Commonwealth Bankshares (CWBS) 10-Q 2010 Q1 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 March 31, 2010

or

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to            

Commission file number: 000-17377

COMMONWEALTH BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA	54-1460991
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

403 Boush Street Norfolk, Virginia	23510
(Address of principal executive offices)	(Zip Code)

(757) 446-6900

(Registrant’s telephone number, including area code)

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

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

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	x

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

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

Common Stock, $2.066 Par Value – 6,889,431 shares as of May 4, 2010

Commonwealth Bankshares, Inc.

Form 10-Q for the Quarter Ended March 31, 2010

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS	3
Consolidated Balance Sheets	3
March 31, 2010
December 31, 2009
Consolidated Statements of Operations	4
Three months ended March 31, 2010
Three months ended March 31, 2009
Consolidated Statements of Comprehensive Income	5
Three months ended March 31, 2010
Three months ended March 31, 2009
Consolidated Statements of Equity	6
Three months ended March 31, 2010
Year ended December 31, 2009
Year ended December 31, 2008
Consolidated Statements of Cash Flows	7
Three months ended March 31, 2010
Three months ended March 31, 2009
Notes to Consolidated Financial Statements	8 - 16
ITEM  2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17 - 25
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4 – CONTROLS AND PROCEDURES	25 - 27
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS	27
ITEM 1A – RISK FACTORS	27
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4 – REMOVED AND RESERVED	27
ITEM 5 – OTHER INFORMATION	27
ITEM 6 – EXHIBITS	27
SIGNATURES	28

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Commonwealth Bankshares, Inc.

Consolidated Balance Sheets

	March 31, 2010			December 31, 2009
	(Unaudited)			(Audited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	3,855,532		$	4,670,991
Interest bearing deposits in banks		181,848,785			178,746,476
Federal funds sold		65,556			2,102,882
Total cash and cash equivalents		185,769,873			185,520,349
Investment securities:
Available for sale, at fair market value		4,054,362			5,597,098
Held to maturity, at amortized cost (fair market value was $141,789 and $158,198, respectively)		141,811			158,168
Total investment securities		4,196,173			5,755,266
Equity securities, restricted, at cost		9,508,250			9,508,250
Loans		1,002,998,560			1,031,884,982
Allowance for loan losses		(49,142,008	)		(45,770,653	)
Loans, net		953,856,552			986,114,329
Premises and equipment, net		35,240,219			35,854,433
Other real estate owned		15,001,425			11,380,254
Deferred tax assets, net		17,836,582			17,005,394
Accrued interest receivable		4,973,089			5,619,916
Other assets		19,073,606			19,745,166
	$	1,245,455,769		$	1,276,503,357
Liabilities and Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	41,962,072		$	44,940,884
Interest-bearing		1,011,406,134			1,035,955,612
Total deposits		1,053,368,206			1,080,896,496
Short-term borrowings		35,000,000			35,000,000
Long-term debt		50,000,000			50,000,000
Trust preferred capital notes		20,619,000			20,619,000
Accrued interest payable		2,962,281			2,678,629
Other liabilities		4,161,521			6,828,936
Total liabilities		1,166,111,008			1,196,023,061
Equity:
Common stock, par value $2.066, 18,150,000 shares authorized; 6,889,432 and 6,888,451 shares issued and outstanding in 2010 and 2009, respectively		14,233,567			14,231,540
Additional paid-in capital		63,839,261			63,839,543
Retained earnings		1,031,708			1,954,500
Accumulated other comprehensive income (loss)		(2,957	)		12,078
Total stockholders’ equity		79,101,579			80,037,661
Noncontrolling interests		243,182			442,635
Total equity		79,344,761			80,480,296
	$	1,245,455,769		$	1,276,503,357

See notes to unaudited consolidated financial statements.

3

Commonwealth Bankshares, Inc.

Consolidated Statements of Operations (Unaudited)

	Three months ended
	March 31, 2010			March 31, 2009
Interest and dividend income:
Loans, including fees	$	14,742,736		$	16,365,614
Investment securities:
Taxable		57,926			64,668
Tax exempt		7,435			8,855
Dividend income, equity securities, restricted		39,024			27,391
Other interest income		110,470			1,461
Total interest and dividend income		14,957,591			16,467,989
Interest expense:
Deposits		6,814,317			6,276,339
Short-term borrowings		35,116			202,901
Long-term debt		477,319			479,978
Trust preferred capital notes		328,060			322,945
Total interest expense		7,654,812			7,282,163
Net interest income		7,302,779			9,185,826
Provision for loan losses		4,998,051			4,004,400
Net interest income after provision for loan losses		2,304,728			5,181,426
Noninterest income:
Service charges on deposit accounts		281,175			313,175
Other service charges and fees		210,589			219,571
Loss on other real estate owned		(264,617	)		—
Other		468,478			747,798
Total noninterest income		695,625			1,280,544
Noninterest expense:
Salaries and employee benefits		542,217			2,504,305
Net occupancy expense		1,015,053			1,005,939
Furniture and equipment expense		504,065			492,086
Other operating expense		2,353,302			1,564,440
Total noninterest expense		4,414,637			5,566,770
Income (loss) before income taxes		(1,414,284	)		895,200
Income tax expense (benefit)		(496,943	)		297,808
Net income (loss)		(917,341	)		597,392
Less: Net income attributable to noncontrolling interests		5,451			16,092
Net income (loss) attributable to the Company	$	(922,792	)	$	581,300
Earnings (loss) per share attributable to the Company’s common stockholders:
Basic	$	(0.13	)	$	0.08
Diluted	$	(0.13	)	$	0.08
Dividends paid per common share	$	—		$	0.08
Basic weighted average shares outstanding		6,888,800			6,861,845
Diluted weighted average shares outstanding		6,888,800			6,861,845

See notes to unaudited consolidated financial statements.

4

Commonwealth Bankshares, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	Three months ended
	March 31, 2010			March 31, 2009
Net income (loss)	$	(917,341	)	$	597,392
Other comprehensive income, net of income tax:
Net change in unrealized (loss) on securities available for sale		(15,035	)		(7,692	)
Comprehensive income (loss)		(932,376	)		589,700
Less: Comprehensive income attributable to noncontrolling interests		5,451			16,092
Comprehensive income (loss) attributable to the Company	$	(937,827	)	$	573,608

See notes to unaudited consolidated financial statements.

5

Commonwealth Bankshares, Inc.

