**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

### **SECURITIES EXCHANGE ACT OF 1934**

### ** **

**For the fiscal year ended December 31,2007**

 

**Commission file number 0-49611**

 

**MILLENNIUMBANKSHARES CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Virginia**                                                     | ** ** | **54-1920520**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
| ** **                                                       | ** ** | ** **                            |
| **1601  Washington Plaza  Reston, Virginia**                     | ** ** | **20190**                             |
|  (Address of principal executive offices)                   | ** ** | (Zip Code)                            |

 

Registrant’s telephone number, including area code **(703) 464-0100**

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:

 

| **Title of each class**                  | ** ** | **Name of each exchange  on which registered** |
|------------------------------------------|------------|------------------------------------------------|
| Common  Stock, par value $5.00 per share |       | The  Nasdaq Stock Market                       |

 

Securities registeredpursuant to Section 12(g) of the Exchange Act:

 

**None**

(Title of class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.Yes oNo x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.Yes o  No x

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K,or any amendment to this Form 10-K. o

 

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

 
| Large Accelerated Filer  o |   | Accelerated Filer  o |   | Non-Accelerated Filer  o |   | Smaller Reporting Company  x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|--------|-----------------------------------|

 

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

 

The aggregate marketvalue of the common stock held by non-affiliates as of June 30, 2007 wasapproximately $58,839,000 (based upon the closing sales price of $8.55 on June 30,2007, as reported on the Nasdaq Capital Market).

 

The number of outstandingshares of the registrant’s common stock as of April 1, 2008 was 8,927,461

 

**Documents Incorporated by Reference**

Portions of registrant’sProxy Statement filed for its 2008 Annual Meeting of Shareholders (Part III).

 

 

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** **

**TABLE OFCONTENTS**

 
|              |                                                                                                                | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                |       |
| **PART I**   |                                                                                                                |
|              |                                                                                                                |       |
| ITEM 1.           | BUSINESS                                                                                                            | 3          |
|              |                                                                                                                |       |
| TEM  1A.          | RISK  FACTORS                                                                                                       | 16         |
|              |                                                                                                                |       |
| ITEM 1B.          | UNRESOLVED STAFF  COMMENTS                                                                                          | 20         |
|              |                                                                                                                |       |
| ITEM  2.          | PROPERTIES                                                                                                          | 21         |
|              |                                                                                                                |       |
| ITEM 3.           | LEGAL PROCEEDINGS                                                                                                   | 21         |
|              |                                                                                                                |       |
| ITEM 4.           | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                | 21         |
|              |                                                                                                                |       |
| **PART II**  |                                                                                                                |
|              |                                                                                                                |       |
| ITEM 5.           | MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES | 22         |
|              |                                                                                                                |       |
| ITEM 6.           | SELECTED FINANCIAL  DATA                                                                                            | 22         |
|              |                                                                                                                |       |
| ITEM 7.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION                          | 23         |
|              |                                                                                                                |       |
| ITEM 7A           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         | 42         |
|              |                                                                                                                |       |
| ITEM 8.           | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 42         |
|              |                                                                                                                |       |
| ITEM 9.           | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               | 81         |
|              |                                                                                                                |       |
| ITEM 9A(T).       | CONTROLS AND  PROCEDURES                                                                                            | 81         |
|              |                                                                                                                |       |
| ITEM 9B.          | OTHER INFORMATION                                                                                                   | 82         |
|              |                                                                                                                |       |
| **PART III** | ** **                                                                                                          |
| ** **        | ** **                                                                                                          | ** ** |
| ITEM 10.          | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             | 82         |
|              |                                                                                                                |       |
| ITEM 11.          | EXECUTIVE  COMPENSATION                                                                                             | 82         |
|              |                                                                                                                |       |
| ITEM 12.          | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                    | 82         |
|              |                                                                                                                |       |
| ITEM 13.          | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                          | 83         |
|              |                                                                                                                |       |
| ITEM 14.          | PRINCIPAL ACCOUNTANT  FEES AND SERVICES                                                                             | 83         |
|              |                                                                                                                |       |
| **PART IV**  | ** **                                                                                                          |
| ** **        | ** **                                                                                                          | ** ** |
| ITEM 15.          | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES                                                                            | 83         |

 

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**PART I**

 

**Caution About Forward Looking Statements**

 

We make forward-looking statements in this Form 10-Kthat are subject to risks and uncertainties. These forward looking statements include statements regarding ourprofitability, liquidity, allowance for loan losses, interest rate sensitivity,market risk, growth strategy and financial and other goals.  The words “believes,” “expects,” “may,” “will,”“should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” orother similar words or terms are intended to identify forward lookingstatements.

 

These forward-looking statements are subject tosignificant uncertainties because they are based upon or are affected byfactors including:

 

·      The abilityto successfully manage our growth or implement our growth strategies if we areunable to identify attractive markets, locations or opportunities to expand inthe future;

·      Reliance onour management team, including our ability to attract and retain key personnel;

·      Thesuccessful management of interest rate risk, including managing changing ratesand policies,

·      Risksinherent in making loans such as repayment risks and fluctuating collateralvalues;

·      Problemswith technology utilized by us;

·      Competitionwith other banks and financial institutions, and companies outside of thebanking industry, including those companies that have substantially greateraccess to capital and other resources;

·      Demand,development and acceptance of new products and services;

·      Changingtrends in customer profiles and behavior;

·      Maintainingcapital levels adequate to meet the requirements of the formal agreement and tosupport our growth;

·      Our abilityto comply with the other provisions of the formal agreement;

·      Maintainingcost controls and asset qualities

·      Changes ingeneral economic and business conditions in our market area; and

·      Changes inbanking and other laws and regulations applicable to us.

·      The othermatters discussed under Item 1A, Risk Factors, of this Form 10-K.

 

Becauseof these uncertainties, our actual future results may be materially differentfrom the results indicated by these forward-looking statements.  In addition, our past results of operationsdo not necessarily indicate our future results.

 

ITEM 1.          BUSINESS

 

**General**

 

Millennium Bankshares Corporation (“Millennium”)is a bank holding company headquartered in Reston, Virginia.  We were incorporated in 1998 and beganoperations in April 1999.  Weprovide commercial and consumer banking services through Millennium BankNational Association (“Millennium Bank” or the “Bank”).  At December 31, 2007, Millennium hadtotal consolidated assets of $518.3 million, loans from continuing operationsof $243.4 million, deposits from continuing operations of $293.5 million andstockholders’ equity of  $38.5 million.

 

Millennium Bank is a nationally charteredcommunity bank with four banking offices – in Reston, Herndon, Sterling, andWarrenton, Virginia.  Three of ourbanking offices are situated in Fairfax and Loudoun Counties, Virginia, justwest of Washington, D.C., and one in Fauquier County, Virginia.

 

Our branches are located in growingcounties.  The population of FairfaxCounty grew from 818,584 in 1990 to 1,006,529 in 2005, while Loudoun County increasedfrom 86,129 in 1990 to an estimated 262,000 in 2006.

 

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Millennium Bank provides a broad range ofcommercial and retail banking services designed to meet the needs of businessesand consumers in the communities we serve. Local decision-making and attentive personal service to customers isemphasized.  By combining thetechnological support and products and services that our customers demand withdirect access to senior management and responsive customer service, MillenniumBank seeks to foster a business and consumer-banking environment that allowseffective competition in our particular market with other financialinstitutions of all sizes.

 

Millennium Bank offers 24 hours a day, sevendays a week Internet banking services. These services allow consumers and businesses to view accounts, maketransfers, submit wire transfer requests, pay bills and place stop payments onchecks over the Internet.

 

##### **RegulatoryAction**

##### ** **

On January 24,2008, the Bank entered into a formal written agreement (the “Agreement”) withthe Office of the Comptroller of the Currency (the “OCC”).  The Agreement requires the Bank to undertakecertain actions within designated timeframes, and to operate in compliance withthe provisions thereof during its term. The Agreement is based on the resultsof an examination of the Bank by the OCC commenced on July 23, 2007.

 

The provisions of the Agreement include the following:(i) By March 31, 2008 the Bank is required to achieve and thereaftermaintain a total risk-based capital ratio equal to 13% of risk-weighted assets,a tier 1 capital ratio equal to 12% of risk-weighted assets, and a leverageratio equal to 10% of adjusted total assets; (ii) Within 60 days, theBoard of Directors of the Bank (the “Board”) is required to adopt and implementa three year capital program, which must be submitted to the OCC for review andprior determination of no supervisory objection; (iii) Within 120 days,the Board is required to adopt and implement a three-year strategic plan whichmust be submitted to the OCC for review and prior determination of nosupervisory objection; (iv) Within 60 days, the Board is required tosubmit for supervisory review a capable Senior Lending Officer; (v) Within90 days, the Board is required to adopt and implement a written program toimprove the Bank’s loan portfolio management; (vi) Within 120 days, theBoard  is required to adopt and implementsystems which provide for effective monitoring of problem loans, creditadministration, compliance with law, and concentrations of credit; (vii) Within90 days, the Board is required to adopt and implement a written program toeliminate the basis for criticism of assets identified as problem assets; (viii) Within90 days, the Board is required to adopt and implement a written risk managementprogram; (ix) Within 60 days, the Board is required to review and revisethe Bank’s written loan policy; (x) Within 30 days of implementation ofthe new credit diagnostic system, and no later than May 31, 2008, theBoard is required to adopt and implement a written asset diversificationprogram; (xi) Within 60 days, the Board is required to review the adequacy ofthe Bank’s Allowance for Loan and Lease Losses and establish a program for themaintenance of an adequate Allowance; (xii) Within 60 days, the Board isrequired to establish an effective, independent and ongoing loan review systemto review, at least quarterly, the Bank’s loan and lease portfolios to assurethe timely identification and categorization of problem credits and portfoliotrends; (xiii) Within 90 days, the Board is required to adopt and implement awritten liquidity, asset and liability management policy; (xiv) Within 60 days,the Board is required to submit for supervisory review a capable, full-timeBank Secrecy Act Officer; and (xv) Within 90 days, the Board is required toensure that the Bank completes the BSA Risk Assessment, and thereafter, theBoard shall review and approve the BSA Risk Assessment annually.

 

Compliancewith the Agreement is to be monitored by a committee (the “Committee”) of atleast five directors, none of whom is an employee of the Bank or a familymember of an employee.  The Committee isrequired to submit written progress reports on a monthly basis and the Agreementrequires the Bank to make periodic reports and filings with the OCC.

 

Thecorrective actions taken by us are discussed later in this Part 1 underthe heading “Strategy”

 

**Subsidiaries**

** **

Millenniumconducts primarily all of its business through Millennium Bank and its whollyand majority owned subsidiaries.   As of December 31,2006, we determined that it was in our best interest to wind down our mortgageoperating subsidiaries.  It was ourdesire to focus exclusively on core banking activities going forward toeliminate, going forward, the risks normally associated with mortgage bankingactivities.  The wind down decision wasalso precipitated by credit quality issues that surfaced in the held for saleloan portfolio during the fourth quarter 2006 and which further escalated in2007 due to repurchase obligations. Accordingly, the results of our mortgageoperations are presented as a component of discontinued operations on theincome statement following the results from 

 

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continuing operations. Additional discussion of discontinued operations can be found in Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of this report on Form 10-K.

 

Thesubsidiaries of Millennium Bank, which were formerly involved in mortgageoperations, listed below, are now inactive.

 
| ** **                                              | ** **   |           |         | **Date**          |
|---------------------------------------------------------|--------------|----------------|--------------|-------------------|
| ***Subsidiary***                                        | *** *** | ***Location*** | *** *** | ***Established*** |
| Millennium  Capital, Inc.                          |         | Reston,  VA    |         | May 1999     |
| Millennium  Sunbelt Mortgage, LLC (“Sunbelt”) |         | Las  Vegas, NV |         | Dec. 2001    |
| Millennium  Bank Mortgage, LLC (“MBM”)        |         | Reston,  VA    |         | Sept.  2005       |
| Millennium  Hyland Mortgage, LLC (“Hyland”)   |         | Reston,  VA    |         | Sept.  2005       |

 

In September 2005,Millennium restructured its mortgage operations.   Prior to September 2005, Millennium wasrecording gross gains on mortgage sales, which were offset by compensationexpense and other direct expenses for the mortgage department. Under the newstructure, the activities of Millennium Capital, Inc., a wholly ownedsubsidiary of Millennium Bank, were terminated, and Millennium establishedcontractual relationships with three mortgage banking limited liabilitycompanies, the terms of each of which provide for a “per loan” fee to be paidto Millennium (the 51% owner of the LLC’s) for each mortgage loan sold andrequired the 49% owners to pay for all costs of operation while retaining allother fee income. At December 31, 2006, Millennium terminated the businessrelationship by written notice.

 

We formed Millennium Financial, Inc. on February 23,2004, to provide insurance services to our bank customers through MetropolitanLife Insurance Company.  In March 2008,we revoked our status as a financial holding company and this entity wasdissolved.

 

**Strategy**

 

In July 2007,Richard Linhart joined the Bank as President and CEO.  With the support of the Bank’s Board ofDirectors and under Mr. Linhart’s leadership, the Bank began initiating aseries of corrective actions and strategic decisions commencing in July 2007in response to anticipated final findings of the OCC’s examiners.  Among the actions taken are the following:

 

·      The Bank embarked on a balance sheetrepositioning strategy consisting of three main components; (i) the saleof its two Richmond branches to refocus its franchise on the core NorthernVirginia market exclusively (completed in March 2008 at which time apre-tax gain of $8.5 million was recorded), (ii) the sale of $100 to $110million in investment securities to partially fund the sale of the two branchesand provide a source of immediate on-balance sheet liquidity and (iii) evaluateoptions in connection with the portfolio of Held for Sale/Repurchased loans..  To avoid further exposure to lossesdue to market conditions and extended delays in resolution, the Bank, on February 7,2008, entered into an agreement to sell its entire portfolio of held for saleand repurchased mortgage loans (the “Portfolio”) to Beltway Capital, HuntValley, Maryland.  The transaction closedon February 8, 2008. Prior to the sale, the loan balance of the Portfolioaggregated $31.3 million, against which the Bank had a valuation allowance of$6.9 million at December 31, 2007. The portfolio consisted of $5.7 million of current performing loans,$11.9 million of delinquent loans, $13.0 million of loans in various stages offoreclosure, and $0.7 million in properties held in other real estate owned.The wholesale bulk sale price paid by Beltway was 43.55% of the outstandingloan balance, or $13.6 million plus accrued interest.  As a result, the Bank established an additionalvaluation allowance as of December 31, 2007, resulting in a charge toearnings of $10.8 million, or $7.1 million net of taxes.

 

·      The Bank made plans to implement a new loanunderwriting and administrative system (Credit Quest), which is expected tostrengthen the credit underwriting, and administration function.

 

·      The Bank approved a new commercial loanpolicy.  A key component of this newpolicy is a shift in philosophy to deemphasize construction; land developmentand non-owner occupied commercial real estate lending, which is highlytransaction oriented, to commercial and industrial lending which is morerelationship-based.

 

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·      The Bank retained a new external loan reviewfirm.

 

·      The Bank hired a new Chief Lending Officer andhas hired other loan officers with substantial Northern Virginia experience andcontacts.

 

·      Changed organizational responsibilities includingseparating the Chief Lending Officer position from the Chief Credit Officerposition.

 

·      Right sizing the expense and cost structure ofthe organization in light of its re-focused activities.  During the fourth and first quarters of 2007and 2008, management has been engaged in an aggressive review of staffing,expenses, and costs.  Apart from thesefactors, management has engaged in an aggressive review of all of its overheadexpenses.

 

These steps were designedto improve risk management, enhance internal controls over creditadministration, focus on the Northern Virginia market, and return the Bank tocore community banking.  The sale of theRichmond branches and the concomitant sale of securities will shrink the Bank’sbalance sheet, enhance capital ratios, and improve the Bank’s liquidityposition.

 

Inaddition to the strategies listed above the following core objectives willcontinue:

 

·      Attractcustomers by providing the financial sophistication and breadth of products ofa regional bank while maintaining the quick response and service of a communitybank.  Continue to diversify productline, including commercial, Small Business Administration, consumer, andmortgage loans.

 

·      Increase netincome and return to shareholders through quality loan growth, while controllingthe cost of our deposits and noninterest expense.

 

·      Diversifyour loan portfolio through use of an array of commercial and Small BusinessAdministration loan products.   We arealso focused on increasing our core deposits, reducing our dependence onbrokered deposits and attracting additional small business customers.

 

·      Expandfootprint in the Northern Virginia market, to the extent not inhibited bycapital constraints and improve the overall visibility and accessibility of ourbranch network.   This expansion, to theextent possible, will most likely take the form of a loan production office ordeposit production office as opposed to a full-service branch facility.

 

**Market Area**

 

We consider our targetmarket to be the greater Washington metropolitan area, which we define as theDistrict of Columbia, the northern Virginia counties of Fairfax, Fauquier,Loudoun and Prince William, and the Maryland counties of Frederick, Montgomeryand Prince George’s.

 

According to the 2005U.S. Census data, the population of the greater Washington metropolitan areawas approximately 5.1 million people. The average median household income figures reported in 2005 by the U.S.Census Bureau for each of the 15 jurisdictions comprising the greaterWashington metropolitan area was approximately $74,708, compared to a nationalmedian household income of approximately $46,242.  Based on estimates released by the Bureau ofLabor Statistics of the U.S. Department of Labor for September 2006, theunemployment rate for the greater Washington metropolitan area wasapproximately 2.9%, compared to a national unemployment rate of 5.8%.  According to 2005 U.S. Census figures,approximately 46% of adults at least 25 years of age in this area have abachelor’s degree or higher, compared to approximately 27% nationally.  As of June 30, 2006, total deposits inthis area were approximately $145 billion.

 

Our headquarters islocated approximately 20 miles west of Washington, D.C., in Reston, Virginia,which is in Fairfax County.  The 2005 U.S.Census data indicates that Fairfax County is the most populous county inVirginia with a population of approximately one million people and a medianhousehold income of over $82,000.  TheU.S. Census data shows that over 55% of Fairfax County adults at least 25 yearsold have a bachelor’s degree or higher.

 

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**Competition**

 

Our headquarters is in the Reston-Herndonmarket area where there is a growing community bank presence.  It is a community serviced by the branches oflarge regional banks that are headquartered, for the most part, in citiesoutside the Washington D.C. Metropolitan area. Our market area is a highly competitive, highly branched banking market.  We compete as a financial intermediary withother commercial banks, savings and loan associations, credit unions, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market mutual funds and other financial institutionsoperating in the Fairfax County market area and elsewhere.

 

Competition in the marketarea for loans to small businesses and professionals is intense, and pricing isimportant.  Most of our competitors havesubstantially greater resources than Millennium.  Many competitors offer services, such asextensive branch networks and trust services, we currently do not provide.  Moreover, larger institutions operating inthe Northern Virginia market have access to borrowed funds at lower costs thanare available to the Bank.  Depositcompetition among institutions in the market area also is strong.  As a result, it is possible that we will payabove-market rates to attract deposits. According to a market share report prepared by the FDIC, we held 0.76%of deposits in the Fairfax County market and 0.72% for Fairfax County andFairfax city combined, as of June 30, 2007, the most recent date for whichmarket share information is available.

 

**Credit Policies**

 

The principal riskassociated with each of the categories of loans in Millennium’s portfolio isthe creditworthiness of its borrowers. Within each category, credit risk is increased or decreased, dependingon prevailing economic conditions.  In aneffort to manage the risk of loans made, our policy gives loan approval limitsto individual officers based on their position and experience.  Loans that are held for sale are underwrittento investor guidelines.  All fixed rateresidential first mortgage loans are pre-sold prior to settlement on the loan.

 

Millennium Bank haswritten policies and procedures to help manage credit risk.  We have implemented a loan review processthat includes portfolio management strategy, underwriting standards and riskassessment guidelines, procedures for ongoing identification and management ofcredit deterioration, and regular portfolio reviews to establish loss exposureand to ascertain compliance with the Bank’s policies.

 

Millennium Bank uses anOfficers Loan Committee and Directors Loan Committee to approve loans.  The Officers Loan Committee, which consistsof the Chairman and additional officers, meets as necessary to review mostapplications for loans that are intended to be held in the portfolio.  A Directors Loan Committee, which currentlyconsists of six directors, approves loans in excess of $1,000,000 that havebeen previously approved by the Officers Loan Committee.  The Directors Loan Committee also reviewslending policies proposed by management.

 

We obtain small businessand commercial loans through direct solicitation of owners and continuedbusiness from customers.  The Bank’s loanofficers review completed commercial loan applications.  As part of the application process,information is obtained concerning the income, financial condition, employmentand credit history of the applicant.  Ifcommercial real estate is involved, information is also obtained concerningcash flow after debt service.  Loanquality is analyzed based on the Bank’s experience and its credit underwritingguidelines, as well as guidelines issued by the Office of the Comptroller ofthe Currency.

 

Inthe normal course of business, the Bank makes various commitments and incurscertain contingent liabilities, which are disclosed in the footnotes of itsannual financial statements, including commitments to extend credit.  At December 31, 2007, commitments toextend credit totaled $49.2 million and standby letters of credit totaled $2.1million.

 

**Commercial Lending**

 

*General.* Commercial business loans and commercial real estate loans generallyhave a higher degree of risk than residential mortgage loans, but havecommensurately higher yields.  To managethese risks, we generally secure appropriate collateral, obtain personalguarantees from principals, and monitor the financial condition of our businessborrowers. The availability of funds for the repayment of commercial businessloans may be substantially dependent on the success of the businessitself.  Further, the collateral forcommercial business loans may depreciate 

 

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over time and cannot be appraised with as much precision as residentialreal estate.  At December 31, 2007,commercial loans and commercial real estate loans from continuing operationstotaled $108.8 million, or 44.0% of the total loan portfolio.

 

Wehave implemented a credit review and monitoring system to review the cash flowof commercial borrowers.  Residentialmortgage loans generally are made on the basis of the borrower’s ability tomake repayment from his/her employment and other income and are secured by realestate, the value of which tends to be easily ascertainable.  In contrast, commercial business loanstypically are made on the basis of the borrower’s ability to make repaymentfrom cash flow from its business and are secured by assets, such as commercialreal estate, accounts receivable, equipment and inventory.

 

*Real Estate Loans. *Commercialreal estate loans may be secured by various types of commercial real estate inMillennium’s market area, including multi-family residential buildings,commercial buildings and offices, small shopping centers, and churches.  In its underwriting of commercial realestate, the Bank may lend up to 80% of the secured property’s appraised value.The Bank’s commercial real estate loan underwriting criteria require anexamination of debt service coverage ratios, the borrower’s creditworthinessand prior credit history and reputation, and generally requires personalguarantees or endorsements of borrowers. At December 31, 2007, commercial real estate loans from continuingoperations totaled $90.0 million, or 36.4% of the total loan portfolio.

 

*Construction Loans. *Whileconstruction loans have been permitted in the past, we are not currentlyseeking new volume in this sector. Loan policy allows for local constructionloans, primarily to individual small builders on a limited basis.  At December 31, 2007, there was $57.1million in construction and land development loans outstanding from continuingoperations in the commercial real estate loan portfolio. The Bank will obtain afirst lien on the property as security for its construction loans and personalguarantees from the borrower’s principal owners.

 

*Small Business Lending.*  Today, the principal activity of the Bank’scommercial loan division is the origination of commercial mortgage andnon-mortgage loans to small and medium sized businesses.  We regularly use various loan guaranteeprograms offered through the Small Business Administration, including the 504loan program, which is intended to help small and medium sized businesses avoidlarge down payments and floating interest rates that are typically associatedwith purchases of fixed assets used to expand operations.  Whenever possible, the 504-loan programprovides long-term and fixed rate financing for investment in fixed assets,primarily real estate and large/heavy equipment.  At December 31, 2007, Small BusinessAdministration loans totaled approximately $12.5 million.

 

**One-to-Four-Family Residential RealEstate Lending**

 

We have discontinuedoriginating one-to-four family residential real estate loans but our currentportfolio still includes loans secured by one-to-four-family residences andnon-conforming adjustable rate mortgages for consumers that do not reside inour market area.

 

When we were stilloriginating these loans we evaluated both the borrower’s ability to makeprincipal and interest payments and the value of the property that will securethe loan. We made first mortgage loans in amounts of up to 100% LTV of theappraised value of the underlying real estate, but retained in our portfoliosome loans with an 80% LTV or less appraised value.   We retain some second mortgage loans securedby property in various market areas. Second mortgage loans with a loan to value ratio over 95% wereunderwritten to institutional investor guidelines.  For conventional loans in excess of 80% loanto value, private mortgage insurance is secured insuring the mortgage loans to75% loan to value.

 

Our currentone-to-four-family residential adjustable rate mortgage loans have interest ratesthat adjust every 1, 3, 5, or 7 years, based on a spread over the rates onone-year U.S. Treasury bills.  Millennium’sadjustable rate mortgage loans generally limit interest rate increases to 2%each rate adjustment period and have an established ceiling rate at the timethe loans are made of up to 6% over the original interest rate.  Borrowers are qualified at the first yearinterest rate plus 2%.  There are risksresulting from increased costs to a borrower as a result of the periodicrepricing mechanisms of these loans. Despite the benefits of adjustable rate mortgage loans to an institution’sasset/liability management, they pose additional risks, primarily because asinterest rates rise, the underlying payments by the borrowers rise, increasing thepotential for default.  At the same time,the marketability of the underlying property may be adversely affected byhigher interest rates.  We minimize theserisks by underwriting these loans to be sold in the secondary mortgage market.

 

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Millennium requires titleopinions and fire and casualty insurance coverage, as well as title insuranceand flood insurance where appropriate, to protect Millennium’s interest.  The borrower pays the cost of this insurancecoverage.  We typically require escrowsfor taxes and insurance.

 

**Consumer Lending**

 

Millennium offers varioussecured and unsecured consumer loans, including unsecured personal loans andlines of credit, automobile loans, deposit account loans, installment anddemand loans, letters of credit, home equity loans and beginning in 2006,marine loans.  Such loans are generallymade to customers with a pre-existing relationship with Millennium or to newcustomers in the greater Washington, D.C. area including Maryland andVirginia.  Marine loans were alsooriginated through a channel of approved dealers and brokers. The marine loanprogram was discontinued in mid-2007.

