Central Virginia Bankshares 10Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OR

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

For the transition period from ____________ to _____________

Commission file number: 000-24002

CENTRAL VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation or organization)	54-1467806 (I.R.S. Employer Identification No.)
2036 New Dorset Road, Post Office Box 39 Powhatan, Virginia (Address of principal executive offices)	23139 (Zip Code)

Registrant’s telephone number, including area code: (804) 403-2000

Not Applicable

(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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark 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 x No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 11, 2011
Common stock, par value $1.25	2,625,977

Index

CENTRAL VIRGINIA BANKSHARES, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

Part I. Financial Information		Page No.

Item 1	Financial Statements

	Consolidated Balance Sheets -
	June 30, 2011 (Unaudited) and December 31, 2010	3

	Consolidated Statements of Operations – Three and Six Months
	Ended June 30, 2011 and 2010 (Unaudited)	4

	Consolidated Statements of Comprehensive Income – Three and Six
	Months Ended June 30, 2011 and 2010 (Unaudited	5

	Consolidated Statements of Stockholders’ Equity - Six
	Months Ended June 30, 2011 and 2010 (Unaudited)	6

	Consolidated Statements of Cash Flows - Six
	Months Ended June 30, 2011 and 2010 (Unaudited)	7

	Notes to Consolidated Financial Statements -
	June 30, 2011 and 2010 (Unaudited)	8

Item 2	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	30

Item 3	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4	Controls and Procedures	53

Part II. Other Information

Item 1	Legal Proceedings	54

Item 1A	Risk Factors	54

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3	Defaults Upon Senior Securities	54

Item 4	Removed and Reserved	54

Item 5	Other Information	54

Item 6	Exhibits	55

Index

PART I

FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2011 and December 31, 2010

(Dollars in thousands except per share amounts)

	June 30, 2011			December 31, 2010
ASSETS	(Unaudited)			(Audited)
Cash and due from banks	$	18,613		$	7,582
Federal funds sold		8,696			6,279
Total cash and cash equivalents		27,309			13,861

Securities available for sale at fair value		109,737			108,798
Securities held to maturity at amortized cost (fair value 2011 - $1,573 ; 2010 - $2,541)		1,546			2,525
Total securities		111,283			111,323
Mortgage and SBA loans held for sale		327			1,854
Loans, net of unearned income		241,296			261,449
Less allowance for loan losses		(9,887	)		(10,524	)
Net loans		231,409			250,925
Bank premises and equipment, net		8,344			8,650
Accrued interest receivable		1,170			1,528
Other real estate owned, net of valuation allowance of $74 and $93, respectively		5,162			2,394
Other assets		17,593			18,607
Total assets	$	402,597		$	409,142

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand deposits	$	35,679		$	35,370
Interest bearing demand deposits and NOW accounts		91,879			82,802
Savings deposits		39,977			38,569
Time deposits, $100,000 and over		53,777			60,592
Other time deposits		116,893			128,729
Total deposits		338,205			346,062

Securities sold under repurchase agreements		1,853			2,973
FHLB borrowings		40,000			40,000
Capital trust preferred securities		5,155			5,155
Accrued interest payable		610			554
Other liabilities		2,689			2,804
Total liabilities	$	388,512		$	397,548
STOCKHOLDERS’ EQUITY
Preferred stock, $1.25 par value, $1,000 liquidation value, 1,000,000 shares authorized
and 11,385 shares issued and outstanding	$	11,385		$	11,385
Common stock, $1.25 par value; 30,000,000 shares authorized; 2,674,416 (includes 48,439
of restricted stock awards) and 2,622,529 shares issued and outstanding, respectively		3,282			3,278
Common stock warrant		412			412
Discount on preferred stock		(235	)		(272	)
Surplus		16,910			16,899
Retained deficit		(14,749	)		(15,063	)
Accumulated other comprehensive loss		(2,920	)		(5,045	)
Total stockholders’ equity		14,085			11,594
Total liabilities and stockholders’ equity	$	402,597		$	409,142

See Notes to Consolidated Financial Statements.

Index

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands except per share data) (Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011		2010
Interest income:
Interest and fees on loans	$	3,468		$	4,063		$	7,174	$	8,242
Interest on securities and federal funds sold:
U.S. Government Treasury notes, agencies and corporations		558			932			1,104		1,898
States and political subdivisions		84			131			174		294
Corporate and other		203			280			439		602
Interest on federal funds sold		11			6			23		14
Total interest income		4,324			5,412			8,914		11,050

Interest expense:
Interest on deposits		1,218			1,782			2,512		3,855
Interest on borrowings:
Securities sold under repurchase agreements		2			5			6		13
FHLB borrowings		383			418			795		833
Capital trust preferred securities		42			52			82		91
Total interest expense		1,645			2,257			3,395		4,792
Net interest income		2,679			3,155			5,519		6,258
Provision for loan losses		700			2,905			1,200		3,220
Net interest income after provision for loan losses		1,979			250			4,319		3,038
Non-interest income
Deposit fees and charges		345			435			677		869
Other service charges, commission and fees		276			218			547		425
Increase in cash surrender value of life insurance		103			114			206		212
Realized gains on securities		560			453			771		494
Other operating income		59			53			136		164
Total non-interest income		1,343			1,273			2,337		2,164
Non-interest expense:
Salaries and benefits		1,361			1,510			2,694		3,032
Occupancy expenses		285			273			573		589
Furniture and equipment expenses		151			198			318		378
FDIC insurance expense		282			225			572		452
Loss on securities write-down (1)		-			11			13		87
Loss on devaluation of other real estate owned		-			146			-		556
Other operating expenses		1,149			1,308			2,135		2,184
Total non-interest expenses		3,228			3,671			6,305		7,278
Income (loss) before income taxes		94			(2,148	)		351		(2,076	)
Income tax (benefit)		-			(1,040	)		-		(1,055	)
Net income (loss)	$	94		$	(1,108	)	$	351	$	(1,021	)
Effective dividends accrued on preferred stock		161			161			321		321
Net income (loss) available to common stockholders	$	(67	)	$	(1,269	)	$	30	$	(1,342	)
Income (loss) per common share, basic	$	(0.03	)	$	( 0.48	)	$	0.01	$	(0.51	)
Income (loss) per common share, diluted	$	(0.03	)	$	( 0.48	)	$	0.01	$	(0.51	)

(1) Total of other-than-temporary impairment losses on securities in the six months ended June 30, 2011 and 2010 is $1.25 million and $2.41 million of which $1.24 million and $2.32 million have been recognized in other comprehensive loss, and impairment losses of $13 thousand and $87 thousand have been recognized in earnings in the six months ended June 30, 2011 and 2010.

See Notes to Consolidated Financial Statements.

Index

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net income (loss)	$	94		$	(1,108	)	$	351		$	(1,021	)
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period, net of tax of $0,$708, $0, and $1,624, respectively	$	2,117		$	1,373		$	2,883		$	3,152
Less: reclassification adjustment for gains included in net income, net of tax of $0, $154, $0, and $168, respectively		(560	)		(299	)		(771	)		(326	)
Less: reclassification adjustment for loss on write-down of securities, net of tax of $0, $4, $0, and $30, respectively		-			7			13			57
Other comprehensive income	$	1,557		$	1,081		$	2,125		$	2,883

Comprehensive income	$	1,651		$	(27	)	$	2,476		$	1,862

See Notes to Consolidated Financial Statements.

Index

CENTRAL VIRGINIA BANKSHARES, INC.

Consolidated Statements of Stockholders Equity

(dollars in thousands, except share amounts)

For the Six Months Ended June 30, 2011 and 2010

(Unaudited)


	Preferred Stock		Common Stock		Surplus		Retained Earnings (Deficit)			Common Stock Warrant		Discount on Preferred Stock			Accumulated Other Comprehensive (Loss)			Total
Balance, December 31, 2009	$	11,385	$	3,273	$	16,893	$	261		$	412	$	(345	)	$	(5,660	)	$	26,219
Cumulative effect of accounting error								284											284
Net loss		-		-		-		(1,021	)		-		-						(1,021	)
Other comprehensive income																2,883			2,883
Accretion of preferred stock discount		-		-		-		(37	)		-		37			-			-
Issuance of 2,091 shares of common stock pursuant to dividend reinvestment plan		-		5		6		-			-		-			-			11
Balance, June 30, 2010	$	11,385	$	3,278	$	16,899	$	(513	)	$	412	$	(308	)	$	(2,777	)	$	28,376

Balance, December 31, 2010	$	11,385	$	3,278	$	16,899	$	(15,063	)	$	412	$	(272	)	$	(5,045	)	$	11,594
Net income		-		-		-		351			-								351
Other comprehensive income																2,125			2,125
Accretion of preferred stock discount		-				-		(37	)		-		37			-			-
Compensation expense for restricted stock		-		-		11		-			-		-			-			11
Issuance of 1,191 shares of common stock pursuant to employment agreement		-		1		-		-			-		-			-			1
Issuance of 2,257 shares of common stock pursuant to dividend reinvestment plan		-		3		-		-			-		-			-			3
Balance, June 30, 2011	$	11,385	$	3,282	$	16,910	$	( 14,749	)	$	412	$	(235	)	$	(2,920	)	$	14,085

See Notes to Consolidated Financial Statements.

Index

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2011 and 2010

(amounts in thousands)

(Unaudited)

	2011			2010
Cash Flows from Operating Activities
Net income (loss)	$	351		$	(1,021	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		308			361
Deferred income tax benefit		-			(1,051	)
Provision for loan losses		1,200			3,220
Compensation expense for restricted stock		11			-
Amortization and accretion on securities, net		171			187
Realized gains on securities		(771	)		(494	)
Realized loss on sale of other real estate owned		40			53
Loss on write-down in value of other real estate owned		-			556
Loss on write-down of other than temporary impairment of securities		13			87
Increase in cash surrender value of life insurance		(206	)		(212	)
Change in operating assets and liabilities:
Decrease in assets:
Mortgage and SBA loans held for sale		1,527			1,094
Accrued interest receivable		358			513
Other assets		1,212			176
(Decrease) increase in liabilities:
Accrued interest payable and other liabilities		(59	)		525
Net cash provided by operating activities		4,155			3,994

Cash Flows from Investing Activities
Proceeds from sales of securities held to maturity		498			-
Proceeds from calls and maturities of securities held to maturity		475			1,927
Proceeds from calls and maturities of securities available for sale		74,868			24,431
Proceeds from sales of securities available for sale		28,909			36,594
Purchase of securities available for sale		(101,997	)		(34,797	)
Proceeds from the sale of OREO		168			873
Net decrease in loans made to customers		15,340			5,373
Net purchases of premises and equipment		5			(21	)
Net cash provided by investing activities		18,266			34,380

Cash Flows from Financing Activities
Net increase in demand deposits, MMDA, NOW, and savings accounts		10,794			3,414
Net decrease in time deposits		(18,651	)		(20,205	)
Net repayment on FHLB borrowings		-			(10,000	)
Net increase (decrease) in securities sold under repurchase agreements		(1,120	)		185
Net proceeds from issuance of common stock		4			11
Net cash used in financing activities		(8,973	)		(26,595	)

Increase in cash and cash equivalents	$	13,448		$	11,779
Cash and cash equivalents:
Beginning		13,861			12,503
Ending	$	27,309		$	24,282
Supplemental Disclosures of Cash Flow Information
Cash payments for: Interest	$	3,339		$	4,564
Income taxes	$	-		$	-
Non-cash investing and financing activities:
Unrealized gain on securities available for sale, net	$	2,125		$	4,333
Loans transferred to other real estate owned	$	2,976		$	2,111

See Notes to Consolidated Financial Statements.

Index

CENTRAL VIRGINIA BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011 and 2010

(Unaudited)

Note 1. Basis of Presentation

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Central Virginia Bankshares, Inc., and its subsidiaries, Central Virginia Bank, including its subsidiary, CVB Title Services, Inc. and Central Virginia Bankshares Statutory Trust I. All significant intercompany transactions and balances have been eliminated in consolidation. ASC Topic 810 Consolidations requires that the Company no longer eliminate through consolidation the equity investment in Central Virginia Bankshares Statutory Trust I by the parent company, Central Virginia Bankshares, Inc., which equaled $155 thousand at June 30, 2011. The subordinated debt of the Trust is reflected as a liability on the Company’s balance sheet. When we refer to “the Company,” “we,” “our” or “us” in this Report, we mean Central Virginia Bankshares, Inc. (consolidated). When we refer to “Central Virginia Bank” or “the Bank”, we mean Central Virginia Bank (subsidiary).

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, (“GAAP”). Certain reclassifications have been made to prior period amounts to conform to the current year presentations.

In our opinion, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2011, and December 31, 2010, the results of operations and comprehensive income for the three and six month periods ended June 30, 2011 and 2010, and cash flows and statements of changes in stockholders’ equity for the six months ended June 30, 2011 and 2010. The statements should be read in conjunction with Notes to Consolidated Financial Statements included in the annual report for the year ended December 31, 2010. The results of operations for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year.

Change in accounting policy: Effective January 1, 2011, the Company changed its accounting policy with respect to non-accrual loans. When a loan is classified as non-accrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Correction of an immaterial error: During the first quarter of 2011, the Company discovered an immaterial error in the accounting for the deferral of quarterly dividends on the Fixed Rate Cumulative Preferred Stock, Series A. It was determined that a liability for the payment of such deferred dividends should not have been accrued since the dividend had not been declared to be paid. Correction of this error would have decreased accrued interest payable and increased retained earnings in the amount of $569 thousand as of December 31, 2010. Correction of this error would not have impacted net income, earnings per share or any bank capital ratio calculations. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 108 (SAB 108), the Company has determined this error to be immaterial and has therefore chosen to revise the December 31, 2010 financials and the Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2010 presented in this document.