Consolidated Statements of Equity

Three Months Ended March 31, 2010, and Years Ended December 31, 2009 and 2008

	Common Shares		Common Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Noncontrolling Interests			Total Equity
Balance, January 1, 2008	6,915,587		$	14,287,602		$	64,742,520		$	34,361,972		$	22,080		$	58,977		$	113,473,151
Comprehensive (loss):
Net (loss)	—			—			—			(3,739,069	)		—			(34,695	)		(3,773,764	)
Change in unrealized gain on securities available for sale, net of tax effect	—			—			—			—			16,759			—			16,759
Total comprehensive (loss)																			(3,757,005	)
Issuance of common stock	77,156			159,406			782,792			—			—			—			942,198
Common stock repurchased	(141,326	)		(291,980	)		(1,768,246	)		—			—			—			(2,060,226	)
Contributions from noncontrolling interest holder	—			—			—			—			—			390,000			390,000
Cash dividends - $0.32 per share	—			—			—			(2,201,590	)		—			—			(2,201,590	)
Cash dividends - Noncontrolling interests	—			—			—			—			—			(8,712	)		(8,712	)
Balance, December 31, 2008	6,851,417			14,155,028			63,757,066			28,421,313			38,839			405,570			106,777,816
Comprehensive (loss):
Net income (loss)	—			—			—			(25,781,103	)		—			37,065			(25,744,038	)
Change in unrealized (loss) on securities available for sale, net of tax effect	—			—			—			—			(26,761	)		—			(26,761	)
Total comprehensive (loss)																			(25,770,799	)
Issuance of common stock	37,034			76,512			82,477			—			—			—			158,989
Cash dividends - $0.10 per share	—			—			—			(685,710	)		—			—			(685,710	)
Balance, December 31, 2009	6,888,451			14,231,540			63,839,543			1,954,500			12,078			442,635			80,480,296
Comprehensive (loss):
Net income (loss)	—			—			—			(922,792	)		—			5,451			(917,341	)
Change in unrealized (loss) on securities available for sale, net of tax effect	—			—			—			—			(15,035	)		—			(15,035	)
Total comprehensive (loss)																			(932,376	)
Purchase of subsidiary shares from noncontrolling interest holder	—			—			—			—			—			(204,904	)		(204,904	)
Issuance of common stock	981			2,027			(282	)		—			—			—			1,745
Balance, March 31, 2010	6,889,432		$	14,233,567		$	63,839,261		$	1,031,708		$	(2,957	)	$	243,182		$	79,344,761

See notes to unaudited consolidated financial statements.

6

Commonwealth Bankshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Three months ended
	March 31, 2010			March 31, 2009
Operating activities:
Net income (loss)	$	(917,341	)	$	597,392
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		4,998,051			4,004,400
Depreciation and amortization		739,974			622,690
Loss on other real estate owned		285,280			70,075
Net amortization of premiums and accretion of discounts on investments securities		303			1,001
Gain on the sale of investment securities available for sale		—			(1,691	)
Deferred tax assets		(823,442	)		(524,548	)
Net change in:
Accrued interest receivable		646,827			137,300
Other assets		671,560			(380,977	)
Accrued interest payable		283,652			(46,905	)
Other liabilities		(2,667,415	)		983,387
Net cash provided by operating activities		3,217,449			5,462,124
Investing activities:
Purchase of investment securities available for sale		(250,000	)		—
Purchase of equity securities, restricted		—			(435,900	)
Net purchase of premises and equipment		(125,760	)		(616,082	)
Improvements to other real estate owned		(19,950	)		(16,855	)
Net (increase) decrease in loans		22,343,225			(34,236,281	)
Purchase of subsidiary shares from noncontrolling interests		(204,904	)		—
Proceeds from:
Calls and maturities of investment securities held to maturity		16,208			6,346
Sales and maturities of investment securities available for sale		1,769,801			1,518,394
Sales of equity securities, restricted		—			1,781,700
Sale of other real estate owned		1,030,000			—
Net cash provided by (used in) investing activities		24,558,620			(31,998,678	)
Financing activities:
Net change in:
Demand, interest-bearing demand and savings deposits		6,135,350			1,069,593
Time deposits		15,680,360			14,694,968
Brokered time deposits		(49,344,000	)		28,979,000
Short-term borrowings		—			(16,602,000	)
Long-term debt		—			(5,000,000	)
Principal payments on long-term debt		—			(26,112	)
Dividends reinvested and sale of stock		1,745			115,352
Dividends paid to stockholders		—			(548,113	)
Net cash provided by (used in) financing activities		(27,526,545	)		22,682,688
Net increase (decrease) in cash and cash equivalents		249,524			(3,853,866	)
Cash and cash equivalents, January 1		185,520,349			11,672,367
Cash and cash equivalents, March 31	$	185,769,873		$	7,818,501
Supplemental cash flow disclosure:
Interest paid during the period	$	7,371,160		$	7,329,068
Supplemental noncash disclosure:
Transfer between loans and other real estate owned	$	4,916,501		$	3,745,575
Sale of other real estate owned financed by Bank loans	$	108,000		$	—

See notes to unaudited consolidated financial statements.

7

Commonwealth Bankshares, Inc.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2010

Note A – Basis of Presentation

The accounting and reporting policies of Commonwealth Bankshares, Inc. (the “Parent”) and its subsidiaries, Commonwealth Bankshares Capital Trust II (the “Trust”), and Bank of the Commonwealth (the “Bank”) and its subsidiaries, BOC Title of Hampton Roads, Inc., T/A Executive Title Center, BOC Insurance Agencies of Hampton Roads, Inc., Community Home Mortgage of Virginia, Inc., T/A Bank of the Commonwealth Mortgage (“Bank of the Commonwealth Mortgage”), Commonwealth Financial Advisors, LLC, Commonwealth Property Associates, LLC and WOV Properties, LLC, are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to accepted practices within the banking industry. The accompanying consolidated financial statements include the accounts of the Parent, the Bank and its subsidiaries, collectively referred to as the “Company”. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Parent owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to this Trust is reported as a liability of the Parent.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year. Based on the Company’s evaluation of subsequent events for potential recognition and/or disclosure, the Company has no events to report.

Certain prior year amounts have been reclassified to conform to the presentation for current year. These reclassifications have no effect on previously reported net income (loss).

Note B – Earnings Per Share

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average common and potential dilutive common equivalent shares outstanding, determined as follows:

	Three months ended
	March 31, 2010			March 31, 2009
Net income (loss) attributable to the Company	$	(922,792	)	$	581,300
Weighted average shares outstanding		6,888,800			6,861,845
Basic earnings (loss) per common share attributable to the Company’s common stockholders	$	(0.13	)	$	0.08
Effect of dilutive securities on EPS:
Weighted average shares outstanding		6,888,800			6,861,845
Diluted average shares outstanding		6,888,800			6,861,845
Diluted earnings (loss) per common share attributable to the Company’s common stockholders	$	(0.13	)	$	0.08

At March 31, 2010 and 2009, options to acquire 399,802 and 463,732 shares of common stock, respectively were not included in computing diluted earnings (loss) per common because their effects were anti-dilutive.