 

Consumer loans may entailgreater risk than do residential mortgage loans, particularly in the case ofunsecured consumer loans, such as lines of credit, or loans secured by rapidlydepreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loanmay not provide an adequate source of repayment of the outstanding loan balanceas a result of the greater likelihood of damage, loss or depreciation.  The underwriting standards employed by theBank for consumer loans include a determination of the applicant’s paymenthistory on other debts and an assessment of ability to meet existingobligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined byverification of gross monthly income for primary employment, and additionallyfrom any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration,the underwriting process also includes an analysis of the value of the securityin relation to the proposed loan amount. Only fiberglass hull power boats and sail boats are considered under themarine lending program.

 

**Employees**

** **

AtDecember 31, 2007, Millennium had 82 full-time equivalent employees.  None of our employees are represented by acollective bargaining unit or union. Millennium believes that its relations with employees are satisfactory.

 

**Supervision and Regulation**

 

*General*.** ** As a bank holding company, we are subject toregulation under the Bank Holding Company Act of 1956, as amended, and theexamination and reporting requirements of the Board of Governors of the FederalReserve System. Other federal and state laws govern the activities of our banksubsidiary, including the activities in which it may engage, the investmentsthat it makes, the aggregate amount of loans that it may grant to one borrower,and the dividends it may declare.  Theselaws are intended primarily to protect depositors and customers of the Bank,not shareholders of Millennium. Our bank subsidiary is also subject to variousconsumer and compliance laws. As a national bank, Millennium Bank is subject toprimary regulation, supervision and examination by the Office of theComptroller of the Currency.

 

The following description summarizes the significantfederal and state laws applicable to us. To the extent that statutory orregulatory provisions are described, the description is qualified in itsentirety by reference to that particular statutory or regulatory provision.

 

*The Bank Holding Company Act.*** **Under the Bank Holding Company Act, we are subject toperiodic examination by the Federal Reserve and required to file periodicreports regarding our operations and any additional information that theFederal Reserve may require. The activities of a bank holding company aregenerally limited to:

 

·      banking, managing or controlling banks;

 

·      furnishing services to or performing services forour subsidiaries; and

 

·      engaging in other activities that the FederalReserve has determined by regulation or order to be so closely related tobanking as to be a proper incident to these activities.

 

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Some of the activities that the Federal Reserve Boardhas determined by regulation to be closely related to the business of bankinginclude making or servicing loans and specific types of leases, performingspecific data processing services and acting in some circumstances as afiduciary or investment or financial adviser.

 

Under the Gramm-Leach-Bliley Act, which is discussedin more detail below, a bank holding company that satisfies certain criteriamay elect to become a “financial holding company” and engage in a broader rangeof activities. With some limited exceptions, the Bank Holding Company Actrequires every bank holding company to obtain the prior approval of the FederalReserve before:

 

·      acquiring substantially all the assets of anybank;

 

·      acquiring direct or indirect ownership or controlof any voting shares of any bank if after such acquisition it would own orcontrol more than 5% of the voting shares of such bank (unless it already ownsor controls the majority of such shares); or

 

·      merging or consolidating with another bankholding company.

 

In addition, and subject to some exceptions, the BankHolding Company Act and the Change in Bank Control Act, together with theirregulations, require Federal Reserve approval prior to any person or companyacquiring “control” of a bank holding company. Control is conclusively presumedto exist if an individual or company acquires 25% or more of any class ofvoting securities of the bank holding company. Control is rebuttably presumedto exist if a person acquires 10% or more, but less than 25%, of any class ofvoting securities and if the institution has registered securities under Section 12of the Securities Exchange Act of 1934 or no other person owns a greaterpercentage of that class of voting securities immediately after thetransaction. The regulations provide a procedure for challenging thisrebuttable control presumption.

 

*Gramm-Leach Bliley Act*. The Gramm-Leach-Bliley Act of 1999 wassigned into law on November 12, 1999. The GLBA covers a broad range ofissues, including a repeal of most of the restrictions on affiliations amongdepository institutions, securities firms and insurance companies.  The following description summarizes some ofits significant provisions.

 

The GLBA repeals sections 20 and 32 of theGlass-Steagall Act, thus permitting unrestricted affiliations between banks andsecurities firms. It also permits bank holding companies to elect to becomefinancial holding companies. A financial holding company may engage in oracquire companies that engage in a broad range of financial services, includingsecurities activities such as underwriting, dealing, investment, merchantbanking, insurance underwriting, sales and brokerage activities. In order tobecome a financial holding company, the bank holding company and all of itsaffiliated depository institutions must be well-capitalized, well-managed andhave at least a satisfactory Community Reinvestment Act rating.

 

The GLBA provides that the states continue to have theauthority to regulate insurance activities, but prohibits the states in mostinstances from preventing or significantly interfering with the ability of abank, directly or through an affiliate, to engage in insurance sales,solicitations or cross-marketing activities. Although the states generally mustregulate bank insurance activities in a nondiscriminatory manner, the statesmay continue to adopt and enforce rules that specifically regulate bankinsurance activities in specific areas identified under the law. Under the newlaw, the federal bank regulatory agencies adopted insurance consumer protectionregulations that apply to sales practices, solicitations, advertising anddisclosures.

 

The GLBA adopts a system of functional regulationunder which the Federal Reserve Board is designated as the umbrella regulatorfor financial holding companies, but financial holding company affiliates areprincipally regulated by functional regulators such as the OCC for national bankaffiliates, the Securities and Exchange Commission for securities affiliates,and state insurance regulators for insurance affiliates. It repeals the broadexemption of banks from the definitions of “broker” and “dealer” for purposesof the Securities Exchange Act of 1934, as amended. It also identifies a set ofspecific activities, including traditional bank trust and fiduciary activities,in which a bank may engage without being deemed a “broker,” and a set ofactivities in which a bank may engage without being deemed a “dealer.”Additionally, the law makes conforming changes in the definitions of “broker”and “dealer” for purposes of the Investment Company Act of 1940, as amended,and the Investment Advisers Act of 1940, as amended.

 

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The GLBA contains extensive customer privacyprotection provisions. Under these provisions, a financial institution mustprovide to its customers, both at the inception of the customer relationshipand on an annual basis, the institution’s policies and procedures regarding thehandling of customers’ nonpublic personal financial information. The lawprovides that, except for specific limited exceptions, an institution may notprovide such personal information to unaffiliated third parties unless theinstitution discloses to the customer that such information may be so providedand the customer is given the opportunity to opt out of such disclosure. Aninstitution may not disclose to a non-affiliated third party, other than to aconsumer reporting agency, customer account numbers or other similar accountidentifiers for marketing purposes. The GLBA also provides that the states mayadopt customer privacy protections that are more strict than those contained inthe act.

 

*Payment of Dividends*.** **We are a legal entity separate anddistinct from our banking and other subsidiaries. Virtually all of our revenueswill result from dividends paid to us by our bank subsidiary, Millennium Bank.Our bank subsidiary is subject to laws and regulations that limit the amount ofdividends that it can pay. Under the National Bank Act, a national bank may notdeclare a dividend in excess of its undivided profits, which means thatMillennium Bank must recover any accumulated losses before it may pay adividend to us. Additionally, Millennium Bank may not declare a dividend to usif the total amount of all dividends, including the proposed dividend, declaredby it in any calendar year exceeds the total of its retained net income of thatyear to date, combined with its retained net income of the two preceding years,unless the dividend is approved by the OCC. Millennium Bank may not declare or pay any dividend if, after making thedividend, the national bank would be “undercapitalized,” as defined in thefederal regulations.

 

Both the OCC and the FDIC have the general authorityto limit the dividends paid by national banks and insured banks if the paymentis deemed an unsafe and unsound practice. Both the OCC and the FDIC haveindicated that paying dividends that deplete a bank’s capital base to aninadequate level would be an unsound and unsafe banking practice.

 

In addition, we are subject to certain regulatoryrequirements to maintain capital at or above regulatory minimums. Theseregulatory requirements regarding capital affect our dividend policies. TheFederal Reserve has indicated that a bank holding company, generally, shouldpay dividends only if its net income available to common shareholders over thepast year has been sufficient to fully fund the dividends, and the prospectiverate of earnings retention appears consistent with the organization’s capitalneeds, asset quality and overall financial condition. Virginia law also imposessome restrictions on our ability to pay dividends. See Item 5.  “Market for Registrant’s Common Equity andRelated Stockholder Matters and Issuer Purchases of Equity Securities” belowfor more information on these restrictions.

 

*Insurance of Accounts, Assessmentsand Regulation by the FDIC.*** **Thedeposits of our bank subsidiary are insured by the FDIC up to the limits setforth under applicable law. The deposits of our bank subsidiary are subject tothe deposit insurance assessments of the Deposit Insurance Fund, or “DIF”, ofthe FDIC.  The DIF is the successor tothe Bank Insurance Fund and the Savings Association Insurance Fund, which weremerged in 2006.

 

The FDIC modified its risk-based deposit insuranceassessment system under authority granted by the Federal Deposit InsuranceReform Act of 2005.  Under the revisedsystem, insured institutions are assigned to one of four risk categories basedon regulatory capital levels, supervisory evaluations, and certain otherfactors. Under the new rules, all insured depository institutions will paydeposit insurance premiums, currently ranging between 5 and 7 basis points onan institution’s assessment base for institutions in risk category 1, thehealthiest institutions, to 43 basis points on an institution’s assessment basefor the riskiest institutions. These rates may be adjusted uniformly from onequarter to the next, except that no single adjustment can exceed 3 basispoints. In addition to being influenced by the risk profile of the particulardepository institution, FDIC premiums are also influenced by the size of theFDIC insurance fund in relation to the designated reserve ratio range.   If the reserve ratio falls below 1.15percent, or is expected to within 6 months, the FDIC must adopt a restorationplan that provides that the DIF will return to 1.15 percent within 5 years. Ifthe reserve ratio exceeds 1.35%, the FDIC may pay dividends to insuredinstitutions.

 

The FDIC is authorized to prohibit any DIF-insuredinstitution from engaging in any activity that the FDIC determines byregulation or order to pose a serious threat to the insurance fund. Also, theFDIC may initiate enforcement actions against banks, after first giving theinstitution’s primary regulatory authority an opportunity to take such action.The FDIC may terminate the deposit insurance of any depository institution ifit determines, after a hearing, that the institution has engaged or is engagingin unsafe or unsound practices, is in an unsafe or unsound condition tocontinue operations, or has violated any applicable law, regulation, order orany condition imposed in 

 

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writing by the FDIC. It also may suspend deposit insurance temporarilyduring the hearing process for the permanent termination of insurance, if theinstitution has no tangible capital. If deposit insurance is terminated, thedeposits at the institution at the time of termination, less subsequentwithdrawals, shall continue to be insured for a period from six months to twoyears, as determined by the FDIC. We are not aware of any existingcircumstances that could result in termination of any of our bank subsidiary’sdeposit insurance.

 

*Capital Requirements.*** **Each of the OCC and the Federal Reserve Board hasissued risk-based and leverage capital guidelines applicable to bankingorganizations that it supervise. Under the risk-based capital requirements, weand our bank subsidiary are each generally required to maintain a minimum ratioof total capital to risk-weighted assets (including specific off-balance sheetactivities, such as standby letters of credit) of 8%. At least half of thetotal capital must be composed of “Tier 1 Capital”, which is defined as commonequity, retained earnings, qualifying perpetual preferred stock and minorityinterest in common equity accounts of consolidated subsidiaries, less certainintangibles. The remainder may consist of “Tier 2 Capital”, which is defined asspecific subordinated debt, some hybrid capital instruments and otherqualifying preferred stock and a limited amount of the loan loss allowance andpretax net unrealized holding gains on certain equity securities.  In addition, each of the federal bankingregulatory agencies has established minimum leverage capital requirements forbanking organizations. Under these requirements, banking organizations mustmaintain a minimum ratio of Tier 1 capital to adjusted average quarterly assetsequal to 3% to 5%, subject to federal bank regulatory evaluation of anorganization’s overall safety and soundness. In sum, the capital measures usedby the federal banking regulators are:

 

·      the Total Risk-Based Capital ratio, which is thetotal of Tier 1 Risk-Based Capital and Tier 2 Capital;

 

·      the Tier 1 Risk-Based Capital ratio; and

 

·      the leverage ratio.

 

Under these regulations, a national bank will be:

 

·      “well capitalized” if it has a Total Risk-BasedCapital ratio of 10% or greater, a Tier 1 Risk-Based Capital ratio of 6%or greater, a leverage ratio of 5% or greater, and is not subject to anywritten agreement, order, capital directive, or prompt corrective actiondirective by a federal bank regulatory agency to meet and maintain a specificcapital level for any capital measure;

 

·      “adequately capitalized” if it has a TotalRisk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capitalratio of 4% or greater, and a leverage ratio of 4% or greater—or 3% in certaincircumstances—and is not well capitalized;

 

·      “undercapitalized” if it has a Total Risk-BasedCapital ratio of less than 8%, a Tier 1 Risk-Based Capital ratio of lessthan 4% (or 3% in certain circumstances), or a leverage ratio of less than 4%(or 3% in certain circumstances).

 

·      “significantly undercapitalized” if it has aTotal Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-BasedCapital ratio of less than 3%, or a leverage ratio of less than 3%; or

 

·      “critically undercapitalized” if its tangibleequity is equal to or less than 2% of tangible assets.

 

The risk-based capital standards of each of the OCCand the Federal Reserve Board explicitly identify concentrations of credit riskand the risk arising from non-traditional activities, as well as an institution’sability to manage these risks, as important factors to be taken into account bythe agency in assessing an institution’s overall capital adequacy. The capitalguidelines also provide that an institution’s exposure to a decline in theeconomic value of its capital due to changes in interest rates be considered bythe agency as a factor in evaluating a banking organization’s capital adequacy.

 

TheOCC and the FDIC may take various corrective actions against anyundercapitalized bank and any bank that fails to submit an acceptable capitalrestoration plan or fails to implement a plan accepted by the OCC or the FDIC.These powers include, but are not limited to, requiring the institution to addcapital, prohibiting asset growth, restricting interest rates paid, requiringprior approval of capital distributions by any bank holding company thatcontrols the institution, requiring divestiture by the institution of itssubsidiaries or by the holding company of 

 

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the institution itself, and requiring the dismissal of directors andofficers.  Effective with the signing ofthe formal agreement our bank subsidiary is required by March 31, 2008 toachieve and thereafter maintain a total risk-based capital ratio equal to 13%of risk-weighted assets, a tier 1 capital ratio equal to 12% of risk-weightedassets, and a leverage ratio equal to 10% of adjusted total assets.

 

*Prompt Corrective Action.*  Under Section 38 of theFederal Deposit Insurance Act (the “FDIA”), each federal banking agency isrequired to implement a system of prompt corrective action for institutionswhich it regulates.  The federal bankingagencies have promulgated substantially similar regulations to implement thesystem of prompt corrective action established by Section 38 of theFDIA.  An institution generally must filea written capital restoration plan which meets specified requirements with anappropriate federal banking agency within 45 days of the date the institutionreceives notice or is deemed to have notice that it is undercapitalized, significantlyundercapitalized or critically undercapitalized.  A federal banking agency must provide theinstitution with written notice of approval or disapproval within 60 days afterreceiving a capital restoration plan, subject to extensions by the applicableagency. An institution which is required to submit a capital restoration planmust concurrently submit a performance guaranty by each company that controlsthe institution.  Such guaranty shall belimited to the lesser of (i) an amount equal to 5.0% of the institution’stotal assets at the time the institution was notified or deemed to have noticethat it was undercapitalized or (ii) the amount necessary at such time torestore the relevant capital measures of the institution to the levels requiredfor the institution to be classified as adequately capitalized.  Such a guaranty shall expire after thefederal banking agency notifies the institution that it has remained adequatelycapitalized for each of four consecutive calendar quarters.  An institution which fails to submit awritten capital restoration plan within the requisite period, including anyrequired performance guaranty, or fails in any material respect to implement acapital restoration plan, shall be subject to the restrictions in Section 38of the FDIA which are applicable to significantly undercapitalizedinstitutions.

 

A “criticallyundercapitalized institution” is to be placed in conservatorship orreceivership within 90 days unless the FDIC formally determines thatforbearance from such action would better protect the deposit insurance fund.Unless the FDIC or other appropriate federal banking regulatory agency makesspecific further findings and certifies that the institution is viable and isnot expected to fail, an institution that remains critically undercapitalizedon average during the fourth calendar quarter after the date it becomescritically undercapitalized must be placed in receivership. The general rule isthat the FDIC will be appointed as receiver within 90 days after a bank becomescritically undercapitalized unless extremely good cause is shown and anextension is agreed to by the federal regulators.  In general, good cause is defined as capitalwhich has been raised and is imminently available for infusion into the bank exceptfor certain technical requirements which may delay the infusion for a period oftime beyond the 90 day time period.

 

Immediately upon becomingundercapitalized, an institution shall become subject to the provisions of Section 38of the FDIA, which (i) restrict payment of capital distributions andmanagement fees; (ii) require that the appropriate federal banking agencymonitor the condition of the institution and its efforts to restore itscapital; (iii) require submission of a capital restoration plan; (iv) restrictthe growth of the institution’s assets; and (v) require prior approval ofcertain expansion proposals.  Theappropriate federal banking agency for an undercapitalized institution also maytake any number of discretionary supervisory actions if the agency determinesthat any of these actions is necessary to resolve the problems of theinstitution at the least possible long-term cost to the deposit insurance fund,subject in certain cases to specified procedures. These discretionary supervisoryactions include: requiring the institution to raise additional capital;restricting transactions with affiliates; requiring divestiture of theinstitution or the sale of the institution to a willing purchaser; and anyother supervisory action that the agency deems appropriate.  These and additional mandatory and permissivesupervisory actions may be taken with respect to significantly undercapitalizedand critically undercapitalized institutions.

 

Additionally, under Section 11(c)(5) ofthe FDIA, a conservator or receiver may be appointed for an institutionwhere:  (i) an institution’sobligations exceed its assets;  (ii) thereis substantial dissipation of the institution’s assets or earnings as a resultof any violation of law or any unsafe or unsound practice;  (iii) the institution is in an unsafe orunsound condition;  (iv) there is awillful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in theordinary course of business;  (vi) lossesor threatened losses deplete all or substantially all of an institution’scapital, and there is no reasonable prospect of becoming “adequatelycapitalized” without assistance; (vii) there is any violation of law orunsafe or unsound practice or condition that is likely to cause insolvency orsubstantial dissipation of assets or earnings, weaken the institution’scondition, or otherwise seriously prejudice the interests of depositors or theinsurance fund;  (viii) aninstitution ceases to be insured;  (ix) theinstitution is undercapitalized and has no reasonable prospect that it willbecome adequately capitalized, fails to become adequately capitalized whenrequired to do so, or fails to submit or materially implement a capitalrestoration plan; or (x) the institution is critically undercapitalized orotherwise has substantially insufficient capital.

 

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*Other Safety and SoundnessRegulations.*** **There are a number of obligations andrestrictions imposed on bank holding companies and their depository institutionsubsidiaries by federal law and regulatory policy that are designed to reducepotential loss exposure to the depositors of such depository institutions andto the FDIC insurance fund in the event that the depository institution isinsolvent or is in danger of becoming insolvent. These obligations andrestrictions are not for the benefit of investors. Regulators may pursue anadministrative action against any bank holding company or national bank, whichviolates the law, engages in an unsafe or unsound banking practice or which isabout to engage in an unsafe and unsound banking practice. The administrativeaction could take the form of a cease and desist proceeding, a removal actionagainst the responsible individuals or, in the case of a violation of law orunsafe and unsound banking practice, a civil money penalty action. A cease anddesist order, in addition to prohibiting certain action, could also requirethat certain action be undertaken. Under the policies of the Federal ReserveBoard, we are required to serve as a source of financial strength to oursubsidiary depository institution and to commit resources to support the bankin circumstances where we might not do so otherwise.

 

The federal bankingregulators have issued guidance for those institutions which are deemed to haveconcentrations in commercial real estate lending.  Pursuant to the supervisory criteriacontained in the guidance for identifying institutions with a potentialcommercial real estate concentration risk, institutions which have (1) totalreported loans for construction, land development, and other land whichrepresent in total 100% or more of an institutions total risk-based capital; or(2) total commercial real estate loans representing 300% or more of theinstitutions total risk-based capital and the institution’s commercial realestate loan portfolio has increased 50% or more during the prior 36 months areidentified as having potential commercial real estate concentration risk.Institutions which are deemed to have concentrations in commercial real estatelending are expected to employ heightened levels of risk management withrespect to their commercial real estate portfolios, and may be required to holdhigher levels of capital.

 

*Interstate Banking and Branching.*** **The federal banking agencies areauthorized to approve interstate bank merger transactions without regard towhether such transaction is prohibited by the law of any state, unless the homestate of one of the banks has opted out of the interstate bank mergerprovisions of the Riegle-Neal Interstate Banking and Branching Efficiency Actof 1994 (the “Riegle-Neal Act”) by adopting a law after the date of enactmentof the Riegle-Neal Act and prior to June 1, 1997 which applies equally toall out-of-state banks and expressly prohibits merger transactions involvingout-of-state banks.  Interstateacquisitions of branches are permitted only if the law of the state in whichthe branch is located permits such acquisitions.  Such interstate bank mergers and branchacquisitions are also subject to the nationwide and statewide insured depositconcentration limitations described in the Riegle-Neal Act. The Riegle-Neal Actauthorizes the federal banking agencies to approve interstate branching de novoby national and state banks in states which specifically allow for suchbranching.  The District of Columbia,Maryland and Virginia have all enacted laws which permit interstateacquisitions of banks and bank branches and permit out-of-state banks toestablish de novo branches.

 

*Monetary Policy.*** **The commercial banking business is affected not onlyby general economic conditions but also by the monetary policies of the FederalReserve Board. The instruments of monetary policy employed by the FederalReserve Board include open market operations in United States governmentsecurities, changes in the discount rate on member bank borrowing and changesin reserve requirements against deposits held by all federally insured banks.The Federal Reserve Board’s monetary policies have had a significant effect onthe operating results of commercial banks in the past and are expected tocontinue to do so in the future. In view of changing conditions in the nationaland international economy and in the money markets, as well as the effect ofactions by monetary fiscal authorities, including the Federal Reserve Board, noprediction can be made as to possible future changes in interest rates, depositlevels, loan demand or the business and earnings of our bank subsidiary.

 

*Federal Reserve System.*** **In 1980, Congress enacted legislation that imposedreserve requirements on all depository institutions that maintain transactionaccounts or nonpersonal time deposits. NOW accounts, money market depositaccounts and other types of accounts that permit payments or transfers to thirdparties fall within the definition of transaction accounts and are subject tothese reserve requirements, as are any nonpersonal time deposits at aninstitution. For net transaction accounts in 2007, the first $9.3 million willbe exempt from reserve requirements. A 3% reserve ratio will be assessed on nettransaction accounts over $9.3 million up to and including $43.9 million. A 10%reserve ratio will be applied to amounts in net transaction accounts in excessof $43.9 million. These percentages are subject to adjustment by the FederalReserve Board. Because required reserves must be maintained in the form ofvault cash or in a non-interest-bearing account at, or on behalf of, a FederalReserve Bank, the effect of the reserve requirement is to reduce the amount ofthe institution’s interest-earning assets.

 

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*Transactions with Affiliates.*** **Transactions between banks and their affiliates aregoverned by Sections 23A and 23B of the Federal Reserve Act and the FederalReserve Board’s Regulation W. An affiliate of a bank is any bank or entity thatcontrols, is controlled by or is under common control with such bank.Generally, Section 23A (i) limits the extent to which the bank or itssubsidiaries may engage in “covered transactions” with any one affiliate to anamount equal to 10% of such institution’s capital stock and surplus, andmaintain an aggregate limit on all such transactions with affiliates to anamount equal to 20% of such capital stock and surplus, and (ii) requiresthat all such transactions be on terms substantially the same, or at least asfavorable, to the bank as those provided to a nonaffiliate. The term “coveredtransaction” includes the making of loans, purchase of assets, issuance of aguarantee and similar other types of transactions. Section 23B applies to “coveredtransaction” as well as sales of assets and payments of money to an affiliate.These transactions must also be conducted on terms substantially the same, orat least as favorable, to the bank as those provided to nonaffiliates.

 

*Loans to Insiders.*** **The Federal Reserve Act and related regulations imposespecific restrictions on loans to directors, executive officers and principalshareholders of banks. Under Section 22(h) of the Federal Reserve Actand the Federal Reserve Board’s Regulation O, any loan to a director, anexecutive officer and to a principal shareholder of a bank, and to entitiescontrolled by any of the foregoing, may not exceed, together with all otheroutstanding loans to such person and the entities controlled by such person,the bank’s loan-to-one borrower limit. Loans in the aggregate to insiders andtheir related interests as a class may not exceed two times the bank’sunimpaired capital and unimpaired surplus until the bank’s total assets equalor exceed $100,000,000, at which time the aggregate is limited to the bank’sunimpaired capital and unimpaired surplus. Section 22(h) alsoprohibits loans, above amounts prescribed by the appropriate federal bankingagency, to directors, executive officers and principal shareholders of a bankor bank holding company, and to entities controlled by such persons, unlesssuch loans are approved in advance by a majority of the board of directors ofthe bank with any “interested” director not participating in the voting.  For Millennium Bank, the loan amount, whichincludes all other outstanding loans to such person, as to which such priorboard of director approval is required, is the greater of $25,000 or 5% ofcapital and surplus (up to $500,000). Section 22(h) requires thatloans to directors, executive officers and principal shareholders be made onterms and underwriting standards substantially the same as offered incomparable transactions to other persons.

 

*Community Reinvestment Act.*** **Under the Community Reinvestment Act and relatedregulations, depository institutions have an affirmative obligation to assistin meeting the credit needs of their market areas, including low and moderate-incomeareas, consistent with safe and sound banking practice. The CommunityReinvestment Act requires the adoption by each institution of a CommunityReinvestment Act statement for each of its market areas describing thedepository institution’s efforts to assist in its community’s credit needs.Depository institutions are periodically examined for compliance with theCommunity Reinvestment Act and are periodically assigned ratings in thisregard. Banking regulators consider a depository institution’s CommunityReinvestment Act rating when reviewing applications to establish new branches,undertake new lines of business, and/or acquire part or all of anotherdepository institution. An unsatisfactory rating can significantly delay oreven prohibit regulatory approval of a proposed transaction by a bank holdingcompany or its depository institution subsidiaries.