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SAB 108 does not require restatement of previously filed financial statements for corrections of immaterial errors.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, Intangible – Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, Interactive Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first

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quarterly report for fiscal periods ending on or after June 15, 2011.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 350) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. 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. The Company has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.

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In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company adopted ASU 2011-05 during the second quarter 2011 and has included the required disclosures in its consolidated financial statements.

Note 2. Securities

Securities Available for Sale

The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale at June 30, 2011 and December 31, 2010 are summarized as follows:

	June 30, 2011 (Unaudited)
(Dollars in 000’s)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
U.S. Treasury securities	$	4,203	$	10	$	(4	)	$	4,209
U.S. government agencies & corporations		5,050		88		-			5,138
Bank eligible preferred and equities		2,277		279		(107	)		2,449
Mortgage-backed securities (1)		81,630		836		(70	)		82,396
Corporate and other debt		15,260		83		(4,056	)		11,287
States and political subdivisions		4,236		65		(43	)		4,258
	$	112,656	$	1,361	$	(4,280	)	$	109,737

	December 31, 2010
(Dollars in 000’s)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Market Value
U.S. Treasury securities	$	30,121	$	18	$	-		$	30,139
U.S. government agencies & corporations		30,464		310		(64	)		30,710
Bank eligible preferred and equities		2,427		150		(403	)		2,174
Mortgage-backed securities (1)		29,048		383		(206	)		29,225
Corporate and other debt		17,294		49		(5,187	)		12,156
States and political subdivisions		4,489		26		(121	)		4,394
	$	113,843	$	936	$	(5,981	)	$	108,798

(1)

At June 30, 2011 and December 31, 2010, GNMA securities represented 94% and 86% of the total market value of mortgage-backed securities, respectively.

The following tables present the gross unrealized losses and fair values as of June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:

Index

	June 30, 2011 (Unaudited)
(Dollars in 000’s)	Less than twelve months					Twelve months or longer					Total
Securities Available for Sale	Approximate Fair Value		Unrealized Losses			Approximate Market Value		Unrealized Losses			Approximate Market Value		Unrealized Losses

U.S. Treasury securities	$	4,004	$	(4	)	$	-	$	-		$	4,004	$	(4	)
Bank eligible preferred and equities		-		-			1,970		(107	)		1,970		(107	)
Mortgage-backed securities		16,119		(70	)		-		-			16,119		(70	)
Corporate and other debt		-		-			9,936		(4,056	)		9,936		(4,056	)
States and political subdivisions		-		-			1,182		(43	)		1,182		(43	)
	$	20,123	$	(74	)	$	13,088	$	(4,206	)	$	33,211	$	(4,280	)


	December 31, 2010
	Less than twelve months					Twelve months or longer					Total
Securities Available for Sale	Approximate Fair Value		Unrealized Losses			Approximate Market Value		Unrealized Losses			Approximate Market Value		Unrealized Losses
U.S. Treasury securities	$	29,000	$	-		$	-	$	-		$	29,000	$	-
U.S. government agencies & corporations		2,965		(28	)		1,964		(36	)		4,929		(64	)
Bank eligible preferred and equities		74		(1	)		1,825		(402	)		1,899		(403	)
Mortgage-backed securities		11,213		(206	)		-		-			11,213		(206	)
Corporate and other debt		1		(62	)		11,404		(5,125	)		11,405		(5,187	)
States and political subdivisions		2,057		(92	)		226		(29	)		2,283		(121	)
	$	45,310	$	(389	)	$	15,419	$	(5,592	)	$	60,729	$	(5,981	)

Changes in market interest rates and changes in credit spreads may result in temporary impairment or unrealized losses, as the fair value of securities will fluctuate in response to these market factors. Of the securities in a net unrealized loss position longer than 12 months as of June 30, 2011, $4.1 million of the total $4.2 million unrealized loss is in the corporate and other debt category where the Company has a number of corporate debt securities issued by companies within the financial sector, with investment grade credit ratings, and other pooled trust preferred securities where the underlying instruments are commercial bank or insurance company trust preferred issues. Due to the multitude of economic issues, and the resulting general market unrest, most of the financial sector debt instruments have experienced historical lows in their market value. While this is not considered a permanent condition, the Company cannot predict with any degree of accuracy when prices will return to historical levels.

The primary relevant factors considered in our evaluation to determine if the impairment is other than temporary are the relationship of current market interest rates as compared to the fixed coupon rate of the securities, credit risk (all the issuers of the securities had investment grade credit ratings or better at the time the securities were purchased), the continued ability to maintain payment of the dividend or coupon, continuation as a going concern, adverse market factors, and any other significant adverse factors. The compilation of these factors leads to a determination that if the overall evidence suggests that the Company can recover substantially all of our investment in the securities within a reasonable period of time, the impairment is considered temporary. After such an analysis, the Company decided to record an Other Than Temporary Impairment (OTTI) related to a Collateralized Debt Obligation (CDO) security investment of $13 thousand during the first six months of 2011.

Securities Held to Maturity

The amortized cost, gross unrealized gains and losses and estimated fair value of securities being held to

Index

maturity at June 30, 2011 and December 31, 2010 are summarized as follows:

(Dollars in 000’s)	June 30, 2011 (Unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Market Value
States and political subdivisions	$	1,546	$	27	$	-	$	1,573

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Market Value
States and political subdivisions	$	2,525	$	16	$	-	$	2,541

During the second quarter of 2011, the Company sold a held to maturity municipal security with a carrying value of $501 thousand. The Company sold the security because the security’s investment grade rating fell below the Company’s acceptable investment policy standards. The security was sold for $498 thousand and a loss of $3 thousand was recorded relating to the sale.

As of June 30, 2011, the Company had eight pooled trust preferred securities that were deemed to be OTTI based on a present value analysis of expected future cash flows. These securities had a fair value of $2.4 million and an unrealized loss of $8.3 million, of which $1.3 million was recognized in other comprehensive loss and $7.0 million was recognized in earnings in current and prior periods. The following table provides further information on these eight securities as of June 30, 2011 (in thousands):

Security	Class	Current Moody’s Ratings (Lowest Assigned Rating)	Amortized Cost		Book Value/ Fair Value		Unrealized Loss		Cumulative Other Comprehensive (Gain) Loss (1)			Amount of OTTI Related to Credit Loss (1)
PreTSL II	Mez	Ca	$	2,310	$	743	$	1,567	$	190		$	1,377
PreTSL XII	B-3	Ca		2,011		567		1,444		665			779
PreTSL XVI	D	NR		1,553		-		1,553		-			1,553
PreTSL XXIII	D-1	NR		1,000		55		945		(55	)		1,000
ALESC 6A	D-1	Ca		1,035		1		1,034		(1	)		1,035
SLOSO 2007	A3F	C		1,000		-		1,000		-			1,000
Preferred CPO Ltd	B/C	Ba3		570		457		113		91			22
Reg Div Fund	Senior	Ca		1,195		596		599		352			247
Tota			$	10,674	$	2,419	$	8,255	$	1,242		$	7,013

(1) Pre-tax.

As of June 30, 2011, the Company had three pooled trust preferred securities that were deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The securities had a fair value of $1.4 million. The following table provides further information on these securities as of June 30, 2011 (in thousands):

Security	Class		Current Moody’s Ratings (Lowest Assigned Rating)	Amortized Cost		Book Value/ Fair Value		Unrealized Loss		Cumulative Other Comprehensive (Gain)/Loss (1)		Amount of OTTI Related to Credit Loss (1)
PreTSL XXIII		C-2	C	$	498	$	212	$	286	$	286	$	-
i-PreTSL III		B-3	B2		1,500		758		742		742		-
i-PreTSL IV		B-2	Ba2		1.000		446		554		554		-
Tota				$	2,998	$	1,416	$	1,582	$	1,582	$	-

(1) Pre-tax.

Index

The Company’s investment in Federal Home Loan Bank (FHLB) stock totaled $2.9 million at June 30, 2011. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess capital stock in 2010, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2011 and no impairment has been recognized. FHLB stock is included with other assets on the balance sheet and is not a part of the available for sale securities portfolio.

The following table presents a roll-forward of the cumulative credit loss component amount of OTTI recognized in earnings:

(Dollars in 000’s)	Three Months Ended June 30, 2011		Six Months Ended June 30, 2011
Balance, beginning of period	$	25,913	$	25,900
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		13

Balance, end of period	$	25,913	$	25,913

Available for Sale Securities with an amortized cost of $4.9 million and $4.5 million and a market value of $5.0 million and $4.5 million and Held to Maturity Securities with an amortized cost of $1.4 million and $1.8 million and a market value of $1.4 million and $1.8 million at June 30, 2011 and December 31, 2010, respectively, were pledged as collateral for repurchase agreement borrowings with correspondent banks and public deposits and for other purposes as required or permitted by law.

Note 3. Loans and allowance for loan losses

Major classifications of our loans as of June 30, 2011 and December 31, 2010 are summarized as follows:

(Dollars in 000’s)	June 30, 2011 (Unaudited)			December 31, 2010
Commercial	$	53,633		$	55,489
Real Estate:
Mortgage		120,565			126,445
Home equity		22,645			21,679
Construction		38,699			51,004
Total real estate		181,909			199,128

Bank cards		902			998
Installment		5,012			5,836
		241,456			261,451
Less unearned income		(160	)		(2	)
Loans, net of unearned income		241,296			261,449
Allowance for loan losses		(9,887	)		(10,524	)
Loans, net	$	231,409		$	250,925

Credit Quality. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading

Index

system is based on experiences with similarly graded loans. For consumer and residential loans, the Company believes that performance and delinquency status is a better indicator of credit quality; therefore, the Company does not generally risk grade real estate mortgage, real estate home equity or installment loans. In general, commercial loans are risk graded; however, there may be certain instances whereby these loans are not risk graded, such as when loans are approved by branch lenders under their loan authority. In general, construction loans are risk graded; however, in instances where construction loans are for residential purposes, these loans are considered to be consumer loans and are not risk graded.

The Company’s internally assigned grades are as follows:

Pass – No change in credit rating of borrower and loan-to-value ratio of asset;

Weak Pass – Weakening of borrower’s debt capacity, earnings and cash flows;

Special Mention – Deterioration in the credit rating of borrower;

Sub-Standard – Deteriorating financial position of borrower, probability of loss is high or expected;

Doubtful – Bankruptcy exists or is highly probable and prospects for recovery is limited; and

Loss – Borrowers deemed incapable of repayment of debt.

The following table represents credit exposures by internally assigned grades as of June 30, 2011:

	June 30, 2011(unaudited)
(Dollars in 000’s)	Commercial		Real Estate - Mortgage		Real Estate – Home Equity		Real Estate - Construction		Bank Cards		Installment		Total
Pass	$	15,769	$	24,166	$	1,388	$	302	$	-	$	74	$	41,699
Weak Pass		17,751		37,669		1,076		6,418		-		11		62,925
Special Mention		4,721		7,037		-		5,868		-		235		17,861
Sub-Standard		14,262		8,698		125		25,965		-		282		49,332
Doubtful		-		326		-		-		-		-		326
Total	$	52,503	$	77,896	$	2,589	$	38,553	$	-	$	602	$	172,143

The following table shows a breakdown of loans that are not risk rated in the table above:

(Dollars in 000’s)	June 30, 2011 (unaudited)
	Performing		Non-Performing		Total
Commercial	$	1,130	$	-	$	1,130
Real Estate – Mortgage		40,685		1,984		42,669
Real Estate – Home Equity		19,674		382		20,056
Real Estate - Construction		146		-		146
Bank Cards		863		39		902
Installment		4,324		86		4,410
Total	$	66,822	$	2,491	$	69,313

The following table represents credit exposures by internally assigned grades as of December 31, 2010:

Index

	December 31, 2010
(Dollars in 000’s)	Commercial		Real Estate - Mortgage		Real Estate – Home Equity		Real Estate - Construction		Bank Cards		Installment		Total
Pass	$	17,755	$	27,361	$	1,380	$	687	$	-	$	22	$	47,205
Weak Pass		17,775		40,403		1,073		7,761		-		17		67,029
Special Mention		4,532		3,238		-		7,536		-		241		15,547
Sub-Standard		14,974		10,440		-		34,419		-		320		60,153
Doubtful		180		326		-		-		-		-		506
Total	$	55,216	$	81,768	$	2,453	$	50,403	$	-	$	600	$	190,440

The following table shows a breakdown of loans that are not risk rated in the table above:

(Dollars in 000’s)	December 31, 2010
	Performing		Non-Performing		Total
Commercial	$	209	$	64	$	273
Real Estate – Mortgage		42,224		2,453		44,677
Real Estate – Home Equity		18,627		599		19,226
Real Estate - Construction		601		-		601
Bank Cards		967		31		998
Installment		5,080		156		5,236
Total	$	67,708	$	3,303	$	71,011

The following summarizes activity in our allowance for loan losses:

(Dollars in 000’s)	June 30, 2011			December 31, 2010			June 30, 2010
Beginning balance	$	10,524		$	10,814		$	10,814
Recoveries credited to allowance		31			318			162
Loans charged off		(1,868	)		(8,392	)		(3,888	)
Provision for loan losses		1,200			7,784			3,220
Ending balance	$	9,887		$	10,524		$	10,308

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2011 and the Company’s recorded investment in loans as of June 30, 2011 related to each balance in the allowance for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	June 30, 2011 (unaudited)
(Dollars in 000’s)	Commercial			Real Estate - Mortgage			Real Estate – Home Equity			Real Estate - Construction			Bank Cards			Installment			Total
Beginning balance	$	2,416		$	2,139		$	224		$	5,621		$	13		$	111		$	10,524
Recoveries credited to allowance		3			9			1			-			1			17			31
Loans charged-off		(126	)		(439	)		(29	)		(1,221	)		(8	)		(45	)		(1,868	)
Provision for loan losses		(486	)		91			26			1,486			9			74			1,200
Ending balance - allowance for loan loss	$	1,807		$	1,800		$	222		$	5,886		$	15		$	157		$	9,887

Index

Period-end amount allocated to:
Loans individually evaluated for impairment	$	854	$	514	$	-	$	3,229	$	-	$	-	$	4,597
Loans collectively evaluated for impairment		953		1,286		222		2,657		15		157		5,290
Ending balance – allowance for loan loss	$	1,807	$	1,800	$	222	$	5,886	$	15	$	157	$	9,887

Ending balance – loans	$	53,633	$	120,565	$	22,645	$	38,699	$	902	$	5,012	$	241,456

Loans individually evaluated for impairment		7,916		8,804		-		31,230		-		-		47,950
Loans collectively evaluated for impairment		45,717		111,761		22,645		7,469		902		5,012		193,506
Ending balance – loans	$	53,633	$	120,565	$	22,645	$	38,699	$	902	$	5,012	$	241,456

The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2010 and the Company’s recorded investment in loans as of December 31, 2010 related to each balance in the allowance for loan losses.