Note C – Investment Securities

The amortized costs and fair values of investment securities are as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2010
Available for sale:
U.S. Government and agency securities	$	3,000,000	$	1,508	$	(22,062	)	$	2,979,446
Mortgage-backed securities		414,315		11,234		(394	)		425,155
State and municipal securities		644,529		5,232		—			649,761
	$	4,058,844	$	17,974	$	(22,456	)	$	4,054,362
Held to maturity:
Mortgage-backed securities	$	141,811	$	350	$	(372	)	$	141,789
	$	141,811	$	350	$	(372	)	$	141,789
December 31, 2009
Available for sale:
U.S. Government and agency securities	$	4,500,000	$	3,325	$	—		$	4,503,325
Mortgage-backed securities		434,306		9,999		(588	)		443,717
State and municipal securities		644,492		5,564		—			650,056
	$	5,578,798	$	18,888	$	(588	)	$	5,597,098
Held to maturity:
Mortgage-backed securities	$	158,168	$	395	$	(365	)	$	158,198
	$	158,168	$	395	$	(365	)	$	158,198

9

Information pertaining to securities with gross unrealized losses at March 31, 2010 and December 31, 2009 aggregated by investment category and length of time that the individual securities have been in a continuous loss position, follows:

	Less Than 12 Months				12 Months or More				Total
March 31, 2010	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Government and agency securities	$	2,477,938	$	22,062	$	—	$	—	$	2,477,938	$	22,062
Mortgage-backed securities		—		—		25,528		394		25,528		394
Total temporarily impaired securities	$	2,477,938	$	22,062	$	25,528	$	394	$	2,503,466	$	22,456
	Less Than 12 Months				12 Months or More				Total
December 31, 2009	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Mortgage-backed securities	$	—	$	—	$	48,593	$	588	$	48,593	$	588
Total temporarily impaired securities	$	—	$	—	$	48,593	$	588	$	48,593	$	588

The unrealized loss positions at March 31, 2010 were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better. Bonds with unrealized loss positions of less than 12 months duration at March 31, 2010 included three direct obligations of US Government agencies. Securities with losses of one year or greater duration included one federal agency mortgage-backed security.

No impairment has been recognized on any securities in a loss position because of management’s intent and demonstrated ability to hold securities to scheduled maturity or call dates.

A maturity schedule of investment securities as of March 31, 2010 is as follows:

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due:
In one year or less	$	2,470,000	$	2,462,270	$	—	$	—
After one year through five years		1,174,529		1,166,937		—		—
After five years through ten years		—		—		—		—
After ten years		—		—		—		—
		3,644,529		3,629,207		—		—
Mortgage-backed securities		414,315		425,155		141,811		141,789
	$	4,058,844	$	4,054,362	$	141,811	$	141,789

At March 31, 2010 and December 31, 2009, the Company had investment securities with carrying values of $3,915,203 and $5,456,751, respectively, pledged to secure public deposits and $27,286 and $28,168, respectively, pledged to secure treasury, tax and loan deposits.

10

Note D – Loans

Major classifications of loans are summarized as follows:

	March 31, 2010			December 31, 2009
Construction and development	$	207,265,619		$	246,763,540
Commercial		74,292,567			73,503,793
Commercial mortgage		545,453,192			531,892,963
Residential mortgage		167,451,784			170,325,348
Installment loans to individuals		10,360,769			11,174,709
Other		270,428			472,331
Gross loans		1,005,094,359			1,034,132,684
Unearned income		(2,095,799	)		(2,247,702	)
Allowance for loan losses		(49,142,008	)		(45,770,653	)
Loans, net	$	953,856,552		$	986,114,329

Non-performing assets are as follows:

	March 31, 2010			December 31, 2009
Non-accrual loans:
Construction and development	$	49,673,570		$	45,483,479
Commercial		2,947,261			3,394,838
Commercial mortgage		23,089,645			14,222,559
Residential mortgage		11,470,016			10,039,495
Installment loans to individuals		622,852			27,910
		87,803,344			73,168,281
Loans contractually past-due 90 days or more:
Construction and development		1,884,047			—
Commercial		11,912			—
Commercial mortgage		2,364,646			4,205,055
Residential mortgage		1,368,419			115,033
Other		13,424			119,127
		5,642,448			4,439,215
Total non-performing loans		93,445,792			77,607,496
Other real estate owned		15,001,425			11,380,254
Total non-performing assets	$	108,447,217		$	88,987,750
Allowance as a percentage of non-performing loans		52.59	%		58.98	%
Non-performing assets as a percentage of total assets		8.71	%		6.97	%

Note E – Allowance for Loan Losses

A summary of transactions in the allowance for loan losses for the three months ended March 31, 2010 and 2009 were as follows:

	March 31, 2010			March 31, 2009
Balance at beginning of year	$	45,770,653		$	31,120,376
Provision charged to operating expense		4,998,051			4,004,400
Loans charged-off		(1,768,333	)		(1,595,705	)
Recoveries of loans previously charged-off		141,637			9,508
Balance at end of period	$	49,142,008		$	33,538,579

11

Note F – Premises and Equipment

Premises and equipment are summarized as follows:

	March 31, 2010			December 31, 2009
Land	$	2,189,418		$	2,189,418
Building and improvements		8,581,354			8,581,354
Leasehold improvements		21,528,731			21,528,730
Furniture and equipment		17,360,008			17,328,195
		49,659,511			49,627,697
Less accumulated depreciation		(14,419,292	)		(13,773,264	)
	$	35,240,219		$	35,854,433

Note G – Deferred Income Taxes

As of March 31, 2010 and December 31, 2009, the Company had recorded net deferred income tax assets (“DTA”) of approximately $17.8 million and $17.0 million, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given uncertain economic outlook, banking industry conditions and other factors. Management is considering certain transactions that would increase the likelihood that a DTA will be realized. Execution of certain transactions may be considered viable but changing market conditions, tax laws, and other factors could affect the success thereof. Based upon management’s analysis of available evidence, it has determined that it is “more likely than not” that the Company’s deferred income tax assets as of March 31, 2010 will be fully realized and therefore no valuation allowance was recorded. However, the Company can give no assurance that in the future its DTA will not be impaired since such determination is based on projections of future earnings and the possible effect of the certain transactions, which are subject to uncertainty and estimates that may change given economic conditions and other factors. Due to the uncertainty of estimates and projections, it is reasonably possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

Due to the net operating loss incurred in the three months ended March 31, 2010 and for the year ended December 31, 2009, the Company has recorded income taxes receivable of approximately $10.9 million and $11.4 million, respectively, which are included in other assets on the accompanying consolidated balance sheets.

Note H – Fair Value Measurements

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

• Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

• Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial and non-financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Financial assets measured at fair value on a recurring basis include the following:

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

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The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Recurring Basis at March 31, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2010
	(in thousands)
Assets
Available for sale securities	$	—	$	4,054	$	—	$	4,054
Assets Measured at Fair Value on a Recurring Basis at December 31, 2009
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2009
	(in thousands)
Assets
Available for sale securities	$	—	$	5,597	$	—	$	5,597

Certain financial and non-financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Financial assets measured at fair value on a non-recurring basis include the following:

Impaired Loans. A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the historical effective interest rate, the observable market price of the loan or the fair value of the collateral. All collateral-dependent loans are measured for impairment based on the fair value of the collateral securing the loan. 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 the Company using observable market data. This valuation would be considered Level 3. An allowance is allocated to an impaired loan if the carrying value exceeds the estimated fair value. Impaired loans had a carrying amount of $277.1 million and $262.7 million, with a valuation allowance of $26.2 million and $22.2 million at March 31, 2010 and December 31, 2009, respectively.