 

TheGramm-Leach-Bliley Act and federal bank regulators have made various changes tothe Community Reinvestment Act. Among other changes, Community Reinvestment Actagreements with private parties must be disclosed and annual reports must bemade to a bank’s primary federal regulator. A bank holding company will not bepermitted to become a financial holding company and no activities authorized underthe GLBA may be commenced by a holding company or by a bank financialsubsidiary if any of its bank subsidiaries received less than a “satisfactory”rating in its latest Community Reinvestment Act examination.

 

*Fair Lending; Consumer Laws.*** **In addition to the Community Reinvestment Act, otherfederal and state laws regulate various lending and consumer aspects of thebanking business. Governmental agencies, including the Department of Housingand Urban Development, the Federal Trade Commission and the Department ofJustice, have become concerned that prospective borrowers experiencediscrimination in their efforts to obtain loans from depository and otherlending institutions. These agencies have brought litigation against depositoryinstitutions alleging discrimination against borrowers. Many of these suitshave been settled, in some cases for material sums, short of a full trial.

 

Recently, these governmental agencies have clarifiedwhat they consider to be lending discrimination and have specified variousfactors that they will use to determine the existence of lending discriminationunder the Equal Credit Opportunity Act and the Fair Housing Act, includingevidence that a lender discriminated on a prohibited 

 

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basis, evidence that a lender treated applicants differently based onprohibited factors in the absence of evidence that the treatment was the resultof prejudice or a conscious intention to discriminate, and evidence that alender applied an otherwise neutral non-discriminatory policy uniformly to allapplicants, but the practice had a discriminatory effect, unless the practicecould be justified as a business necessity.

 

Banks and other depository institutions also aresubject to numerous consumer-oriented laws and regulations. These laws, whichinclude the Truth in Lending Act, the Truth in Savings Act, the Real EstateSettlement Procedures Act, the Electronic Funds Transfer Act, the Equal CreditOpportunity Act, and the Fair Housing Act, require compliance by depositoryinstitutions with various disclosure requirements and requirements regulatingthe availability of funds after deposit or the making of some loans tocustomers.

 

*USA Patriot Act of 2001.*Under the Uniting and Strengthening America byProviding Appropriate Tools Required to Intercept and Obstruct Terrorism Act,commonly referred to as the “USA Patriot Act” or the “Patriot Act,” financialinstitutions are subject to prohibitions against specified financialtransactions and account relationships, as well as enhanced due diligencestandards intended to detect, and prevent, the use of the United Statesfinancial system for money laundering and terrorist financing activities.  The Patriot Act requires financialinstitutions, including banks, to establish anti-money laundering programs,including employee training and independent audit requirements, meet minimumstandards specified by the act, follow minimum standards for customeridentification and maintenance of customer identification records, andregularly compare customer lists against lists of suspected terrorists,terrorist organizations and money launderers. The costs or other effects of the compliance burdens imposed by thePatriot Act or future anti-terrorist, homeland security or anti-moneylaundering legislation or regulations cannot be predicted with certainty.

 

**Future Regulatory Uncertainty**

 

Because federal regulation of financial institutionschanges regularly and is the subject of constant legislative debate, we cannotforecast how federal regulation of financial institutions may change in thefuture and impact our operations.

 

ITEM1A.              RISK FACTORS

 

**RisksAssociated with Millennium**

 

***Failure to complywith the provisions of the Formal Agreement could subject the Bank and its directorsto additional enforcement actions and further damage to its reputation.***

 

While the Corporation intends to take such actions asmay be necessary to enable the Bank to comply with the requirements of theAgreement, there can be no assurance that the Bank will be able to comply fullywith the provisions of the Agreement, or to do so within the timeframesrequired, that compliance with the Agreement will not be more time consuming ormore expensive than anticipated, or that compliance with the Agreement willenable the Corporation and Bank to resume profitable operations, or thatefforts to comply with the Agreement, or to refocus the Bank as a traditionalcommunity bank, will not have adverse effects on the operations and financialcondition of the Company.

 

***A large percentage of our loans are securedby real estate, and an adverse change in the real estate market may result inlosses and adversely affect our profitability.***

 

Approximately87% of our loan portfolio, as of December 31, 2007 was comprised of loanssecured by real estate.  Moreimportantly, we also have a high concentration of commercial real estatesecured loans including construction and land development loans that are moresensitive to changes in the economy or adverse conditions in the local realestate market.  An adverse change in theeconomy affecting values of real estate generally or in our market areasspecifically could impair the value of our collateral and our ability to sellthe collateral upon foreclosure.  In theevent of a default with respect to any of these loans, the amounts we receiveupon sale of the collateral may be insufficient to recover outstandingprincipal and interest on the loan.  As aresult, our profitability and financial condition could be negatively impactedby an adverse change in the real estate market. Furthermore we may be required to maintain higher levels of capital thanwe would otherwise be expected to maintain.

 

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***Failure to maintaineffective systems of internal and disclosure control could have a materialadverse effect on our results of operation and financial condition.***

 

Effective internal and disclosure controls arenecessary for us to provide reliable financial reports and effectively preventfraud and to operate successfully as a public company.  If we cannotprovide reliable financial reports or prevent fraud, our reputation andoperating results would be harmed.  As part of our ongoing monitoring ofinternal control we may discover material weaknesses or significantdeficiencies in our internal control as defined under standards adopted by thePublic Company Accounting Oversight Board that require remediation.

 

As of December 31, 2006, we determined that itwas in our best interest to wind down our mortgage operating subsidiaries.  It was our desire to focus exclusively oncore banking activities going forward to eliminate, going forward, the risksnormally associated with mortgage banking activities.  The wind down decision was also precipitatedby credit quality issues that surfaced in the held for sale loan portfolioduring the fourth quarter.  As a result,in connection with the evaluation of our disclosure controls and procedures asof December 31, 2006, we determined that there was a material weakness inour internal control over financial reporting as of that date arising from ourinability to identify promptly these credit quality issues.  Additionally, we have determined that amaterial weakness in our internal control over financial reporting existed asof December 31, 2007, relating to the application of subsequent eventaccounting principles.  Under the PCAOBstandards, a “material weakness” is a control deficiency, or combination ofcontrol deficiencies, that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected.

 

While we believe we have successfully remediated theseweaknesses, we cannot make any assurances that other internal or disclosurecontrol deficiencies might not be identified.  Any failure to maintaineffective controls or timely effect any necessary improvement of our internaland disclosure controls could, among other things, result in losses from fraudor error, harm our reputation or cause investors to lose confidence in ourreported financial information, all of which could have a material adverseeffect on our results of operation and financial condition.

 

***We are dependent on our management team,and the loss of our senior executive officers or other key employees couldimpair our relationship with our customers and adversely affect our businessand financial results***

 

On April 4,2007 we announced the hiring of Richard I. Linhart to succeed Carroll C.Markley as President and Chief Executive Officer.  Mr. Linhart previously served as SeniorExecutive Vice President and Chief Operating Officer for James Monroe Bancorp.He joined the Bank in mid-July 2007. Dale G. Phelps, our Chief Financial Officer, was appointed to an interimrole as President and Chief Executive Officer until Mr. Linhart’sarrival.  Mr. Phelps has over 29years of experience in the financial services industry. Concurrently, John F.Novak was appointed to serve as Chief Operating Officer. Mr. Novak hasover 38 years of experience in the financial services industry. Our success isdependent upon the continued service and skills of these individuals as well asother senior officers.  The unexpectedloss of services of one or more of these key personnel could have an adverseimpact on our business because of their skills, knowledge of our market, yearsof industry experience and the difficulty of promptly finding qualifiedreplacement personnel.

 

***Our business is subject to interest raterisk and fluctuations in interest rates may adversely affect our earnings andcapital levels.***

 

Themajority of our assets are monetary in nature and, as a result, we are subjectto significant risk from changes in interest rates.  Changes in interest rates can impact our netinterest income as well as the valuation of our assets and liabilities.  Our earnings are significantly dependent onour net interest income, which is the difference between interest income oninterest-earning assets, such as loans and securities, and interest expense oninterest-bearing liabilities, such as deposits and borrowings.  We expect that we will periodicallyexperience “gaps” in the interest rate sensitivities of our assets andliabilities, meaning that either our interest-bearing liabilities will be moresensitive to changes in market interest rates than our interest-earning assets,or vice versa.  In either event, ifmarket interest rates should move contrary to our position, this “gap” willwork against us and our earnings may be negatively affected.

 

An increasein the general level of interest rates may also, among other things, reduce thedemand for loans and our ability to originate loans.  Conversely, a decrease in the general levelof interest rates, among other things, may lead to an increase in prepaymentson our loans and increased competition for deposits.  Accordingly, changes 

 

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in the general level of market interest rates affect our net yield oninterest-earning assets, loan origination volume, loan portfolios and ouroverall results.

 

Althoughour asset-liability management strategy is designed to control our risk fromchanges in the general level of market interest rates, market interest ratesare affected by many factors outside of our control, including inflation,recession, changes in unemployment, money supply and international disorder andinstability in domestic and foreign financial markets.  It is quite possible that significant changesin interest rates may take place in the future, and we cannot always accuratelypredict the nature or magnitude of such changes or how such changes may affectour business.

 

***We may not be able to use brokered depositsas a source of funds, which may require us to curtail our asset base andgrowth.***

 

We solicitdeposits from brokers because our banking offices do not attract enoughdeposits to fund all of the loans that we make. These “brokered deposits” represent funds that brokers gather from thirdparties and package in batches in order to find higher interest rates than aretypically available for certificates of deposits with large balances, ascompared to individually deposited smaller denomination deposits.  Deposit holders then earn a higher rate onthe money that they have invested, and the broker charges a fee for itsservice.  Brokered deposits are availablein bulk, and they do not require any investments in branch offices or branchpersonnel or spending for marketing or education of employees. At December 31,2007, $56.1 million of our deposits were brokered deposits.  The weighted average interest rate on ourbrokered deposits was 4.99% at December 31, 2007.

 

Awell-capitalized bank may accept brokered deposits without restriction.  Adequately capitalized banks may only accept,renew or rollover such deposits with the consent of the FDIC. As a result ofthe capital provisions in its formal agreement with the OCC, the Bank is notwell-capitalized, and is treated as only adequately capitalized, despite havingcapital levels which would otherwise satisfy the conditions for wellcapitalized status. Although we plan to seek permission to accept brokereddeposits from the FDIC, the FDIC may deny permission, or may permit us toaccept fewer brokered deposits than the level we consider desirable.  If it were required to reduce its level ofbrokered deposits, the Bank also would have to reduce its assets and, mostlikely, curtail its lending activities. Any reduction could have an adverseeffect on our revenues.

 

***Market conditions may adversely affect ourability to continue to rely on brokered deposits as a source of funds and causeus to seek alternative sources that may not be on terms favorable to us.***

 

Brokereddeposits are normally more costly than traditional core deposits, as they carrya higher blended interest rate.  Ifmarket conditions change, brokers may transfer deposited funds from us intoother investments or demand higher interest rates for new deposits.  Moreover, brokers operate in a nationalmarket and will place funds with banks that offer to pay the highest interestrates.  Unlike businesses and individualswho bank with us in our market, there is no basis for a business relationshipwith deposit brokers that would provide a stable deposit base.  There is a higher likelihood that, unlike depositsfrom our local customers, the funds that brokered deposits provide us will notremain with us after maturity.

 

Wecould be confronted with the choice of curtailing our lending activity orpaying above market interest rates in order to attract and retaindeposits.  Either action could reduce ournet income.  Any inability to keep ourdeposit growth on pace with the growth in our loan portfolio may affect our netincome.  In this situation, we may needto obtain alternative sources of funding, which may or may not be available tous on terms that we would consider favorable.

 

***Our profitability depends significantly onlocal economic conditions.***

 

Oursuccess depends primarily on the general economic conditions of the geographicmarkets in which we operate.  Unlikelarger banks that are more geographically diversified, we provide banking andfinancial services to customers primarily in the northern Virginia area.  The local economic conditions in these areashave a significant impact on our commercial, real estate and constructionloans, the ability of our borrowers to repay their loans and the value of thecollateral securing these loans.  Asignificant decline in general economic conditions, caused by inflation, recession,acts of terrorism, outbreak of hostilities or other international or domesticcalamities, unemployment or other factors could impact these local economicconditions and negatively affect our financial results.

 

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***We could be subject to environmental risksand associated costs on our foreclosed real estate assets.***

 

Asignificant portion of our loan portfolio is secured by real property.  There is a risk that hazardous or toxic wastecould be found on the properties that secure our loans.  If we acquire such properties as a result offoreclosure, we could be held responsible for the cost of cleaning up orremoving this waste, and this cost could exceed the value of the underlyingproperties and adversely affect our profitability.  Although we have policies and procedures thatrequire us to perform an environmental review before initiating any foreclosureaction on real property, these reviews may not be sufficient to detect allpotential environmental hazards.

 

***Our allowance for loan losses may not besufficient to cover actual loan losses, which could adversely affect ourearnings.***

 

We areexposed to the risk that our loan customers may not repay their loans accordingto the terms of these loans and the collateral securing the payment of theseloans may be insufficient to fully compensate the bank for the outstandingbalance of the loan plus the costs to dispose of the collateral.  We may experience significant loan losses,which could have a material adverse effect on our operating results andfinancial condition.  Management makesvarious assumptions and judgments about the collectibility of our loanportfolio, including the diversification by industry of our commercial loanportfolio, the effect of changes in the local real estate market on collateralvalues, the results of recent regulatory examinations, the effects on the loanportfolio of current economic indicators and their probable impact onborrowers, the amount of charge-offs for the period, the amount ofnonperforming loans and related collateral security, and the evaluation of ourloan portfolio by the external loan review.

 

Wemaintain an allowance for loan losses in an attempt to cover loan lossesinherent in our loan portfolio. Additional loan losses will likely occur in the future and may occur ata rate greater than we have experienced to date.  In determining the size of the allowance, werely on an analysis of our loan portfolio, our experience and our evaluation ofgeneral economic conditions.  If ourassumptions prove to be incorrect, our current allowance may not be sufficientand adjustments may be necessary to allow for different economic conditions oradverse developments in our loan portfolio. Material additions to the allowance would materially decrease netincome.

 

Inaddition, federal and state regulators periodically review our allowance forloan losses and may require us to increase our provision for loan losses orrecognize further loan charge-offs, based on judgments different than those ofour management.  Any increase in ourallowance for loan losses or loan charge-offs as required by these regulatoryagencies could have a material negative effect on our operating results andfinancial condition.

 

***Our small to medium-sized business targetmarket may have fewer financial resources to weather a downturn in the economy.***

 

Wetarget our business development and marketing strategy primarily to serve thebanking and financial services needs of small to medium-sized businesses.  These small to medium-sized businesses generallyhave fewer financial resources in terms of capital or borrowing capacity thanlarger entities.  If general economicconditions negatively impact the northern Virginia area or the other markets inwhich we operate, our results of operations and financial condition may benegatively affected.

 

***An interruption in or breach in security ofour information systems may result in a loss of customer business.***

 

Werely heavily on communications and information systems to conduct ourbusiness.  Any failure or interruption orbreach in security of these systems could result in failures or disruptions inour customer relationship management, general ledger, deposits, servicing orloan origination systems.  We cannotassure you that such failures or interruptions will not occur or, if they dooccur, that they will be adequately addressed by us.  The occurrence of any failures orinterruptions could result in a loss of customer business and have a negativeeffect on our results of operations and financial condition.

 

***Our business strategy may not besuccessful, and that could have an adverse effect on the value of your commonstock.***

 

Ourbusiness strategy calls for us to take advantage of our existing investments infacilities and personnel by growing in our existing banking market andexpanding into new markets if appropriate opportunities arise.  We 

 

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may not be successful in increasing the volume of our loans anddeposits at acceptable risk levels and on acceptable terms, in expanding ourasset base to a targeted size, or in managing the costs and implementationrisks associated with our strategy.  Evenif we successfully increase our capital, increasing the volume of our loanswill require that we be able to fund that increase through additional depositswe accept in our market or through brokers, or through other funding sources,such as borrowings.  In addition, we maynot be able to maintain capital sufficient to support our continued growth andmay not be able to fund any particular amount of increase in our loans.

 

***If we need additional capital in thefuture, we may not be able to obtain it on terms that are favorable, which maylimit our growth.***

 

Weanticipate that we will support our growth strategy through additional depositsat new branch locations and investment opportunities.  It is possible that we may need to raiseadditional capital to support our future growth.  Our ability to raise capital throughborrowings or the sale of securities will depend primarily upon our financialcondition and the conditions of financial markets at the time.  We cannot make any assurance that additionalcapital would be available on terms satisfactory to us or at all.  The failure to raise additional capital onterms that are favorable to us or at all may force us to limit our growthstrategy.

 

**RisksAssociated With Our Industry**

 

***We face strong competition from otherfinancial institutions and financial service companies, which could adverselyaffect our operations and financial condition.***

 

Weface vigorous competition from banks and other financial institutions,including savings and loan associations, savings banks, finance companies andcredit unions.  A number of these banksand other financial institutions have substantially greater resources andlending limits, larger branch systems and a wider array of banking servicesthan we do.  We also compete with otherproviders of financial services, such as money market mutual funds, brokeragefirms, consumer finance companies, insurance companies and governmentalorganizations, each of which may offer more favorable financing than we areable to provide.  Some of our nonbankcompetitors are not subject to the same extensive regulations that governus.  This competition may reduce or limitour margins on banking services, reduce our market share and adversely affectour results of operations and financial condition.

 

***We operate in a highly regulatedenvironment and, as a result, are subject to extensive regulation andsupervision that could adversely affect our financial performance, and we maybe adversely affected by changes in federal and local laws and regulations.***

 

We aresubject to extensive regulation, supervision and examination by federal andstate banking authorities.  Any change inapplicable regulations or federal or state legislation could have a substantialimpact on us, our subsidiaries, and our operations.  Additional legislation and regulations may beenacted or adopted in the future that could significantly affect our powers,authority and operations, or the powers, authority and operations of the Bank,which could have a material adverse effect on our financial condition andresults of operations.  Further,regulators have significant discretion and power to prevent or remedy unsafe orunsound practices or violations of laws by banks and bank holding companies inthe performance of their supervisory and enforcement duties.  The exercise of this regulatory discretionand power may have a negative impact on us.

 

ITEM1B                UNRESOLVEDSTAFF COMMENTS

 

Notapplicable

 

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ITEM 2.          PROPERTIES

 

Millennium conducts itsbusiness from its main office in Reston, Virginia, three other branch bankingoffices and one former branch location being utilized as an administrativeoffice.  During 2007, the Bank alsooccupied two additional branch offices in Colonial Heights and Richmond,Virginia, the sale of which was completed in March 2008. The leasesrelated to such branches were assumed by the purchaser of the branches. Thefollowing table provides certain information with respect to our properties:

 
| **Location**                              | ** ** | **Date Facility  Opened** | ** ** | **Ownership and  Leasing Arrangements**                                                                                                                                                                                                    |
|-------------------------------------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Main Office:                              | ** ** | ** **                | ** ** | ** **                                                                                                                                                                                                                                 |
|                                      | ** ** | ** **                | ** ** | ** **                                                                                                                                                                                                                                 |
| 1601 Washington  Plaza Reston, Virginia   |       | 1999                      |       | Leased from 1601  Washington Plaza, LLC, a Virginia limited liability company, the members of  which are also Millennium shareholders. Lease expires in 2010, subject to  Millennium’s right to renew for an additional 10-year term. |
|                                      |       |                      |       |                                                                                                                                                                                                                                       |
| Branch Offices:                           |       |                      |       |                                                                                                                                                                                                                                       |
|                                      |       |                      |       |                                                                                                                                                                                                                                       |
| 1025-K Seneca  Road Great Falls, Virginia |       | 2001                      |       | Lease from  Tectum, LLC expires in 2010, subject to Millennium’s right to renew for two  additional five-year terms.                                                                                                                  |
|                                      |       |                      |       |                                                                                                                                                                                                                                       |
| 1051 Elden  Street Herndon, Virginia      |       | 2001                      |       | Leased from 1051  Elden Street, LLC, a Virginia limited liability company, the members of which  are also Millennium shareholders. Lease expires in 2013 and has three  consecutive five-year renewal options.                             |
|                                      |       |                      |       |                                                                                                                                                                                                                                       |
| 21430 Cedar  Drive Unit 107 Sterling, VA  |       | 2007                      |       | Leased from  Richland Investment Group, LLC. Lease expires in 2012 and has two consecutive  five-year renewal options.                                                                                                                     |

 

We believe that all ofour properties are maintained in good operating condition and are suitable andadequate for our operational needs.

 

ITEM 3.          LEGAL PROCEEDINGS

 

In the course of ouroperations, we may become a party to legal proceedings arising from thebanking, financial, and other activities it conducts.   Management does not anticipate that theultimate liability, if any, arising out of these matters will have a materialeffect on Millennium’s financial condition, operating results or liquidity.

 

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

There were no matters presented to Millennium’sshareholders during the quarter ended December 31, 2007.

 

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**PART II**

 

ITEM 5.         MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES

 

**MarketPrices and Dividends**

 

Our common stock has been listed for quotationon the Nasdaq Capital Market (formerly known as the Nasdaq Small Cap Market)under the symbol “MBVA” since February 6, 2002, following our initialpublic offering at $6.00 per share.    As of April 1, 2008, our common stock was held by 104 shareholdersof record and 858 beneficial holders who own shares in street name.

 

The high and low sale prices per share for ourcommon stock for each quarter of 2007 and 2006, as well as the amount of cashdividends per share we declared in each quarter, were as follows:

 
| ** **   | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend** | ** ** |
|--------------|------------|----------|------------|---------|------------|--------------|------------|
|         |       |     |       |    |       |         |       |
| **2007**     |       |     |       |    |       |         |       |
| 1st  Quarter |       | 11.40    |       | 8.73    |       | .02          |       |
| 2nd  Quarter |       | 10.39    |       | 8.25    |       | .02          |       |
| 3rd  Quarter |       | 8.85     |       | 6.75    |       | .02          |       |
| 4th Quarter  |       | 7.10     |       | 4.97    |       | .00          |       |
|         |       |     |       |    |       |         |       |
| **2006**     |       |     |       |    |       |         |       |
| 1st  Quarter |       | 9.85     |       | 8.40    |       | .02          |       |
| 2nd  Quarter |       | 9.65     |       | 8.60    |       | .02          |       |
| 3rd  Quarter |       | 9.29     |       | 8.22    |       | .02          |       |
| 4th Quarter  |       | 9.35     |       | 8.12    |       | .02          |       |

 

**Dividend Policy**

 

Ourfuture dividend policy is subject to the discretion of the board of directorsand will depend upon a number of factors, including future consolidatedearnings, financial condition, liquidity and capital requirements of bothMillennium and Millennium Bank, applicable governmental regulations andpolicies and other factors deemed relevant by our board of directors.  During the first quarter of 2006, Millenniumdeclared its first quarterly dividend since it began operations in 1999.   Effective mid-year 2007, the payment ofdividends was discontinued due to a lack of earnings.   Dividend payments will not resume until asustained period of earnings has been exhibited.

 

Our ability todistribute cash dividends will depend primarily on the ability of oursubsidiary bank to pay dividends to us. As a national bank, Millennium Bank is subject to certain restrictionson our reserves and capital imposed by federal banking statutes andregulations.   Furthermore, underVirginia law, we may not declare or pay a cash dividend on our capital stock ifwe are insolvent or if the payment of the dividend would render us insolvent orunable to pay our obligations as they become due in the ordinary course of business.  For additional information on theselimitations, see “Item 1.  Business –Government Supervision and Regulation – Payment of Dividends” above.

 

##### **StockRepurchases**

##### ** **

We did notrepurchase any shares of our common stock during any quarter of the year ended December 31,2007.  The Board of Directors approved astock repurchase program on April 6, 2007 but no repurchases have beenmade nor are any anticipated to be made in 2008.  Under the program, we may repurchase up to446,314 shares of our common stock, which represents 5% of the outstandingshares of common stock. The executive committee of the Board of Directors willadminister the program, which does not have an expiration date.  Any repurchased stock will become authorizedand unissued stock available for future issuance by us.

 

ITEM 6.          SELECTED FINANCIAL DATA

 

The followingtable sets forth the Corporation’s return on average assets (net income dividedby average assets), return on average equity (net income divided by averageshareholder’s equity), equity to assets ratio (average shareholder’s equitydivided by average total assets) and dividend payout ratio (dividends declaredper common share divided by net income per common share).

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Return on  average assets                            |       | (1.88    | )%         | (.10     | )%         | .39      | %          |
| Return on  average equity                            |       | (22.47   | )%         | (.99     | )%         | 3.36     | %          |
| Ratio of  dividends to net income                    |       | N/A      |       | N/A      |       | 0.00     | %          |
| Average  shareholder’s equity to average assets |       | 8.38     | %          | 9.86     | %          | 11.72    | %          |
| Net income (loss)  per share continuing              |       | $        | (.23       | )        | $          | .19      |       | $ | .11 |   |
| Net income (loss)  per share - discontinued          |       | $        | (.95       | )        | $          | (.24     | )          | $ | .08 |   |
| Net income (loss)  per share                         |       | $        | (1.17      | )        | $          | (.05     | )          | $ | .19 |   |

 

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ITEM 7.         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

**General**

 

MillenniumBankshares Corporation is a bank holding company headquartered in Reston,Virginia.  We were incorporated in 1998and began operations in April 1999. We provide services through our principal operating subsidiary, MillenniumBank.  We presently operate four bankingoffices, all in Virginia; one office each in Reston, Sterling, Herndon, andWarrenton.  In March 2008 wecompleted the sale of two additional branches located in the Richmond, Virginiaarea as part of a strategic plan to focus on our core northern Virginia marketWe are a community bank providing a broad range of commercial and retailbanking services designed to meet the needs of businesses and consumers in thecommunities we serve.  We emphasize localdecision-making within our organization and provide personal service to ourcustomers.  By combining thetechnological support, products and services that our customers demand withdirect access to senior management and responsive customer service, we work tofoster a business and consumer banking environment that allows us toeffectively compete in our particular market with other financial institutionsof all sizes.

