deposits $100,000 or greater (1)		49,220		1.18	%		38,326		1.63	%
Time deposits less than $100,000		53,224		0.54	%		60,333		1.15	%

Total interest-bearing deposits		166,023		0.85	%		128,621		1.21	%

Total average deposits	$	188,913		0.75	%	$	145,185		1.07	%

(1)	Includes brokered deposits of $5.1 million at June 30, 2011 and $10.2 million at December 31, 2010.

The following table presents maturities of large denomination time deposits (equal to or greater than $100,000) as of June 30, 2011:


	Within 3 Months		3-6 Months		6-12 Months (1)		Over 12 Months		Total		Percent of Total Deposits
Time deposits	$	9,071	$	3,883	$	9,474	$	17,858	$	40,286		19.95	%

(1)	Includes brokered deposits of $5.1 million.

Short-Term Borrowings

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


	June 30, 2011									December 31, 2010
	Period-end Balance		Highest Month-end Balance		Average Balance		Weighted Average Rate			Year-end Balance		Highest Month-end Balance		Average Balance		Weighted Average Rate
Federal funds purchased	$	—	$	2,191	$	568		0.76	%	$	—		—	$	37		0.76	%
Other borrowings		—		1,000		1,571		0.09	%		—	$	4,700		742		0.81	%

Total short-term borrowings	$	—	$	3,191	$	2,139				$	—	$	4,700	$	779		0.57	%

LIQUIDITY AND CAPITAL RESOURCES

In the six-month period ended June 30, 2011, cash and cash equivalents increased $7.1 million compared to a decrease of $21.6 million in the same period in 2010. Net cash used in operating activities was $1.2 million for the six-month period ended June 30, 2011 compared to net cash used in operating activities of $4.3 million for the same period in 2010. The lower use of cash in operating activities is primarily due to a lower net loss and an increase in other assets in the 2011 period. Net cash used in investing activities was $31.8 million for the six-month period ended June 30, 2011 compared to net cash used in investing activities of $45.7 million for the same period in 2010. In the six-month period ended June 30, 2011, net cash invested in securities was $42.5 million lower than in the same period of 2010; however, in the six-month period ended June 30, 2011, our net investment in loans was $13.0 million higher than in the same period in 2010. Net cash provided by financing activities in the six-month period ended June 30, 2011 was $40.0 million compared to $28.4 million for the same period of 2010. Greater cash provided by financing activities in the six-month period ended June 30, 2011 was primarily due to the issuance and sale of 4,600,000 shares of our common stock in an underwritten public offering, as more fully described below.

Liquidity

Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate deposit withdrawals, payments of debt and operating expenses 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 may help management predict the amount of cash required. In assessing liquidity, management gives consideration to various factors, including stability of deposits, maturity of time deposits, quality, volume and maturity of assets, sources and costs of borrowings, 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 have access to a credit line from our primary correspondent bank in the amount of $9.0 million. This line is for short-term liquidity needs and is subject to the prevailing federal funds interest rate.

In addition, we have a secured borrowing facility with the Federal Home Loan Bank. The total credit availability is equal to 30% of our total assets. Under this facility, we have one non-amortizing term loan outstanding for $20 million, which was originated on January 25, 2008, bears a rate of 2.5%, and matures on January 25, 2013. As of June 30, 2011, our total credit availability under this facility was $59.4 million, based our March 31, 2011 balance sheet.

We also have an uncommitted line of credit by a national bank to borrow federal funds up to $5.0 million on an unsecured basis. The uncommitted line is not a confirmed line or loan and terminates on June 30, 2012, if not cancelled earlier. Borrowings under this arrangement bear interest at the prevailing federal funds rate. At June 30, 2011, there were no borrowings outstanding under this uncommitted line of credit.

On April 4, 2011, we completed the issuance and sale of 4,000,000 shares of our common stock at a public offering price of $4.25 per share pursuant to an effective registration statement filed with the Securities and Exchange Commission (“SEC”). On April 14, 2011, we completed the issuance and sale of an additional 600,000 shares of our common stock in connection with the over-allotment option granted by us to the underwriters of the offering. Net proceeds, after the underwriters’ discount and expenses, were $17.7 million.

In management’s opinion, we maintain the ability to generate sufficient amounts of cash to cover normal requirements and any additional needs that 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. Our capital management strategies have been developed to maintain our “well-capitalized” position.