Other Real Estate Owned.Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at the lower of cost or estimated fair market value of the property, less estimated disposal costs, if any. The Company estimates fair value at the asset’s liquidation value less disposal costs using management’s

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assumptions which are based on current market trends and historical loss severities for similar assets. Any excess of cost over the estimated fair market value at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically by management and any write-downs are charged against current earnings in the Company’s consolidated statements of operations. Other real estate owned had a carrying amount of $15.0 million and $11.4 million at March 31, 2010 and December 31, 2009, respectively. For the three months ended March 31, 2010 and 2009, the Company recorded losses of $260.9 thousand and $0, respectively, due to valuation adjustments on other real estate owned property in its consolidated statements of operations.

The following table summarizes financial assets measured at fair value on a non-recurring basis as of March 31, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2010
	(in thousands)
Assets
Impaired loans	$	—	$	—	$	250,902	$	250,902
Other real estate owned	$	—	$	—	$	15,001	$	15,001
Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2009
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2009
	(in thousands)
Assets
Impaired loans	$	—	$	—	$	240,530	$	240,530
Other real estate owned	$	—	$	—	$	11,380	$	11,380

Non-financial assets measured at fair value on a non-recurring basis include the following:

Goodwill.Goodwill requires an impairment review at least annually and more frequently if certain impairment indicators are evident. Goodwill had a carrying amount of $249.5 thousand at March 31, 2010 and December 31, 2009. Based on the annual testing for impairment of goodwill, there have been no impairment charges to date.

FASB ASC Topic 825 “Financial Instruments” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:

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

Equity Securities.The carrying amount approximates fair value.

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Investment Securities. Fair values are based on published market prices or dealer quotes. Available-for-sale securities are carried at their aggregate fair value.

Loans, Net.For loans receivable with short-term and/or variable characteristics, the total receivables outstanding approximate fair value. The fair value of other loans is estimated by discounting the future cash flows using the build up approach to discount rate construction. Components of the discount rate include a risk free rate, credit quality component and a service charge component.

Accrued Interest Receivable and Accrued Interest Payable.The carrying amount approximates fair value.

Deposits.The fair value of noninterest bearing deposits and deposits with no defined maturity, by FASB ASC Topic 825 definition, is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the future cash flows using the build up approach to discount rate construction. Components of the discount rate include a risk free rate, credit quality component and a service charge component.

Short-Term Borrowings.The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values.

Long-Term Debt.The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Loan Commitments, Standby and Commercial Letters of Credit.Fair values for off-balance sheet lending commitments approximate the contract or notional value taking into account the remaining terms of the agreement and the counterparties’ credit standings. The fair values of these items are not significant and are not included in the following table.

The estimated fair value and the carrying value of the Company’s recorded financial instruments are as follows:

	March 31, 2010				December 31, 2009
(in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Cash and cash equivalents	$	185,770	$	185,770	$	185,520	$	185,520
Investment securities		4,196		4,196		5,755		5,755
Equity securities		9,508		9,508		9,508		9,508
Loans, net		953,857		983,342		986,114		1,018,746
Accrued interest receivable		4,973		4,973		5,620		5,620
Deposits		1,053,368		1,072,956		1,080,896		1,110,313
Short-term borrowings		35,000		35,000		35,000		35,000
Long-term debt		50,000		54,245		50,000		54,091
Accrued interest payable		2,962		2,962		2,679		2,679

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

General

The sole business of Commonwealth Bankshares, Inc. is to serve as a holding company for Bank of the Commonwealth. The Company was incorporated as a Virginia Corporation on June 6, 1988, and on November 7, 1988 it acquired the Bank.

Bank of the Commonwealth was formed on August 28, 1970 under the laws of Virginia. Since the Bank opened for business on April 14, 1971, its main banking and administrative offices have been located in Norfolk, Virginia. The Bank currently operates four branches in Norfolk, six branches in Virginia Beach, four branches in Chesapeake, two branches in Portsmouth, one branch in Suffolk, and four branches in North Carolina, located in Powells Point, Waves, Moyock and Kitty Hawk. Bank of the Commonwealth Mortgage currently operates one mortgage branch office in Virginia Beach and one mortgage branch office in Gloucester, Virginia. Executive Title Center currently operates one title insurance branch office in Suffolk, Virginia. Commonwealth Financial Advisors currently has one location in Norfolk, Virginia.

The Company concentrates its marketing efforts in the cities of Norfolk, Virginia Beach, Portsmouth, Chesapeake and Suffolk, Virginia and Northeastern North Carolina. The Company intends to continue concentrating its banking activities in its current markets, which the Company believes are attractive areas in which to operate.

The following discussion provides information about the important factors affecting the consolidated results of operations, financial condition, capital resources and liquidity of the Company. This report identifies trends and material changes that occurred during the reporting period and should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Forward-Looking Statements

Some of the matters discussed below and elsewhere in this report include forward-looking statements. These forward-looking statements include statements regarding profitability, liquidity, adequacy of the allowance for loan losses, interest rate sensitivity, market risk and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. The forward-looking statements we use in this report are subject to significant risks, assumptions and uncertainties, including among other things, the following important factors that could affect the actual outcome of future events:

• Our dependence on key personnel;

• The high level of competition within the banking industry;

• Our dependence on commercial real estate loans that could be negatively affected by a further downturn in the real estate market;

• Continued unfavorable economic conditions in the overall national economy as well as in our specific market areas within Hampton Roads, Virginia and Northeastern North Carolina;

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

• The adequacy of our estimate for known and inherent losses in our loan portfolio;

• Changes in interest rates;

• Our ability to manage our growth;

• Our ability to assess and manage our asset quality;

• Our ability to maintain internal control over financial reporting;

• Our ability to raise capital as needed by our business;

• Our reliance on secondary sources, such as Federal Home Loan Bank (“FHLB”) advances, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs;

• Impacts of implementing various accounting standards;

• Governmental and regulatory changes that may adversely affect our expenses and cost structure; and

• Other factors described from time to time in our SEC filings.

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Because of these and other uncertainties, our actual results and performance may be materially different from results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of future performance.

We caution you that the above list of important factors is not all inclusive. These forward-looking statements are made as of the date of this report, and we may not undertake steps to update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s most critical accounting policy relates to the Company’s allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company’s borrowers to make required loan payments. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses may be required. See Note 1 – Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009, for further information related to the allowance for loan losses.

Recent Accounting Pronouncements

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.

Adoption of New Accounting Standards

In February 2010, the FASB issued Accounting Standards Update ASU No. 2010-10,“Consolidations (Topic 810) - Amendments for Certain Investment Funds.” ASU 2010-10 defers the effective date of the amendments to the consolidation requirements made by ASU 2009-17 to a company’s interest in an entity (i) that has all of the attributes of an investment company, as specified under ASC Topic 946, “Financial Services - Investment Companies,” or (ii) for which it is industry practice to apply measurement principles of financial reporting that are consistent with those in ASC Topic 946. As a result of the deferral, a company will not be required to apply the ASU 2009-17 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest held by a related party should be treated as though it is an entity’s own interest when evaluating the criteria for determining whether such interest represents a variable interest. In addition, ASU 2010-10 also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. The provisions of ASU 2010-10 became effective for the Company as of January 1, 2010 and did not have a significant impact on the Company’s financial statements.