 

Our operating revenues are derivedprimarily from interest earned on loans and investment securities portfolio netof interest paid on deposit products and borrowings.  Millennium also receives revenue from salesof Small Business Administration loans and fee income from loans, deposits andother banking products.

 

As of December 31, 2006, we determined thatit was in our best interest to wind down our mortgage operatingsubsidiaries.  It was our desire to focusexclusively on core banking activities to eliminate, going forward, the risksnormally associated with mortgage banking activities.  The wind down decision was also precipitatedby credit quality issues that surfaced in the held for sale loan portfolioduring the fourth quarter.   Accordingly, the results of our mortgage operations are presented as oneof the components of discontinued operations on the income statement followingthe results from continuing operations

 

Beginningin the later half of 2007, the Bank embarked on a balance sheet repositioningstrategy consisting of three main components; (i) the sale of its twoRichmond branches to refocus its franchise on the core Northern Virginia marketexclusively (completed in March 2008 at which time a pre-tax gain of $8.5million was recorded), (ii) the sale of $100 to $110 million in investmentsecurities to partially fund the sale of the two branches and provide a sourceof immediate on-balance sheet liquidity and (iii) evaluate options inconnection with the portfolio of Held for Sale/Repurchased loans.  To avoid further exposure to losses due tomarket conditions and extended delays in resolution, the Bank, on February 7,2008, entered into an agreement to sell its entire portfolio of held for saleand repurchased mortgage loans (the “Portfolio”) to Beltway Capital, HuntValley, Maryland.    The transactionclosed on February 8, 2008. Prior to the sale, the loan balance of thePortfolio aggregated $31.3 million, against which the Bank had a valuationallowance of $6.9 million at December 31, 2007.  The portfolio consisted of $5.7 million ofcurrent performing loans, $11.9 million of delinquent loans, $13.0 million ofloans in various stages of foreclosure, and $0.7 million in properties held inother real estate owned. The wholesale bulk sale price paid by Beltway was43.55%, or $13.6 million plus accrued interest. As a result, the Bank established an additional valuation allowance asof December 31, 2007, resulting in a charge to earnings of $10.8 million,or $7.1 million net of taxes.

 

The following presents management’s discussion andanalysis of our consolidated financial condition at December 31, 2007 and2006 and the results of our operations for the years ended December 31,2007 and 2006.  The discussion should beread in conjunction with the accompanying consolidated financial statementspresented elsewhere in this Form 10-K.

 

**CriticalAccounting Policies**

 

*General*

 

The financial condition and results of operationspresented in the Consolidated Financial Statements, accompanying Notes to theConsolidated Financial Statements and management’s discussion and analysis are,to a large degree, dependent upon our accounting policies.  The selection and application of theseaccounting policies involve judgments, estimates, and uncertainties that aresusceptible to change.

 

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Presented below is discussion of those accountingpolicies that management believes are the most important to the portrayal andunderstanding of our financial condition and results of operations.  These critical accounting policies requiremanagement’s most difficult, subjective and complex judgments about mattersthat are inherently uncertain.  In theevent that different assumptions or conditions were to prevail, and dependingupon the severity of such changes, the possibility of materially differentfinancial condition or results of operations is a reasonable likelihood.  See also Note 1 of the accompanyingConsolidated Financial Statements presented elsewhere in this Form 10-K.

 

*Allowance for Loan Losses*

 

Millennium monitors and maintains an allowance forloan losses to absorb an estimate of probable losses inherent in the loanportfolio.  Millennium maintains policiesand procedures that address the systems of control over the following areas ofmaintenance of the allowance: the systematic methodology used to determine theappropriate level of the allowance to provide assurance that the allowance forloan losses is maintained in accordance with accounting principles generallyaccepted in the United States of America; the accounting policies for loancharge-offs and recoveries; the assessment and measurement of impairment in theloan portfolio; and the loan grading system.

 

Millennium evaluates various loans individually forimpairment as required by Statement of Financial Accounting Standard (SFAS) No. 114,Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,Accounting by Creditors for Impairment of a Loan – Income Recognition andDisclosures.  Loans evaluatedindividually for impairment include non-performing loans, such as loans onnon-accrual, loans past due 90 days or more, restructured loans and other loansselected by management.  The evaluationsare based upon discounted expected cash flows or collateral valuations.  If the evaluation shows that a loan isindividually impaired, then a specific reserve is established for the amount ofimpairment.  If a loan evaluatedindividually is not impaired, then the loan is assessed for impairment underSFAS No. 5, Accounting for Contingencies (SFAS 5), with a group of loansthat have similar characteristics.

 

For loans without individual measures of impairment,Millennium makes estimates of losses for groups of loans as required by SFAS5.  Loans are grouped by similarcharacteristics, including the type of loan, the assigned loan grade and thegeneral collateral type.  A loss ratereflecting the expected loss inherent in a group of loans is derived based uponestimates of default rates for a given loan grade, the predominant collateraltype for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted forrelevant environmental factors and other conditions of the portfolio of loans,including: borrower and industry concentrations; levels and trends indelinquencies, charge-offs and recoveries; changes in underwriting standardsand risk selection; level of experience, ability and depth of lendingmanagement; and national and local economic conditions.

 

The amount of estimated impairment for individuallyevaluated loans and groups of loans is added together for a total estimate ofloan losses.  This estimate of losses iscompared to the allowance for loan losses of Millennium as of the evaluationdate and, if the estimate of losses exceeds the allowance, an additionalprovision to the allowance would be made. If the estimate of losses is less than the allowance, the degree towhich the allowance exceeds the estimate is evaluated to determine whether theallowance falls outside a range of estimates. If the estimate of losses were below the range of reasonable estimates,the allowance would be reduced by way of a credit to the provision for loanlosses.  Millennium recognizes theinherent imprecision in estimates of losses due to various uncertainties andvariability related to the factors used, and therefore a reasonable rangearound the estimate of losses is derived and used to ascertain whether theallowance is too high.  If differentassumptions or conditions were to prevail and it is determined that theallowance is not adequate to absorb the new estimate of probable losses, anadditional provision for loan losses would be made, which amount may bematerial to the Consolidated Financial Statements.

 

### **Financial Summary**

### ** **

Forthe year ended December 31, 2007, we recorded a loss from continuingoperations of $2.0 million, or $(0.23) per diluted share, versus earnings fromcontinuing operations of $1.7 million, or $0.18 per diluted share, for2006.  Including losses from discontinuedoperations, which reflects the impact on earnings from the sale in February 2008of the Company’s portfolio of held for sale and repurchased mortgage loans, andearnings attributable to the Richmond area branches, we recorded a net loss of$10.5 million, or $(1.17) per diluted share versus a net loss of $481,000, or$(0.05) per diluted share, for 2006.  Theincrease in the loss for 2007 is attributable 

 

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tothe valuation allowance established in the fourth quarter with respect tomortgage loans that were originated in 2006 and additional mortgage loansrepurchased in 2007 due to early payment defaults. The sale of the portfolio ofheld-for-sale/repurchased mortgage loans was consummated in February 2008.  We ended our indirect origination of mortgageloans on December 31, 2006, and made our last repurchase of mortgage loansin July 2007. We also recorded an other than temporary impairment chargeof $1.2 million, included in continuing operations, related to investmentsecurities expected to be sold in the first quarter of 2008 in conjunction withthe sale of the Richmond branches.

 

Furtherinformation regarding discontinued operations can be found under the subheading“Discontinued Operations” within this Item.

 

Total assets declined to $518.3 millionat December 31, 2007, compared to $591.5 million at December 31,2006, representing a decrease of $73.2 million or 12.4%.  Loans from continuing operations, net ofallowance for loan losses at December 31, 2007 were $243.4 million, adecrease of  $6.5 million from the December 31,2006 balance of $249.9 million.  Theinvestment portfolio increased by $773,000 at December 31, 2007 ascompared to the prior year ended December 31, 2006.  Total deposits from continuing operations were$293.4 million at December 31, 2007, a $77.6 million decrease over theprior year-end balance of $371.1million, with the bulk of the decrease in totaldeposits reflected in time deposits.

 

Shareholders’ equity was $38.5 million atDecember 31, 2007 compared with $47.6 million at December 31,2006.  Book value per share was $4.31 at December 31,2007 and $5.33 at December 31, 2006.

 

## *Net Interest Income*

## * *

Net interest income is the largest component ofour earnings and is equal to the amount by which interest income exceedsinterest expense.  Interest earningassets consist primarily of loans and securities, while deposits and borrowingsrepresent the major portion of interest bearing liabilities.  Changes in the volume and mix of assets andliabilities, as well as changes in the yields and rates paid, determine changesin net interest income.  The net interestmargin is calculated by dividing net interest income by average interestearning assets.

 

Net interest income on a fullytaxable-equivalent basis attributable to continuing operations was $10.0million in 2007 and  $10.6 million in 2006.  Net interest income from discontinuedoperations was $595,000 in 2007 and $2.8 million in 2006.

 

Asreflected in the following table, net interest income on a fullytaxable-equivalent basis was $10.6 million for the year ended December 31,2007 compared to $13.4 million for the same period in 2006.  Interest income for the year ended December 31,2007 was $34.4 million, up from $32.4 million for the same period lastyear.   The interest income increase wasattributable to a 12.8% increase in average earning assets partially offset bya  40 basis point decrease in grossyield.   Of the $2.0 million increase ininterest income, $3.6 million was attributable to volume and $(1.6) million wasattributable to rate changes.   Growth ininterest income would have been more pronounced except that the composition ofaverage earning assets shifted to a higher percentage of investmentsecurities.  Additional funds weredeployed in the investment portfolio in an effort to reduce the overallinterest rate exposure in a declining rate scenario.  The effort was not successful as declines inthe federal funds target rate resulted in more rapid and more extensivereduction in yields in earning assets than in rates paid on interest bearingliabilities.  Loan yield decreased 65basis points due to the combined effects of asset quality deterioration, as thedollar volume of nonaccrual loans increased dramatically, and variable rateloans indexed to the prime rate began to decrease in September 2007 inconjunction with the decision by the Federal Open Market Committee to reversecourse and ease short-term interest rates. Average loans increased 6.5% whileaverage securities increased 27.5%. Interest expense increased $4.8 million asthe average balance of deposits and borrowed funds increased as well as therates paid thereon.  Most of theincreased funding for earning assets was concentrated in higher-ratecertificates of deposit, the rate paid on interest-bearing liabilitiesincreased due to intense local competition and the implementation of a moreaggressive deposit pricing strategy. Funding of earning assets from interestfree sources also declined from 12.1% for the year ended December 31, 2006to 9.0% for the same period this year.  To date, Millennium has not been successful in generating higher volumesof lower cost demand and transaction accounts but expects some limitedimprovement to occur due to its new lending paradigm which focuses oncommercial and industrial loans to small businesses which normally bring with itdeposit relationships as opposed to large commercial real estate secured loanswhich are “transaction oriented” and do not generally bring in a high dollarvolume of core deposits.     The netinterest margin decreased by 84 basis points to 2.01% for the year ended December 31,2007 as compared to 2.85% for the same period in 2006.

 

25

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With the expectation of further easing ofshort-term rates by the FOMC in 2008, the negative effects of the housingbubble on credit markets and regulatory factors associated with the formalagreement referenced earlier, management does not expect that the net interestmargin will improve significantly in 2008.

 

The following tables set forth average balancesof total interest earning assets and total interest bearing liabilities for theperiods indicated, showing the average distribution of assets, liabilities,shareholders’’ equity and the related income, expense and correspondingweighted average yields and costs. Assets and liabilities reflected in this table include assets andliabilities from discontinued operations. Loans placed on non-accrual status are included in the average balances.Net loan fees included in interest income on loans totaled $65,000, $110,000,and $(47,000) for 2007, 2006 and 2005, respectively.

 
| ** **                                       | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(Dollars in thousands)**             | ** ** | **Average  Balances**           | ** ** | **Earnings/  Expense**          | ** ** | **Yield/  Rate**                | ** ** | **Average  Balances** | ** ** | **Earnings/  Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balances** | ** ** | **Earnings/  Expense** | ** ** | **Yield/  Rate** | ** ** |
| Assets:                                          |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Earning  Assets                         |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned discounts (1)            |       | $                               | 325,782    |                            | $          | 23,496                          |       | 7.21 | % | $ | 306,019 |   | $ | 24,041 |   | 7.86 | % | $ | 281,248 |   | $ | 19,320 |   | 6.87 | % |
| Securities (2)                                   |       | 194,510                         |       | 10,463                          |       | 5.38                            | %          | 152,571 |   | 7,780 |   | 5.10 | % | 114,244 |   | 4,820 |   | 4.22 | % |
| Federal funds  sold                              |       | 9,406                           |       | 471                             |       | 5.01                            | %          | 10,838 |   | 565 |   | 5.21 | % | 1,718 |   | 37 |   | 2.15 | % |
| Total interest  earning assets                   |       | 529,698                         |       | 34,430                          |       | 6.50                            | %          | 469,428 |   | 32,386 |   | 6.90 | % | 397,210 |   | $ | 24,177 |   | 6.09 | % |
|                                             |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other assets                                     |       | 26,191                          |       |                            |       |                            |       | 24,714 |   |   |   |   |   | 18,146 |   |   |   |   |   |
| Total assets                                     |       | $                               | 555,889    |                            |       |                            |       |   | $ | 494,142 |   |   |   |   |   | $ | 415,356 |   |   |   |   |   |
|                                             |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities                                      |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                       |       | $                               | 386,137    |                            | $          | 18,582                          |       | 4.81 | % | $ | 342,867 |   | $ | 15,250 |   | 4.45 | % | $ | 274,200 |   | $ | 8,562 |   | 3.12 | % |
| Borrowed funds                                   |       | 95,925                          |       | 5,218                           |       | 5.44                            | %          | 69,979 |   | 3,775 |   | 5.39 | % | 65,714 |   | 2,737 |   | 4.17 | % |
| Total  interest-bearing liabilities              |       | 482,062                         |       | 23,800                          |       | 4.94                            | %          | 412,846 |   | 19,025 |   | 4.61 | % | 339,914 |   | 11,299 |   | 3.32 | % |
|                                             |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                     |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |       | 23,707                          |       |                            |       |                            |       | 29,902 |   |   |   |   |   | 24,589 |   |   |   |   |   |
| Other liabilities                                |       | 3,542                           |       |                            |       |                            |       | 2,640 |   |   |   |   |   | 2,156 |   |   |   |   |   |
| Total liabilities                                |       | 509,311                         |       |                            |       |                            |       | 445,388 |   |   |   |   |   | 366,659 |   |   |   |   |   |
| Shareholders’  equity                       |       | 46,578                          |       |                            |       |                            |       | 48,754 |   |   |   |   |   | 48,697 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |       | $                               | 555,889    |                            |       |                            |       |   | $ | 494,142 |   |   |   |   |   | $ | 415,356 |   |   |   |   |   |
| Net interest  income                             |       |                            |       | $                               | 10,630     |                            |       |   |   |   | $ | 13,361 |   |   |   |   |   | $ | 12,878 |   |   |   |
| Interest spread  (3)                             |       |                            |       |                            |       | 1.56                            | %          |   |   |   |   | 2.29 | % |   |   |   |   | 2.77 | % |
| Net interest  yield on earning assets (4)        |       |                            |       |                            |       | 2.01                            | %          |   |   |   |   | 2.85 | % |   |   |   |   | 3.24 | % |

 

----

(1) Includes loansheld for sale.

(2) Incomecomputed on a fully tax-equivalent basis.

(3) Interestspread is the average yield earned on earning assets less the average rate paidon interest bearing liabilities.

(4) Net interestmargin is net interest income expressed as a percentage of average earningassets.

 

26

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The following table describes the impact onMillennium’s interest income resulting from changes in average balances andaverage rates for the periods indicated. The change in interest due to both volume and rate has been allocated tovolume and rate changes in proportion to the relationship of the absolutedollar amounts of the change in each.

 
| ** **                                           | ** ** | **December 31, 2007 vs. 2006** | ** ** | **December 31, 2006 vs. 2005** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **Due to**                                    | ** ** | **Change in**                                 | ** ** | ** ** | ** ** | **Due to** | ** ** | **Change in** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                 | ** ** | **Volume**                                         | ** ** | **Rate**                                           | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Interest Earned  On:                                 |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                                  | 1,425      |                                               | $          | (1,970 | ) | $ | (545 | ) | $ | 1,946 |   | $ | 2,775 |   | $ | 4,721 |   |
| Securities                                           |       | 2,255                                              |       | 428                                                |       | 2,683 |   | 1,954 |   | 1,006 |   | 2,960 |   |
| Federal Funds  Sold                                  |       | (72                                                | )          | (22                                                | )          | (94 | ) | 475 |   | 53 |   | 528 |   |
| Total interest  earned on interest-bearing assets    |       | 3,608                                              |       | (1,564                                             | )          | 2,044 |   | 4,375 |   | 3,834 |   | 8,209 |   |
|                                                 |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest Paid  On:                                   |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                           |       | 2,082                                              |       | 1,250                                              |       | 3,332 |   | 3,054 |   | 3,634 |   | 6,688 |   |
| Borrowed funds                                       |       | 1,411                                              |       | 32                                                 |       | 1,443 |   | 230 |   | 808 |   | 1,038 |   |
| Total interest  paid on interest-bearing liabilities |       | 3,493                                              |       | 1,282                                              |       | 4,775 |   | 3,284 |   | 4,442 |   | 7,726 |   |
|                                                 |       |                                               |       |                                               |       |   |   |   |   |   |   |   |   |
| Net interest  income                                 |       | $                                                  | 115        |                                               | $          | (2,846 | ) | $ | (2,731 | ) | $ | 1,091 |   | $ | (608 | ) | $ | 483 |   |

 

**Investments**

 

At December 31,2007, Millennium had $180.0 million in total debt securities and restrictedstock securities, an increase of 1.6% from $177.2 million at December 31,2006.  The portfolio allocation at December 31,2007 reflected a continued migration from the agency sector to the municipalsector.

 

The following tables show the amortized cost andfair  value of investment securities atthe dates indicated.

 
| ** **                              | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(Dollars in thousands)**    | ** ** | **Cost**                        | ** ** | **Fair Value**             | ** ** | **Cost**                        | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Available for  sale                     |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| U. S. Government  and Agency securities |       | $                               | 61,722     |                            | $          | 61,905                          |       | $ | 72,160 |   | $ | 70,597 |   | $ | 60,287 |   | $ | 58,315 |   |
| Mortgage-backed  securities             |       | 48,508                          |       | 48,535                          |       | 50,716                          |       | 50,014 |   | 33,702 |   | 32,886 |   |
| States and  political subdivisions      |       | 54,777                          |       | 54,445                          |       | 43,695                          |       | 43,364 |   | 25,409 |   | 25,026 |   |
| Other                                   |       | 8,749                           |       | 8,591                           |       | 8,802                           |       | 8,728 |   | 7,584 |   | 7,587 |   |
| Total debt  securities                  |       | 173,756                         |       | 173,476                         |       | 175,373                         |       | 172,703 |   | 126,982 |   | 123,814 |   |
| Equity  securities                      |       | 6,541                           |       | 6,541                           |       | 4,449                           |       | 4,449 |   | 4,551 |   | 4,551 |   |
| Total                                   |       | $                               | 180,297    |                            | $          | 180,017                         |       | $ | 179,822 |   | $ | 177,152 |   | $ | 131,533 |   | $ | 128,365 |   |

 

At December 31,2007, management identified a pool of approximately $100 million of investmentsecurities that it intended to sell during the 1st quarter of 2008to partially fund the sale of the Richmond branches and to deleverage thebalance sheet in conjunction with the balance sheet repositioning strategyreferenced in Part I, Item 1.  Included in the securities identified for sale were $78.5 million ofsecurities for which the fair value was less than book value.   Since we no longer had the intent andability to hold these bonds to recovery, the unrealized loss could no longer bedeemed temporary therefore at December 31, 2007, the Bank recorded a $1.2million (pre-tax) impairment charge on these securities.   As a result of the price improvementsrealized due to 

 

27

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changes in the yield curve since December 31, 2007, we recognizeda gain on the sale of these securities of $729,000 (pre-tax) during the firstquarter 2008.

 

Thefollowing table sets forth the dollar amount of the other than temporaryimpairment charge recorded in 2007 by investment sector.

 
| **(Dollars in thousands)**    | ** ** | **Amortized Cost  Prior to Impairment  Charge** | ** ** | **Impairment  Charge** | ** ** | **Amortized Cost and  Fair Value After  Impairment Charge** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------------------------------------------|------------|
| U. S. Government  and Agency securities |       | $                                                              | 33,699     |                   | $          | 269                                                                                  |       | $ | 33,430 |   |
| Mortgage-backed  securities             |       | 10,697                                                         |       | 169                    |       | 10,528                                                                               |       |
| States and  political subdivisions      |       | 34,124                                                         |       | 759                    |       | 33,365                                                                               |       |
| Total Debt  Securities                  |       | $                                                              | 78,520     |                   | $          | 1,197                                                                                |       | $ | 77,323 |   |

 

The following table sets forth the maturitydistribution and weighted average tax-equivalent yields, based on contractual maturity,of all debt securities in the securities available for sale portfolio based onamortized cost as of December 31, 2007.  Actual maturities for mortgage-backed securities will vary based on thelevel of prepayments in the underlying mortgage pools.

 
| **(Dollars in thousands)**    | ** ** | **Within 1  Year** | ** ** | **After 1 But  Within 5  Years** | ** ** | **After 5 But  Within 10  years** | ** ** | **After 10  years** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|-----------|------------|
| U. S. Government  and Agency securities |       | $                       | 4,985      |                                            | $          | 27,729                                           |       | $                        | 29,008     |      | $          | — |   | $ | 61,722 |   |
| Mortgage-backed  securities             |       | 332                     |       | 3,188                                           |       | 5,095                                            |       | 39,893                   |       | 48,508    |       |
| States and  political subdivisions      |       | —                  |       | —                                          |       | 7,573                                            |       | 47,204                   |       | 54,777    |       |
| Other                                   |       | —                  |       | —                                          |       | —                                           |       | 8,749                    |       | 8,749     |       |
| Total Debt  Securities                  |       | $                       | 5,317      |                                            | $          | 30,917                                           |       | $                        | 41,676     |      | $          | 95,846 |   | $ | 173,756 |   |
|                                    |       |                    |       |                                            |       |                                             |       |                     |       |      |       |
| U. S. Government  and Agency securities |       | 4.00                    | %          | 4.42                                            | %          | 5.01                                             | %          | —                   | %          | 4.66      | %          |
| Mortgage-backed  securities             |       | 3.04                    | %          | 3.31                                            | %          | 4.49                                             | %          | 5.48                     | %          | 5.22      | %          |
| States and  political subdivisions      |       | —                  | %          | —                                          | %          | 5.61                                             | %          | 5.97                     | %          | 5.92      | %          |
| Other                                   |       | —                  | %          | —                                          | %          | —                                           | %          | 6.57                     | %          | 6.57      | %          |
| Total  tax-equivalent yield             |       | 3.94                    | %          | 4.31                                            | %          | 5.06                                             | %          | 5.82                     | %          | 5.31      | %          |

 

There are no securities with a single issuer forwhich the amortized cost (book value) in the aggregate exceeds 10% ofshareholders’ equity.

 

**Loans**

 

Net loans from continuing operations consist oftotal loans, deferred loan (fees) costs and the allowance for loan losses.  Net loans were $243.4 million at December 31,2007, a decrease of 2.6% from December 31, 2006.

 

28

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Thefollowing table sets forth the composition of Millennium’s loan portfolio atthe dates indicated.

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| **(Dollars  in thousands)** | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Mortgage loans              |       | $                     | 69,175     |   | $ | 73,661 |   | $ | 54,367 |   | $ | 61,774 |   | $ | 67,736 |   |
| Commercial real estate      |       | 90,024                |       | 101,251 |   | 98,892 |   | 106,689 |   | 70,619 |   |
| Construction and land loans |       | 57,098                |       | 48,991 |   | 30,020 |   | 22,448 |   | 13,658 |   |
|                        |       |                  |       |   |   |   |   |   |   |   |   |
| Total real estate loans     |       | 216,297               |       | 223,903 |   | 183,279 |   | 190,911 |   | 152,013 |   |
| Commercial business loans   |       | 18,792                |       | 17,123 |   | 11,038 |   | 11,217 |   | 12,957 |   |
| Consumer loans              |       | 12,225                |       | 12,514 |   | 1,854 |   | 1,832 |   | 2,663 |   |
| Overdrafts                  |       | 25                    |       | 22 |   | 19 |   | 9 |   | 13 |   |
|                        |       |                  |       |   |   |   |   |   |   |   |   |
| Total loans receivable      |       | 247,339               |       | 253,562 |   | 196,190 |   | 203,969 |   | 167,646 |   |
| Less:                       |       |                  |       |   |   |   |   |   |   |   |   |
| Deferred costs (fees)       |       | (110                  | )          | (221 | ) | (291 | ) | (147 | ) | (39 | ) |
| Allowance for loan losses   |       | (3,853                | )          | (3,441 | ) | (3,215 | ) | (2,925 | ) | (3,057 | ) |
| Total loans receivable, net |       | $                     | 243,376    |   | $ | 249,900 |   | $ | 192,684 |   | $ | 200,897 |   | $ | 164,550 |   |

 

AtDecember 31, 2007, there was no significant change in loan compositioncompared with loan composition at December 31, 2006.   The loan portfolio remains heavily weightedin loans secured by real estate.

 

Thefollowing table shows the contractual maturity of selected categories of loansat December 31, 2007.  The tablereflects the entire unpaid principal balance in the maturity period thatincludes the final loan payment date, and accordingly, does not give effect toperiodic principal repayments or possible prepayments.