	December 31, 2010
(Dollars in 000’s)	Commercial		Real Estate - Mortgage		Real Estate – Home Equity		Real Estate - Construction		Bank Cards		Installment		Total
Ending balance - allowance for loan loss	$	2,416	$	2,139	$	224	$	5,621	$	13	$	111	$	10,524

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,216	$	738	$	-	$	2,623	$	-	$	-	$	4,577
Loans collectively evaluated for impairment		1,200		1,401		224		2,998		13		111		5,947
Ending balance – allowance for loan loss	$	2,416	$	2,139	$	224	$	5,621	$	13	$	111	$	10,524

Ending balance – loans	$	55,489	$	126,445	$	21,679	$	51,004	$	998	$	5,836	$	261,451

Loans individually evaluated for impairment		8,689		11,894		-		38,236		-		-		58,819
Loans collectively evaluated for impairment		46,800		114,551		21,679		12,768		998		5,836		202,632
Ending balance – loans	$	55,489	$	126,445	$	21,679	$	51,004	$	998	$	5,836	$	261,451

Impaired Loans. Impaired loans include loans that are on non-accrual but may also include loans that are performing and paying per the terms of the loan agreement. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on non-accruing impaired loans are typically applied to principal unless collectability

Index

of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Interest payments on accruing impaired loans are recognized as interest income. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Quarter-end impaired loans are set forth in the following table:

	June 30, 2011 (unaudited)
(Dollars in 000’s)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	3,107	$	3,107	$	-	$	3,135	$	107
Real estate:
Mortgage		5,703		5,827		-		6,382		190
Construction		11,251		13,079		-		11,857		282

With an allowance recorded:
Commercial	$	4,809	$	4,809	$	854	$	4,936	$	110
Real estate:
Mortgage		3,566		3,566		514		3,472		51
Construction		20,045		20,974		3,229		21,770		297

Total:
Commercial	$	7,916	$	7,916	$	854	$	8,071	$	217
Real Estate:
Mortgage	$	9,269	$	9,393	$	514	$	9,854	$	241
Construction	$	31,296	$	34,053	$	3,229	$	33,627	$	579
Total:	$	48,481	$	51,362	$	4,597	$	51,552	$	1,037

Year-end impaired loans are set forth in the following table:

	December 31, 2010
(Dollars in 000’s)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	3,508	$	3,508	$	-	$	2,132	$	194
Real estate:
Mortgage		7,592		7,592		-		4,236		495
Construction		15,553		18,329		-		8,028		674

With an allowance recorded:
Commercial	$	5,181	$	5,181	$	1,216	$	2,958	$	100
Real estate:
Mortgage		4,302		4,721		738		4,311		157
Construction		22,683		24,803		2,623		13,992		905

Total:
Commercial	$	8,689	$	8,689	$	1,216	$	5,090	$	294
Real Estate:
Mortgage	$	11,894	$	12,313	$	738	$	8,547	$	652
Construction	$	38,236	$	43,132	$	2,623	$	22,020	$	1,579
Total:	$	58,819	$	64,134	$	4,577	$	35,657	$	2,525

Index

Generally, no additional funds are committed to be advanced in connection with our impaired loans. Impaired loans include loans that are on non-accrual but may also include loans that are performing and paying per the terms of the loan agreement. The Company has identified these loans as impaired because either (1) they are related to construction and development loans where the underlying project is delayed, or (2) the fair value of the collateral supporting the loan may be less than the loan amount even though the loan is current. At the time that the loan becomes ninety days past due, the Company will generally put the loan on non-accrual, unless the loan is well-secured and in the process of collection.

As of June 30, 2011 loans classified as troubled debt restructurings and included in impaired loans in the disclosure above totaled $7.7 million. At June 30, 2011, $6.1 million of the loans classified as troubled debt restructurings are in compliance with the modified terms. There were $8.5 million in troubled debt restructurings at December 31, 2010. The following table provides further information regarding our troubled debt restructurings as of June 30, 2011:

(Dollars in 000’s)	June 30, 2011 (unaudited)
	Number of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Commercial		4	$	3,592	$	3,585
Real Estate – Mortgage		6		2,944		2,888
Real Estate – Home Equity		-		-		-
Real Estate - Construction		10		1,449		1,272
Total		20	$	7,985	$	7,745

The table below shows troubled debt restructurings that subsequently defaulted as of June 30, 2011:

(Dollars in 000’s)	June 30, 2011 (unaudited)
	Number of Contracts		Recorded investment
Commercial		-	$	-
Real Estate – Mortgage		1		272
Real Estate – Home Equity		-		-
Real Estate - Construction		1		448
Total		2	$	720

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in managements’ opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following is a table which includes an aging analysis of the recorded investment of past due loans as of June 30, 2011:

Index

(Unaudited) (Dollars in 000’s)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-Accruals
Commercial	$	918	$	693	$	3,826	$	5,437	$	48,196	$	53,633	$	301	$	4,570
Real estate:
Mortgage		3,394		1,073		4,006		8,473		112,092		120,565		687		6,555
Home equity		959		111		40		1,110		21,535		22,645		40		180
Construction		1,028		1,062		11,838		13,928		24,771		38,699		100		15,657
Bank cards		2		28		9		39		863		902		9		-
Installment		32		50		5		87		4,925		5,012		1		12
Total	$	6,333	$	3,017	$	19,724	$	29,074	$	212,382	$	241,456	$	1,138	$	26,974

The following is a table which includes an aging analysis of the recorded investment of past due loans as of December 31, 2010:

(Dollars in 000’s)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-Accruals
Commercial	$	917	$	2,451	$	930	$	4,298	$	51,191	$	55,489	$	198	$	1,714
Real estate:
Mortgage		4,332		2,119		5,374		11,825		114,620		126,445		464		9,024
Home equity		436		40		178		654		21,025		21,679		-		261
Construction		1,667		2,228		16,247		20,142		30,862		51,004		825		19,946
Bank cards		2		19		10		31		967		998		-		-
Installment		99		34		23		156		5,680		5,836		5		18
Total	$	7,453	$	6,891	$	22,762	$	37,106	$	224,345	$	261,451	$	1,492	$	30,963

Note 4. FHLB and Other Borrowings

The borrowings from the Federal Home Loan Bank of Atlanta, Georgia (“FHLB”), are secured by qualifying residential and commercial first mortgage loans, qualifying home equity loans and certain specific investment securities. The Company, through its principal subsidiary, Central Virginia Bank, has available unused borrowing capacity from the Federal Home Loan Bank totaling $17.1 million. The borrowings at June 30, 2011 and December 31, 2010, consist of the following and had a weighted-average interest rate of 3.60% at June 30, 2011 and 4.05% at December 31, 2010:

(Dollars in 000’s)		June 30, 2011 (Unaudited)				December 31, 2010
Fixed rate borrowings with interest rates ranging from 2.95% to 4.57% (1)		$	40,000			$	40,000

(1)

Interest on fixed rate FHLB borrowings are due quarterly with principal due and payable periodically from June 29, 2011 to July 24, 2017.

The contractual maturities of our FHLB advances as of June 30, 2011 are as follows:

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(Dollars in 000’s)	June 30, 2011 (Unaudited)
Due in 2011	$	-
Due in 2012		-
Due in 2013		-
Due in 2014		25,000
Due in 2015		-
Thereafter		15,000
	$	40,000

Other borrowings: Securities sold under agreements to repurchase amounted to $1.0 million and $2.0 million at June 30, 2011 and December 31, 2010, respectively. These borrowings mature daily and are secured by U.S. Government Agency securities with fair values of $1.0 million and $2.2 million at June 30, 2011 and December 31, 2010, respectively. The rates of interest were 0.75% for both periods presented. Repurchase agreements for customers total $0.9 million at June 30, 2011 and $1.0 million at December 31, 2010. These borrowings mature daily and are secured by U.S. Government Agency securities with fair values of $2.0 million at June 30, 2011 and $2.0 million at December 31, 2010. Interest rates of 0.125% and 0.35% were paid on these borrowings for the quarter ended June 30, 2011 and for the year ended December 31, 2010, respectively.

Borrowing facilities: The Company has entered into various borrowing arrangements with other financial institutions for federal funds and other borrowings. The total amount of borrowing facilities available as of June 30, 2011 total $117.1 million, of which $75.2 million remains available to borrow. The total amount of borrowing facilities at December 31, 2010, was approximately $121.1 million with $79.1 million available to borrow.

Note 5. Stock-Based Compensation

Stock Options: The Company has a Stock Plan that provides for the grant of Incentive Stock Options up to a maximum of 341,196 shares of common stock of which 154,420 shares have not been issued. This Plan was adopted to foster and promote our long-term growth and financial success by assisting in recruiting and retaining directors and key employees by enabling individuals who contribute significantly to participate in our future success and to align their interests with ours. The options were granted at the market value on the date of each grant. The maximum term of the options is ten years. The Company has not issued new options, and no expense has been recognized, since 2007.

The following table presents a summary of our options under the Plan at June 30, 2011:

(unaudited)	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
Outstanding at December 31, 2010		19,331		$	18.46	$	-
Granted		-			-		-
Exercised		-			-		-
Canceled or expired		(8,218	)	$	18.09		-
Options outstanding, June 30, 2011		11,113		$	18.73	$	-
Options exercisable, June 30, 2011		11,113		$	18.73	$	-

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2011. This amount changes based on changes in the market value of our common stock.

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Information pertaining to our options outstanding at June 30, 2011 is as follows:

(unaudited)	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Outstanding	Weighted Average Exercise Price
$11.53 $15.21-$24.81	2,736 8,377	1.05 years 2.55 years	$11.53 $21.09	2,736 8,377	$11.53 $21.09

Restricted Stock: During the first six months of 2011, the Company granted 48,439 restricted stock under the Company’s Stock Incentive Plan to the Company’s Officers. The restricted stock will vest over a three year period from the date of grant. All grantees of these restricted stock are entitled to receive all dividends and distributions (also known as “dividend equivalent rights”) paid with respect to the common shares of the Company underlying such restricted stock at the time such dividends or distributions are paid to holders of common shares.

The Company recognizes compensation expense for outstanding restricted stock over their vesting periods for an amount equal to the fair value of the restricted stock at grant date. Fair value is determined by the price of the common shares underlying the restricted stock on the grant date. As of June 30, 2011, there was $73 thousand of total unrecognized compensation cost related to non-vested restricted stock granted under the Stock Plan. That cost is expected to be recognized over a weighted-average period of 3 years. The Company recorded $11 thousand of compensation expense related to restricted stock during the six months ended June 30, 2011.

A summary of the status of the Company’s non-vested restricted stock as of June 30, 2011, and changes during the quarter ended June 30, 2011, is presented below:

(unaudited)	Number Of Restricted Stock		Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2011		-	$	-
Granted		48,439		1.73
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2011		48,439	$	1.73

Note 6. Fair Value Measurements

As required by FASB ASC Topic 820, the Company must record fair value adjustments to certain assets and liabilities required to be measured at fair value and to determine fair value disclosures. Topic 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

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Level 1:

Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2:

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3:

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by us to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or substantially similar securities by using pricing models that consider observable market data (Level 2). The Company uses an independent valuation firm that specializes in valuing debt securities (Level 3). The independent firm evaluates all relevant credit and structural aspects of each debt security, determining appropriate performance assumptions and performing discounted cash flow analysis. The following topics are covered in their evaluation:

Detailed credit and structural evaluation for each piece of collateral in the debt security;

Collateral performance projections for each piece of collateral in the debt security;

Terms of the debt security structure; and

Discounted cash flow modeling.