In February 2010, the FASB issued Accounting Standards Update ASU No. 2010-09, “Subsequent Events (Topic 855) - Amendments to Certain Recognition and disclosure Requirements.”The FASB amended its guidance on subsequent events to no longer require SEC filers to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements in order to alleviate potential conflicts between the FASB’s guidance and the SEC’s filing requirements. This guidance was effective immediately upon

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issuance. The adoption of this guidance had no impact on our results of operations or financial condition. While our consolidated financial statements no longer disclose the date through which we have evaluated subsequent events, we continue to be required to evaluate subsequent events through the date when our financial statements are issued.

In January 2010, the FASB issued Accounting Standards Update ASU No. 2010-06,“Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010.

In January 2010, the FASB issued Accounting Standards Update ASU No. 2009-17,“Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. As further discussed above, ASU No. 2010-10,“Consolidations (Topic 810) - Amendments for Certain Investment Funds,” deferred the effective date of ASU 2009-17 for a reporting entity’s interests in investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In March 2010, the FASB issued Accounting Standards Update ASU No. 2010-11,“Derivatives and Hedging (Topic 815),” which clarifies that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. The provisions of ASU 2010-11 will be effective July 1, 2010. Early adoption is permitted at the beginning of an entity’s first interim reporting period beginning after issuance of this guidance. The adoption of this guidance is not expected to have any impact on the Company’s financial statements.

Stock Compensation Plans

The Company has stock option plans that provide for the issuance of restricted stock awards, stock options in the form of incentive stock options and non-statutory stock options, stock appreciation rights and other stock-based awards to employees and directors of the Company. Stock option compensation expense is the estimated fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Share-based compensation expense is recorded in salary and employee benefits. Substantially, all employee stock options

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are awarded at the end of the year as part of an employee’s overall compensation, based on the individual’s performance during the year, and either vest immediately or over a nominal vesting period. There were no options granted during the three months ended March 31, 2010 and 2009, respectively. There have been no significant changes in the assumptions for the Black-Scholes option-pricing model previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. A summary of the Company’s stock option activity and related information for the three months ended March 31, 2010 is as follows:

	Stock Options Outstanding	Weighted Average Exercise Price		Remaining Contractual Life (in months)	Aggregate Intrinsic Value
Balance at December 31, 2009	431,262	$	17.21
Granted	—		—
Forfeited	—		—
Exercised	—		—
Expired	31,460		8.27
Balance at March 31, 2010	399,802	$	17.91	61.58	$	(5,881,087	)
Balance exercisable at March 31, 2010	399,802	$	17.91	61.58	$	(5,881,087	)

See Note 18 - Stock Based Compensation Plans of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009, for further information related to stock based compensation.

Additional Regulatory Restrictions on the Parent and the Bank

As previously disclosed, the Company received a letter from the Federal Reserve Bank of Richmond (“FRB”) dated December 11, 2009 stating that the Bank is deemed to be in “troubled condition” within the meaning of federal statutes and regulations. Please see “Part I, Item 1. Business - Regulation and Supervision” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for further information about the letter and certain additional limitations and regulatory restrictions the letter imposes on the Parent and the Bank.

Financial Condition

Total assets at March 31, 2010 were $1.2 billion, a decrease of 2.4% or $31.0 million from December 31, 2009. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. As of March 31, 2010, total gross loans (excluding unearned interest) were $1.0 billion, a decrease of $28.9 million or 2.8% from December 31, 2009. The decline in total gross loans for the first quarter of 2010 is the result of scheduled principal curtailments and lower loan demand.

As of March 31, 2010, 82.3% of the Company’s loan portfolio consisted of commercial loans, which are considered to provide higher yields, but also generally carry a greater risk. It should be noted that 66.0% of these commercial loans are collateralized with real estate. At March 31, 2010, 70.9% of the Bank’s total loan portfolio consisted of loans collateralized with real estate.

Deposits are the most significant source of the Company’s funds for use in lending and general business purposes. Deposits at March 31, 2010 were $1.1 billion, a decrease of $27.5 million or 2.6% from December 31, 2009. The decline in deposits is a result of the reduction in broker certificates of deposit. Noninterest-bearing demand deposits decreased by $3.0 million or 6.6% and interest-bearing deposits decreased by $24.5 million or 2.4%. Time deposits, excluding broker certificates of deposit, increased $15.7 million during the first three months of 2010, with interest-bearing demand and savings accounts increasing $8.4 million and $666.2

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thousand, respectively. Included in time deposits less than $100,000 as of March 31, 2010 and December 31, 2009 are $442.9 million and $492.3 million, respectively, in broker certificates of deposits. The interest rates paid on these deposits are consistent, if not lower, than the market rates offered in our local area. Also included in time deposits less than $100,000 are QwickRate deposits. As of March 31, 2010 and December 31, 2009, the Company had $39.8 million and $37.4 million in QwickRate deposits, respectively. The Company is committed to improving its liquidity position through the generation of core deposits and thus work to eliminate our dependence on out of market time deposits. Management believes the overall growth in core deposits is a result of the Company’s competitive interest rates on all deposit products, special promotions and product enhancements, as well as the Company’s continued marketing efforts. The Company’s core deposit base is predominantly provided by individuals and businesses located within communities served.

Short-term borrowings and long-term debt, both in the form of advances from FHLB, were $35.0 million and $50.0 million, respectively at March 31, 2010 and December 31, 2009.

Results of Operation

During the first three months of 2010, the Company reported a loss of $922.8 thousand, a decrease of 258.7% over reported net income of $581.3 thousand for the first three months of 2009. As a prudent measure against potential future losses, management elected to provide an additional $5.0 million to its allowance for loan losses during the first three months of 2010. On a per share basis, our diluted loss for the three months ended March 31, 2010 was $0.13, or a 262.5% decrease compared to earnings per share of $0.08 for the same period in 2009.

Profitability as measured by the Company’s return on average assets (“ROA”) was (0.29%) and 0.22% for the three months ended March 31, 2010 and 2009, respectively. ROA was impacted by the decrease in net earnings of 258.7% and by the increase in average assets of $179.1 million or 16.4% from March 31, 2009 to March 31, 2010. The return on average equity (“ROE”) was (4.67%) and 2.20% for the three months ended March 31, 2010 and 2009, respectively. The decrease in ROE is the result of our net loss and the decline in year-to-date average equity of $26.8 million or 25.1% from March 31, 2009 to March 31, 2010. The decrease in year-to-date average equity is primarily the result of our net loss of $25.8 million for the year ended December 31, 2009.

A fundamental source of the Company’s earnings, net interest income, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities, while deposits, short-term borrowings and long-term debt represent the major portion of interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations. Net interest income was $7.3 million for the three months ended March 31, 2010, a decrease of $1.9 million or 20.5% from the $9.2 million for the three months ended March 31, 2009.