** **
| ** **                 | ** ** | **December 31, 2007** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Commercial,**                 | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Financial and**          | ** ** | **Real Estate/** | ** ** |
| **(Dollars in thousands)** | ** ** | **Agricultural**                | ** ** | **Construction** | ** ** |
|                       |       |                            |       |   |   |
| Variable  Rate:            |       |                            |       |   |   |
| Within  1 year             |       | $                               | 11,820     |   | $ | 25,400 |   |
| 1 to  5 years              |       | 1,739                           |       | 10,594 |   |
| After  5 years             |       | 3,565                           |       | 14,993 |   |
| Total                      |       | $                               | 17,124     |   | $ | 50,987 |   |
| Fixed  Rate:               |       |                            |       |   |   |
| 1 to  5 years              |       | $                               | 1,526      |   | $ | 755 |   |
| After  5 years             |       | 142                             |       | 5,356 |   |
| Total                      |       | $                               | 1,668      |   | $ | 6,111 |   |
|                       |       |                            |       |   |   |
| Total  Maturities          |       | $                               | 18,792     |   | $ | 57,098 |   |

 

**Asset Quality**

 

*General*

 

Assetquality is an important factor in the successful operation of a financialinstitution.  Banking regulations requireinstitutions to classify their assets and to establish prudent generalallowances for losses for

 

29

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assetsclassified as substandard or doubtful. For the portion of assets classified as loss, an institution is requiredto either establish specific allowances of 100% of the amount classified orcharge such amounts off its books.

 

Assetsthat do not currently expose Millennium to sufficient risk to warrantclassification in one of the aforementioned categories, but possess potentialweaknesses, are required to be designated special mention by management.  These loans are monitored closely so that wecan mitigate our exposure to further deterioration in the asset.  Millennium charges off any loans that areclassified as loss.

 

Unlesswell secured and in the process of collection, Millennium places loans in anon-accrual status once they become past due greater than 90 days, or earlierin situations in which the loans have developed inherent problems that indicatepayment of principal and interest may not be made in full.  Whenever the accrual of interest is stopped,previously accrued but uncollected interest income is reversed.  Thereafter, interest is recognized only ascash is received.  The loan is reinstatedto an accrual basis after it has been brought current as to principal andinterest under the contractual terms of the loan.

 

###### ***Non-Performing Assets***

###### ** **

Millennium had $23.1million of non-accrual loans at December 31, 2007, compared to $3.0million at December 31, 2006. The following table details informationconcerning non-accrual, past due and restructured loans at the dates indicated:

 
| ** **                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **2007**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                        | ** ** | **Portfolio**         | ** ** | **Held for Sale** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Non-accrual  loans                                          |       | $                     | 13,711     |   | $ | 9,370 |   | $ | 3,043 |   | $ | 598 |   | $ | 822 |   | $ | 146 |   |
| Foreclosed  properties                                      |       | 1,811                 |       | 763 |   | 74 |   | — |   | — |   | — |   |
| Restructured  loans                                         |       | —                |       | — |   | — |   | — |   | — |   | — |   |
| Total  non-performing assets                                |       | $                     | 15,522     |   | $ | 10,113 |   | $ | 3,117 |   | $ | 598 |   | $ | 822 |   | $ | 146 |   |
|                                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans  past due 90 days or more and still accruing interest |       | $                     | 874        |   | $ | — |   | $ | 379 |   | $ | 166 |   | $ | 339 |   | $ | 162 |   |

 

Thenon-acccrual loans listed as held for sale in the above table are a componentof assets from discontinued operations and are reported net of valuationreserves.

 

Informationregarding impaired loans is as follows:

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Loans  with no allocated allowance for loan losses            |       | $                     | —     |   | $ | — |   | $ | — |   |
| Loans  with allocated allowance for loan losses               |       | 13,711                |       | 3,043 |   | 598 |   |
| Total                                                         |       | $                     | 13,711     |   | $ | 3,043 |   | $ | 598 |   |
|                                                          |       |                  |       |   |   |   |   |
| Amount  of the allowance for loan losses allocated            |       | $                     | 288        |   | $ | 555 |   | $ | 289 |   |
| Average  investment in impaired loans                         |       | $                     | 21,070     |   | $ | 1,651 |   | $ | 120 |   |
| Interest  income recognized during impairment                 |       | $                     | —     |   | $ | — |   | $ | — |   |
| Interest  income recognized on a cash basis on impaired loans |       | $                     | —     |   | $ | — |   | $ | — |   |

 

Noadditional funds are committed to be advanced in connection with the aboveimpaired loans.

 

*Delinquent and problem loans*

 

Whena borrower fails to make a required payment on a loan, Millennium attempts tocure the delinquency by contacting the borrower.  A notice is mailed to the borrower after apayment is 15 days past due and again when

 

30

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theloan is 30 days past due.  For mostloans, if the delinquency is not cured within 60 days, Millennium issues anotice of intent to foreclose on the property and if the delinquency is notcured within 90 days, Millennium may institute foreclosure action.  In most cases, deficiencies are curedpromptly.

 

*Allowance for losses on loans*

 

Millenniumprovides valuation allowances for probable losses incurred on loans when wedetermine that a significant decline in the value of the collateral hasoccurred, and if the value of the collateral is less than the amount of theunpaid principal of the related loan plus estimated costs of acquisition andsale.  In addition, Millennium alsoprovides reserves based on the dollar amount and type of collateral securingits loans, in order to protect against unanticipated losses.  A loss experience percentage is establishedfor each loan type and is reviewed at least annually, and more frequently if weidentify factors that require us to consider a change to the percentage.  Each month, the loss percentage is applied tothe portfolio, by product type, to determine the minimum amount of reservesrequired.  Although management believesthat it uses the best information available to make such determinations, futureadjustments to reserves may be necessary, and net income could be significantlyaffected, if circumstances differ substantially from assumptions used in makingthe initial determinations.

 

Ananalysis of the allowance for loan losses, including charge-off activity, ispresented below for the periods indicated. Net charge-offs of $1.6 million were experienced in 2007 versus netrecoveries of  $73,000 in 2006.  Due to the higher level of charge-offs in2007, general deterioration in overall loan quality and adjustments toqualitative factors in the allowance methodology due to a general downturn inthe economy, the provision for loan loss expense was $1.9 million higher in2007 than in 2006.

 
| ** **                                                                                                               | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                                                                                  | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Balance,  beginning of period                                                                                            |       | $                                         | 3,441      |   | $ | 3,215 |   | $ | 2,925 |   | $ | 3,057 |   | $ | 3,499 |   |
| Less  Charge-offs:                                                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                                                                                               |       | 1,092                                     |       | — |   | 55 |   | — |   | 160 |   |
| Real  estate-mortgage                                                                                                    |       | 543                                       |       | — |   | 217 |   | 520 |   | 981 |   |
| Consumer  installment loans                                                                                              |       | 13                                        |       | — |   | — |   | 1 |   | — |   |
| Plus Recoveries:                                                                                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                                                                                               |       | —                                    |       | — |   | 49 |   | — |   | — |   |
| Real  estate-mortgage                                                                                                    |       | 55                                        |       | 73 |   | 75 |   | 117 |   | 12 |   |
| Consumer  installment loans                                                                                              |       | —                                    |       | — |   | — |   | 1 |   | — |   |
| Net Charge-offs  (recoveries)                                                                                            |       | 1,593                                     |       | (73 | ) | 148 |   | 403 |   | 1,129 |   |
|                                                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Provision for  loan losses                                                                                               |       | 2,005                                     |       | 153 |   | 438 |   | 271 |   | 687 |   |
|                                                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Balance, end of  period                                                                                                  |       | $                                         | 3,853      |   | $ | 3,441 |   | $ | 3,215 |   | $ | 2,925 |   | $ | 3,057 |   |
|                                                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Ratio of net  charge-offs to average loans outstanding, including loans from discontinued  operations, during the period |       | 0.49                                      | %          | (0.02 | )% | 0.05 | % | 0.16 | % | 0.51 | % |

 

The allowance for loanlosses at December 31, 2007, was $3.9 million, compared to $3.4 million atDecember 31, 2006.  The provisionfor loan losses for 2007 was $2.0 million as compared to $153,000 for the yearended December 31, 2006.

 

The allowance for loanlosses was 1.32% of total loans outstanding (including portfolio loans ofdiscontinued operations) at December 31, 2007 compared to 1.15% at December 31,2006.  Net charge-offs (recoveries) as a percentageof average 

 

31

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loans, including loans from discontinued operations, were 0.49% and(0.02)% for December 31, 2007 and 2006, respectively.   Management believes the allowance for loanlosses is adequate to cover credit losses probable and incurred in the loanportfolio at December 31, 2007.

 

Theallowance for loan losses includes specific allowances for certain loans and ageneral allowance applicable to all loan categories; however, management hasallocated the allowance to provide an indication of the relative riskcharacteristics of the loan portfolio. The allocation is an estimate and shouldnot be interpreted as an indication that charge-offs will occur in theseamounts, or that the allocation indicates future trends. The allocation of theallowance at December 31 for the years indicated and the ratio of relatedoutstanding loan balances to total loans are as follows:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **(Dollars in thousands)** | ** ** | **Percent**           | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** |
|                                 |       |                  |       |   |   |   |   |   |   |
| Loans secured by  real estate:       |       |                  |       |   |   |   |   |   |   |
| Construction/land  development       |       | 22.9                  | %          | $ | 818 |   | 16.3 | % | $ | 371 |   |
| 1 – 4 family  residential       |       | 24.5                  | %          | 1,162 |   | 34.3 | % | 1,199 |   |
| Multi-family  residential            |       | 3.2                   | %          | 142 |   | 2.9 | % | 66 |   |
| Non-farm,  non-residential           |       | 38.2                  | %          | 1,268 |   | 37.0 | % | 1,143 |   |
| Loans to farmers                     |       | 0                     | %          | — |   | 0 | % | — |   |
| Commercial and  industrial           |       | 6.7                   | %          | 314 |   | 5.5 | % | 472 |   |
| Loans to  individuals                |       | 4.5                   | %          | 149 |   | 4.0 | % | 190 |   |
|                                 |       |                  |       |   |   |   |   |   |   |
| Total                                |       | 100.0                 | %          | $ | 3,853 |   | 100.0 | % | $ | 3,441 |   |

 
| ** **                           | ** ** | **December 31** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **(Dollars in thousands)** | ** ** | **Percent**          | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans secured by  real estate:       |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Construction/land  development       |       | 15.9                 | %          | $ | 243 |   | 12.8 | % | $ | — |   | 8.0 | % | $ | 143 |   |
| 1 – 4 family  residential       |       | 28.3                 | %          | 810 |   | 36.2 | % | 488 |   | 38.5 | % | 1,595 |   |
| Multi-family  residential            |       | 3.9                  | %          | 12 |   | 1.2 | % | 268 |   | 0.6 | % | 9 |   |
| Non-farm,  non-residential           |       | 45.5                 | %          | 544 |   | 43.0 | % | 84 |   | 43.5 | % | 792 |   |
| Loans to farmers                     |       | 0.5                  | %          | — |   | 0.0 | % | — |   | 0.0 | % | — |   |
| Commercial and  industrial           |       | 4.8                  | %          | 1,554 |   | 5.3 | % | 1,900 |   | 7.1 | % | 477 |   |
| Loans to  individuals                |       | 1.1                  | %          | 52 |   | 1.5 | % | 185 |   | 2.3 | % | 41 |   |
|                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Total                                |       | 100.0                | %          | $ | 3,215 |   | 100.0 | % | $ | 2,925 |   | 100.0 | % | $ | 3,057 |   |

 

**Noninterest Income**

 

Millennium’s noninterestincome from continuing operations consists primarily of loan fees, net gains onsale of loans and fees, service charges on deposit accounts and, income frombank owned life insurance.  The followingtable presents information on the sources and amounts of noninterest income.

 

32

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| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| **Noninterest Income**                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **(Dollars in thousands)**                 |       |                  |       |   |   |
| Service charges                            |       | $                     | 298        |   | $ | 238 |   |
| Gain on sale of loans and loan fees, net   |       | 334                   |       | 501 |   |
| Gain (loss) on sale of securities, net (1) |       | (1,202                | )          | 56 |   |
| Income from bank owned life insurance      |       | 504                   |       | 450 |   |
| Other income                               |       | 190                   |       | 129 |   |
| Total                                      |       | $                     | 124        |   | $ | 1,374 |   |

 

----

  (1) Includesimpairment charge of $(1,197)

 

  Theloss on sale of securities recognized in 2007 was incurred in conjunction withthe sale of the branches.

 

**Noninterest Expense**

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| **Noninterest Expense**              | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **(Dollars in thousands)**                |       |                  |       |   |   |
| Salary and benefits                       |       | $                     | 5,294      |   | $ | 4,800 |   |
| Occupancy                                 |       | 873                   |       | 911 |   |
| Furniture, equipment & computers |       | 899                   |       | 873 |   |
| Marketing fees                            |       | 221                   |       | 201 |   |
| Professional fees                         |       | 1,095                 |       | 634 |   |
| Merger related expense                    |       | —                |       | 5 |   |
| Administrative expense                    |       | 2,644                 |       | 2,030 |   |
| Total                                     |       | $                     | 11,026     |   | $ | 9,454 |   |

 

Salaries and benefits expense, the largestcomponent of noninterest expense from continuing operations, rose in 2007compared with 2006 due primarily to a decrease in deferred salary expensebecause of a corresponding decrease in loan originations.  Professional fees increased in 2007 from 2006primarily because of legal fees associated with credit related collectionefforts on issues related to the banks portfolio loans, and administrativeexpense increased from 2006 to 2007 primarily due to higher franchise taxes andFDIC insurance premiums.

 

**Income Taxes**

 

Millennium recorded an income tax benefit fromcontinuing operations in the amount of $2.1 million for the year ended December 31,2007 compared with income tax expense of $55,000 for 2006. Income tax expense (benefit) varies from one year tothe next with changes in the level of income before taxes, changes in theamount of tax-exempt income, and the relationship of these changes to eachother.  In 2006 and continuing in 2007,Millennium increased its investments in municipal securities and bank ownedlife insurance, the income from which is not taxable, thereby reducing itseffective tax rate.

 

Inaddition to federal income taxes, the bank pays a Virginia State franchisetax.  The franchise tax was $460,000 and,$245,000 for the years ending December 31, 2007 and 2006,respectively.  Franchise tax increased in2007 due to additional capital that was down streamed to the Bank from theParent in 2006.

 

33

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**Discontinued Operations**

 

As of December 31,2006, the Corporation determined that it was in its best interest to wind downits mortgage operating subsidiaries.  Itwas the Corporation’s desire to focus exclusively on core banking activitiesgoing forward to eliminate, going forward, the risks normally associated withmortgage banking activities.  The winddown decision was further precipitated by credit quality issues that surfacedin the held for sale loan portfolio during the fourth quarter 2006.

 

Results in 2007 werenegatively impacted by losses from discontinued operations, as additionalvaluation reserves were required as a result of additional loan repurchases dueto early payment default coupled with rapid deterioration in liquidation valuesdue to increasing turmoil in the housing and credit markets.   To avoid further exposure to losses due tomarket conditions and extended delays in resolution, the Bank, on February 7,2008, entered into an agreement to sell its entire portfolio of held for saleand repurchased mortgage loans (the “Portfolio”) to Beltway Capital, HuntValley, Maryland. The transaction closed on February 8, 2008. Prior to thesale, the loan balance of the Portfolio aggregated $31.3 million, against whichthe Bank had a valuation allowance of $7.3 million at December 31, 2007.  The portfolio consisted of $5.7 million ofcurrent performing loans, $11.9 million of delinquent loans, $13.0 million ofloans in various stages of foreclosure, and $0.7 million in properties held inother real estate owned. The wholesale bulk sale price paid by Beltway was43.55%, or $13.6 million plus accrued interest. As a result, the Bank established an additional valuation allowance asof December 31, 2007, resulting in a charge to earnings of $10.8 million,or $7.1 million net of taxes.  This valuationallowance is in addition to and separate from the allowance for loanlosses.  The valuation allowance wasoriginally established by a charge to earnings in December 2006 and wasfurther increased by additional charges to earnings during the 3rd and4th quarter of 2007. Accordingly, the results of our mortgage operations are presented as acomponent of discontinued operations following the results from continuingoperations.

 

On December 3, 2007,the Corporation announced that the Bank had entered into a purchase andassumption agreement (the “Agreement”) to sell its two branches in theRichmond, Virginia market to EVB, a wholly owned subsidiary of Eastern VirginiaBankshares (Nasdaq: EVBS).  Accordingly,the results of the two Richmond branches is included as a component ofdiscontinued operations.

 

The components ofdiscontinued operations are reflected in the table that follows.

 

34

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**STATEMENTOF INCOME FOR DISCONTINUED OPERATIONS**

** **
| ** **                                                          | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Interest  Income**                                                |       | 6,056      |       | $        | 8,373      |   |
| **Interest  Expense**                                               |       | 5,461      |       | 5,581    |       |
| Net Interest  Income                                                |       | 595        |       | 2,792    |       |
|                                                                |       |       |       |     |       |
| **Provision  for Loan Losses**                                      | ** ** | **—** |       | 172      |       |
|                                                                |       |       |       |     |       |
| Net Interest  Income after Provision for Loan Losses                |       | 595        |       | 2,620    |       |
|                                                                |       |       |       |     |       |
| Noninterest  Income                                                 |       |       |       |     |       |
| Gain (loss) on  sale of loans and loan fees, net                    |       | (12,441    | )          | (1,728   | )          |
| Other income                                                        |       | 113        |       | 80       |       |
| Total  Noninterest Income                                           |       | (12,328    | )          | (1,648   | )          |
|                                                                |       |       |       |     |       |
| Noninterest  Expense                                                |       |       |       |     |       |
| Officers’ and  employees’ compensation and benefits       |       | 562        |       | 742      |       |
| Occupancy and  equipment expense                                    |       | 282        |       | 228      |       |
| Marketing,  promotion and advertising expense                       |       | 6          |       | 5        |       |
| Other operating  expense                                            |       | 215        |       | 3,271    |       |
| Total  Noninterest Expense                                          |       | 1,065      |       | 4,246    |       |
|                                                                |       |       |       |     |       |
| **Income  (loss) from Discontinued Operations before Income Taxes** |       | (12,798    | )          | (3,274   | )          |
|                                                                |       |       |       |     |       |
| **Income  Tax Expense (benefit)**                                   |       | (4,351     | )          | (1,113   | )          |
|                                                                |       |       |       |     |       |
| **Income  (loss) from Discontinued Operations**                     |       | $          | (8,447     | )        | $          | (2,161 | ) |
|                                                                     |            |            |            |          |            |  |  |

 

AtDecember 31, 2007 there were $12.7 million in loans held for saleattributable to discontinued mortgage operations.     Included in the carrying amount for loansheld for sale was a $17.2 million lower of cost or market adjustment. Theexpense associated with this adjustment is reflected as a contra revenue itemin gain on sale of loans, net.   Theamount reflected in other loan expense for 2006 in the following table is acharge to establish a $2.9 million reserve for potential off-balance sheetexposure associated with loans already sold to investors.    Investor agreements provide that the sellermust buyback the loan under certain conditions, such as early payment default,and management determined at December 31, 2006 that it was more likelythan not that buyback conditions occurred in some of the production sold toinvestors, particularly for identified loans that were originated under subprime underwriting guidelines.

 

Otheroperating expenses consist of the following:

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Dues and fees                     |       | 28       |       | 29       |       |
|                              |       |     |       |     |       |
| Meetings and  seminar expense     |       | 9        |       | 9        |       |
| Miscellaneous  operating expenses |       | 43       |       | 252      |       |
| Office expenses                   |       | 44       |       | 48       |       |
| Other operating  losses           |       | 3        |       | 9        |       |
| Outside services                  |       | 1        |       | 2        |       |
| Professional  fees                |       | 62       |       | —   |       |
| Other loan  expense               |       | 25       |       | 2,922    |       |
| Total Other  Operating Expenses   |       | $        | 215        |     | $          | 3,271 |   |
|                                   |            |          |            |          |            |  |  |

 

35

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**Sources of Funds**

 

*Deposits*

 

Depositshave been the principal source of Millennium’s funds for use in lending and forother general business purposes. Millennium has also employed alternative methods to gather deposits tofunds for use in our commercial lending and investment activities.  Alternative methods used are advances fromthe Federal Home Loan Bank of Atlanta for daily and longer-term borrowings andalso brokered deposits.  Brokereddeposits are deposits that we obtain through brokers for a fee.  Brokered deposits are available in bulk, andthey do not require any investments in branch offices, branch personnel oradditional spending for marketing or education of employees.  The brokered deposits that we obtain consistprimarily of jumbo 30 day to 3-year certificates of deposits. Brokered depositsoften earn a rate of interest that is higher than the rates we pay on otherdeposit products, which increases Millennium’s overall cost of funds anddecreases our net interest margin.   Dueto the capital provisions of the formal agreement we can no longer accept,renew or rollover brokered deposits until such time as we receive a waiver fromthe FDIC and/or the “troubled institution” status is lifted.

 

Millenniumattracts both short-term and long-term deposits from the general public byoffering a wide assortment of accounts and rates.  Millennium offers statement savings accounts,various checking accounts, various money market accounts, fixed-ratecertificates with varying maturities, and individual retirement accounts and isexpanding to provide deposit products and services for businesses.  Millennium’s principal use of deposits is tooriginate loans and fund investment securities.

 

AtDecember 31, 2007, deposits from continuing operations were $293.5 million,a decrease of 20.93% from $371.1 million at December 31, 2006.  Deposit levels in most deposit productsdeclined in 2007 however the decrease in deposits was most heavily concentratedin certificates of deposit under $100,000 as we chose to deemphasize high-rateCD promotions utilized in the previous year. Raising low cost depositscontinues to be a challenge in our marketplace as it is for the bankingindustry as a whole.  Demand depositsdeclined in large measure due to declines in title company balancesattributable to weakness in the housing sector. In order to reduce the overall cost of funds and reduce our reliance onhigh cost time deposits and short-term borrowings as a funding source, wecontinue to direct extensive marketing efforts towards attracting lower costtransaction accounts, however, there is no assurance that these efforts will besuccessful, or if successful, that they will reduce our reliance on timedeposits and short-term borrowings.

 

Thefollowing table sets forth the dollar amount of deposits in the various typesof deposit programs offered by Millennium at the dates indicated.  Deposits related to discontinued operationsare excluded.

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**   | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Savings accounts             |       | $                     | 4,861      |   | $ | 6,882 |   | $ | 17,523 |   |
| Demand deposit accounts      |       | 17,117                |       | 28,366 |   | 21,910 |   |
| NOW accounts                 |       | 29,004                |       | 34,677 |   | 29,219 |   |
| Money market accounts        |       | 29,852                |       | 40,483 |   | 46,155 |   |
| CD’s less than $100K    |       | 143,148               |       | 194,762 |   | 97,634 |   |
| CD’s greater than $100K |       | 69,471                |       | 65,953 |   | 26,003 |   |
| Total                        |       | $                     | 293,453    |   | $ | 371,123 |   | $ | 238,444 |   |

 

36

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Thefollowing table contains information pertaining to the average amount and theaverage rate paid on each of the following deposit categories for the periodsindicated.  This table includes averagesfor both continuing and discontinued operations.

 
| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                           | ** ** | **Average**                                 | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** | **Average** | ** ** | **Rate** | ** ** |
| **(Dollars in thousands)** | ** ** | **Balance**                                 | ** ** | **Paid** | ** ** | **Balance** | ** ** | **Paid** | ** ** | **Balance** | ** ** | **Paid** | ** ** |
| Non-interest bearing                 |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                      |       | $                                           | 23,707     |   | 0.00 | % | $ | 29,902 |   | 0.00 | % | $ | 24,589 |   | 0.00 | % |
| Interest bearing                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                         |       | 50,100                                      |       | 3.65 | % | 45,117 |   | 3.67 | % | 39,717 |   | 2.54 | % |
| Savings/Money                        |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Market accounts                      |       | 52,272                                      |       | 3.59 | % | 68,754 |   | 3.54 | % | 105,431 |   | 2.37 | % |
| Time deposits                        |       | 283,765                                     |       | 5.24 | % | 228,996 |   | 4.87 | % | 129,052 |   | 3.92 | % |
| Total deposits                       |       | $                                           | 409,844    |   | 4.53 | % | $ | 372,769 |   | 4.09 | % | $ | 298,789 |   | 2.87 | % |

 

Thevariety of deposit accounts offered by Millennium has allowed us to becompetitive in obtaining funds and has allowed us to respond with flexibilityto, although not to eliminate, the threat of disintermediation (the flow offunds away from depository institutions such as banking institutions intodirect investment vehicles such as government and corporate securities).  The ability of Millennium to attract andmaintain deposits, and its cost of funds, has been, and will continue to be,significantly affected by market conditions.

 

Thefollowing table indicates the amount of Millennium’s certificates of depositsby time remaining until maturity at December 31, 2007:

 
| ** **                                  | ** ** | **Maturity**      | ** ** |
|---------------------------------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **3 Months** | ** ** | **Over 3 to** | ** ** | **Over 6 to** | ** ** | **Over** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                  | ** ** | **or less**  | ** ** | **6 months** | ** ** | **12 months** | ** ** | **12 months** | ** ** | **Total** | ** ** |
|                                        |       |              |       |   |   |   |   |   |   |   |   |
| Certificates of deposit less than $100,000  |       | $                 | 27,383     |   | $ | 17,691 |   | $ | 61,219 |   | $ | 36,855 |   | $ | 143,148 |   |
| Certificates of deposit of $100,000 or more |       | 30,613            |       | 4,691 |   | 22,765 |   | 11,402 |   | 69,471 |   |
| Total certificates of deposits              |       | $                 | 57,996     |   | $ | 22,382 |   | $ | 83,984 |   | $ | 48,257 |   | $ | 212,619 |   |

 

*Borrowings*

 

Asa member of the Federal Home Loan Bank of Atlanta, Millennium is required toown capital stock in the Federal Home Loan Bank and is authorized to apply foradvances from the Federal Home Loan Bank. Each Federal Home Loan Bank credit program has its own interest rate,which may be fixed or variable, and range of maturities.  The Federal Home Loan Bank may prescribe theacceptable uses to which these advances may be put, as well as on the size ofthe advances and repayment provisions. The advances are collateralized by Millennium’s investment in FederalHome Loan Bank stock and by Millennium’s agency and mortgage-backed investmentsecurities.  At December 31, 2007,and December 31, 2006, $91.5 million and $47.9 million, respectively, wasoutstanding to the Federal Home Loan Bank.

 

37

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Millennium’sborrowings also include securities sold under agreements to repurchase andfederal funds purchased.  At December 31,2007 and December 31, 2006, Millennium had $1.1 million and $0,respectively, in repurchase agreements. There were no outstanding federal fundspurchased at December 31, 2007 and December 31, 2006.