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 us and our financial performance. 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 Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios. On December 7, 2009, BankCap Partners received approval from the Federal Reserve to acquire up to 65.02% of the common stock of First Bankshares (now Xenith Bankshares), and indirectly, SuffolkFirst Bank (now Xenith Bank). The approval order contained conditions related to BankCap Partners, as well as the conduct of the Bank’s business. The condition applicable to the Bank provided that, during the first three years of operation after the merger, which is the period beginning December 22, 2009 and ending December 22, 2012, the Bank must operate within the parameters of its business plan submitted in connection with BankCapPartners’ application to the Federal Reserve, and the Bank must obtain prior written regulatory consent to any material change in its business plan. The business plan sets forth minimum leverage and risk-based capital ratios of at least 10% and 12%, respectively, through 2012. As of June 30, 2011, we met all minimum capital adequacy requirements to which we are subject, including those contained in our business plan as submitted to the Federal Reserve, and are categorized as “well- capitalized”. Since June 30, 2011, there are no conditions or events that management believes have changed our status as “well-capitalized”.

The following table presents Tier 1 and total risk-based capital and risk-weighted assets for the Bank and Xenith Bankshares as of the date stated:


	June 30, 2011
	Xenith Bank		Xenith Bankshares
Tier 1 capital	$	48,758	$	49,337
Total risk-based capital		51,246		52,584
Risk-weighted assets		197,702		198,526

The following table compares capital ratios for the Bank and Xenith Bankshares to regulatory minimum and well-capitalized ratios as of the date stated:


	June 30, 2011						Regulatory Minimum			Well Capitalized
	Xenith Bank			Xenith Bankshares			Regulatory Minimum			Well Capitalized
Tier 1 leverage ratio		17.85	%		18.07	%		4.00	%		> 5.00	%
Tier 1 risk-based capital ratio		24.56	%		24.96	%		4.00	%		> 6.00	%
Total risk-based capital ratio		25.81	%		26.60	%		8.00	%		> 10.00	%

Pursuant to our business plan submitted to the Federal Reserve with the application of BankCap Partners to acquire up to 65.02% of the common stock of First Bankshares (now Xenith Bankshares), and indirectly, SuffolkFirst Bank (now Xenith Bank), we are required to maintain leverage and risk-based capital ratios of at least 10% and 12%, respectively, through 2012.

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 interest-earning assets (loans, investments, etc.) at various terms and rates.

Interest rate risk is the exposure to fluctuations in 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 balance sheet may be asset or liability sensitive at a given time. We intend to manage the Bank’s asset or liability sensitivity to optimize earnings, to minimize interest rate risk and to preserve capital 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.

Gap Analysis

Gap analysis tools monitor the “gap” between interest-sensitive assets and interest-sensitive liabilities. The Bank uses a simulation model to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, we attempt to mitigate risks associated with anticipated interest rate movements by understanding the dynamic nature of our balance sheet components. We evaluate our balance sheet components (securities, loan and deposit portfolios) to manage our interest rate risk position.

A negative interest-sensitive gap results when interest-sensitive liabilities exceed interest-sensitive assets for a specific re-pricing “time horizon”. The gap is positive when interest-sensitive assets exceed interest-sensitive liabilities for a given time period. For a bank with a positive gap, rising interest rates would be expected to have a positive effect on net interest income, and falling rates would be expected to have a negative effect. The following table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Variable–rate loans are reflected at the earliest re-pricing interval since they re-price according to their terms. Borrowed funds are reflected at the earlier of their maturity or contractual re-pricing interval. Interest-bearing liabilities, with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected at expected rates of attrition. Time deposits and fixed-rate loans are reflected at their respective contractual maturity dates.

The following table, “Gap Report”, indicates that, on a cumulative basis through the next 12 months, our interest rate-sensitive assets exceed interest rate-sensitive liabilities, resulting in an asset-sensitive position at June 30, 2011 of $60.6 million. This net asset-sensitive position was a result of $161.3 million in interest rate-sensitive assets being available for re-pricing during the next 12 months and $100.7 million in interest rate-sensitive liabilities being available for re-pricing during the next 12 months. Our gap position at June 30, 2011 is considered by management to be favorable in a flat to increasing interest rate environment.


	0-180 Days		181-360 days			1-3 Years			Over 3 Years		Totals
Assets:
Cash and cash due	$	13,949	$	—		$	—		$	—	$	16,369
Fed Funds Sold		2,909		—			—			—		2,909
Securities		4,843		1,638			8,817			48,927		65,660
Loans		132,679		5,277			21,600			18,279		184,589
Allowance for loan and lease losses		—		—			—			—		—
Premises and Equipment		—		—			—			—		—
Intangibles		—		—			—			—		—
OREO		—		—			—			—		—
Other Assets		—		—			—			—		—

Total Assets	$	154,380	$	6,915		$	30,417		$	67,206	$	288,719

Liabilities and Equity
Demand deposits	$	—	$	—		$	—		$	—	$	22,679
Interest-bearing deposits		62,392		38,350			74,654			13,365		189,277
Fed Funds Purchased		—		—			—			—		—
Borrowed funds		—		—			20,000			—		20,000
Other liabilities		—		—			—			—		1,824
Shareholders’ equity		—		—			—			—		64,820