The following table presents the balances of our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

(Dollars in 000’s)(Unaudited)			Fair Value Measurements at June 30, 2011 Using
Description	Balance as of June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	4,209	$	-	$	4,209	$	-
U.S. government agencies and corporations		5,138		-		5,138		-
Bank eligible preferred and equities		2,449		-		2,449		-
Mortgage-backed securities		82,396		-		82,396		-
Corporate and other debt		11,287		-		7,452		3,835
States and political subdivisions		4,258		-		4,258		-

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(Dollars in 000’s)			Fair Value Measurements at December 31, 2010 Using
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	30,139	$	-	$	30,139	$	-
U.S. government agencies and corporations		30,710		-		30,710		-
Bank eligible preferred and equities		2,174		-		2,174		-
Mortgage-backed securities		29,225		-		29,225		-
Corporate and other debt		12,156		-		8,724		3,432
States and political subdivisions		4,394		-		4,394		-

The table below presents reconciliation and statements of operations classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011:

(Dollars in 000’s) (Unaudited)	Available for Sale Securities
Balance, December 31, 2010	$	3,432
Total realized and unrealized gains (losses):
Included in earnings		(13	)
Included in other comprehensive income		416
Purchases, sales, issuances and settlements, net		-
Transfers in and (out) of Level 3		-
Balance, June 30, 2011	$	3,835

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by us to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Other real estate owned: Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at the lesser of book value or fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, (Level 2) valuations are periodically performed by us and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in net expenses from foreclosed assets.

Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market and SBS certificates held pending being pooled into an SBA security. Fair value is based on the price secondary markets are currently offering for similar loans and SBA certificates using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the quarter ended June 30, 2011. Gains and losses on the sale of loans are recorded within other operating income on the Consolidated Statements of Operations.

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Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of us using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

The following table summarizes our assets that were measured at fair value on a nonrecurring basis during the period.

(Dollars in 000’s) (Unaudited)			Fair Value Measurements at June 30, 2011 Using
Description	Balance as of June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans Net of Valuation Allowance	$	23,823	$	-	$	23,823	$	-
Other real estate owned	$	5,162	$	-	$	5,162	$	-

(Dollars in 000’s)			Fair Value Measurements at December 31, 2010 Using
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans Net of Valuation Allowance	$	27,589	$	-	$	27,589	$	-
Other real estate owned	$	2,394	$	-	$	2,394	$	-

ASC 820-10-50 “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

The following methods and assumptions were used by the Company and subsidiary in estimating the fair value of financial instruments:

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Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate their fair values.

Investment securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable or substantially similar instruments.

Mortgage and SBA loans held for sale: The carrying amount of loans held for sale approximate their fair values.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Accrued interest receivable and accrued interest payable: The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values.

Deposit liabilities: The fair values of demand deposits equal their carrying amounts which represents the amount payable on demand. The carrying amounts for variable-rate fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected maturities on time deposits.

Federal funds purchased and securities sold under repurchase agreements: The carrying amounts for federal funds purchased and securities sold under repurchase agreements approximate their fair values.

FHLB borrowings: The fair value of FHLB borrowings is estimated by discounting its future cash flows using net rates offered for similar borrowings.

Capital trust preferred securities: The carrying amount of the capital trust preferred securities approximates their fair values.

The following is a summary of the carrying amounts and estimated fair values of our financial assets and liabilities at June 30, 2011 and December 31, 2010:

	June 30, 2011 (Unaudited)				December 31, 2010
	Dollars in 000’s				Dollars in 000’s
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and due from banks	$	18,613	$	18,613	$	7,582	$	7,582
Federal funds sold		8,696		8,696		6,279		6,279
Securities available for sale		109,737		109,737		108,798		108,798
Securities held to maturity		1,546		1,573		2,525		2,541

Mortgage and SBA loans held for sale		327		327		1,854		1,854
Loans, net		231,409		229,036		250,925		249,613
Accrued interest receivable		1,170		1,170		1,528		1,528

Financial liabilities:
Demand and variable rate deposits		167,535		167,535		156,741		156,741
Certificates of deposit		170,670		171,397		189,321		190,765
Securities sold under repurchase
Agreements		1,853		1,853		2,973		2,973
FHLB borrowings		40,000		43,618		40,000		44,233
Capital trust preferred securities		5,155		5,155		5,155		5,155
Accrued interest payable		610		610		554		554

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At June 30, 2011 and December 31, 2010, the Company had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed, and, therefore, they were deemed to have an immaterial affect on the current fair market value.

Note 7. Income Taxes

The Company earned net income of $94 thousand and incurred a net loss of $1.1 million for the three months ended June 30, 2011 and June 30, 2010, respectively. The Company had no income tax expense for the second quarter 2011 as compared to a tax benefit of $1.0 million in the second quarter of 2010. The Company earned net income of $351 thousand and incurred a net loss of $1.0 million for the six months ended June 30, 2011 and June 30, 2010, respectively. The Company had no income tax expense for the first six months of 2011 as compared to a tax benefit of $1.1 million for the first six months of 2010. Additionally, due to recent significant losses, the Company was unable to ascertain it would generate sufficient net income in the near term to realize its deferred tax assets, and therefore, established a deferred tax valuation allowance during the third quarter 2010.

Note 8. Other Operating Expenses

The following table summarizes the details of other operating expenses for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in 000’s)	2011		2010		2011		2010
Advertising and public relations	$	12	$	55	$	25	$	97
Taxes and licenses		30		57		63		119
Legal and professional fees		138		142		251		220
Consulting fees		132		257		249		340
Outsourced data processing fees		180		138		284		275
Other		657		659		1,263		1,133
Total other operating expenses	$	1,149	$	1,308	$	2,135	$	2,184

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Note 9. Deferral of Dividends on Preferred Stock and Deferral of Interest on Capital Trust Preferred Securities

On February 12, 2010, the Company notified the U.S. Department of the Treasury that the Board of Directors of the Company determined that the payment of the quarterly cash dividend of $142 thousand due during the first quarter of 2010, and subsequent quarterly payments on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (the “Series A Preferred Stock”) should be deferred. In the event the Company defers dividends on the Series A Preferred Stock for an aggregate of six quarterly dividend periods, the holders of the Series A Preferred Stock will be entitled to elect two additional members to the Company’s Board of Directors at the next shareholder meeting. The Company has deferred six quarterly dividend payments, and the Treasury Department has been in contact with the Company. At this time, the Treasury has indicated they are not sending an observer to the Company’s Board meetings; however, they have not indicated as to their intention of electing additional Board members to the Company’s Board of Directors. The total arrearage on such preferred stock as of June 30, 2011 is $854 thousand.

On March 4, 2010 the Company notified U.S. Bank, National Association that pursuant to Section 2.11 of the Indenture dated December 17, 2003 among Central Virginia Bankshares, Inc. as Issuer and U.S. Bank, National Association, as Trustee for the $5,155,000 Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033, (CUSIP 155793AA0), the Board of Directors of Central Virginia Bankshares, Inc. had determined to defer the regular quarterly Interest Payments on such Debentures, effective March 31, 2010. As of June 30, 2011 the total arrearage on such interest payments is $254 thousand.

Note 10. Regulatory Matters

Over the past thirty-six months, the Company’s capital position has been negatively impacted by deteriorating economic conditions that in turn has caused losses in its investment and loan portfolios. As a result of a 2009 examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank of Richmond, the Company has entered into a written agreement with the Bureau of Financial Institutions and the Federal Reserve. The written agreement requires the Company to develop a plan to significantly exceed the capital level required to be classified as “well capitalized.” It also provides that the Company shall:

submit written plans to the Bureau of Financial Institutions and the Federal Reserve to strengthen corporate governance and board and management structure;

strengthen board oversight of the management and operations of the Company;

strengthen credit risk management and administration;

establish ongoing independent review and grading of the Company’s loan portfolio; enhance internal audit processes;

improve asset quality;

review and revise our methodology for determining the allowance for loan and lease losses (“ALLL”) and maintain an adequate ALLL;

maintain sufficient capital;

establish a revised contingency funding plan;

establish a revised investment policy; and

improve the Company’s earnings and overall condition.

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The Company has complied with the initial requirements of the written agreement, including submitting plans to significantly exceed the capital level required to be classified as “well capitalized”, improve corporate governance, strengthen board oversight of management and operations, strengthen credit risk management and administration, and improve asset quality. The Company continues to address the requirements of the written agreement, as well as, monitor, expand and revise all items to ensure compliance.

In addition, the Company is evaluating strategies regarding capital enhancements. Such strategies could include capital offerings, a sale leaseback of bank owned real estate, continued reduction in assets, or further management of the securities portfolio.

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

The Company and the Bank. Central Virginia Bankshares, Inc. (the “Company”) was incorporated as a Virginia corporation on March 7, 1986, solely to acquire all of the issued and outstanding shares of Central Virginia Bank (the “Bank”). The Bank was incorporated on June 1, 1972 under the laws of the Commonwealth of Virginia and, since opening for business on September 17, 1973, its main and administrative office had been located on U.S. Route 60 at Flat Rock, in Powhatan County, Virginia. When we refer to “the Company,” “we,” “our” or “us” in this Report, we mean Central Virginia Bankshares, Inc. (consolidated). When we refer to “Central Virginia Bank” or “the Bank”, we mean Central Virginia Bank (subsidiary).

Our website is www.centralvabank.com and contains information relating to the Company and our business. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these documents as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Copies of our Audit Committee Charter, Nominating Committee Charter, Compensation Committee Charter and Code of Conduct are included on our website and are available to the public.

Principal Market Area. Our primary service areas are Powhatan and Cumberland Counties, eastern Goochland County and western Chesterfield and western Henrico Counties. Our present intention is to continue our activities in our current market area which we consider to be an attractive and desirable area in which to operate.

Banking Services. Our principal business is to attract deposits and to loan or invest those deposits on profitable terms. We engage in a general community and commercial banking business, targeting the banking needs of individuals and small to medium sized businesses in our primary service area. We offer all traditional loan and deposit banking services as well as newer services such as Internet banking, telephone banking, and debit cards. In addition, we offer other ancillary services such as the sales of non-deposit investment products through a partnership with Infinex, Inc. a registered broker-dealer and member of FINRA and SIPC. We make term loans, both alone and in conjunction with other banks or governmental agencies. We also offer other related services, such as ATMs, travelers’ checks, safe deposit boxes, deposit transfer, notary public, escrow, drive-in facilities and other customary banking services. Our lending policies, deposit products and related services are intended to meet the needs of individuals and businesses in our market area.

Our plan of operation for future periods is to continue to operate as a community bank and to focus our lending and deposit activities in our primary service area. As our primary service area continues to shift from rural to suburban in nature, we will compete aggressively for customers through our traditional personal service and hours of operation. We may originate construction loans as the area becomes more developed. Consistent with our focus on providing community based financial services, we do not plan to diversify our loan portfolio geographically by making significant loans outside of our primary service area. While we and our borrowers are directly affected by the economic conditions and the prevailing real estate market in the area, we are better able to monitor the financial condition of our borrowers by concentrating our lending activities in our primary service area. We will continue to evaluate the feasibility of entering into other markets as opportunities become available.

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Written Agreement with the Bureau of Financial Institutions and the Federal Reserve

Over the past thirty-six months, our capital position has been negatively impacted by deteriorating economic conditions that in turn has caused losses in our investment and loan portfolios. As a result of a 2009 examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank of Richmond, we have entered into a written agreement with the Bureau of Financial Institutions and the Federal Reserve. The written agreement requires us to develop a plan to significantly exceed the capital level required to be classified as “well capitalized.” It also provides that we shall:

submit written plans to the Bureau of Financial Institutions and the Federal Reserve to strengthen corporate governance and board and management structure;

strengthen board oversight of the management and operations of Central Virginia Bank;

strengthen credit risk management and administration;

establish ongoing independent review and grading of our loan portfolio; enhance internal audit processes;

improve asset quality;

review and revise our methodology for determining the allowance for loan and lease losses (“ALLL”) and maintain an adequate ALLL;

maintain sufficient capital;

establish a revised contingency funding plan;

establish a revised investment policy; and

improve our earnings and overall condition.

The written agreement also restricts the payment of dividends and any payments on trust preferred securities or subordinated debt, and any reduction in capital or the purchase or redemption of stock without the prior approval of the Bureau of Financial Institutions and the Federal Reserve. We have complied with the initial requirements of the written agreement, including submitting plans to significantly exceed the capital level required to be classified as “well capitalized”, improve corporate governance, strengthen board oversight of management and operations, strengthen credit risk management and administration, and improve asset quality. We continue to address the requirements of the written agreement, as well as, monitor, expand and revise all items to ensure compliance.

Current Regulatory Environment

Beginning in the summer of 2007, significant adverse changes in financial market conditions resulted in a deleveraging of the entire global financial system. As part of this process, residential and commercial mortgage markets in the United States have experienced a variety of difficulties including loan defaults, credit losses and reduced liquidity. In response to these unprecedented events, the U.S. Government has taken a number of actions to improve stability in the financial markets and encourage lending. One such program is the Troubled Assets Relief Program, or TARP.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer

Protection Act (or the Dodd-Frank Act). The Dodd-Frank Act provides for new regulations on financial institutions and creates new supervisory and advisory bodies, including the new Consumer Financial Protection Bureau. The Dodd-Frank Act tasks many agencies with issuing a variety of new regulations, including rules related to mortgage origination and servicing, securitization and derivatives. As the Dodd-Frank Act has only recently been enacted and because a significant number of regulations have yet to be proposed, it is not possible for us to predict how the Dodd-Frank Act will impact our business.

Factors Impacting Our Operating Results

In addition to the prevailing market conditions, we expect that the results of our operations will be affected by a number of factors and will primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, commercial and residential mortgage loans, commercial real estate debt, mortgage-backed securities and other financial

Index

assets in the marketplace. Our net interest income includes the actual payments we receive and is also impacted by the level of loans that are not accruing interest due to their delinquency level. Our net interest income also varies over time, primarily as a result of changes in interest rates, volume and levels of interest earning assets and interest paying deposits and liabilities. Interest rates vary according to the type of asset, conditions in the financial markets, credit worthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of the amounts that we have provided for at June 30, 2011.