 

Millenniumuses borrowings to supplement deposits when borrowings are available at a loweroverall cost to Millennium or they can be invested at a positive rate ofreturn.

 

Thefollowing tables set forth the maximum month-end balances, average balances andweighted average rates, of Federal Home Loan Bank advances, securities soldunder agreements to repurchase and other borrowings for the years indicated.

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| **(Dollars in thousands)**            | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Maximum Balance:                                |       |                                       |       |   |   |   |   |
| FHLB advances                                   |       | $                                          | 116,800    |   | $ | 92,600 |   | $ | 66,100 |   |
| Federal funds  purchased                        |       | —                                     |       | 7,620 |   | 20,907 |   |
| Subordinated  debentures                        |       | 8,000                                      |       | 8,000 |   | 8,000 |   |
| Securities sold  under agreements to repurchase |       | $                                          | 1,592      |   | $ | — |   | $ | — |   |

 
| ** **                                      | ** ** | **2007**    | ** ** | **2006**     | ** ** | **2005**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                      | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                      | ** ** | **Average** | ** ** | **Average**  | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Balance** | ** ** | **Rate**     | ** ** | **Balance** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** |
| FHLB advances                                   |       | $           | 87,524     |         | 5.05       | %           | $          | 60,563 |   | 4.82 | % | $ | 49,435 |   | 3.57 | % |
| Federal funds  purchased                        |       | 36          |       | 6.61         | %          | 1,416       |       | 5.15 | % | 8,279 |   | 3.86 | % |
| Subordinated  debentures                        |       | 8,000       |       | 9.69         | %          | 8,000       |       | 9.76 | % | 8,000 |   | 8.18 | % |
| Securities sold  under agreements to repurchase |       | $           | 365        |         | 5.02       | %           | $          | 0 |   | 0.00 | % | $ | 0 |   | 0.00 | % |

 

**Liquidity and Capital Resources**

 

Liquidityis the ability to meet present and future financial obligations either throughthe sale of existing assets or the acquisition of additional funds throughasset and liability management.  Cashflow projections are regularly reviewed and updated to assure that adequateliquidity is provided.  As a result ofMillennium’s management of liquid assets and the ability to generate liquiditythrough increasing deposits, management believes that Millennium maintainsoverall liquidity that is sufficient to satisfy its depositors’ requirementsand meet its customers’ credit needs.

 

Millennium’sprimary sources of funds are deposits, borrowings, and amortization,prepayments and maturities of outstanding loans and investments, and loansales.  While scheduled payments from theamortization of loans and securities are relatively predictable sources offunds, deposit flows and loan prepayments are greatly influenced by generalinterest rates, economic conditions and competition.  Excess funds are invested in overnightdeposits to fund cash requirements experienced in the normal course ofbusiness.  Millennium has been able togenerate sufficient cash through its deposits as well as borrowings.

 

Operatingactivities in 2007 provided $5.5 million but absorbed approximately $14.5million in 2006.  This change resultedprimarily from changes in the level of loans held for sale between theperiods.  In 2007, more funds were providedfrom this activity due to the decision to wind down mortgage operations effectiveDecember 2006.   In 2007, $52.0million in cash was provided by investing activities while in 2006 investingactivities utilized approximately $149.0 million. In 2007, loan originationsslowed, barely keeping pace with payments received and the net effect ofinvestment securities activity was insignificant.   Federal funds sold were 

 

38

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used to offset planned depositrunoff.  In 2006 the change resultedprimarily from approximate increases of $49.4 million in federal funds sold,$47.0 in the net increase in loans, and $59.3 in the net increase of investmentsecurities.  For the years ended December 31,2007 and 2006, financing activities utilized $61.6 million and provided $166.2million, respectively.  In 2007, thechange was primarily the result of deposit outflows partially offset byincreases in wholesale borrowing. In 2006, this change was primarily a resultof an increase of approximately $183.7 million in deposits. This increase waspartially offset by an approximate $17.1 million decrease in FHLB borrowings.

 

Millenniumuses its sources of funds primarily to meet operating needs, to pay depositwithdrawals and fund loan commitments. At December 31, 2007 and December 31, 2006 total approved loancommitments were $51.3 million and $65.0 million, respectively.  Certificates of deposit scheduled to maturein one year or less at December 31, 2007, totaled $164.4 million.

 

AtDecember 31, 2007, we had a borrowing limit of $102.9 million with the FederalHome Loan Bank with a remaining borrowing capacity of $11.4 million, two linesof credit with the Community Bankers Bank in Virginia in the amounts of $10.4million secured and $12.0 million unsecured, a $5.0 million unsecured line withthe Bankers Bank and a $7.5 million unsecured line with Compass Bank, all ofwhich were undrawn upon.

 

Afterreviewing the financial and operating condition of the Bank, the Federal HomeLoan Bank, on January 29, 2008 rescinded the Bank’s credit availabilityuntil such time as the Formal Agreement with the OCC has been terminated orsignificant improvement in the Bank’s financial condition has occurred.   The Federal Home Loan Bank did allow theBank to retain credit availability of $66.4 million, which was the amount ofborrowings outstanding at that date.  The Federal Home Loan Bank also required that all outstanding advancesbe collateralized only with cash and/or securities.   The federal funds facilities at the BankersBank and Compass Bank were also rescinded. These actions, coupled with the restrictions placed upon us by theFormal Agreement, which prohibit us from renewing existing brokered deposits oraccepting new brokered deposits, have placed a strain on liquidity and haveincreased the risk that overall liquidity will not be sufficient to satisfy itsdepositors’ requirements and meet our customers’ credit needs.

 

Managementintends to fund anticipated loan closings and operating needs through cash onhand, proceeds from the sale of loans, cash generated from operations andanticipated increases in deposits. Current and anticipated marketing programs will be primarily targeted atthe attraction of lower cost transaction accounts.

 

Capitalrepresents funds, earned or obtained, over which financial institutions canexercise greater control in comparison with deposits and borrowed funds.  The adequacy of Millennium’s capital isreviewed by management on an ongoing basis with reference to size, compositionand quality of Millennium’s resources and consistent with regulatoryrequirements and industry standards. Management seeks to maintain a capital structure that will supportanticipated asset growth and absorb any potential losses.

 

MillenniumBankshares and Millennium Bank are subject to regulatory capital requirementsof the Federal Reserve.  At December 31,2007, Millennium exceeded all such regulatory capital requirements as shown inthe following table.  As noted above,under the formal agreement, the Bank is required to achieve by March 31,2008 and thereafter maintain, higher minimum capital levels.

 

39

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| ** **                                      | ** ** | **December 31, 2007**             | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| **(Dollars in thousands)**                      | ** ** | **Millennium Bankshares  Corporation** | ** ** | **Millennium****Bank** | ** ** |
| **Tier 1 Capital:**                             |       |                                        |       |   |   |
| Common stock                                    |       | $                                           | 44,637     |   | $ | 14,800 |   |
| Capital surplus                                 |       | 4,757                                       |       | 29,800 |   |
| Trust preferred securities (1)                  |       | 8,000                                       |       | — |   |
| Retained earnings                               |       | (10,729                                     | )          | (7,600 | ) |
| Disallowed intangible assets                    |       | —                                      |       | — |   |
| Total Tier 1 Capital                            |       | 46,665                                      |       | 37,000 |   |
|                                            |       |                                        |       |   |   |
| **Tier 2 Capital:**                             |       |                                        |       |   |   |
| Allowance for loan losses (2)                   |       | 3,853                                       |       | 3,790 |   |
| Off balance sheet risk exposure                 |       | 136                                         |       | 136 |   |
| Trust preferred securities                      |       | —                                      |       | — |   |
| Total Tier 2 Capital                            |       | 3,989                                       |       | 3,926 |   |
| Total Risk Based Capital                        |       | $                                           | 50,654     |   | $ | 40,926 |   |
| Risk Weighted Assets                            |       |                                        |       |   |   |
|                                            |       |                                        |       |   |   |
| Capital Ratios:                                 |       |                                        |       |   |   |
| Tier 1 Risk-based                               |       | 12.65                                       | %          | 10.12 | % |
| Total Risk-based                                |       | 13.73                                       | %          | 11.20 | % |
| Tier 1 Capital to average adjusted total assets |       | 8.65                                        | %          | 6.91 | % |
|                                                 |            |                                             |            |  |  |  |  |  |  |  |

 

----

| (1) |   | Limited  to 25% of Tier 1 Capital. Remainder is Tier 2 capital. |
|-----|--------|-----------------------------------------------------------------|
| (2) |   | Limited  to 1.25% of risk weighted assets.                      |

 

**Off Balance Sheet Arrangements**

 

We****enterinto certain off-balance sheet arrangements in the normal course of business tomeet the financing needs of our customers. These off-balance sheet arrangements include commitments to extendcredit, standby letters of credit and financial guarantees which would impactour liquidity and capital resources to the extent customer’s accept and or usethese commitments. These instruments involve, to varying degrees, elements ofcredit and interest rate risk in excess of the amount recognized in the balancesheet. With the exception of these off-balance sheet arrangements, and theCorporation’s obligations in connection with its trust preferred securities, wehave no off-balance sheet arrangements that have or are reasonably likely tohave a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures, or capital resources, that is material to investors. The following table summarizes our off-balancesheet arrangements.

** **
| ** **                                               | ** ** | **Maturity by Period** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| **December 31, 2007 (in thousands)** | ** ** | **Less than  1 year**  | ** ** | **Greater  than 1 year  to 3 years** | ** ** | **Greater than  3 years to 5  years** | ** ** | **Greater than  5 years** | ** ** | **Total** | ** ** |
| Standby letters  of credit                               |       | $                                | 2,109      |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,109 |   |
| Commitments to  extend credit                            |       | 14,449                           |       | 11,291 |   | 1,446 |   | 21,974 |   | 49,160 |   |
| Mortgage banking  commitments:                           |       |                             |       |   |   |   |   |   |   |   |   |
| Rate lock  commitments                                   |       | $                                | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

40

----

 

Standby letters of creditrepresent commitments by us to repay a third party beneficiary when a customerfails to repay a loan or debt instrument. The terms and risk of loss involvedin issuing standby letters of credit are similar to those involved in issuingloan commitments and extending credit. In addition to credit risk, we also have liquidity risk associated withstand by letters of credit because funding for these obligations could berequired immediately.

 

Commitments to extendcredit are loan commitments, which assure a borrower of financing for aspecified period of time at a specified rate on a loan Millennium intends tohold in its portfolio.  The risk toMillennium under such commitments is limited to the terms of thecontracts.  For example, Millennium maynot be obligated to advance funds if the customer’s financial conditiondeteriorates or if the customer fails to meet specific covenants.  An approved loan commitment represents apotential credit risk once the funds are advanced to the customer.  This is also a liquidity risk since thecustomer may demand immediate cash that would require funding and interest raterisk as market interest rates may rise above the rate committed.

 

**Aggregate Contractual Obligations**

 

The following table summarizes our contractual obligations.

** **
| ** **                           | ** ** | **Maturity by Period at December 31, 2007** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Less than  1 year**                                           | ** ** | **Greater  than 1  year to 3  years** | ** ** | **Greater  than 3  years to 5  years** | ** ** | **Greater than  5 years** | ** ** | **Total** | ** ** |
| Deposits                             |       | $                                                                         | 245,196    |   | $ | 44,995 |   | $ | 3,262 |   | $ | — |   | $ | 293,453 |   |
| FHLB borrowings                      |       | 52,690                                                                    |       | 7,000 |   | 20,800 |   | 11,000 |   | 91,490 |   |
| Subordinated  debentures             |       | —                                                                    |       | — |   | — |   | 8,000 |   | 8,000 |   |
| Lease  commitments                   |       | 564                                                                       |       | 771 |   | 497 |   | 1,170 |   | 3,002 |   |
| Total                                |       | $                                                                         | 298,450    |   | $ | 52,766 |   | $ | 24,559 |   | $ | 20,170 |   | $ | 345,945 |   |

 

Deposits representnon-interest bearing, money market, savings, NOW, certificates of deposits,brokered and all other deposits held by the Company.  Amounts that have an indeterminate maturityperiod are included in the less than one-year category above.

 

FHLBborrowings represent the amounts that are due to the FHLB of Atlanta. Theseamounts have fixed maturity dates.  Someof these borrowings, although fixed, are subject to conversion provisions atthe option of the FHLB or Millennium can prepay these advances without apenalty.  Management does not believethese advances will be converted in the near term.

 

Lease commitmentsrepresent the total minimum lease payments under non-cancelable operatingleases.

 

**Impact of Inflation and Changing Prices and Seasonality**

 

Thefinancial statements that are included in this document have been prepared inaccordance with generally accepted accounting principles which require themeasurement of financial position and operating results in terms of historicaldollars, without considering changes in the relative purchasing power of moneyover time due to inflation.

 

Unlikeindustrial companies, virtually all of the assets and liabilities of afinancial institution are monetary in nature. As a result, interest rates have a more significant impact on afinancial institution’s performance than the effects of general levels ofinflation.  Interest rates do notnecessarily move in the same direction or in the same magnitude as the price ofgoods and services, since such prices are affected by inflation.

 

41

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ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following financialstatements are filed as a part of this Form 10-K.

Report of IndependentRegistered Public Accounting Firm

Consolidated BalanceSheets as of December 31, 2007 and 2006

Consolidated Statementsof Operations for the Years Ended December 31, 2007 and 2006

Consolidated Statementsof Changes in Stockholders’ Equity for the Years Ended December 31, 2007and 2006

Consolidated Statementsof Cash Flows for the Years Ended December 31, 2007 and 2006

Notes to ConsolidatedFinancial Statements

 

42

----

 

**Report Of IndependentRegistered Public Accounting Firm**

** **

Board of Directors andShareholders

Millennium BanksharesCorporation

Reston, Virginia

 

We have audited the accompanying consolidated balancesheets of MillenniumBankshares Corporation  as of December 31, 2007 and 2006 and the related consolidatedstatements of operations, changes in stockholders’ equity, and cash flows forthe years then ended.   These financialstatements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Millennium Bankshares Corporation as of December 31,2007 and 2006, and the results of its operations and its cash flows for theyears then ended, in conformity with U.S. generally accepted accountingprinciples.

 

 
|   | Crowe Chizek and  Company LLC |
|--------|-------------------------------|

 

Lexington, Kentucky

April 18, 2008

 

43

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MILLENNIUM BANKSHARES CORPORATION

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

 

(dollars in thousands, except share data)

 
| ** **                                                                                                              | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                    |       |       |       |       |       |
| **ASSETS**                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and due  from banks                                                                                                |       | $          | 3,894      |       | $          | 7,981 |   |
| Federal funds  sold                                                                                                     |       | 1,464      |       | 50,364     |       |
| Securities  available for sale                                                                                          |       | 173,476    |       | 172,703    |       |
| Restricted stock                                                                                                        |       | 6,541      |       | 4,449      |       |
| Loans receivable  (net of allowance for loan losses of $3,853 in 2007 and $3,441 in 2006)                               |       | 243,376    |       | 249,900    |       |
| Premises and  equipment, net                                                                                            |       | 1,846      |       | 1,848      |       |
| Accrued interest  receivable                                                                                            |       | 2,745      |       | 3,000      |       |
| Bank owned life  insurance                                                                                              |       | 13,149     |       | 12,645     |       |
| Other assets                                                                                                            |       | 2,945      |       | 2,814      |       |
| Deferred tax  assets                                                                                                    |       | 8,706      |       | 2,164      |       |
| Other real  estate owned                                                                                                |       | 1,811      |       | 74         |       |
| Assets of  discontinued operations                                                                                      |       | 58,361     |       | 83,600     |       |
|                                                                                                                    |       |       |       |       |       |
| **Total  Assets**                                                                                                       |       | $          | 518,314    |       | $          | 591,542 |   |
|                                                                                                                    |       |       |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                           |       |       |       |       |       |
|                                                                                                                    |       |       |       |       |       |
| **Liabilities**                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                                                                |       |       |       |       |       |
| Noninterest-bearing                                                                                                     |       | $          | 17,117     |       | $          | 28,366 |   |
| Interest-bearing                                                                                                        |       | 276,336    |       | 342,757    |       |
| Total Deposits                                                                                                          |       | 293,453    |       | 371,123    |       |
|                                                                                                                    |       |       |       |       |       |
| Federal funds  purchased and repurchase agreements                                                                      |       | 1,134      |       | —     |       |
| Advances from  Federal Home Loan Bank                                                                                   |       | 91,490     |       | 47,900     |       |
| Subordinated  debentures                                                                                                |       | 8,000      |       | 8,000      |       |
| Accrued interest  payable                                                                                               |       | 1,070      |       | 1,226      |       |
| Other accrued  expenses                                                                                                 |       | 1,113      |       | 4,068      |       |
| Liabilities of  discontinued operations                                                                                 |       | 83,574     |       | 111,673    |       |
| Total  Liabilities                                                                                                      |       | 479,834    |       | 543,990    |       |
|                                                                                                                    |       |       |       |       |       |
| **Stockholders’  Equity**                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock, $5  par value; authorized 10,000,000 shares; issued and outstanding 8,927,461 in  2007, 8,926,291 in 2006 |       | 44,637     |       | 44,631     |       |
| Additional  paid-in capital                                                                                             |       | 4,757      |       | 4,408      |       |
| Accumulated  other comprehensive loss                                                                                   |       | (185       | )          | (1,762     | )          |
| Retained  earnings (deficit)                                                                                            |       | (10,729    | )          | 275        |       |
| Total  Stockholders’ Equity                                                                                        |       | 38,480     |       | 47,552     |       |
|                                                                                                                    |       |       |       |       |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                    |       | $          | 518,314    |       | $          | 591,542 |   |

 

The Notes toConsolidated Financial Statements are an integral part of these statements.

 

44

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MILLENNIUM BANKSHARES CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2007 AND  2006

(Dollars in thousands, except share data)

 
| ** **                                                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Interest  Income**                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including  fees                                            |       | $          | 19,744     |       | $          | 17,871 |   |
| Securities                                                        |       | 7,036      |       | 4,968      |       |
| Federal funds  sold                                               |       | 359        |       | 401        |       |
| Total Interest  Income                                            |       | 27,139     |       | 23,240     |       |
|                                                              |       |       |       |       |       |
| **Interest  Expense**                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                          |       | 13,403     |       | 10,335     |       |
| Federal funds  purchased and repurchase agreements                |       | 20         |       | 59         |       |
| Advances from  Federal Home Loan Bank                             |       | 4,142      |       | 2,269      |       |
| Subordinated  debentures                                          |       | 775        |       | 781        |       |
| Total Interest  Expense                                           |       | 18,340     |       | 13,444     |       |
|                                                              |       |       |       |       |       |
| Net Interest  Income                                              |       | 8,799      |       | 9,796      |       |
|                                                              |       |       |       |       |       |
| **Provision  for Loan Losses**                                    |       | 2,005      |       | (19        | )          |
|                                                              |       |       |       |       |       |
| Net Interest  Income after Provision for Loan Losses              |       | 6,794      |       | 9,815      |       |
|                                                              |       |       |       |       |       |
| **Noninterest  Income**                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain on sale of  loans and loan fees, net                         |       | 334        |       | 501        |       |
| Service charges                                                   |       | 298        |       | 238        |       |
| Gain (loss) on  sale of securities                                |       | (5         | )          | 56         |       |
| Impairment  charge on investment securities                       |       | (1,197     | )          | —     |       |
| Income from bank  owned life insurance                            |       | 504        |       | 450        |       |
| Other income                                                      |       | 190        |       | 129        |       |
| Total Noninterest  Income                                         |       | 124        |       | 1,374      |       |
|                                                              |       |       |       |       |       |
| **Noninterest  Expense**                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Officers’ and  employees’ compensation and benefits     |       | 5,294      |       | 4,800      |       |
| Occupancy and  equipment expense                                  |       | 1,772      |       | 1,784      |       |
| Marketing,  promotion and advertising expense                     |       | 221        |       | 201        |       |
| Other operating  expense                                          |       | 3,739      |       | 2,669      |       |
| Total  Noninterest Expense                                        |       | 11,026     |       | 9,454      |       |
|                                                              |       |       |       |       |       |
| **Income  (loss) from Continuing Operations before Income Taxes** |       | (4,108     | )          | 1,735      |       |
|                                                              |       |       |       |       |       |
| **Provision  for Income Tax Expense (benefit)**                   |       | (2,087     | )          | 55         |       |
|                                                              |       |       |       |       |       |
| **Income  (loss) from Continuing Operations**                     |       | (2,021     | )          | 1,680      |       |
|                                                              |       |       |       |       |       |
| **Loss  from Discontinued Operations, net of tax**                |       | (8,447     | )          | (2,161     | )          |
|                                                              |       |       |       |       |       |
| **Net  loss**                                                     |       | $          | (10,468    | )          | $          | (481 | ) |

 

The Notes toConsolidated Financial Statements are an integral part of these statements.

 

45

----

 
| ** **                                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                               |       |       |       |       |       |
| **Earnings  (loss) per common share from continuing operations**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                              |       | $          | (0.23      | )          | $          | 0.19 |   |
| Diluted                                                            |       | $          | (0.23      | )          | $          | 0.18 |   |
|                                                               |       |       |       |       |       |
| **Earnings  (loss) per common share from discontinued operations** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                              |       | $          | (0.95      | )          | $          | (0.24 | ) |
| Diluted                                                            |       | $          | (0.95      | )          | $          | (0.24 | ) |
|                                                               |       |       |       |       |       |
| **Earnings  (loss) per common share**                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                              |       | $          | (1.17      | )          | $          | (0.05 | ) |
| Diluted                                                            |       | $          | (1.17      | )          | $          | (0.05 | ) |
|                                                               |       |       |       |       |       |
| **Dividends  per common share**                                    |       | $          | 0.06       |       | $          | 0.08 |   |
|                                                               |       |       |       |       |       |
| **Weighted  average shares outstanding**                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                              |       | 8,926,855  |       | 8,902,634  |       |
| Diluted                                                            |       | 8,926,855  |       | 9,115,857  |       |

 

The Notes toConsolidated Financial Statements are an integral part of these statements.

 

46

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MILLENNIUM BANKSHARES CORPORATION

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007 AND 2006

(Dollars in thousandsexcept share data)

 
| ** **                                                                                 | ** ** | ** **         | ** ** | ** ** | ** ** | **Addtional** | ** ** | ** **    | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|---------------|------------|---------------|------------|------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                 | ** ** | ** **         | ** ** | ** ** | ** ** | **Paid**      | ** ** | **Retained**  | ** ** | **Accumulated**              | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                                                                 | ** ** | **Number**         | ** ** | **Common** | ** ** | **in**        | ** ** | **Earnings**  | ** ** | **Other Comprehensive** | ** ** | ** ** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                 | ** ** | **of Shares** | ** ** | **Stock**  | ** ** | **Capital**   | ** ** | **(Deficit)** | ** ** | **Income (Loss)**       | ** ** | **Totals** | ** ** | **Income (Loss)** | ** ** |
| Balance,  January 1, 2006                                                             |       | 8,848,329          |       | $          | 44,241     |          | $          | 4,075         |       | $                            | 1,467      |       | $          | (2,090            | )          | $ | 47,693 |   |   |   |
|                                                                                       |       |               |       |       |       |          |       |          |       |                         |       |       |       |              |       |
| Options exercised                                                                          |       | 77,962             |       | 390        |       | 110           |       | —        |       | —                       |       | 500        |       |              |       |
| Stock  compensation expense                                                                |       |               |       |       |       | 223           |       | —        |       | —                       |       | 223        |       |              |       |
| Dividends paid                                                                             |       |               |       |       |       |          |       | (711          | )          |                         |       | (711       | )          |              |       |
| Changes in net  unrealized gain (loss) on securities available for sale, net of tax effect |       |               |       | —     |       | —        |       | —        |       | 328                          |       | 328        |       | $                 | 328        |   |
| Net loss                                                                                   |       | —             |       | —     |       | —        |       | (481          | )          | —                       |       | (481       | )          | (481              | )          |
|                                                                                       |       |               |       |       |       |          |       |          |       |                         |       |       |       |              |       |
| Balance,  December 31, 2006                                                           |       | 8,926,291          |       | 44,631     |       | 4,408         |       | 275           |       | (1,762                       | )          | 47,552     |       | (153              | )          |
|                                                                                       |       |               |       |       |       |          |       |          |       |                         |       |       |       |              |       |
| Options  exercised                                                                         |       | 1,170              |       | 6          |       | —        |       | —        |       | —                       |       | 6          |       |              |       |
| Stock compensation  expense                                                                |       |               |       | —     |       | 349           |       | —        |       | —                       |       | 349        |       |              |       |
| Dividends paid                                                                             |       |               |       |       |       |          |       | (536          | )          |                         |       | (536       | )          |              |       |
| Changes in net  unrealized gain (loss) on securities available for sale, net of tax effect |       |               |       | —     |       | —        |       | —        |       | 1,577                        |       | 1,577      |       | 1,577             |       |
| Net loss                                                                                   |       | —             |       | —     |       | —        |       | (10,468       | )          |                         |       | (10,468    | )          | (10,468           | )          |
|                                                                                       |       |               |       |       |       |          |       |          |       |                         |       |       |       |              |       |
| Balance,  December 31, 2007                                                           |       | $                  | 8,927,461  |       | $          | 44,637        |       | $             | 4,757      |                         | $          | (10,729    | )          | $                 | (185       | ) | $ | 38,480 |   | $ | (8,891 | ) |
|                                                                                            |            |                    |            |            |            |               |            |               |            |                              |            |            |            |                   |            |  |  |  |  |  |  |  |

 

The Notes toConsolidated Financial Statements are an integral part of these statements.