Total interest and dividend income was $15.0 million for the three months ended March 31, 2010, a decrease of $1.5 million or 9.2% from the same period of 2009. Interest income on loans, including fees, decreased $1.6 million or 9.9% to $14.7 million for the three months ended March 31, 2010 as compared to the same period in 2009. While the Company’s performing loans provided a strong yield and helped maintain solid sources of interest income, the level of non-performing and restructured loans lead to a year over year decrease in interest income.

Interest expense was $7.7 million and $7.3 million for the three months ended March 31, 2010 and 2009, respectively. The slight increase in interest expense of 5.1% can be attributed to the increase in the Company’s average interest bearing liabilities, which was offset by the decrease in the overall rate paid on these liabilities. Average interest bearing liabilities increased $212.5 million or 22.9% from March 31, 2009 to March 31, 2010. This substantial increase was mostly due to the $245.6 million increase in total deposits as of March 31, 2010 as compared to 2009. The overall average rate paid on our interest bearing liabilities decreased 46 basis points between March 31, 2009 and March 31, 2010, which was due to our time deposits repricing to align with the decreases to the prime rate.

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The net interest margin, calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s effectiveness in generating income from earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competition and the economy. The Company’s net interest margin (tax equivalent basis) was 2.41% during the first three months of 2010, as compared to 3.53% for the same period in 2009. The compression of our margins from the prior year is the result of the increase in the balance of non-accruing and restructured loans and the increased liquidity placed in interest bearing deposits of banks (overnight funds) paying only 0.25%. The average balance of interest bearing deposits in banks increased $189.0 million from March 31, 2009 to March 31, 2010. In addition, the continued pressure on deposit pricing and the competitiveness for deposits from the reduction in liquidity throughout the financial markets has kept rates at a high level relative to loan rates.

The provision for loan losses is the annual cost of maintaining an allowance for inherent credit losses. The amount of the provision each year and the level of the allowance are matters of judgment and are impacted by many factors, including actual credit losses during the period, the prospective view of credit losses, loan performance measures and trends (such as delinquencies and charge-offs), loan growth, the economic environment and other factors, both internal and external, that may affect the quality and future loss experience of the credit portfolio. At March 31, 2010, the Company had total allowance for loan losses of $49.1 million or 4.90% of total loans. As a result of the continued economic uncertainties, the Company made provisions for loan losses of $5.0 million for the first three months of 2010, an increase of $993.7 thousand or 24.8% over the same period of 2009. Loan charge-offs for the three months ended March 31, 2010 totaled $1.8 million and recoveries for the same period totaled $141.6 thousand. Of the $1.8 million in loan charge-offs as of March 31, 2010, substantially the entire amount was comprised of relationships with specific reserve allocations previously established. Net charge-offs as a percentage of average loans outstanding was 0.16% and 0.15% for the three months ended March 31, 2010 and 2009, respectively.

Non-performing assets were $108.4 million or 8.71% of total assets at March 31, 2010 compared to $89.0 million or 6.97% of total assets at December 31, 2009 and $71.1 million or 6.41% of total assets at March 31, 2009. Non-performing loans increased $15.8 million in the first three months of 2010 to $93.4 million. Non-performing loans at March 31, 2010 were comprised of 153 loans, an increase of 29 loans, which is reflective of the unprecedented economic environment which continues to negatively impact our loan portfolio. $89.9 million or 96.2% of the total non-performing loans are comprised of 124 loans secured by real estate, of which $51.6 million are construction and development loans. The Company’s Loan Impairment Committee continues to monitor non-performing assets, past due loans, identify potential problem credits and develop action plans to work through these loans as promptly as possible. As all non-performing loans are deemed impaired, the Committee has individually reviewed the underlying collateral value (less cost to sell) on each of these loans as a part of its analysis of impaired loans. As a result of this comprehensive analysis, a $26.2 million specific reserve for loan losses has been established for non-performing loans. Based on current collateral values, we believe our reserve is adequate to cover any short falls resulting from the sale of the underlying collateral. Based on current accounting and regulatory guidelines the Company has provided a reserve based on current market values for these impaired loans however, management plans to work with our customers to get through these unprecedented economic times and to minimize any potential credit exposure. Management has taken a proactive approach to monitoring these loans and will continue to actively manage these credits to minimize losses.

The Company is required to account for certain loan modifications or restructurings as troubled debt restructurings (“TDR”). In general, the modification or restructuring of a loan constitutes a TDR when we grant a concession to a borrower experiencing financial difficulty. TDR typically result from the Company’s loss mitigation activities and include rate reductions or other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. As of March 31, 2010, the Company’s TDR loans totaled $98.5 million as compared to none one year earlier. Of this total, approximately $71.6 million are in compliance with modified terms, $7.0 million are 30-89 days delinquent, $259.8 thousand are 90 days or more delinquent, and $19.6 million are classified as non-accrual.

Other real estate owned (“OREO”) at March 31, 2010 was $15.0 million, compared to $11.4 million at December 31, 2009. The balance at March 31, 2010 was comprised of 46 properties of which 25 were residential properties.

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For the three months ended March 31, 2010, new foreclosures included 12 properties totaling $4.9 million, of which $4.7 million represented seven residential properties and four residential lots. OREO sales for the three months ended March 31, 2010 consisted of three residential properties and two residential lots, which resulted in a net loss of $3.7 thousand. At March 31, 2010, there were four residential properties under contract for sale. Subsequent to March 31, 2010, there were an additional four residential properties and one commercial property under contract for sale, of which one of the residential properties sold resulting in a loss of $47.4 thousand. The remaining properties are being actively marketed and management does not anticipate any material losses associated with these properties. As a direct result of the continued decline in the real estate market, the Company recorded losses of $260.9 thousand in its consolidated statements of operations for the three months ended March 31, 2010, due to valuation adjustments on 12 OREO properties. There were no losses due to valuation adjustments on OREO properties during the same period of 2009. Asset quality remains a top priority for the Company. We continue to allocate significant resources to the expedient disposition of non-performing and other lower quality assets.

Total noninterest income decreased in the three months ended March 31, 2010 to $695.6 thousand, a decrease of $584.9 thousand or 45.7% from the $1.3 million reported for the same period in 2009. Service charges on deposit accounts decreased $32.0 thousand, or 10.2% in the first quarter of 2010, which was primarily attributable to a decrease of $34.7 thousand, or 13.3% in non-sufficient funds (“NSF”) fees. Other service charges and fees reflected a slight decrease of $9.0 thousand or 4.1% during the first three months of 2010. Other service charges and fees included increases of $6.3 thousand and $3.8 thousand in checkbook sales and ATM fee income, respectively, which was offset by a reduction in trust service fee income of $17.2 thousand for the quarter ended March 31, 2010. Revenues generated from the Bank’s mortgage, title and investment subsidiaries, which are included in other noninterest income, were $300.2 thousand for the three months ended March 31, 2010 compared to $394.7 thousand for the same period in 2009. Revenues from the mortgage and title subsidiaries continue to be down from the prior year due to the slow economy and the weak housing markets. For the three months ended March 31, 2010 and 2009, the Company recorded losses on OREO totaling $264.6 thousand and $0, respectively. For 2010, $260.9 thousand relates to losses from valuation adjustments and the remaining $3.7 thousand relates to net losses on the sales of OREO properties.