Credit Risk. We may be exposed to various levels of credit risk, depending on the nature of our underlying assets. Our Loan Committee will approve and monitor credit risk and other risks associated with our loan portfolio and our Asset Liability Committee (“ALCO”) will approve and monitor credit risk associated with our investment portfolio. Our Board of Directors monitors credit risk through their monthly Board of Directors meetings.

Amount of Earning Assets. The amount of our earning assets, as measured by the aggregate unpaid principal balance of our loan and our investment portfolios, is a key revenue driver. During 2010, we strategically decreased the balances of our investment portfolio and borrowings and certificates of deposits in order to improve our capital position. During 2011, our earning assets have decreased and we have shifted portions of our investment portfolio into government backed securities. These securities have no credit risk and carry lower returns. Generally, as the size of our earning assets decrease, the amount of interest income we receive decreases. The reduction in earning assets also helps to lower interest expense as we incur less interest expense to finance the earning assets. However, the decline in our interest income has been greater than the decrease in our interest expense which, in total, reduces our net interest income.

Changes in Market Interest Rates. With respect to our business operations, increases in interest rates, in general, may over time cause:

the interest expense associated with our borrowings to increase;

the value of our fixed rate investment securities to decline;

the interest expense associated with our variable rate deposits to increase;

coupons on our variable rate loans to reset, although on a delayed basis, to higher interest rates to the extent allowed by individual loan caps; and

to the extent applicable under the terms of our assets, prepayments on our mortgage loan portfolio and mortgage-backed securities to slow thus increasing the duration of these assets.

Conversely, decreases in interest rates, in general, may over time cause:

to the extent applicable under the terms of our assets, prepayments on our mortgage loans and mortgage-backed securities to increase thus shortening the duration of these assets;

the interest expense associated with our variable rate deposits and borrowings to decrease;

the value of our fixed rate investment securities to increase; and

coupons on our adjustable-rate loans to reset, although on a delayed basis, to lower interest rates subject to interest rate floors on the individual loan.

Since changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to effectively manage interest rate risks.

Summary Results

For the quarter ended June 30, 2011, we reported net income of $94 thousand. This compares to a net loss of $1.1 million for the quarter ended June 30, 2010. The increase in net income is $1.2 million when compared to earnings in the second quarter of 2010. The increase is primarily due to lower provisions for loan losses and lower non-interest expenses in the second quarter of 2011. After $161 thousand in unpaid dividends and accretion of discount on preferred stock, we reported a net loss available to

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common shareholders of $67 thousand for the quarter ended June 30, 2011 compared to a net loss available to common shareholders of $1.3 million for the same quarter of the previous year. Basic and diluted loss per share increased $0.45 to $(0.03) for the quarter ended June 30, 2011 from $(0.48) for the comparable period 2010. The return (loss) on average assets for the second quarter 2011 was 0.09% versus (0.97)% for the second quarter of 2010. The return (loss) on shareholders’ equity was 2.90% for the second quarter 2011 compared to (15.53)% in the second quarter of 2010.

For the year to date 2011, we reported net income of $351 thousand. This compares to a loss of $1.0 million for the same period in 2010. The increase in net income is $1.4 million or 134% when compared to year to date earnings in 2010. The increase is primarily due to lower levels of interest expense on deposits, lower provision for loan losses and lower non-interest expenses recorded in 2011 compared to 2010. After accounting for $321 thousand in unpaid dividends and accretion of discount on preferred stock, net income available to common shareholders was $30 thousand for the year to date 2011. Basic and diluted income (loss) per share increased $0.52 to $0.01 for the year to date 2011 from $(0.51) for the comparable period 2010. The return (loss) on average assets for the year to date 2011 was 0.17% versus (0.44)% for the same period 2010. The return (loss) on shareholders’ equity was 5.83% for the year to date 2011 compared to (7.31)% in the same period 2010.

Revenue, the sum of net interest income and noninterest income, of $4.0 million in the second quarter 2011 was $0.4 million lower than the $4.4 million earned in the second quarter 2010. The largest contributor to this decrease was lower net interest income of $0.5 million offset by an increase in realized gains on available for sale securities of $0.1 million. Our net interest margin decreased to 2.90% in the second quarter 2011 as compared to 3.00% in the second quarter 2010.

Revenue of $7.9 million for the year to date 2011 was $0.5 million lower compared with the same period in 2010. The largest contributor to this decrease was lower net interest income and lower deposit fees and charges, offset by growth in our other service charges, commission and fees and an increase in our realized gains on available for sale securities. Our net interest margin improved to 2.97% for the year to date 2011 compared to 2.92% for the same period in 2010.

Our allowance for loan losses was $9.9 million at June 30, 2011, compared with $10.5 million at December 31, 2010. At June 30, 2011, total assets declined $6.5 million or 2% to $402.6 million from $409.1 million at December 31, 2010. We continue to reduce our liabilities as total liabilities at June 30, 2011 declined $9.0 million or 2% to $388.5 million from $397.5 million at December 31, 2010. Total stockholders’ equity increased $2.5 million to $14.1 million at June 30, 2011 from $11.6 million at December 31, 2010.

Our financial results for the second quarter 2011 compared to the second quarter 2010 included the following:

Our net interest income in the second quarter 2011 was $2.7 million. Our net interest margin in the second quarter 2011 decreased to 2.90% compared to 3.00% for the second quarter 2010. Total interest income for the quarter was $4.3 million while total interest expense was $1.6 million. Interest income was lower by 20% from a year earlier primarily due to a decline in our average earning assets and a decline in our yield earned on our investment portfolio for the second quarter 2011 as compared to the second quarter 2010. Our yield on our investment portfolio declined due to the increase of our percentage of government backed securities in the second quarter 2011, which have no credit risk and carry lower returns. Our interest expense declined by 27% from the prior year’s second quarter due primarily to lower interest rates on deposits and a $41.3 million reduction in the average balance of certificate of deposits partially offset by an increase in the average balance of interest bearing deposits, from the second quarter 2010.

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Non-interest income of $1.3 million increased 5%, or $70 thousand from the prior year’s second quarter total of $1.3 million. This increase was due primarily to an increase in our realized gains on the sale of securities available for sale, offset by lower deposit fees and charges.

Total non-interest expense for the second quarter 2011 was $3.2 million, a decrease of 12% or $0.5 million as compared to $3.7 million last year. The decrease was due primarily to lower OREO valuation expenses of $146 thousand and lower salaries and benefits of $149 thousand.

We are continuing our efforts to reduce all controllable expenses while increasing categories of non-interest income with a goal of improving our efficiency ratio in future quarters.

For the second quarter 2011, $0.7 million was added to the allowance for loan losses, compared to the same period in 2010, when $2.9 million was added to the allowance. Our charge-offs for the second quarter 2011 were $1.1 million compared to $3.2 million for the comparable period in 2010. We believe that a reserve of 4.10% of total loans at June 30, 2011 is sufficient to absorb any losses inherent in the portfolio. However, we will adjust our reserves in response to changes in the market and our reserve percentage may change. The allowance for loan losses now represents 23.3% of quarter-end non-performing assets, compared to 31.7% in the second quarter of the prior year. This decline is due to partial charge-offs recorded in prior years on non-performing loans and a higher level of non-performing assets since the second quarter of 2010.

Our financial results for the six months ending June 30, 2011 compared to the six months ending June 30, 2010 included the following:

Our year-to-date 2011 net interest income was $5.5 million compared to $6.3 million for year-to-date 2010. The lower interest rate environment helped our net interest margin for the first half of 2011, resulting in a net interest margin of 2.97% an increase of 5 basis points from 2.92% for the comparable period of 2010. Total interest income for year-to-date 2011 was $8.9 million while total interest expense was $3.4 million. Interest income was lower by 19% from a year earlier due to a reduction in interest income on our investment securities of $1.1 million compared to the same period of 2010 due to the increase of our percentage of government backed securities, and $1.1 million in lower interest income on our loan portfolio due primarily from having $27.0 million in non-accrual loans. Our interest expense declined by 29% from the prior year’s first six months due primarily to $1.3 million in lower interest expense on deposits in addition to $54 thousand in lower interest expense from borrowings.

Non-interest income of $2.3 million increased 8%, or $0.1 million from the prior year’s year-to-date total of $2.2 million. This increase was due primarily to an increase in our realized gains on the sale of securities available for sale of $277 thousand, offset by a decline of $192 thousand in deposit fees and charges due to regulatory changes relating to overdraft rules for debit and ATM cards effective during the third quarter of 2010.

Total non-interest expense for year-to-date 2011 was $6.3 million, a decrease of 13% or $1.0 million as compared to $7.3 million last year. The decrease was due primarily to lower OREO valuation expenses of $556 thousand and lower salaries and benefits of $338 thousand.

For year-to-date 2011, we added $1.2 million to the allowance for loan losses, compared to $3.2 million for the same period in 2010. This decrease of $2.0 million is due to a lower balance of non-performing loans at June 30, 2011 compared to December 31, 2010. Our charge-offs were $1.9 million for the first half of 2011 compared to $3.5 million for the comparable period in 2010. During the first half of 2011 we did not increase our valuation reserve for other real estate as compared to $556 thousand during the comparable period in 2010.

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CRITICAL ACCOUNTING POLICIES

General

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we may use historical loss factors as one of the many factors and estimates utilized in determining the inherent losses that may be present in our loan portfolio. Actual losses could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would affect our transactions could change.

Allowance for loan losses

The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to establish the allowance for loan losses each quarter. To determine the total allowance for loan losses, we estimate the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. The allowance for loan losses consists of amounts applicable to the following portfolio segments: (1) the commercial loan portfolio, (2) the construction loan portfolio, (3) the real estate portfolio (mortgage and home equity), and (4) the consumer loan portfolio (installment and bank cards). For purposes of determining the allowance for loan losses, we have segmented certain loans in the portfolio by product type. Each class of loan exercises significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the collectability of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component is related to loans that are classified as either doubtful or substandard. The general component covers non-classified and special mention loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, construction and residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller

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balance homogenous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

To determine the balance of the allowance account, loans are pooled by portfolio segment and losses are modeled using historical experience, quantitative and other mathematical techniques over the loss emergence period. Each class of loan exercises significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment. We use a vendor supplied model in this process. Management must use judgment in establishing additional input metrics, as described below, for the modeling process. The model and assumptions used to determine the allowance are reviewed by the Asset and Liability Committee. The Board provides final approval on the methodology used for the model.

The following is how management determines the balance of the allowance account for each segment or class of loans.

Commercial loans. Commercial loans are pooled by portfolio class and an historical loss percentage as well as an estimated years for impairment is applied to each class. Historical loss percentages are based on actual loan charge-offs weighted over a three year period, with the most recent quarter weighted more heavily. The estimated years for impairment is based on historical loss experience over the loss emergence period. At June 30, 2011, the estimated years for impairment for each class were as follows:

Commercial – 24 Months

Based on credit risk assessment and management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. In addition, based on management’s analysis of leading predictors of losses and risks inherent with commercial loans, additional loss multipliers are applied to loan balances. Currently, management has applied additional loss estimations based on recent charge-off and delinquency experience within the portfolio.

Construction loans. Construction loans are pooled by portfolio class and an historical loss percentage, as well as an estimated years for impairment, is applied to each class. Historical loss percentages are based on actual loan charge-offs weighted over a three year period, with the most recent quarter weighted more heavily. The estimated years for impairment are based on historical loss experience modeling over the loss emergence period. At June 30, 2011, the estimated years for impairment for each class were as follows:

Other Construction, Land Development and other Loans – 18 Months

Residential Construction – 12 Months

Based on credit risk assessment and management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. Additional loss estimations, associated with risks inherent with construction loans, are based on housing inventory and real estate sales statistics for the region in which the property is located and are applied to balances of residential development loans.

Real estate loans. Real estate loans (mortgage and home equity) are pooled by portfolio class and an historical loss percentage, as well as an estimated years for impairment is applied to each class. Historical loss percentages are based on actual loan charge-offs weighted over a three year period, with the most recent quarter weighted more heavily. The estimated years for impairment are based on historical loss experience over the loss emergence period. At June 30, 2011, the estimated years for impairment for each class were as follows:

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Mortgages – 12 Months

Commercial – 24 Months

Home Equity – 12 Months

Management estimates an additional component of the allowance for loan losses for the non-impaired real estate segment through the application of loss factors to loans grouped by their individual past due status. These ratings reflect the estimated default probability.

In addition, based on management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. Currently, management has applied additional loss estimations based on risks inherent with real estate loans and are based on the current unemployment rate for the region in which the borrower resides and the current inventory within the Metropolitan Statistical Area (MSA) the residence is located.

Consumer loans. Consumer loans (installment and bank cards) are pooled by portfolio class and an historical loss percentage is applied to each class. Historical loss percentage time frames vary between classes. These time frames are based on historical loss experience modeling and other quantitative and mathematical migration techniques over the loss emergence period. At June 30, 2011, the historical loss time frame for each class was as follows:

Other Consumer Loans – 18 Months

Based on credit risk assessment and management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. During the year, management has applied additional loss estimations based on risks inherent with consumer loans and are based on the current unemployment rate for the region and on the past due status of the loan. Criteria ranges are created and loss multipliers are linked to each range. The applicable loss multipliers are then applied to the unsecured balances to estimate the allowance balance for the segment.

The establishment of the allowance for loan losses relies on a consistent process that requires multiple layers of management review and judgment and responds to changes in economic conditions and collateral value, among other influences. From time to time, events or economic factors may affect the loan losses. Our allowance for loan losses is sensitive to risk ratings assigned to individually evaluated loans and economic assumptions and delinquency trends driving statistically modeled reserves.