 

47

----

 

MILLENNIUM BANKSHARES CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007 AND 2006

(dollars in thousands, except share data)

 
| ** **                                                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net loss                                                                      |       | (10,468    | )          | (481       | )          |
| Non- cash items  included in net loss                                         |       |       |       |       |       |
| Depreciation and  amortization                                                |       | 575        |       | 633        |       |
| Depreciation and  amortization-discontinued operations                        |       | 80         |       | 80         |       |
| Provision for  loan losses, including discontinued operations                 |       | 2,005      |       | 153        |       |
| Amortization of  investment security premiums and accretion of discounts, net |       | 189        |       | 190        |       |
| Realized loss  (gain) on sale of investment securities available for sale     |       | 5          |       | (56        | )          |
| Impairment loss  on loans held for sale                                       |       | 12,625     |       | 2,965      |       |
| Impairment  charge on investment securities                                   |       | 1,197      |       | —     |       |
| Loss on disposal  of fixed assets                                             |       | 25         |       | —     |       |
| Loss on disposal  of other real estate owned                                  |       | 50         |       | —     |       |
| Stock compensation  expense                                                   |       | 349        |       | 223        |       |
| Income from bank  owned life insurance                                        |       | (504       | )          | (450       | )          |
| Changes in                                                                    |       |       |       |       |       |
| Loans held for  sale- discontinued operations                                 |       | 12,467     |       | (18,649    | )          |
| Accrued interest  receivable                                                  |       | 255        |       | (1,169     | )          |
| Accrued interest  receivable- discontinued operations                         |       | 15         |       | 12         |       |
| Other assets                                                                  |       | (10,319    | )          | (1,628     | )          |
| Other assets -  discontinued operations                                       |       | 61         |       | (106       | )          |
| Accrued interest  payable                                                     |       | (156       | )          | 497        |       |
| Accrued interest  payable- discontinued operations                            |       | (11        | )          | 6          |       |
| Other accrued  expenses                                                       |       | (2,957     | )          | 3,249      |       |
| Other accrued  expenses-discontinued operations                               |       | (3         | )          | (3         | )          |
| Net Cash  Provided by (Used in) Operating Activities                          |       | 5,480      |       | (14,534    | )          |
|                                                                          |       |       |       |       |       |
| **Cash  Flows from Investing Activities**                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Decrease (increase)  in federal funds sold                                    |       | 48,900     |       | (49,449    | )          |
| Loan  originations and payments, net                                          |       | 5,419      |       | (54,547    | )          |
| Loan  originations and payments, net- discontinued operations                 |       | 13         |       | 7,541      |       |
| Purchase of  securities available for sale                                    |       | (32,730    | )          | (59,293    | )          |
| Sales of securities  available for sale                                       |       | 22,291     |       | 3,178      |       |
| Maturities and pay  downs of securities available for sale                    |       | 8,573      |       | 7,691      |       |
| Purchase of bank  owned life insurance                                        |       | —     |       | (4,000     | )          |
| Payments for the  purchase of premises and equipment                          |       | (624       | )          | (117       | )          |
| Disbursements  for other real estate owned                                    |       | (1,766     | )          | —     |       |
| Proceeds from  disposal of other real estate owned                            |       | 1,907      |       | —     |       |
| Proceeds from  disposal of fixed assets                                       |       | 9          |       | —     |       |
| Net Cash  Provided by (Used In) Investing Activities                          |       | 51,992     |       | (148,996   | )          |
|                                                                          |       |       |       |       |       |
| **Cash  Flows from Financing Activities**                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common stock                                       |       | 6          |       | 500        |       |
| Cash dividends  paid                                                          |       | (536       | )          | (711       | )          |
| Net (decrease)  increase in deposits                                          |       | (77,670    | )          | 140,288    |       |
| Net (decrease)  increase in deposits- discontinued operations                 |       | (28,083    | )          | 43,444     |       |
| Net increase  (decrease) in FHLB borrowings                                   |       | 43,590     |       | (17,100    | )          |
| Net increase  (decrease) in Federal funds purchased and repurchase agreements |       | 1,134      |       | (215       | )          |
| Net Cash (Used  in) Provided by Financing Activities                          |       | (61,559    | )          | 166,206    |       |
|                                                                          |       |       |       |       |       |
| **Net  Change in Cash and Due from Banks**                                    |       | (4,087     | )          | 2,676      |       |
| ** **                                                                    |       |       |       |       |       |
| **Cash  and Due from Banks of Continuing Operations beginning of year**       |       | 7,981      |       | 5,305      |       |
| ** **                                                                    |       |       |       |       |       |
| **Cash  and Due from Banks of Continuing Operations, end of year**            |       | $          | 3,894      |       | $          | 7,981 |   |
| ** **                                                                    |       |       |       |       |       |
| **Supplemental  Cash Flow Information**                                       |       |       |       |       |       |
| ** **                                                                    |       |       |       |       |       |
| Interest Paid                                                                 |       | $          | 18,533     |       | $          | 10,731 |   |
| Taxes Paid                                                                    |       | —     |       | —     |       |
| Loans transferred to other real estate owned                                  |       | 3.589      |       | —     |       |
| ** **                                                                    |       |       |       |       |       |
| Net Change in Cash from Discontinued Operations                               |       | ($61       | )          | 107        |       |

 

The Notes to Consolidated Financial Statements are anintegral part of these statements.

 

48

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MILLENINUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Organizationand Principles of Consolidation**

** **

Theaccompanying consolidated financial statements include the accounts of theMillennium Bankshares Corporation (the Corporation) and its subsidiaries:Millennium Bank, N.A. and Millennium Financial, Inc.  All significant intercompany accounts andtransactions have been eliminated.  TheCorporation was incorporated in 1998 and began operations on April 1,1999.

 

MillenniumBank, N.A., (the Bank) is a federally chartered national bank and is subject toregulation by the Office of the Comptroller of the Currency (OCC).  The accounts of Millennium Bank, N.A. includeits subsidiary, Millennium Capital, Inc. and include other investmentswhose equity is not material to Millennium Bank, N.A.  The principal activities of the Bank are toattract deposits and originate loans. Millennium Capital, Inc., a wholly owned subsidiary of the Bank,conducted mortgage banking, as permitted by applicable regulations, fornationally chartered banks until August 31, 2005. In September 2005,three majority-owned operating subsidiaries engaged in mortgage banking beganoperations; Millennium Sunbelt Mortgage, LLC, Millennium Bank Mortgage, LLC andMillennium Hyland Mortgage, LLC (the “LLC’s”).  As of December 31, 2006, the Corporation determined that it was inits best interest to wind down its mortgage operating subsidiaries.  It was the Corporation’s desire to focusexclusively on core banking activities to eliminate, going forward, the risksnormally associated with mortgage banking activities.  The wind down decision was also precipitatedby credit quality issues that surfaced in the held for sale loan portfolioduring the fourth quarter 2006.  Accordingly,the results of the Corporation’s mortgage operations are presented as acomponent of discontinued operations on the income statement following theresults from continuing operations.

 

TheBank is engaged in the general business of banking, aimed at servingindividuals, small and medium sized businesses and the professional communitiesprincipally located throughout the Northern Virginia and Richmond, Virginiaareas.  The Bank conducts full-servicebanking operations from several branches in these areas and its headquarters islocated in Reston, Virginia.  In November 2007the Bank entered into an agreement for the sale of the assets and liabilitiesrelated to the two Richmond area branches, which was consummated in March 2008.  Accordingly, the results of the Corporation’sRichmond branches are presented as a component of discontinued operations onthe income statement following the results from continuing operations.

 

Theaccounting and reporting policies of the Corporation are in accordance withU.S. generally accepted accounting principles and conform to general practiceswithin the banking industry.  The moresignificant of these policies are discussed below.

 

**Reclassifications**

** **

Certainreclassifications have been made to prior period balances to conform to thecurrent year.

 

**Useof Estimates**

** **

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.  Actual results could vary from the estimatesthat were used.  Material estimates thatare particularly

 

49

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MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except sharedata)

 

**1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(continued)

** **

**Useof Estimates**(continued)

** **

susceptibleto significant change in the near term relate to the determination of theallowance for loan losses and the fair value of financial instruments.

 

Thedetermination of the adequacy of the allowance for loan losses is based onestimates that are particularly susceptible to significant changes in theeconomic environment and market conditions. In connection with the determination of the estimated losses on loans,management obtains independent appraisals for significant collateral.

 

**SignificantConcentrations**

** **

Mostof the Corporation’s activities are with customers located within the NorthernVirginia and Richmond, Virginia areas. Most of the Corporation’s loans are secured by real estate in theseareas.  Later footnotes discuss the typesof securities that the Corporation invests in and the types of lending theCorporation engages in.  The Corporationdoes not have any significant concentrations in any one customer.

 

TheCorporation’s primary source of income is interest income earned on loans andinvestment securities net of interest paid on deposit products and borrowings.

 

**InvestmentSecurities**

** **

Debtsecurities not classified as held-to-maturity and equity securities areclassified as available-for-sale.  Theamortization of premiums and accretion of discounts are recognized in interestincome using methods approximating the interest method over the period tomaturity without anticipating prepayments, except for mortgage-backedsecurities where prepayments are anticipated. Securities available-for-sale arecarried at fair value with unrealized gains and losses reported in othercomprehensive income, net of tax. Realized gains (losses) on securities available-for-sale are included inother income (expense).  Gains and losseson the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

 

Declinesin the fair value of securities below their cost that are deemed to be otherthan temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairmentlosses, management considers independent price quotations, projected targetprices of investment analysts within the short term and the financial conditionof the issuer.

 

**LoansHeld for Sale**

** **

Loansoriginated and intended for sale in the secondary market are aggregated intopools of loans with similar characteristics and carried at the lower of cost orestimated fair value in the aggregate for each pool.   Unrealized losses, if any, are recognizedthrough a valuation allowance by charges to income.  Loans later transferred to a long-terminvestment classification are transferred at the lower of cost or market valueon the transfer date.  Any differencebetween the carrying amount of the loan and its outstanding principal balanceat the time of transfer is recognized as an adjustment to yield by the interestmethod.

 

50

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(continued)

** **

**Loansand Loan Fees**

** **

TheCorporation grants mortgage, commercial and consumer loans to customers.  A substantial portion of the loan portfoliois represented by commercial and mortgage loans secured by real estate throughoutthe Northern Virginia and Richmond, Virginia areas.  The ability of the Corporation’s debtors tohonor their contracts is dependent upon the real estate and general economicconditions in these areas.

 

Loansthat management has the intent and ability to hold for the foreseeable futureor until maturity or pay-off generally are reported at their outstanding unpaidprincipal balances adjusted for charge-offs, the allowance for loan losses, andany deferred fees or costs on originated loans. Loan origination and commitment fees, as well as certain directorigination costs, are deferred and amortized as a yield adjustment over thelives of the related loans using the interest method without anticipatingprepayments.  Amortization of deferredloan fees is discontinued when a loan is placed on non-accrual status.

 

Theaccrual of interest on mortgage and commercial loans is discontinued at thetime the loan is 90 days delinquent unless the credit is well secured and inprocess of collection.  Credit card loansand other personal loans are typically charged off no later than 180 days pastdue.  In all cases, loans are placed onnon-accrual status or charged off at an earlier date if collection of principalor interest is considered doubtful.

 

Allinterest accrued but not collected for loans that are placed on non-accrual orcharged off is reversed against interest income.  The interest on these loans is accounted foron the cash-basis or cost-recovery method, until qualifying for return toaccrual.  Loans are returned to accrualstatus when all the principal and interest amounts contractually due arebrought current and future payments are reasonably assured.

 

**Allowancefor Loan Losses**

** **

Theallowance for loan losses is maintained at a level, which, in management’s judgment,is adequate to reflect probable incurred losses in the loan portfolio.  Loan losses are charged against the allowancewhen management believes the uncollectability of a loan balance isconfirmed.  Subsequent recoveries, ifany, are credited to the allowance. The amount of the allowance is based onmanagement’s evaluation of the collectibility of the loan portfolio, includingthe nature of the portfolio, credit concentrations, trends in historical lossexperience, specific impaired loans, economic conditions, and other risksinherent in the portfolio.  Allocationsof the allowance may be

 

51

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MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(continued)

** **

**Allowancefor Loan Losses**(continued)

** **

madefor specific loans, but the entire allowance is available for any loan that, inmanagement’s judgment, should be charged off.

 

Aloan is considered impaired when, based on current information and events, itis probable that the Corporation will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factors consideredby management in determining impairment include payment status, collateralvalue, and the probability of collecting scheduled principal and interestpayments due.  Loans that experienceinsignificant payment delays and payment shortfalls generally are notclassified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  Allowances for impaired loans are generallydetermined based on collateral values or the present value of estimated cashflows.  Although management usesavailable information to recognize losses on loans, because of uncertaintiesassociated with local economic conditions, collateral values, and future cashflows on impaired loans, it is reasonably possible that a material change couldoccur in the allowance for loan losses in the near term.  However, the amount of the change that isreasonably possible cannot be estimated. The allowance is increased by a provision for loan losses, which ischarged to expense and reduced by charge-offs, net of recoveries.  Changes in the allowance relating to impairedloans are charged or credited to the provision for loan losses.  Past due status is determined based oncontractual terms.

 

**ForeclosedAssets (Other Real Estate Owned)**

** **

Assetsacquired through or in instead of loan foreclosure are initially recorded atfair value less costs to sell when acquired establishing a new cost basis.  If fair value declines subsequent toforeclosure, a valuation allowance is recorded through expense. Operating costsafter acquisition are expensed.

 

**FederalHome Loan Bank Stock and Federal Reserve Bank Stock**

** **

TheBank, as a member of the Federal Home Loan Bank (FHLB) of Atlanta, is requiredto hold shares of capital stock in the FHLB consisting of two components;membership stock equal to the lesser of a specified percentage of the Bank’stotal assets on December 31 of the prior year, or 0.20 percent, plusactivity-based stock which is 4.50 percent times the Bank’s outstandingadvances from the FHLB.  This investmentis recorded at cost, carried as a restricted security, and periodicallyevaluated for impairment. Both cash and stock dividends are reported asincome.  The amount of FHLB stock was$5,168, and $3,052 at December 31, 2007, and 2006, respectively. The Bank,as a member of the Federal Reserve Bank (FRB) is also required to hold sharesof capital stock in the FRB.  This stockis recorded at cost, carried as a restricted security and periodically evaluatedfor impairment. The amount of FRB stock was $1,315 and $1,338 at December 31,2007 and 2006, respectively.

 

**Premisesand Equipment**

** **

**Premises and equipment are statedat cost, less accumulated depreciation and amortization.  Leasehold improvements are amortized over thelife of the lease using the straight-line method.**

 

52

----

 

**MILLENNIUM BANKSHARES CORPORATION**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**(continued)

** **

**Premisesand Equipment**(continued)

** **

Furnitureand equipment are depreciated over estimated useful lives of three to sevenyears using the straight-line method. Computer hardware and software are depreciated over estimated usefullives of three to five years using the straight-line method.  Automobiles are depreciated over theestimated useful live of three years using the straight-line method.  Expenditures for maintenance, repairs, andimprovements that do not materially extend the useful lives of property andequipment are charged to earnings.  Whenproperty or equipment is sold or otherwise disposed of, the cost and relatedaccumulated depreciation or amortization are removed from the respective accounts,and the resulting gain or loss is reflected in current earnings.

 

**BankOwned Life Insurance**

** **

**The Corporation has purchasedlife insurance policies on certain officers. The Corporation is the beneficiary and no value inures to theemployee.    Upon adoption of EITF 06-5,which is discussed further below, Bank Owned Life Insurance is recorded at theamount that can be realized under the insurance contract at the balance sheetdate, which is the cash surrender value adjusted for other charges or otheramounts due that are probable at settlement. Prior to adoption of EITF 06-5 the Corporation recorded owned lifeinsurance at its cash surrender value.**

** **

**In September 2006, the FASBEmerging Issues Task Force finalized Issue No. 06-5,  “Accounting for Purchases of LifeInsurance-Determining the Amount That Could Be Realized in Accordance with FASBTechnical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance”,(Issue). This Issue requires that a policyholder consider contractual terms ofa life insurance policy in determining the amount that could be realized underthe insurance contract.  It also requiresthat if the contract provides for a greater surrender value if all individualpolicies in a group are surrendered at the same time, that the surrender valuebe determined based on the assumption that policies will be surrendered on anindividual basis.   Lastly, the Issuerequires disclosure when there are contractual restrictions on the Corporation’sability to surrender a policy.   Theadoption of EITF 06-05 on January 1, 2007 had no impact on the Corporation’sfinancial statements.**

** **

**DividendPayment Restrictions**

** **

Federaland state banking regulations place certain restrictions on dividends paid andloans or advances made by the Bank to the Corporation.  The total amount of dividends that may bepaid in any calendar year is limited to the current years’ net profits,combined with the retained net profits of the preceding two years and loans oradvances from the Bank to the Corporation are limited to 10 percent of the Bank’scapital stock and surplus on a secured basis. At December 31, 2007, theBank had no retained earnings available for the payment of dividends.  No funds are available for loans or advancesby the Bank to the Corporation.

 

**IncomeTaxes**

** **

Incometax expense is the total of current year income tax due or refundable and thechange in deferred tax assets and liabilities. Deferred income tax assets andliabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax assetor liability is determined based on the tax effects of the temporarydifferences between the book and tax bases of the various balance sheet assetsand liabilities and gives current recognition to changes in tax rates and laws.A valuation allowance, if needed, reduces deferred tax assets to the amountexpected to be realized. The Bank paysstate franchise tax in lieu of state income taxes.

 

53

----

 

MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**1.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (**continued)

 

**Earningsper Common Share**

** **

Basicearnings per share represents income available to common stockholders dividedby the weighted-average number of common shares outstanding during theperiod.  Diluted earnings per sharereflects additional common shares that would have been outstanding if dilutivepotential common shares had been issued, as well as any adjustment to incomethat would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate tooutstanding stock options and are determined using the treasury stock method.Earnings and dividends per share are restated for all stock splits and stockdividends through the date of issuance of the financial statements

 

**StockCompensation Plans**

** **

Effective January 1,2006, the Corporation adopted Statement of Financial Accounting Standards (“SFAS”)No. 123R, “Share Based Payment.” The Company elected to utilize the modifiedprospective transition method; therefore, prior period results were notrestated. Prior to the adoption of SFAS 123R, stock-based compensation expenserelated to stock options was not recognized in the results of operations if theexercise price was at least equal to the market value of the common stock onthe grant date, in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.”

 

SFAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized as compensation expense over the service period (generally thevesting period) in the consolidated financial statements based on their fairvalues. For options with graded vesting, we value the stock option grants andrecognize compensation expense as if each vesting portion of the award was asingle award. Under the modified prospective method, unvested awards, andawards that were granted, modified, or settled on or after January 1, 2006are measured and accounted for in accordance with SFAS 123R.

 

**Statementsof Cash Flows**

** **

TheCorporation considers all cash and amounts due from depository institutions,excluding Federal funds sold, to be cash equivalents for purposes of thestatements of cash flows. Net cash flows are reported for loan, deposit andshort term borrowing transactions.

 

**Off-BalanceSheet Credit Related Financial Instruments**

** **

Inthe ordinary course of business, the Corporation has entered into commitmentsto extend credit, including commitments under credit card arrangements,commercial letters of credit, and standby letters of credit.  The face amount for these items representsthe exposure to loss, before considering customer collateral or ability torepay. Such financial instruments are recorded when they are funded.

 

54

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MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**1.    SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (**continued)

 

**Transfersof Financial Assets**

** **

Transfersof financial assets are accounted for as sales, when control over the assetshas been surrendered.  Control overtransferred assets is deemed to be surrendered when (1) the assets havebeen isolated from the Corporation, (2) the transferee obtains the right(free of conditions that constrain it from taking advantage of that right) topledge or exchange the transferred assets, and (3) the Corporation doesnot maintain effective control over the transferred assets through an agreementto repurchase them before their maturity.

 

**FairValue of Financial Instruments**

** **

Fairvalue of financial instruments are estimated using relevant market informationand other assumptions, as more fully disclosed in a separate note. Fair valueestimates involve uncertainties and matters of significant judgment regardinginterest rates, credit risk, prepayments, and other factors, especially in theabsence of broad markets for particular items. Changes in assumptions or inmarket conditions could significantly affect the estimates.

 

**ComprehensiveIncome**

** **

ComprehensiveIncome consists of net income and other comprehensive income.  Other comprehensive income includesunrealized gains and losses on securities available for sale which are also recognizedas separate components of equity.

 

**Recent Accounting Pronouncements**

 

In July 2006, the FASB released Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes.” This interpretation revises the recognitiontests for tax positions taken in tax returns such that a tax benefit isrecorded only when it is more likely than not that the tax position will beallowed upon examination by taxing authorities. The amount of such a taxbenefit to record is the largest amount that is more likely than not to beallowed. Any reduction in deferred tax assets or increase in tax liabilitiesupon adoption will correspondingly reduce retained earnings.  The adoption of FIN 48 had no effect onthe Corporation’s financial statements.

 

55

----

 

MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollarsin thousands, except share data)

 

**1.    SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (**continued)

 

**Recent Accounting Pronouncements**(continued)

 

In September 2006, the FASB issued Statement No. 157 (SFAS157), “Fair Value Measurements.” SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007 andinterim periods within those years.  TheCompany does not expect the implementation of SFAS 157 to have a materialimpact on its financial statements.

 

In February 2007, the FASB issued Statement No. 159 (SFAS 159),“The Fair Value Option for Financial Assets and Liabilities.” SFAS 159 allowsentities the option to measure eligible financial instruments at fair value asof specified dates. Such election, which may be applied on aninstrument-by-instrument basis, is typically irrevocable once elected. SFAS 159is effective for fiscal years beginning after November 15, 2007, and earlyapplication is allowed under certain circumstances.  The Corporation is evaluating the impact ofthis new standard, but currently believes that adoption, if and when elected,will not have a material impact on its financial statements.

 

**2.    SUBSEQUENTEVENTS**

** **

**Supervisory Action**

 

OnJanuary 24, 2008, the Bank entered into a formal written agreement (the “Agreement”)with the Office of the Comptroller of the Currency (the “OCC”).  The Agreement requires the Bank to undertakecertain actions within designated timeframes, and to operate in compliance withthe provisions thereof during its term. TheAgreement is based on the results of an examination of the Bank by the OCCcommenced as of July 23, 2007

 

Theprovisions of the Agreement include the following: (i) By March 31,2008, The Bank is required to achieve and thereafter maintain a totalrisk-based capital ratio equal to 13% of risk-weighted assets, a tier 1 capitalratio equal to 12% of risk-weighted assets, and a leverage ratio equal to 10%of adjusted total assets; (ii) Within 60 days, the Board of Directors ofthe Bank (the “Board”) is required to adopt and implement a three year capitalprogram, which must be submitted to the OCC for review and prior determinationof no supervisory objection; (iii) Within 120 days, the Board is requiredto adopt and implement a three-year strategic plan which must be submitted tothe OCC for review and prior determination of no supervisory objection; (iv) Within60 days, the Board is required to submit for supervisory review a capableSenior Lending Officer; (v) Within 90 days, the Board is required to adoptand implement a written program to improve the Bank’s loan portfoliomanagement; (vi) Within 120 days, the Board  is required to adopt and implement systemswhich provide for effective monitoring of problem loans, credit administration,compliance with law, and concentrations of credit; (vii) Within 90 days,the Board is required to adopt and implement a written program to eliminate thebasis for criticism of assets identified as problem assets; (viii) Within90 days, the Board is required to adopt and implement a written risk managementprogram; (ix) Within 60 days, the Board is required to review and revisethe Bank’s written loan policy; (x) Within 30 days of implementation ofthe new credit diagnostic system, and no later than May 31, 2008, the Boardis required to adopt and implement a written asset diversification program;(xi) Within 60 days, the

 

56

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollarsin thousands, except share data)

 

**2.    SUBSEQUENTEVENTS (**continued)

** **

**Supervisory Action**(continued)

 

Boardis required to review the adequacy of the Bank’s Allowance for Loan and LeaseLosses and establish a program for the maintenance of an adequate Allowance;(xii) Within 60 days, the Board is required to establish an effective,independent and ongoing loan review system to review, at least quarterly, theBank’s loan and lease portfolios to assure the timely identification andcategorization of problem credits and portfolio trends; (xiii) Within 90 days,the Board is required to adopt and implement a written liquidity, asset andliability management policy; (xiv) Within 60 days, the Board is required tosubmit for supervisory review a capable, full-time Bank Secrecy Act Officer;and (xv) Within 90 days, the Board is required to ensure that the Bankcompletes the BSA Risk Assessment, and thereafter, the Board shall review andapprove the BSA Risk Assessment annually. Compliance with the Agreement is tobe monitored by a committee (the “Committee”) of at least five directors, noneof whom is an employee of the Bank or a family member of an employee.  The Committee is required to submit writtenprogress reports on a monthly basis and the Agreement requires the Bank to makeperiodic reports and filings with the OCC.

 

Failureto comply with the provisions of the Agreement could subject the Bank and itsdirectors to additional enforcement actions. While the Corporation intends to take such actions as may be necessary toenable the Bank to comply with the requirements of the Agreement, there can beno assurance that the Bank will be able to comply fully with the provisions ofthe Agreement, or to do so within the timeframes required, that compliance withthe Agreement will not be more time consuming or more expensive thananticipated, or that compliance with the Agreement will enable the Corporationand Bank to resume profitable operations, or that efforts to comply with theAgreement, or to refocus the Bank as a traditional community bank, will nothave adverse effects on the operations and financial condition of the Company.

 

InJuly 2007, Richard Linhart joined the Bank as President and CEO.  With the support of the Bank’s Board ofDirectors and under Mr. Linhart’s leadership, the Bank began initiating aseries of corrective actions commencing in July 2007 in response toanticipated final findings of the OCC’s examiners.  Among the actions taken are the following:

 

·                  The Bankentered into an agreement on November 30, 2007 to sell its two Richmondbranches for a 9.25% premium on the outstanding deposits on the effective dateof the transaction, plus the net book value of the loans and certain otherassets. This transaction was consummated in March 2008 at which time a pre-taxgain of $8.5 million was recorded.

 

·                  The Bankbegan evaluating options in connection with the Held For Sale/Repurchased Loanportfolio culminating in a bulk sale executed in February 2008.

 

·                  The Bank isimplementing a new system (Credit Quest), which is expected to strengthen thecredit underwriting, and administration function.

 

·                  The Bank hasapproved a new commercial loan policy.

 

·                  The Bank hasretained a new external loan review firm.

 

·                  The Bank hashired a new Chief Lending Officer and has hired other loan officers withsubstantial Northern Virginia experience and contacts.