Total Liabilities and Equity	$	62,392	$	38,350		$	94,654		$	13,365	$	298,601

Discrete Gap:	$	91,988	$	(31,435	)	$	(64,237	)	$	53,841
Cumulative Gap:	$	91,988	$	60,553		$	(3,684	)	$	50,157

Commitments and Contingencies

In the normal course of business, we have commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Additionally, we issue letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

These commitments represent outstanding off-balance sheet commitments. The following table presents unfunded loan commitments outstanding as of the date stated:


	June 30, 2011
Commercial lines of credit	$	27,731
Construction loans
- Commercial		14,933
- Residential		1,037
Home equity lines of credit		5,828
Consumer and overdraft protection		679
Letters of credit		2,758

Total commitments	$	52,966

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-Q are “forward-looking statements”. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our plans, objectives and goals, future events or results, our competitive strengths and business strategies, and the trends in our industry are forward-looking statements. The words “believe,” “will,” “may,” “could,” “estimate,” “project,” “predict,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “future,” “likely,” “probably,” “suggest,” “goal,” “potential” and similar expressions, as they relate to our company, are intended to identify forward-looking statements.

Forward-looking statements made in this Form 10-Q reflect beliefs, assumptions, and expectations of future events or results, taking into account the information currently available to us. These beliefs, assumptions, and expectations may change as a result of many possible events, circumstances or factors, not all of which are currently known to us. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed, or implied by, in the forward-looking statements. You should carefully consider these matters, along with the risks discussed under “Risk Factors” in Part I, Item 1A in the 2010 Form 10-K and the following factors, which are not intended to be exhaustive, that may cause actual results to vary materially from our forward-looking statements:

•

general economic conditions nationally, regionally or in our target markets;

•

the efforts of government agencies to stabilize the equity and debt markets;

•

the adequacy of our allowance for loan losses and the methodology for determining such allowance;

•

adverse changes in our loan portfolio and credit risk-related losses and expenses;

•

concentrations within our loan portfolio, including exposure to commercial real estate loans, and to our target markets;

•

our dependence on our target markets in and around Virginia;

•

reduced deposit flows and loan demand as well as increasing default rates;

•

changes in interest rates, reducing our margins or the volumes or values of the loans we make and the deposits and investments we hold;

•

business conditions in the financial services industry, including competitive pressures among financial services companies, new service and product offerings by competitors, and similar factors;

•

the degree and nature of our competition, with the understanding that competitors may have greater financial resources and access to capital and may offer services that enable those competitors to compete more successfully than we can;

•

the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;

•

our ability and willingness to pay dividends on our common stock in the future;

•

changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

•

volatility of the market price of our common stock and capital markets generally;

•

our dependence on limited markets in and around Virginia;

•

our limited operating history;

•

changes in our competitive strengths or business or strategies;

•

the availability, terms and deployment of debt and equity capital;

•

our dependence upon key personnel whose continued service is not guaranteed and our ability to identify, hire and retain highly qualified personnel in the future;

•

our ability to implement our business strategies successfully;

•

the adequacy of our cash reserves and liquidity;

•

negative publicity and the impact on our reputation;

•

rapidly changing technology;

•

war or terrorist activities causing deterioration in the economy;

•

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and

•

the risks discussed in our public filings with the SEC.

As a result of these factors, among others, the future events or results that are the subject of our beliefs, assumptions and expectations expressed in, or implied by, our forward-looking statements in this Form 10-Q may not be achieved in any specified time frame, or at all, which could be material. Accordingly and as noted above, you should not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or the persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by applicable law or regulations, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. 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 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, 2011 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

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 2010 Form 10-K 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 2010 Form 10-K.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Index:


Exhibit No.*		Description

2.1		Purchase and Assumption Agreement, dated as of June 1, 2011, by and between Xenith Bank and Paragon Commercial Bank (incorporated by reference to Current Report on Form 8-K filed by Xenith Bankshares, Inc. on June 3, 2011 (File No. 000-53380))

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

*	XBRL Interactive Data File will be filed by amendment to this Quarterly Report on Form 10-Q within 30 days of the date of the filing of this Quarterly Report on Form 10-Q as permitted by Rule 405(a)(ii) of Regulation S-T.

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 12, 2011				/s/ T. GAYLON LAYFIELD, III

				T. Gaylon Layfield, III President and Chief Executive Officer (Principal Executive Officer)

Date: August 12, 2011				/s/ THOMAS. W. OSGOOD

				Thomas W. Osgood
				Executive Vice President, Chief Financial Officer,
				Chief Administrative Officer and Treasurer
				(Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company