Management monitors differences between estimated and actual incurred loan losses. This monitoring process includes periodic assessments by senior management of loan segments and the models used to estimate incurred losses in those segments.

The Estimation Process. We estimate loan losses under multiple economic scenarios to establish a range of potential outcomes for each criterion applied to the allowance calculation. Management applies judgment to develop its own view of loss probability within that range, using external and internal parameters with the objective of establishing an allowance for the losses inherent within these portfolios as of the reporting date.

Reflected in the portions of the allowance previously described is an amount for imprecision or uncertainty that incorporates the range of probable outcomes inherent in estimates used for the allowance, which may change from period to period. This amount is the result of our judgment of risks inherent in the portfolios, economic uncertainties, historical loss experience and other subjective factors, including industry trends, calculated to better reflect our view of risk in each loan portfolio. No single statistic or measurement determines the adequacy of the allowance for loan loss. Changes in the allowance for loan loss and the related provision expense can materially affect net income.

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Loan Charge-off Policies. The amount of the loan to be charged off determines the level of review and approval. Charge-offs (aggregated by loan number) will be reviewed and approved as designated below:

Charge-Off Amount	Required Approval
No more than $9,999	Senior Credit Officer or President/CEO
$10,000 up to $300,000	Senior Loan Committee
More than $300,000	Board of Directors

The Board of Directors will receive and review a report of charged-off loans and the total amount of charge-offs at each monthly meeting of the Board.

Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (1) we intend to sell the security or (2) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more -likely-than-not that it will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is credit loss, the loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. Management regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the best estimate of the present value of cash flows expected to be collected from debt securities, its intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.

EARNINGS PERFORMANCE

NET INTEREST INCOME

Our net interest income was $2.7 million and $3.2 million, respectively, for the second quarter of 2011 and 2010; representing a decrease of $0.5 million. Our net interest income was $5.5 million and $6.3 million, respectively, for the first six months of 2011 and 2010; representing a decrease of $0.8 million. This decrease was due primarily to a decline in interest income earned on both our loan and investment portfolios as a result of a decline in average earning assets and a decline in our yield earned on our investment portfolio, partially offset by declines in our interest expense paid on interest paying deposits.

Our net interest margin is a measure of our net interest income performance. It represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest earning assets. Our net interest margin for the second quarter of 2011 was 2.90% compared to 3.00% for the comparable period in 2010. This decrease in net interest margin was due primarily to a decline in average earning assets, offset by a decline in interest expense paid on our deposits. The net interest margin for the first half of 2011 was 2.97% compared to 2.92% for the comparable period in 2010. Our increase in net interest margin for the first half of 2011 was due primarily to a reduction in our interest rates paid on deposits and a reduction in our average balance of certificate of deposits.

Index

Our total interest income was $4.3 million and $8.9 million for the second quarter and first half of 2011, respectively, down from $5.4 million and $11.1 million, respectively from a year ago due to the following:

Loan portfolio

●

Interest and fees on loans was $3.5 million and $7.2 million for the second quarter of 2011 and first half of 2011, respectively, down from $4.1 million and $8.2 million a year ago. The decrease was due to a decline in loans of $39.8 million, or 14%, from June 30, 2010 to June 30, 2011.

●

During the second quarter of 2011, our average loans totaled $246.1 million, a decrease of $40.2 million or 14% from $286.3 million in the second quarter of 2010.

●

During the first half of 2011, our average loans totaled $252.0 million, a decrease of $37.2 million or 13% from $289.2 million in the first half of 2010.

●

Our annualized yield on loans remained relatively stable at 5.64% for the second quarter 2011 from 5.68% in the comparable quarter of 2010.

●

Our annualized yield on loans remained stable at 5.70% for the first half of 2011 from 5.70% in the comparable period of 2010.

Securities portfolio

●

Interest on securities was $0.8 million and $1.7 million for the second quarter of 2011 and first half of 2011, respectively, down from $1.3 million and $2.8 million a year ago.

●

Our average investment securities totaled $97.9 million in the second quarter of 2011, a decrease of $26.5 million or 21% from $124.4 million in the second quarter of 2010.

●

Our average investment securities totaled $94.0 million in the first half of 2011, a decrease of $33.2 million or 26% from $127.2 million in the first half of 2010.

●

Our investment securities in the second quarter of 2011 yielded 3.45%, compared to 4.32% in the second quarter of 2010 as security yields have been affected by the declining rate environment as reinvestment of $28.4 million in the sales, calls or maturities of securities during the second quarter 2011 have been at lower yields. We have increased our percentage of government backed securities in the second quarter 2011, which have no credit risk and carry lower returns.

●

Our annualized yield on securities decreased to 3.65% for the first half of 2011 from 4.39% in the comparable period of 2010.

Our average interest earning assets totaled $370.1 million in the second quarter of 2011, a decrease of $50.9 million or 12% from $421.0 million in the second quarter of 2010. Our yield on total interest earning assets dropped to 4.67% in the second quarter 2011 from 5.14% in the same quarter 2010 resulting in a decrease of $1.1 million in total interest income for the second quarter 2011.

Our total interest expense was $1.6 million and $3.4 million for the second quarter of 2011 and first half of 2011, respectively, down from $2.3 million and $4.8 million a year ago due to the following:

Deposits

●

Our interest expense on deposits was $1.2 million and $2.5 million for the second quarter of 2011 and the first half of 2011, respectively down from $1.8 million and $3.9 million from a year ago due to a combination of lower balances on our higher paying certificate of deposit accounts and a decrease in interest rates paid on interest bearing deposits.

●

Our total average interest bearing deposits were $304.0 million for the second quarter 2011, a decrease of $32.4 million or 10% from $336.4 million for the second quarter 2010. The decline was primarily in our certificate of deposits.

●

Our total average interest paying deposits were $304.2 million for the first half 2011, a decrease of $36.9 million or 11% from $341.1 million for the first half 2010. The decrease was primarily due to a decline in our certificate of deposits.

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Our rate paid on deposits for the second quarter 2011 was 1.60% down from 2.12% for the second quarter 2010 due to the downward repricing of many of our deposits and an overall decline in rates that we offer.

●

Our rate paid on deposits for the first half 2011 was 1.65% down from 2.26% for the first half 2010.

Borrowings

●

Interest on borrowings remained stable at $0.4 million and $0.9 million for the second quarter of 2011 and first half of 2011, respectively as compared to $0.5 million and $0.9 million a year ago.

●

Our average balance on borrowings for the second quarter 2011 was $46.8 million down from $53.6 million for the second quarter 2010, representing a $6.8 million or 13% decline in average borrowings. The decrease in average borrowings was primarily related to the decline in our overnight advances of $10 million.

●

Our average balance on borrowings for the first half 2011 was $47.4 million down from $56.9 million for the second quarter 2010, representing a $9.5 million or 17% decline in average borrowings.

●

Our average interest rate on borrowings for the second quarter of 2011 was 3.65% up from 3.54% for the second quarter 2010 because we had lower balances outstanding on our overnight FHLB advances and federal funds purchased and securities sold under repurchase agreements, which carry the lowest cost of funds rate.

●

Our average rate on borrowings for the first half 2011 was 3.73% up from 3.29% for the first half 2010 because we had lower balances outstanding on our overnight FHLB advances and federal funds purchased or securities sold under repurchase agreements, which carry the lowest cost of funds rate.

The yield on our interest-bearing liabilities decreased to 1.88% in the second quarter 2011 compared to 2.31% in the second quarter 2010. Our average interest-bearing liabilities decreased $39.3 million or 10% to $350.8 million in the second quarter of 2011 compared to $390.1 million in the second quarter of 2010.

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The following table sets forth our average interest earning assets and our average interest bearing liabilities, the average yields earned on assets and rates paid on liabilities, and our net interest margin, for the periods indicated.

	Three Months Ended								Three Months Ended
	June 30, 2011								June 30, 2010
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Interest-earning assets:	($ amounts in thousands)
Federal funds sold	$	26,130		$	11		0.17	%	$	10,279		$	6		0.23	%
Securities: (1)
U. S. Treasury and other government agencies and corporations		68,892			558		3.24	%		88,481			932		4.21	%
States and political subdivisions		6,369			84		5.28	%		10,070			131		5.20	%
Other securities		22,604			203		3.59	%		25,880			280		4.33	%
Total securities		97,865			845		3.45	%		124,431			1,343		4.32	%
Loans		246,060			3,468		5.64	%		286,281			4,063		5.68	%
Total interest-earning assets		370,055		$	4,324		4.67	%		420,991		$	5,412		5.14	%
Allowance for loan losses		(9,912	)							(9,982	)
Cash and other non interest-earning assets		43,277								48,142
Total Assets	$	403,419							$	459,152

Interest-bearing liabilities:
Deposits:
Interest bearing demand and MMDA	$	90,418		$	165		0.73	%	$	83,643		$	179		0.86	%
Savings		39,952			70		0.70	%		37,835			85		0.90	%
Other time		173,661			983		2.26	%		214,940			1,518		2.82	%
Total deposits		304,031			1,218		1.60	%		336,418			1,782		2.12	%

Fed funds purchased and securities sold under REPO		1,649			2		0.49	%		3,027			5		0.66	%
FHLB Term advances		40,000			383		3.83	%		40,000			413		4.13	%
FHLB Overnight advances		-			-		-			5,451			5		0.37	%
Capital trust preferred securities		5,155			42		3.26	%		5,155			52		4.03	%
Total borrowings		46,804			427		3.65	%		53,633			475		3.54	%
Total interest-bearing liabilities		350,835			1,645		1.88	%		390,051			2,257		2.31	%
Demand deposits		36,279								39,321
Other non interest bearing liabilities		3,371								1,237
Total Liabilities		390,485								430,609
Stockholders’ Equity		12,934								28,543
Total Liabilities and Stockholders’ Equity	$	403,419							$	459,152
Net interest spread				$	2,679		2.79	%				$	3,155		2.83	%
Net interest margin (2)							2.90	%							3.00	%

(1) Includes securities available for sale and securities held to maturity.

(2) Calculated as our annualized net interest spread divided by the average balance for the period of our total interest-earning assets.

Index

	Six Months Ended								Six Months Ended
	June 30, 2011								June 30, 2010
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Interest-earning assets:	($ amounts in thousands)
Federal funds sold	$	26,514		$	23		0.17	%	$	12,844		$	14		0.22	%
Securities: (1)
U. S. Treasury and other government agencies and corporations		65,150			1,104		3.39	%		88,532			1,898		4.29	%
States and political subdivisions		6,689			174		5.20	%		11,310			294		5.20	%
Other securities		22,172			439		3.96	%		27,399			602		4.39	%
Total securities		94,011			1,717		3.65	%		127,241			2,794		4.39	%
Loans		251,530			7,174		5.70	%		289,182			8,242		5.70	%
Total interest-earning assets		372,055		$	8,914		4.79	%		429,267		$	11,050		5.15	%
Allowance for loan losses		(10,137	)							(10,292	)
Cash and other non interest-earning assets		41,680								45,911
Total Assets	$	403,598							$	464,886

Interest-bearing liabilities:
Deposits:
Interest bearing demand and MMDA	$	87,279		$	316		0.72	%	$	84,151		$	417		0.99	%
Savings		39,354			136		0.69	%		36,494			184		1.01	%
Other time		177,570			2,060		2.32	%		220,432			3,254		2.95	%
Total deposits		304,203			2,512		1.65	%		341,077			3,855		2.26	%

Fed funds purchased and securities sold under REPO		2,227			6		0.54	%		4,070			13		0.64	%
FHLB Term advances		40,000			795		3.98	%		40,000			818		4.09	%
FHLB Overnight advances		-			-		-			7,713			15		0.39	%
Capital trust preferred securities		5,155			82		3.18	%		5,155			91		3.53	%
Total borrowings		47,382			883		3.73	%		56,938			937		3.29	%
Total interest-bearing liabilities		351,585			3,395		1.93	%		398,015			4,792		2.41	%
Demand deposits		36,349								37,621
Other non interest bearing liabilities		3,614								1,332
Total Liabilities		391,548								436,968
Stockholders’ Equity		12,050								27,918
Total Liabilities and Stockholders’ Equity	$	403,598							$	464,886
Net interest spread				$	5,519		2.86	%				$	6,258		2.74	%
Net interest margin (2)							2.97	%							2.92	%

(1) Includes securities available for sale and securities held to maturity.

(2) Calculated as our annualized net interest spread divided by the average balance for the period of our total interest-earning assets.

NON-INTEREST INCOME

Non-interest income of $1.3 million remained stable as compared to the prior year’s second quarter total of $1.3 million. Second quarter 2011 non-interest income included:

●

Deposit fees and charges, down $90 thousand from a year ago.

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●

Realized gains on the sale of securities, up $107 thousand from last year.

Year to date 2011 non-interest income of $2.3 million increased 8%, or $173 thousand from the first six months of 2010. The increase was due primarily to higher gains on realized gains on sale of available for sale securities. Year to date 2011 non-interest income included:

●

Deposit fees and charges, down $192 thousand from a year ago, due to regulatory changes relating to overdraft rules for debit and ATM cards effective during the third quarter of 2010.

●

Investment and insurance commissions, of $202 thousand, up 343% year over year, due to higher transaction volumes.

●

Secondary mortgage market loan fees, down $51 thousand from a year ago reflecting lower origination and sale of our conforming residential mortgage loans. Effective January 1, 2011, the Company ceased the origination of residential mortgage loans.

●

Increase of $277 thousand in realized gains on the sale of securities available for sale.