Noninterest expense represents the overhead expenses of the Company. Costs associated with managing our asset and liability growth has resulted in increases to almost all components of noninterest expense. Noninterest expense for the three months ended March 31, 2010 totaled $4.4 million, a decrease of $1.2 million from the $5.6 million recorded during the comparable period in 2009. The ratio of annualized noninterest expense to year-to-date average total assets was 1.41% and 2.06% for the three months ended March 31, 2010 and 2009, respectively.

A key measure of overhead is the operating efficiency ratio. The operating efficiency ratio is calculated by dividing noninterest expense by net bank revenue on a tax equivalent basis. Efficiency gains can be achieved by controlling costs and generating more diverse and higher levels of noninterest income along with increasing our margins. The Company’s efficiency ratio (tax equivalent basis) was 55.16% for the three months ended March 31, 2010, as compared to 53.15% for the comparable period in 2009. For the three months ended March 31, 2010, the Company’s efficiency ratio was impacted by the decrease in interest income due to non-performing and restructured loans, the increase in losses on OREO, the increases to FDIC insurance and expenses related to OREO properties, and the decrease in salaries and employee benefits.

Salaries and employee benefits decreased by $2.0 million or 78.3% to $542.2 thousand for the three months ended March 31, 2010 compared to the $2.5 million reported during the first three months of 2009. The decrease in salaries and employee benefits was the direct result of the elimination of the executive officer deferred compensation plans. Occupancy expense and furniture and equipment expense had only minimal increases when comparing the first three months of 2010 to 2009. Occupancy expenses increased 0.9% or $9.1 thousand while furniture and equipment expenses increased 2.4% or $12.0 thousand. Other noninterest operating expenses, which includes a grouping of numerous transactions relating to normal banking operations, increased $788.9 thousand for the three months ended March 31, 2010, a 50.4% increase over the comparable period for 2009. The increase was comprised of increases of $530.4 thousand, $95.3 thousand, $144.2 thousand and $95.8 thousand in FDIC insurance, expenses related to OREO properties, professional fees

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and loan collection costs, respectively. During the second quarter of 2009, the FDIC increased deposit insurance costs for all banks to help replenish the Deposit Insurance Fund. In addition, the continued decline in real estate values and economic uncertainties has had a negative impact on our loan portfolio, which has resulted in a steady rise of expenses related to troubled asset resolution.

Income tax benefit for the three months ended March 31, 2010 was $496.9 thousand compared to income tax expense of $297.8 thousand for the same period in 2009. The Company’s effective tax rate was 35.1% for the three months ended March 31, 2010, compared to 33.3% for the comparable period in 2009.

Capital Resources

Total stockholders’ equity for the Company decreased $936.1 thousand, or 1.2%, to $79.1 million at March 31, 2010 compared to $80.0 million at December 31, 2009. The decrease in total stockholders’ equity for the first three months of 2010 was the result of our loss of $922.8 thousand.

The Federal Reserve Board, the Office of Controller of the Currency, and the FDIC has issued risk-based capital guidelines for U.S. banking organizations. These guidelines provide a capital framework that is sensitive to differences in risk profiles among banking companies.

Risk-based capital ratios are a measure of capital adequacy. At March 31, 2010, the Bank’s risk-adjusted capital ratios were 8.97% for Tier 1 and 10.27% for total capital, well above the required minimums of 4% and 8%, respectively. These ratios are calculated using regulatory capital (either Tier 1 or total capital) as the numerator and both on and off-balance sheet risk-weighted assets as the denominator. Tier 1 capital consists primarily of common equity less goodwill and certain other intangible assets. Total capital adds certain qualifying debt instruments and a portion of the allowance for loan losses to Tier 1 capital. One of four risk weights, primarily based on credit risk, is applied to both on and off-balance sheet assets to determine the asset denominator. Under Federal Reserve rules, the Bank was considered “well capitalized,” the highest category of capitalization defined by the regulators, as of March 31, 2010.

In order to maintain a strong equity capital position and to protect against the risks of loss in the investment and loan portfolios and on other assets, management will continue to monitor the Bank’s capital position. Several measures have been or will be employed to maintain the Bank’s strong capital position, including but not limited to continuing its efforts to return all non-performing assets to performing status, monitoring the Bank’s growth and continued utilization of its formal asset/liability policy.

Cash Dividends

For the three months ended March 31, 2010 and 2009, the Company paid out cash dividends of $0.00 and $.08 per share. The Company’s Board of Directors determines the amount of and whether or not to declare dividends. Such determinations by the Board take into account the Company’s financial condition, results of operations and other relevant factors, including any relevant regulatory restrictions. The Company’s only source of funds for cash dividends are dividends paid to the Company by the Bank.

As a result of the Bank currently being deemed to be in “troubled condition” within the meaning of federal statutes and regulations by the FRB, each of the Company and the Bank are subject to additional limitations and regulatory restrictions and may not pay dividends to its shareholders (including payments by the Company related to trust preferred securities).

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. For more information on the Company’s off-balance sheet arrangements, see Note 21 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

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Contractual Obligations

The Company’s contractual obligations consist of operating lease obligations, FHLB borrowings, trust preferred capital notes, standby letters of credit and commitments to extend credit. There have been no material changes to the contractual obligations disclosed in the Annual Report on Form 10-K for the year ended December 31, 2009.

Liquidity

Bank liquidity is a measure of the ability to generate and maintain sufficient cash flows to fund operations and to meet financial obligations to depositors and borrowers promptly and in a cost-effective manner. Asset liquidity is provided primarily by maturing loans and investments, and by cash received from operations. Other sources of asset liquidity include readily marketable assets, especially short-term investments, and long-term investment securities that can serve as collateral for borrowings. On the liability side, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed.

The Company maintains a liquid portfolio of both assets and liabilities and attempts to mitigate the risk inherent in changing rates in this manner. Cash, interest bearing deposits in banks, federal funds sold and investments classified as available for sale totaled $189.8 million as of March 31, 2010. To provide liquidity for current ongoing and unanticipated needs, the Company maintains a portfolio of marketable investment securities, and structures and monitors the flow of funds from these securities and from maturing loans. The Company maintains access to short-term funding sources as well including the ability to borrow from the Federal Home Loan Bank of Atlanta up to $155.8 million. As a result of the Company’s management of liquid assets, and the ability to generate liquidity through liability funding, including the use of broker certificates of deposit, management believes that the Company maintains overall liquidity sufficient to satisfy its depositor’s requirements and to meet customers’ credit needs.