NON-INTEREST EXPENSE

Total non-interest expense for the second quarter 2011 was $3.2 million, a decrease of 12% or $0.5 million as compared to $3.7 million last year. Second quarter non-interest expense included:

●

Salaries and benefits totaled $1.4 million in the second quarter, a decrease of $0.1 million or 6% from $1.5 million last year to reflect our focus on efficiencies in our operations.

●

FDIC insurance expense increased $57 thousand dollars from last year due primarily to increases in premium charged by the FDIC on our deposits. We expect that FDIC insurance expense may continue at a higher level for the foreseeable future.

●

Loss on devaluation of other real estate owned decreased $146 thousand compared to last year due to there not being any provision required during the second quarter 2011.

●

Legal, professional and consulting fees totaled $270 thousand in the second quarter, a decrease of $129 thousand from last year reflecting incremental costs associated with addressing regulatory issues related to our written agreement with the Bureau of Financial Institutions and the Federal Reserve during 2010.

●

OTTI charges on our investment securities portfolio were zero, a decrease of $11 thousand from last year. We do not expect significant OTTI charges during 2011.

Total non-interest expense for year to date 2011 was $6.3 million, a decrease of 13% or $1.0 million as compared to $7.3 million last year. Year to date 2011 non-interest expense included:

●

Salaries and benefits totaled $2.7 million, a decrease of $0.3 million or 11% from $3.0 million last year to reflect our focus on efficiencies in our operations.

●

FDIC insurance expense was up $120 thousand dollars from last year as a result of substantially higher premium rates coupled with the growth in deposits. We expect that FDIC insurance expense may continue at a higher level for the foreseeable future.

●

Loss on devaluation of other real estate owned decreased $556 thousand compared to last year due to there not being any provision required during the first half of 2011.

●

Legal, professional and consulting fees totaled $500 thousand in the first half of 2011, a decrease of $60 thousand from last year reflecting incremental costs associated with addressing regulatory issues related to our written agreement with the Bureau of Financial Institutions and the Federal Reserve during 2010.

●

OTTI charges on our investment securities portfolio were $13 thousand, a decrease of $74 thousand from last year. We do not expect significant OTTI charges during 2011.

We are continuing our efforts towards reducing all controllable expenses while increasing categories of non-interest income.

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INCOME TAXES

We reported no income tax expense in the second quarter of 2011, compared to a benefit of $1.0 million in the second quarter of 2010. We reported no income tax expense in the first half of 2011, compared to a benefit of $1.1 million for the first half of 2010. No tax expense was reported for 2011 as it is charged against our deferred tax asset valuation allowance.

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FINANCIAL CONDITION

LOAN PORTFOLIO

We actively extend consumer loans to individuals and commercial loans to small and medium sized businesses within our primary service area. Our commercial lending activity extends across our primary service area of Powhatan, Cumberland, eastern Goochland County, western Chesterfield, and western Henrico Counties. Consistent with our focus on providing community-based financial services, we generally do not attempt to diversify our loan portfolio geographically by making significant amounts of loans to borrowers outside of our primary service area.

The principal economic risk associated with each of the categories of loans in our loan portfolio is the creditworthiness of our borrowers. Within each category, such risk is increased or decreased depending on prevailing economic conditions. The risk associated with real estate mortgage loans and installment loans to individuals varies based upon employment levels, consumer confidence, fluctuations in value of residential real estate and other conditions that affect the ability of consumers to repay indebtedness. The risk associated with commercial, financial and agricultural loans varies based upon the strength and activity of the local economies of our market areas. The risk associated with real estate construction loans varies based upon the supply of and demand for the type of real estate under construction. Many of our real estate construction loans are for pre-sold or contract homes. Builders are limited as to the number and dollar amount of loans for speculative home construction based on the financial strength of the borrower and the prevailing market conditions. The economy has had an impact on each of our loan categories to varying degrees. Because our real estate loans and commercial loans are primarily based on residential homes, we have seen the decline in residential home sales and values negatively impact our various loan portfolios. We do expect to see resumption of some economic growth in our markets in the future and would expect to see some improvements in the quality of our loan portfolio.

At June 30, 2011, total loans net of unearned income were $241.3 million and had decreased by $20.2 million or 8% from December 31, 2010, and had decreased $39.8 million or 14% from June 30, 2010. The loan to deposit ratio was 71.4% at June 30, 2011, compared to 75.5% at December 31, 2010 and 76.2% at June 30, 2010. The size of our loan portfolio has been reduced primarily as a result of declining demand of qualified applicants in our marketplace for the quarter ended June 30, 2011 as compared to the quarter ended June 30, 2010.

The table below shows the percentage of our various loan categories as a percentage of our total loans for the respective periods:

	June 30, 2011			December 31, 2010			June 30, 2010
Real estate related loans		75	%		75	%		76	%
Consumer loans		3	%		3	%		3	%
Commercial and industrial loans		22	%		22	%		21	%
Total		100	%		100	%		100	%

ASSET QUALITY

Non-performing assets include non-accrual loans, loans 90 days or more past due, restructured loans, other real estate owned, and other non-performing assets. Non-accrual loans are loans on which interest accruals have been discontinued. Loans which reach non-accrual status may not be restored to accrual status until all delinquent principal and interest has been paid. Restructured loans are loans with respect to which a borrower has been granted a concession on the interest rate or the original repayment terms because of financial difficulties. OREO is real estate acquired through foreclosure. We have no mortgages

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within our mortgage loan portfolios that are defined as “sub-prime”.

Our non-performing assets at the end of the second quarter 2011 increased to $42.1 million compared to $32.5 million at the end of the second quarter of the prior year and increased slightly from $40.9 million for the immediately preceding quarter. This resulted primarily from an increase in loans that are 90 days past due and still accruing and an increase in other real estate owned since June 30, 2010 and since the immediately preceding quarter. Non-performing assets in the second quarter 2011 increased from March 31, 2011 by 3% and increased from June 30, 2010 by 29%. A majority of non-performing and past due loans are secured. Therefore losses, if any, will be lessened by the fair value of the liquidation of the collateral securing the loans.

The following table summarizes our non-performing assets:

	June 30, 2011		Mar. 31, 2011		Dec. 31, 2010		Sept. 30, 2010		June 30, 2010

Loans accounted for on a non-accrual basis	$	26,974	$	28,011	$	30,963	$	24,839	$	26,164
Loans contractually past due 90 days or more as to interest or principal payments and still accruing (not included in non-accrual loans above)		1,138		3		1,492		2,167		355
Loans restructured and in compliance with modified terms (not included in non-accrual loans or loans contractually past due 90 days or more above)		6,100		6,228		6,510		-		-
Total non-performing loans	$	34,212	$	34,242	$	38,965	$	27,006	$	26,519
Other real estate owned		5,162		4,366		2,394		3,000		3,850
Other non-performing assets		2,707		2,330		2,330		2,165		2,165
Total non-performing assets	$	42,081	$	40,938	$	43,689	$	32,171	$	32,534

We foreclose on delinquent real estate loans when all other repayment possibilities have been exhausted. Our practice is to value real estate acquired through foreclosure at fair value, which is the lower of (i) an independent current appraisal or market analysis less anticipated costs of disposal, or (ii) the existing loan balance. The current extended decline in the national economy and unemployment rates from 2007 to the end of the second quarter 2011 has also negatively affected the local real estate market. The majority of the non-performing loans are real estate related. As such, over the next several quarters, we anticipate that our total non-performing assets will likely stay at historically elevated levels and then begin to decline. We further believe that the majority of nonperforming loans are adequately secured by collateral.

We have analyzed the potential risk of loss in our loan portfolio, given the loan balances and the value of the underlying collateral, and have recognized losses where appropriate. Non-performing loans are monitored on an ongoing basis as part of our periodic internal and external loan review process. We do not believe that the current level of non-performing loans at June 30, 2011 is reflective of any significant systemic problem within our loan portfolio but rather is a reflection of the current economic environment. We review the adequacy of our allowance for loan loss at the end of each month. We use a loan risk classification system, which classifies all loans, including impaired or problem credits as substandard, doubtful, or loss, according to a scale of 1-8 with 8 being a loss. We also evaluate adversely classified loans relative to their collateral value and make appropriate reductions to the carrying value of those loans to approximate fair value based on that review. Should any of the individual classified loans deteriorate further in the future, additional write downs may be required. Our ratio of the allowance for loan losses to total loans was 4.10% at June 30, 2011; 4.03% at December 31, 2010; and 3.67% at June 30, 2010. At June 30, 2011, the ratio of the allowance for loan losses to total non-performing assets was 23.3% compared to 27.0% at December 31, 2010 and 31.7% at June 30, 2010. This ratio declined at June 30, 2011 compared to December 31, 2010 primarily due to a decrease in our non-performing assets due to a decline in our non

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accrual loans. We have also recorded $1.9 million in charge-offs on our non-performing assets, which also decreases the ratio. We believe that the allowance for loan losses, which may or may not increase at the same rate as the loan portfolio grows, is adequate as of June 30, 2011 to provide for probable losses. However, considering the current state of the local real estate markets, and the risk as identified by periodic qualitative and quantitative analysis, we expect that additions to our reserve for possible loan losses may be necessary in the future.

For each period presented, the provision for loan losses charged to operations is based on our judgment after taking into consideration all factors connected with the collectability of the existing portfolio. We evaluate the loan portfolio in light of economic conditions, changes in the nature and value of the portfolio, industry standards and other relevant factors. Specific factors considered by us in determining the amounts charged to operations include internally generated loan review reports as well as reports from an outside loan reviewer, previous loan loss experience with the borrower, the status of past due interest and principal payments on the loan, the quality of financial information supplied by the borrower, the general financial condition of the borrower, and the value of any collateral securing the loan.

Given the activity in our net charged off loan levels, the ratio of the reserve for loan losses to outstanding loans, the generally depressed real estate markets, and the increase in the total nonperforming assets, we concluded that it would be appropriate to continue to make additions to the allowance for loan losses. We made a provision for loan losses of $0.7 million in the second quarter of 2011, following a provision of $0.5 million in the first quarter of 2011 and a provision of $2.7 million in the fourth quarter of 2010. We will continue to evaluate, on a monthly basis, the adequacy of the total reserve for loan losses. We anticipate that we will continue to make provisions as losses are incurred in subsequent periods. The decision to continue, increase or decrease additions to the reserve will be based on the monthly qualitative analysis of the loan portfolio, considering, among other factors, increases in the risk profile of certain types of lending, loan growth, overall economic conditions, and the volume of non-performing and adversely classified loans. Despite our best efforts, the reserve may be adjusted in future periods if there are significant changes in the assumptions or factors utilized when making valuations, or conditions differ materially from the assumptions originally utilized. Any such adjustments are made in the reporting period when the relevant factors become known and when applied as part of the analysis indicate a change in the level of potential loss is warranted.

SECURITIES

Our investment securities portfolio serves primarily as a source of liquidity and yield. Certain of the securities are pledged to secure public or government deposits and others are specifically identified as collateral for borrowings from the FHLB or repurchase agreements with correspondent banks and customers. The remaining portion of the portfolio is held for investment income, available for sale in the event liquidity is needed to fund loan growth or cover deposit outflows, and for general asset/liability management purposes. At the end of the second quarter 2011, total securities were $111.3 million, remaining stable as compared to December 31, 2010 balances of $111.3 million, and have increased by $7.5 million or 7% since the June 30, 2010 balance of $103.8 million. The increase since June 2010 was due primarily to purchases of various securities.

Our securities portfolio consists of two components, securities available for sale and securities held to maturity. Securities are classified as held to maturity when we have the intent and the ability at the time of purchase to hold the securities to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities to be held for indefinite periods of time are classified as available for sale and accounted for at fair value. Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, general liquidity needs and other similar factors. Our

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investment policy requires that all rated securities that are purchased must be investment grade or better. Our recent purchases of securities have been securities of investment grade credit quality with short to intermediate and occasionally, longer term maturities.

We review and evaluate all securities quarterly or more frequently as necessary for possible impairment. If, in our judgment, there is serious doubt as to the probability of collecting substantially all our basis in a security within a reasonable period of time, an impairment write down will be recognized. We conducted impairment reviews as of June 2011 for all securities where cash flow information was obtainable. Our analysis indicated that we expect to recover the entire amortized cost basis of the security. We also determined that we would not be required to sell the securities before the recovery of the entire amortized cost basis of the security. We presently hold the following securities with credit ratings that, subsequent to purchase, have declined below minimum investment grade:

$175 thousand Ally Bank (formerly GMAC) Perpetual Preferred Stock,

$1 million MBIA Global Funding 5.07% maturing 6/15/2015,

$2 million Bank Boston Capital 1.007% maturing 1/15/2027,

$2 million Bank of America Capital .8213% maturing 1/15/2027, and

$2 million in Sallie Mae preferred stock.

We hold eleven CDO securities where the underlying pooled collateral is various bank and insurance company trust preferred securities. As noted in Note 2 to the consolidated financial statements, eight of the eleven securities now have ratings that are below minimum investment grade. We use an independent valuation firm that specializes in valuing debt securities. The independent firm evaluates all relevant credit and structural aspects of each debt security, determining appropriate performance assumptions and performing discounted cash flow analysis. The following topics are covered in their evaluation:

Detailed credit and structural evaluation for each piece of collateral in the debt security;

Collateral performance projections for each piece of collateral in the debt security;

Terms of the debt security structure; and

Discounted cash flow modeling.

Following the quarterly evaluation of these securities, management has concluded that, with the exception of the previously noted non-cash charge, the impairment within the CDO securities is considered temporary as of June 30, 2011. We do not own any securities collateralized by “sub-prime” or “alt A” mortgage loans.