The Company’s Asset/Liability Management Committee (“ALCO”) is responsible for formulating liquidity strategies, monitoring performance based on established objectives and approving new liquidity initiatives. ALCO’s overall objective is to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, the interest rate and economic outlook, market opportunities and customer requirements. General strategies to accomplish this objective include maintaining a strong balance sheet, achieving solid core deposit growth, taking on manageable interest rate risk and adhering to conservative financial management on a daily basis. These strategies are monitored regularly by ALCO and reviewed periodically with the Board of Directors.

Inflation

The Company carefully reviews Federal Reserve monetary policy in order to ensure an appropriate position between the cost and utilization of funds.

The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of the Company’s assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor the magnitude of the changes is directly related to price level indices. Accordingly, management believes the Company can best counter inflation over the long-term by managing net interest income and controlling net increases in noninterest income and expenses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes from the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are

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designed to ensure that material information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

During the first quarter the Company carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report (March 31, 2010).

Internal Control over Financial Reporting. In the Annual Report on Form 10-K for the year ended December 31, 2009, management’s assessment of the effectiveness of the Company’s internal control over financial reporting reported a material weakness as a result of inadequate control policies related to the determination of the allowance for loan losses. Specifically, the Company’s policies and procedures did not provide for timely evaluation of management’s approach to assessing credit risk inherent in the Company’s loan portfolio or timely revision of that approach to reflect changes in the economic environment. The methodology and systems for the establishment of both general reserves and specific reserves on loans needed improvement in order to adequately estimate the expected losses in the Company’s loan portfolio. Further, the system for the identification and evaluation of nonaccrual and impaired loans and resulting implications to revenue recognition needed to be updated.

Remediation Plan

In response to the material weakness previously identified, the Company has implemented and will continue to reinforce the following remediation plan, which the Company believes has remediated the material weakness.

• Reviewed the overall loan loss provision process by assessing and enhancing the historical risk factors, recent trends in portfolio performance and economic forecasts used in determining the provision for loan losses.

• Enhanced the methodology used in determining the provision for loan losses by assessing and updating related assumptions, valuations and judgments of management in light of the current economic and regulatory environment.

• Ensured that the historical loss experience and all significant qualitative or environmental factors that affect the collectability of the portfolio have been appropriately considered.

• Continued enhancement of training for its loan officers in the risk rating and problem loan identification process. Credit administration along with the Company’s independent loan review team will continue to have full authority in the final judgment of credit ratings.

• Expanded the Company’s credit analysis department to ensure timely review of borrowers’ current financial conditions.

• Hired a Chief Credit Officer in March 2010 to oversee and strengthen credit administration.

• Implemented continual assessment of lending and credit administration policies and procedures, revising them as necessary to promote a culture that expects reliability and integrity of data.

While management is not required to re-assess the effectiveness of internal control over financial reporting during the fiscal year, the Company believes, through these steps, it has appropriately addressed the material weakness in its internal control over financial reporting disclosed in its Form 10-K. The Company cannot

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assure you that it or its independent accountants will not in the future identify further material weaknesses or significant deficiencies in the Company’s internal control over financial reporting that have not been discovered to date. In addition, the effectiveness of any system of internal controls is subject to inherent limitations and there can be no assurance that the Company’s internal control over financial reporting will prevent or detect all errors.

Changes in Internal Control over Financial Reporting. Except as described above, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company expects the changes related to the remediation plan to materially affect and improve its internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

As of March 31, 2010, there were no legal proceedings against the Company.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

We announced an open ended program in May 2007 by which we were authorized to repurchase an unlimited number of our own shares of common stock in open market and privately negotiated transactions. During the first three months of 2010, we repurchased no shares of our common stock. Since December 11, 2009, we are prohibited from repurchasing or redeeming shares of our common stock without prior approval from the FRB and the SCC.

Item 3. Defaults Upon Senior Securities

There were no defaults upon senior securities during the quarter.

Item 4. Removed and Reserved

Item 5. Other Information

Effective March 31, 2010, the Bank terminated the deferred supplemental compensation agreements it had in place with each of the Company’s named executive officers (Edward J. Woodard, Jr., CLBB, President and Chief Executive Officer; Cynthia A. Sabol, CPA, Executive Vice President and Chief Financial Officer; Simon Hounslow, Executive Vice President and Chief Lending Officer; and Stephen G. Fields, Executive Vice President and Commercial Loan Officer).

The Bank originally entered into these deferred supplemental compensation agreements to help retain the services of these key executives. Under Mr. Woodard’s supplemental agreement, upon the later of Mr. Woodard’s attaining the age of 65 or his retirement (or, if earlier, his death), Mr. Woodard or his beneficiary was entitled to payment from the Bank of: (i) $250,000 in 120 equal consecutive monthly installments of $2,083.33 each, (ii) $720,000 in 180 equal consecutive monthly installments of $4,000 each, and (iii) $540,000 in 180 equal consecutive monthly installments of $3,000 each. Under the supplemental agreement, Mr. Woodard was obligated to make himself available to the Company after his retirement, so long as he received payments under the supplemental agreement, for occasional consultation which the Company could have reasonably requested.

The terms and conditions of the deferred supplemental compensation agreements with Ms. Sabol, Mr. Hounslow and Mr. Fields were virtually the same as those of Mr. Woodard’s deferred supplemental compensation agreement except for the amount of payment to which they were entitled. Under her supplemental agreement, Ms. Sabol was entitled to payment from the Bank of $1,500,000 in 180 equal consecutive monthly installments of $8,333.33 each. Mr. Hounslow and Mr. Fields were each entitled to $750,000 in 180 equal consecutive monthly installments of $4,166.67 each.

These deferred supplemental compensation agreements were terminated by mutual agreement in recognition of the Bank’s desire to terminate the economic liability associated with the deferred supplemental compensation agreements involving all employees who were not in payment status under such agreements and as part of the Bank’s capital planning process. As a result of the termination of these agreements, these executives will not receive the benefits described above upon attaining the age of 65 or retirement, and no payments or other compensation was received by these executives in connection with the termination.

Neither the Company nor the Bank incurred any early termination penalties as a result of the termination of these agreements.

The termination agreements are filed as Exhibits 10.28 through 10.31 to this Form 10-Q.

Item 6. Exhibits

(a) Exhibits

10.28	Termination of Deferred Supplemental Compensation Agreement with Edward J. Woodard, Jr., dated as of March 31, 2010.
10.29	Termination of Deferred Supplemental Compensation Agreement with Cynthia A. Sabol, dated as of March 31, 2010.
10.30	Termination of Deferred Supplemental Compensation Agreement with Simon Hounslow, dated as of March 31, 2010.
10.31	Termination of Deferred Supplemental Compensation Agreement with Stephen G. Fields, dated as of March 31, 2010.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1	Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350.

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SIGNATURES

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

	Commonwealth Bankshares, Inc.
	(Registrant)
Date:May 17, 2010	by:	/S/    EDWARD J. WOODARD, JR., CLBB
		Edward J. Woodard, Jr., CLBB
		President and Chief Executive Officer
Date:May 17, 2010	by:	/S/    CYNTHIA A. SABOL, CPA
		Cynthia A. Sabol, CPA
		Executive Vice President & Chief Financial Officer

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