During the second quarter of 2011, we recorded no other-than-temporary impairment charges. We determined this based on our estimate of credit losses on the related securities. As noted above, this estimate was based on an independent analysis from an outside firm that specializes in valuing complex financial instruments. We reviewed the assumptions used in the analysis and believe that these assumptions are reasonable.

Our annualized average yield on the entire portfolio was 3.45% for the second quarter of 2011, compared to 4.32% for the same period in 2010. We have increased our percentage of government backed securities in the second quarter 2011, which have no credit risk and carry lower returns, which has caused a decline in our yields earned on our portfolio. Due to the lower rate environment, over the next several quarters, it is anticipated that there will continue to be a significant number of agency securities called by the issuer. Reinvesting the called bond proceeds in securities with lower coupons, or utilizing the funds to reduce borrowings or fund loan growth, will likely result in a lower overall portfolio yield in the future.

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DEPOSITS AND BORROWINGS

Our main source of funds is deposit accounts. Our deposit base is comprised of demand deposits, savings and money market accounts and other time deposits. Our deposits are provided by individuals and businesses located within the communities served. We generally do not accept out of market deposits, nor do we solicit or accept any brokered deposits. Due to our “adequately capitalized” status, we are not permitted to accept brokered deposits without prior regulatory approval or offer interest rates that are significantly higher than the average rates in our market area.

Total deposits were $338.2 million as of June 30, 2011, a decrease of $7.9 million or 2% from $346.1 million at December 31, 2010. Total deposits have decreased by $30.5 million or 8% from the June 30, 2010 level of $368.7 million. The decrease in deposits is primarily due to the decline in the interest rate paid on time deposits. The average aggregate interest rate paid on interest bearing deposits was 1.60% in the second quarter of 2011, compared to 2.12% for the corresponding period in 2010. The majority of our deposits are higher yielding certificates of deposit because many of our customers are individuals who seek higher yields than those offered on regular savings, money market savings and interest checking accounts. At June 30, 2011 certificates of deposit represented 50.5% of total deposits as compared to 54.7% at December 31, 2010 and 57.0% at June 30, 2010.

The following table is a summary of our time deposits of $100,000 or more by remaining maturities at June 30, 2011, March 31, 2011, December 31, 2010, and June 30, 2010:

	Time Deposits $100,000 or More (Dollars in thousands)
	June 30, 2011		March 31, 2011		December 31, 2010		June 30, 2010
Three months or less	$	10,781	$	12,711	$	13,484	$	10,512
Three to twelve months		28,397		31,500		30,627		33,216
Over twelve months		14,599		12,039		16,481		24,893
Total	$	53,777		56,250	$	60,592	$	68,621

Our total borrowings at June 30, 2011 were $47.0 million, and consisted of overnight borrowings of $1.8 million, term borrowings of $40.0 million, and capital trust preferred long term debt of $5.2 million. The weighted average cost of these borrowings in the second quarter of 2011 was 3.65% compared to 3.54% in the comparable period of 2010. The increase in the weighted average interest rate during the second quarter of 2011 as compared to the second quarter of 2010 was due to less reliance on federal funds purchased, which have an interest rate of less than 1 percent and the reduction of $10 million in borrowings at June 30, 2011 as compared to June 30, 2010.

The $1.8 million in overnight borrowings at June 30, 2011 consisted of repurchase agreements, and we had no overnight advances from the FHLB or federal funds purchased. The $3.0 million in overnight borrowings at December 31, 2010 consisted of federal funds purchased and repurchase agreements, and we had no overnight advances from the FHLB. Of the $2.9 million in overnight borrowings at June 30, 2010, $2.9 million was in federal funds purchased and repurchase agreements and there were no overnight advances from the FHLB. Our $40.0 million in term borrowings at June 30, 2011 were structured borrowings from the FHLB and the balance was unchanged compared to December 31, 2010 and June 30, 2010. The structured borrowings from the FHLB at June 30, 2011 consisted of various, convertible term advances, and were modified during the second quarter of 2011 to extend the maturity date for three years for $20 million of advances and lower the fixed interest rate associated with the debt. The weighted average cost of these borrowings in the second quarter of 2011 was 3.83% compared to 4.13% in the comparable period of 2010.

As of June 30, 2011, we had $5.2 million in capital trust preferred debt outstanding which originated on

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December 17, 2003 at a variable interest rate of 3 month LIBOR plus 285 basis points and which resets quarterly. The debt matures on December 17, 2033. The current weighted average cost of these borrowings in the second quarter of 2011 was 3.26% compared to 4.03% in the comparable period of 2010. The aggregate rate on all interest bearing liabilities for the second quarter of 2011 was 1.88%, compared to 2.31% in the comparable period of 2010.

CAPITAL RESOURCES

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance and changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to current operations and to promote public confidence. The Bank is considered to be “adequately-capitalized” for regulatory purposes at June 30, 2011. The primary indicators relied on by the Federal Reserve Board and other bank regulators in measuring strength of capital position are the Tier 1 capital, Total Capital and Leverage ratios. Tier 1 Capital consists of common and qualifying preferred stockholders’ equity less goodwill. Total Capital consists of Tier 1 Capital, qualifying subordinated debt and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted assets, which consist of both on and off-balance sheet risks. The Leverage Ratio consists of Tier 1 Capital divided by quarterly average assets.

Our total risk based capital position remains “adequate,” while our tier 1 risk-based capital ratio and leverage ratio continue to be above the “well capitalized” minimum levels at quarter end. As a result of an examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank of Richmond, we have entered into a written agreement with the Bureau of Financial Institutions and the Federal Reserve as of June 30, 2010. The written agreement requires us to develop plans to increase capital until the Bank significantly exceeds the capital level required to be classified as “well capitalized,” establish and submit definitive plans to strengthen board oversight; better monitor, control, and improve asset quality; and improve overall risk identification, forecasting and management, at Central Virginia Bank. The Company is evaluating strategies regarding capital enhancements. Such strategies could include capital offerings, a sale leaseback of bank owned real estate, continued reduction in assets, or further management of the securities portfolio.

Banking regulations also require us to maintain certain minimum capital levels in relation to Bank assets. A comparison of our actual regulatory capital as of June 30, 2011, with minimum requirements, as defined by regulation, is shown below:

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Actual

	Regulatory Minimum			June 30, 2011			March 31, 2011			December 31, 2010			June 30, 2010

Consolidated	For Capital Adequacy Purposes
Total risk-based capital		8.0	%		9.5	%		8.9	%		8.4	%		8.7	%
Tier 1 risk-based capital		4.0	%		8.2	%		7.7	%		7.1	%		7.4	%
Leverage ratio		4.0	%		5.5	%		5.4	%		5.1	%		5.6	%

Central Virginia Bank	Adequately Capitalized			Well Capitalized
Total risk-based capital		8.0	%		10.0	%	9.1	%	8.6	%	8.2	%	8.3	%
Tier 1 risk-based capital		4.0	%		6.0	%	7.8	%	7.3	%	6.9	%	7.1	%
Leverage ratio		4.0	%		5.0	%	5.3	%	5.2	%	4.9	%	5.3	%

LIQUIDITY AND INTEREST RATE SENSITIVITY

Liquidity

Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments and loans maturing within one year. Our ability to obtain deposits and purchase funds at favorable rates determines our liability liquidity. As a result of our management of liquid assets and the ability to generate liquidity through liability funding, we believe that we maintain overall liquidity sufficient to satisfy our depositors’ requirements and meet our customers’ credit needs.

Additional sources of liquidity available to us include, but are not limited to, loan repayments, and the ability to obtain deposits through the adjustment of interest rates, borrowing from the FHLB, purchasing of federal funds, and selling securities under repurchase agreements. To further meet our liquidity needs, we also have access to the Federal Reserve System discount window. In the past, growth in deposits and proceeds from the maturity of investment securities has been more than sufficient to fund the net increase in loans. We expect current conditions to be continued in future quarters. We have previously used portions of our borrowing availability when interest rates were favorable, to purchase marketable securities in an effort to increase net interest income and at the same time lock in lower rate cost of funds for up to five years.

We have entered into various borrowing arrangements with other financial institutions for federal funds, and other borrowings. The total amount of borrowing facilities available as of June 30, 2011 are $117.1 million, of which $75.2 million remains available to borrow.

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The following table presents our contractual obligations at June 30, 2011 and the scheduled payment amounts due at various intervals over the next five years and beyond.

	Payment due by period (Dollars in thousands)
	Total		Less than 1 year		1 – 3 years		3 -5 years		More than 5 years
Capital trust preferred securities	$	5,155	$	-	$	-	$	5,155	$	-
FHLB borrowings (1)		40,000		-		25,000		-		15,000
Securities sold under repurchase agreements		1,853		1,853		-		-		-
Total	$	47,008	$	1,853	$	25,000	$	5,155	$	15,000

(1)

Federal Home Loan Bank advances generally are callable prior to the maturity date indicated above. If the advance is called, the advance can be, at the option of the Bank, converted to another advance with a different interest structure, while maintaining the same maturity date. See Note 4 in Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers. These off-balance sheet arrangements include unfunded commitments to extend credit and standby letters of credit which would impact our liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

Interest Rate Sensitivity

In conjunction with maintaining a satisfactory level of liquidity, we must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves periodic monitoring of the interest sensitive assets relative to interest sensitive liabilities over specific time intervals, and under various interest rate or yield curve shifts upward and downward.

At June 30, 2011, our interest sensitivity gap was positive at the 1-month point and negative at the 2-month through the 12- month points. The cumulative gap is positive at the 1-month, and remains positive through the 4-month point. Since the largest amount of our interest sensitive assets and liabilities mature or re-price within 12 months, we monitor this area closely. We do not emphasize interest sensitivity analysis beyond this time frame because we believe various unpredictable factors could result in erroneous interpretations. Early withdrawal of deposits, prepayments of loans and loan delinquencies are some of the factors that could have such an effect. In addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change in net interest margin. While we do not match each of our interest sensitive assets against specific interest sensitive liabilities, we do seek to enhance the net interest margin while minimizing exposure to interest rate fluctuations.

EFFECTS OF INFLATION

Inflation significantly affects industries having high proportions of fixed assets or high levels of inventories. Although we are not significantly affected in these areas, inflation may have an impact on the growth of assets. As assets grow rapidly, it may become necessary to increase equity capital at proportionate levels to maintain the appropriate equity to asset ratios.

Our reported earnings results may have been affected by inflation, but isolating the effect is difficult. The different types of income and expense are affected in various ways. Interest rates are affected by inflation, but the timing and magnitude of the changes may not coincide with changes in the consumer price index. We actively monitor interest rate sensitivity in order to minimize the effects of inflationary trends on interest rates. Other areas of non-interest expenses may be more directly affected by inflation.

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FORWARD-LOOKING STATEMENTS

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by us, changing trends in customer profiles and changes in laws and regulations applicable to us. Although we believe that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that our actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For a description of factors that may cause actual results to differ materially from such forward-looking statements, see our Annual Report on Form 10-K for the year ended December 31, 2010, and other reports from time to time filed with or furnished to the Securities and Exchange Commission. We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. We undertake no obligation to update any forward-looking statements made in this report.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the quantitative and qualitative disclosures about market risk made in our Annual Report on Form 10-K for the year ended December 31, 2010, as discussed in the section on interest rate sensitivity in Item 2 above.

ITEM 4 CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are operating effectively in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

No changes have occurred during the second quarter 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

There are no pending or threatened legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of either the Company or its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

ITEM 1A RISK FACTORS

Other than as set forth below, there were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2010.

Concerns regarding downgrade of the U.S. credit rating could have a material adverse effect on our business, financial condition and liquidity.

On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. These downgrades could have a material adverse impact on financial markets and economic conditions in the United States generally, the market value of such instruments and the credit risk associated with State governments such as Virginia that have significant economic relationships with the U.S. government. Debt instruments of this nature are key assets on the balance sheets of financial institutions, including ours. In turn, the market’s anticipation of these impacts could have a material adverse effect on our business, financial condition and liquidity and could exacerbate the other risks to which we are subject, including those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

ITEM 4 REMOVED AND RESERVED

ITEM 5 OTHER INFORMATION

None.

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ITEM 6 EXHIBITS

	Exhibit No.	Document

	10.1	Compensation Agreement, effective May 1, 2011, between Central Virginia Bank and Charles F. Catlett, III, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K files with the SEC on June 10, 2011.
	10.2	Compensation Agreement, effective November 1, 2011, between Central Virginia Bank and Charles F. Catlett, III, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2011.

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

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

	32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

	101	The following materials from the Central Virginia Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

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SIGNATURES

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

	CENTRAL VIRGINIA BANKSHARES, INC.
	(Registrant)


Date: August 15, 2011	/s/ Herbert E. Marth, Jr.
	Herbert E. Marth, Jr., President and Chief Executive
	Officer (Principal Executive Officer)



Date: August 15, 2011	/s/ Robert B. Eastep
	Robert B. Eastep, Senior Vice President and
	Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

	Exhibit No.	Description

	10.1	Compensation Agreement, effective May 1, 2011, between Central Virginia Bank and Charles F. Catlett, III, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2011.
	10.2	Compensation Agreement, effective November 1, 2011, between Central Virginia Bank and Charles F. Catlett, III, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2011.
	31.1	Rule 13(a)-14(a) Certification of Chief Executive Officer.
	31.2	Rule 13(a)-14(a) Certification of Chief Financial Officer.
	32.1	Statement of Chief Executive Officer and Chief Financial
		Officer Pursuant to 18 U.S.C. Section 1350.
	101	The following materials from the Central Virginia Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Central Virginia Bankshares (CVBK) Inactive 10-Q2011 Q2 Quarterly report

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