 

57

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollarsin thousands, except share data)

 

**2.    SUBSEQUENTEVENTS**(continued)

** **

**Supervisory Action**(continued)

 

·                  Changes inorganizational responsibilities including separating the Chief Lending Officerposition from the Chief Credit Officer position.

 

Thesesteps are designed to improve risk management, enhance internal controls overcredit administration, focus on the Northern Virginia market, and return theBank to core community banking.  The saleof the Richmond branches and the concomitant sale of securities will shrink theBank’s balance sheet, enhance capital ratios, and improve the Bank’s liquidityposition.

 

**Richmond Branches**

 

OnMarch 14, 2008, the Corporation announced that it had completed the saleof its two branches in the Richmond, Virginia market to EVB, a wholly ownedsubsidiary of Eastern Virginia Bankshares (Nasdaq: EVBS).  EVB assumed the deposits, fixed assets, andcertain of the outstanding loans of the Colonial Heights and Broad Streetbranches and paid the Bank a premium on the outstanding deposits on theeffective date of the transaction.    Thesale was part of a series of strategic transactions designed to reposition theBank as a smaller community bank concentrating exclusively in the NorthernVirginia market.  As of December 31,2006, the Corporation determined that it was in its best interest to wind downits mortgage operating subsidiaries.  Itwas the Corporation’s desire to focus exclusively on core banking activitiesgoing forward to eliminate, going forward, the risks normally associated withmortgage banking activities.  The winddown decision was further precipitated by credit quality issues that surfacedin the held for sale loan portfolio during the fourth quarter 2006.

 

**BulkSale**

 

Results in 2007 were negatively impactedby losses from discontinued operations, as additional valuation reserves wererequired as a result of additional loan repurchases due to early paymentdefault coupled with rapid deterioration in liquidation values due toincreasing turmoil in the housing and credit markets.   To avoid further exposure to losses due tomarket conditions and extended delays in resolution, the Bank, on February 7,2008, entered into an agreement to sell its entire portfolio of held for saleand repurchased mortgage loans (the “Portfolio”) to Beltway Capital, HuntValley, Maryland. The transaction closed on February 8, 2008. Prior to thesale, the loan balance of the Portfolio aggregated $31.3 million, against whichthe Bank had total reserves of $6.9 million at December 31, 2007.  The portfolio consisted of $5.7 million ofcurrent performing loans, $11.9 million of delinquent loans, $13.0 million ofloans in various stages of foreclosure, and $0.7 million in properties held inother real estate owned. The wholesale bulk sale price paid by Beltway was43.55% of the outstanding loan balance, or $13.6 million plus accruedinterest.  As a result, the Bankestablished an additional valuation allowance as of December 31, 2007,resulting in a charge to earnings of $10.8 million, or $7.1 million net oftaxes.  This valuation allowance is inaddition to and separate from the allowance for loan losses.  The valuation allowance was originallyestablished by a charge to earnings in December 2006 and was furtherincreased by additional charges to earnings during the 3rd and 4thquarter of 2007.

** **

**3.   DISCONTINUED OPERATIONS**

 

OnDecember 3, 2007, the Corporation announced that the Bank had entered intoa purchase and assumption agreement (the “Agreement”) to sell its two branchesin the Richmond, Virginia market to EVB, a wholly owned subsidiary of EasternVirginia Bankshares (Nasdaq: EVBS). Accordingly, the results of the two Richmond branches are included as acomponent of discontinued operations

 

58

----

 

MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollarsin thousands, except share data)

 

**3.    DISCONTINUED OPERATIONS**(continued)

** **

Asof December 31, 2006, we determined that it was in our best interest to winddown our mortgage operating subsidiaries. It was our desire to focusexclusively on core banking activities to eliminate, going forward, the risksnormally associated with mortgage banking activities. The wind down decisionwas also precipitated by credit quality issues that surfaced in the held forsale loan portfolio during the fourth quarter 2006. Accordingly, the results ofour mortgage operations are included as one of the components of discontinuedoperations.

 

Theresults of the Corporation’s mortgage operations and the Richmond branches arepresented in a separate category on the income statement following the resultsfrom continuing operations.

 

**STATEMENTOF INCOME FOR DISCONTINUED OPERATIONS**

** **
| ** **                                                    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest  Income**                                          |       | $          | 6,056      |       | $          | 8,373 |   |
| **Interest  Expense**                                         |       | 5,461      |       | 5,581      |       |
| Net Interest  Income                                          |       | 595        |       | 2,792      |       |
| **Provision  for Loan Losses**                                |       | —     |       | 172        |       |
| Net Interest  Income after Provision for Loan Losses          |       | 595        |       | 2,620      |       |
|                                                          |       |       |       |       |       |
| **Noninterest  Income**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gain (loss) on  sale of loans and loan fees, net              |       | (12,441    | )          | (1,811     | )          |
| Other income                                                  |       | 113        |       | 163        |       |
| Total  Noninterest Income                                     |       | (12,328    | )          | (1,648     | )          |
|                                                          |       |       |       |       |       |
| **Noninterest  Expense**                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Officers’ and  employees’ compensation and benefits |       | 562        |       | 742        |       |
| Occupancy and  equipment expense                              |       | 282        |       | 228        |       |
| Marketing,  promotion and advertising expense                 |       | 6          |       | 5          |       |
| Other operating  expense                                      |       | 215        |       | 3,271      |       |
| Total  Noninterest Expense                                    |       | 1,065      |       | 4,246      |       |
| **Loss  from Discontinued Operations before Income Taxes**    |       | (12,798    | )          | (3,274     | )          |
| ** **                                                    |       |       |       |       |       |
| **Tax  Benefit**                                              |       | (4,351     | )          | (1,113     | )          |
| ** **                                                    |       |       |       |       |       |
| **Loss  from Discontinued Operations**                        |       | $          | (8,447     | )          | $          | (2,161 | ) |

 

Forthe year ended December 31, 2007 and 2006, the loss from discontinued mortgageoperations totaled $(9,118) and $(2,994). For the year ended December 31, 2007and 2006, the income from discontinued operations related to the Richmondbranches totaled $671 and $833.

 

AtDecember 31, 2007 there were $12.7 million in loans held for saleattributable to discontinued operations. Included in the carrying amount forloans held for sale is a $17.2 million lower of cost or market adjustment. Theexpense associated with this adjustment is reflected as a contra revenue itemin gain on sale of loans, net.   Otheroperating expense for 2006 includes a $2.9 million charge to establish areserve for potential off-balance sheet exposure associated with loans alreadysold to investors.  Investor agreementsprovide that the seller must buyback the loan under certain conditions, such asearly payment default, and management determined at December 31, 2006 thatit was more likely than not that buyback conditions occurred in some of theproduction sold to investors, particularly for identified loans that wereoriginated under sub prime underwriting guidelines.

 

59

----

 

MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**3.    DISCONTINUED OPERATIONS**(continued)

** **

Thetables below set forth the assets and liabilities of discontinued operations.

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash                                 |       | $                     | 245        |   | $ | 307 |   |
| Loans                                |       | 45,144                |       | 45,157 |   |
| Loans held for  sale                 |       | 12,636                |       | 37,728 |   |
| Fixed assets                         |       | 125                   |       | 182 |   |
| Other assets                         |       | 211                   |       | 226 |   |
| Assets of  discontinued operations   |       | $                     | 58,361     |   | $ | 83,600 |   |

** **
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**    | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Deposits                                |       | $                     | 83,523     |   | $ | 111,606 |   |
| Other  liabilities                      |       | 51                    |       | 67 |   |
| Liabilities of  discontinued operations |       | $                     | 83,574     |   | $ | 111,673 |   |

 

At December 31, 2007 and 2006, total assets related tothe discontinued mortgage operations were $12.6 million and $37.7 million. AtDecember 31, 2007 and 2006, total liabilities related to the discontinuedmortgage operations were $0 and $0.

 

At December 31, 2007 and 2006, total assets related tothe discontinued Richmond branches were $45.7 million and $45.9 million. AtDecember 31, 2007 and 2006, total liabilities related to the discontinuedRichmond branches were $83.6 million and $111.7 million.

 

Otheroperating expenses consist of the following:

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Dues and fees                     |       | $        | 28         |     | $          | 29 |   |
| Meetings and  seminar expense     |       | 9        |       | 9        |       |
| Miscellaneous  operating expenses |       | 43       |       | 252      |       |
| Office expenses                   |       | 44       |       | 48       |       |
| Other operating  losses           |       | 3        |       | 9        |       |
| Outside services                  |       | 1        |       | 2        |       |
| Professional  fees                |       | 62       |       | —   |       |
| Other loan  expense               |       | 25       |       | 2,922    |       |
| Total Other  Operating Expenses   |       | $        | 215        |     | $          | 3,271 |   |

 

**4.     RESTRICTIONS ON CASH AND AMOUNTS DUE FROMBANKS**

** **

The Bank is requiredto maintain a certain amount of cash on hand or with the Federal ReserveBank.  At December 31, 2007 and 2006the required reserve balances amounted to $654 and $3,175, respectively.

 

On January 28, 2008the Bank was notified by the Federal Reserve that it had been placed on thereal-time monitor and was no longer eligible for its Exempt Cap, meaning thatdaylight overdrafts were no longer permitted.  Concurrent with this notification, the Bank was required to pledgecollateral in the amount of $1.7 million. 

 

60

----

 

MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**5.    **SECURITIES AVAILABLEFOR SALE

** **

Theamortized cost and fair value of securities available for sale as shown in thebalance sheets of the Corporation are as follows:

 
| ** **                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                             | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| December 31,  2007                |       |          |       |           |       |           |       |       |       |
| U.S. Government  and Agency securities |       | $             | 61,722     |           | $          | 189            |       | $          | (6         | ) | $ | 61,905 |   |
| Mortgage-backed  securities            |       | 48,508        |       | 194            |       | (167           | )          | 48,535     |       |
| States and  political subdivisions     |       | 54,777        |       | 34             |       | (366           | )          | 54,445     |       |
| Other debt  securities                 |       | 8,749         |       | 15             |       | (173           | )          | 8,591      |       |
| Total Debt  Securities                 |       | $             | 173,756    |           | $          | 432            |       | $          | (712       | ) | $ | 173,476 |   |

 
| ** **                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                             | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| December 31,  2006                |       |          |       |           |       |           |       |       |       |
| U.S. Government  and Agency securities |       | $             | 72,160     |           | $          | 20             |       | $          | (1,583     | ) | $ | 70,597 |   |
| Mortgage-backed  securities            |       | 50,716        |       | 29             |       | (731           | )          | 50,014     |       |
| States and  political subdivisions     |       | 43,695        |       | 41             |       | (372           | )          | 43,364     |       |
| Other debt  securities                 |       | 8,802         |       | 8              |       | (82            | )          | 8,728      |       |
| Total Debt  Securities                 |       | $             | 175,373    |           | $          | 98             |       | $          | (2,768     | ) | $ | 172,703 |   |

 

Theamortized cost and fair value of debt securities available for sale at December 31,2007 by contractual maturity were as follows. Mortgage-backed securities, which are not due at a single maturity date,are shown separately.

 
| ** **                          | ** ** | ** **    | ** ** | **Fair**   | ** ** |
|-------------------------------------|------------|---------------|------------|------------|------------|
| ** **                          | ** ** | **Amortized** | ** ** | **Market** | ** ** |
| ** **                          | ** ** | **Cost**      | ** ** | **Value**  | ** ** |
| Less than one  year                 |       | $             | 4,985      |       | $          | 4,985 |   |
| After one year  through five years  |       | 44,573        |       | 44,656     |       |
| After five years  through ten years |       | 23,451        |       | 23,579     |       |
| After ten years                     |       | 52,239        |       | 51,721     |       |
| Mortgage-backed  securities         |       | 48,508        |       | 48,535     |       |
|                                |       | $             | 173,756    |       | $          | 173,476 |   |

 

61

----

 

MILLENNIUMBANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollarsin thousands, except share data)

 

**5.    SECURITIES AVAILABLE FOR SALE** (continued)

** **

**Investment securities with a carrying amount of $110,439and $99,244 at December 31, 2007 and 2006 respectively, were pledged ascollateral for Federal Home Loan Bank and Community Bankers Bank advances, tosecure repurchase agreements and for other purposes as required or permitted bylaw.**

** **

**During 2007 and 2006, proceeds from the sale of investmentsecurities totaled $22,291 and $3,178, respectively, with gross realized gainsof $55 and $56, and gross realized losses of $60 and $0, respectively.**

** **

**Securities with unrealized losses atyear-end 2007 and 2006, aggregated by investment category and length of timethat individual securities have been in a continuous unrealized loss position,are as follows:**

 
| ** **                               | ** ** | **December 31, 2007**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | ** **                             | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                               | ** ** | **Fair**                               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(Dollars in thousands)**     | ** ** | **Value**                              | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Government  and Agencies securities |       | $                                      | 3,984      |   | $ | (6 | ) | $ | — |   | $ | — |   | $ | 3,984 |   | $ | (6 | ) |
| Mortgage-backed  securities              |       | 802                                    |       | — |   | 15,008 |   | (167 | ) | 15,810 |   | (167 | ) |
| States and  political Subdivisions       |       | 12,565                                 |       | (347 | ) | 1,651 |   | (19 | ) | 14,216 |   | (366 | ) |
| Other debt  securities                   |       | 2,371                                  |       | (121 | ) | 2,455 |   | (52 | ) | 4,826 |   | (173 | ) |
|                                     |       | $                                      | 19,722     |   | $ | (474 | ) | $ | 19,114 |   | $ | (238 | ) | $ | 38,836 |   | $ | (712 | ) |

 
| ** **                               | ** ** | **December 31, 2006**        | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | ** **                             | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                               | ** ** | **Fair**                               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **(Dollars in thousands)**     | ** ** | **Value**                              | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Government  and Agencies securities |       | $                                      | 3,158      |   | $ | (7 | ) | $ | 58,728 |   | $ | (1,576 | ) | $ | 61,886 |   | $ | (1,583 | ) |
| Mortgage-backed  securities              |       | 14,327                                 |       | (44 | ) | 24,914 |   | (687 | ) | 39,241 |   | (731 | ) |
| States and  political Subdivisions       |       | 18,758                                 |       | (200 | ) | 10,227 |   | (172 | ) | 28,985 |   | (372 | ) |
| Other debt  securities                   |       | 7,463                                  |       | (82 | ) | — |   | — |   | 7,463 |   | (82 | ) |
|                                     |       | $                                      | 43,706     |   | $ | (333 | ) | $ | 93,869 |   | $ | (2,435 | ) | $ | 137,575 |   | $ | (2,768 | ) |

 

At December 31,2007, management identified a pool of approximately $100 million of investmentsecurities that it intended to sell during the 1st quarter of 2008to partially fund the sale of the Richmond branches and to deleverage thebalance sheet in conjunction with a balance sheet repositioning strategy.   Included in the investment securitiesidentified for sale were $78.5 million of investment securities for which thefair value was less than book value.  Since we no longer had the intent and ability to hold these bonds torecovery, the unrealized loss could no longer be deemed temporary therefore at December 31,2007, the Bank recorded a $1.2 million (pre-tax) impairment charge on thesesecurities.   As a result of the priceimprovements realized due to changes in the yield curve since December 31,2007, we estimate that we will recognize a gain on the sale of these securitiesof approximately $800,000 (pre-tax) during the first quarter 2008.

 

62

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollarsin thousands, except share data)

 

**5.    SECURITIES AVAILABLE FOR SALE** (continued)

** **

Thefollowing table sets forth the dollar amount of the other than temporaryimpairment charge recorded in 2007, by investment sector.

 
| **(Dollars in thousands)**    | ** ** | **Amortized Cost  Prior to Impairment  Charge** | ** ** | **Impairment  Charge** | ** ** | **Amortized Cost and  Fair Value After  Impairment Charge** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------------------------------------------|------------|
| U. S. Government  and Agency securities |       | $                                                              | 33,699     |                   | $          | 269                                                                                  |       | $ | 33,430 |   |
| Mortgage-backed  securities             |       | 10,697                                                         |       | 169                    |       | 10,528                                                                               |       |
| States and  political subdivisions      |       | 34,124                                                         |       | 759                    |       | 33,365                                                                               |       |
| Total Debt  Securities                  |       | $                                                              | 78,520     |                   | $          | 1,197                                                                                |       | $ | 77,323 |   |

** **

**Other than those bonds earmarked forsale in conjunction with the sale of the Richmond branches, unrealized losseson bonds have not been recognized into income because the bonds are investmentgrade, management has the intent and ability to hold for the foreseeablefuture, and the decline in fair value is due to changes in market interestrates, not in estimated cash flows.  Thefair value is expected to recover as the bonds approach their maturity date orreset date.**

** **

**6.    LOANS RECEIVABLE**

 

Loans receivable include the following at December 31:

 
|                        |
|-----------------------------|
| ** **                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Real estate  loans          |   |   |   |   |   |
| Mortgage                    |   | $ | 69,175 |   | $ | 73,661 |   |
| Commercial                  |   | 90,024 |   | 101,251 |   |
| Construction                |   | 57,098 |   | 48,991 |   |
| Total real  estate loans    |   | 216,297 |   | 223,903 |   |
| Commercial                  |   | 18,792 |   | 17,123 |   |
| Consumer                    |   | 12,225 |   | 12,514 |   |
| Overdrafts                  |   | 25 |   | 22 |   |
| Subtotal                    |   | 247,339 |   | 253,562 |   |
| Allowance for  loan losses  |   | (3,853 | ) | (3,441 | ) |
| Deferred loan  costs (fees) |   | (110 | ) | (221 | ) |
| Total Loans                 |   | $ | 243,376 |   | $ | 249,900 |   |

 
| An analysis of the allowance for loan losses is as  follows at December 31: |
|----------------------------------------------------------------------------------|
|                                                                             |
| ** **                                                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance  beginning of period                                                     |   | $ | 3,441 |   | $ | 3,215 |   |
| Provision for  loan losses                                                       |   | 2,005 |   | (19 | ) |
| Provision  attributable to discontinued operations                               |   | — |   | 172 |   |
| Loans charged to  reserve                                                        |   | (1,648 | ) | — |   |
| Recoveries  credited to reserve                                                  |   | 55 |   | 73 |   |
| Totals                                                                           |   | $ | 3,853 |   | $ | 3,441 |   |

 

The provision for loans lossesattributable to discontinued operations relate to losses recognized onportfolio loans made to provide operating capital to the 49% owners of the LLC’sin conjunction with their mortgage operations.

 

63

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**6.    LOANS RECEIVABLE**(continued)

 
| ** **                                                  | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(Dollars in thousands)**                        | ** ** | **Portfolio**                   | ** ** | **Held For Sale**     | ** ** | **Portfolio** | ** ** |
|                                                        |       |                            |       |                            |       |   |   |
| Non-accrual  loans                                          |       | $                               | 13,711     |                            | 9,370      |   | $ | 3,043 |   |
| Foreclosed  properties                                      |       | 1,811                           |       | 763                             |       | 74 |   |
| Total  non-performing assets                                |       | $                               | 15,522     |                            | $          | 10,133 |   | $ | 3,117 |   |
| Loans past due  90 days or more and still accruing interest |       | $                               | 874        |                            | $          | — |   | $ | 379 |   |

 

Mortgage loans totaling $36.3 million and$15.5 million were pledged as collateral for Federal Home Loan Bank advances atDecember 31, 2007 and December 31, 2006, respectively, under ablanket floating lien.

 

Informationregarding impaired loans is as follows:

 
| ** **                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Loans with no  allocated allowance for loan losses            |       | $                     | —     |   | $ | — |   |
| Loans with  allocated allowance for loan losses               |       | 13,711                |       | 3,043 |   |
| Total                                                         |       | $                     | 13,711     |   | $ | 3,043 |   |
|                                                          |       |                  |       |   |   |
| Amount of the  allowance for loan losses allocated            |       | $                     | 288        |   | $ | 555 |   |
| Average  investment in impaired loans                         |       | $                     | 21,070     |   | $ | 1,651 |   |
| Interest income  recognized during impairment                 |       | $                     | —     |   | $ | — |   |
| Interest income  recognized on a cash basis on impaired loans |       | $                     | —     |   | $ | — |   |

 

Noadditional funds are committed to be advanced in connection with the impairedloans above.

 

**7.    PREMISES AND EQUIPMENT**

** **

Premisesand equipment include the following at December 31:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Furniture and  equipment                        |       | $        | 4,863      |     | $          | 4,664 |   |
| Leasehold  improvements                         |       | 1,873    |       | 1,646    |       |
| Total cost                                      |       | 6,736    |       | 6,310    |       |
| Less accumulated  depreciation and amortization |       | (4,890   | )          | (4,462   | )          |
| Premises and  equipment, net                    |       | $        | 1,846      |     | $          | 1,848 |   |

 

Depreciation of premises and equipmentfrom continuing operations charged to expense amounted to $575 and $633 in 2007and 2006, respectively.

 

64

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**8.    DEPOSITS**

** **

Time deposits in denominations of$100,000 or more totaled $69,471 at year-end 2007 and $65,953 at year-end2006.  Time deposits mature as follows atDecember 31, 2007:

 
| 2008  |   | $      | 164,362 |   |
|-------|--------|--------|---------|--------|
| 2009  |   | 34,150 |    |
| 2010  |   | 6,688  |    |
| 2011  |   | 3,381  |    |
| 2012  |   | 4,038  |    |
| Total |   | $      | 212,619 |   |

 

**9.    BORROWINGS**

** **

The Corporation had borrowingsoutstanding as follows:

 
| ** **                       | ** ** | **Interest** | ** ** | ** **             | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| **December 31, 2007:** | ** ** | **Rate**     | ** ** | **Maturity**           | ** ** | **Amount** | ** ** |
| Federal Home  Loan Bank (1)      |       |         |       |                   |       |       |       |
| Advances                         |       | 5.16         | %          | April 18, 2008    |       | $          | 10,000     |   |
| Advances                         |       | 4.40         | %          | May 9, 2008       |       | 15,090     |       |
| Advances                         |       | 5.21         | %          | June 2, 2008      |       | 2,500      |       |
| Advances                         |       | 5.12         | %          | June 11, 2008     |       | 5,000      |       |
| Advances                         |       | 4.51         | %          | July 25, 2008     |       | 1,500      |       |
| Advances                         |       | 5.07         | %          | August 13, 2008   |       | 5,000      |       |
| Advances                         |       | 5.08         | %          | October 20 2008   |       | 10,000     |       |
| Advances                         |       | 4.36         | %          | December 22, 2008 |       | 3,600      |       |
| Advances                         |       | 5.26         | %          | July 27, 2009     |       | 5,000      |       |
| Advances                         |       | 4.64         | %          | July 26, 2010     |       | 2,000      |       |
| Advances                         |       | 5.45         | %          | March 29, 2011    |       | 800        |       |
| Advances                         |       | 5.11         | %          | June 20, 2011     |       | 5,000      |       |
| Advances                         |       | 4.40         | %          | March 1, 2012     |       | 5,000      |       |
| Advances                         |       | 4.31         | %          | March 8, 2012     |       | 5,000      |       |
| Advances                         |       | 4.61         | %          | March 8, 2012     |       | 5,000      |       |
| Advances                         |       | 5.32         | %          | June 28, 2016     |       | 5,000      |       |
| Advances                         |       | 4.51         | %          | February 21, 2017 |       | 6,000      |       |
|                             |       |         |       |                   |       | $          | 91,490     |   |

 

65

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**9.    BORROWINGS**(continued)

** **
| ** **                       | ** ** | **Interest** | ** ** | ** **             | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| **December 31, 2006:** | ** ** | **Rate**     | ** ** | **Maturity**           | ** ** | **Amount** | ** ** |
| Federal Home  Loan Bank          |       |         |       |                   |       |       |       |
| Advances                         |       | 5.46         | %          | February 13, 2007 |       | 5,000      |       |
| Advances                         |       | 5.43         | %          | June 11, 2007     |       | 5,000      |       |
| Advances                         |       | 4.41         | %          | July 25, 2007     |       | 1,500      |       |
| Advances                         |       | 3.44         | %          | October 9, 2007   |       | 1,000      |       |
| Advances                         |       | 5.43         | %          | December 11, 2007 |       | 2,500      |       |
| Advances                         |       | 5.50         | %          | December 17, 2007 |       | 2,500      |       |
| Advances                         |       | 5.46         | %          | June 2, 2008      |       | 2,500      |       |
| Advances                         |       | 4.51         | %          | July 25, 2008     |       | 1,500      |       |
| Advances                         |       | 4.36         | %          | December 22, 2008 |       | 3,600      |       |
| Advances                         |       | 3.90         | %          | March 23, 2010    |       | 5,000      |       |
| Advances                         |       | 4.64         | %          | July 26, 2010     |       | 2,000      |       |
| Advances                         |       | 5.45         | %          | March 29, 2011    |       | 800        |       |
| Advances                         |       | 5.11         | %          | June 20, 2011     |       | 5,000      |       |
| Advances                         |       | 4.86         | %          | March 12, 2012    |       | 5,000      |       |
| Advances                         |       | 5.32         | %          | June 28, 2016     |       | 5,000      |       |
|                             |       |         |       |                   |       | $          | 47,900     |   |
|                                  |            |              |            |                        |            |            |            |  |

 

----

(1) Of the $91,490 in Federal HomeLoan Bank advances outstanding at December 31, 2007, $22,590 haveadjustable rates which are reset quarterly, $37,900 have fixed rates tomaturity, and $31,000 have fixed rates which may be convertible to three-monthLIBOR.  Advances are subject toprepayment penalties.

 

Afterreviewing the financial and operating condition of the Bank, the Federal HomeLoan Bank, on January 29, 2008 rescinded the Bank’s credit availabilityuntil such time as the Formal Agreement with the OCC has been terminated orsignificant improvement in the Bank’s financial condition has occurred.   The Federal Home Loan Bank did allow theBank to retain credit availability of $66.4 million, which was the amount ofborrowings outstanding at that date.  The Federal Home Loan Bank also required that all outstanding advancesbe collateralized only with cash and/or securities.   The federal funds facilities at The BankersBank and Compass Bank were also rescinded.

 

66

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**9.**    BORROWINGS (continued)

** **

Quarteraverage balances, rates and maximum balances for FHLB borrowings in 2007 and2006 are indicated below.

 
| ** **         | ** ** | **Quarter** | ** ** | ** **  | ** ** | **Quarter** | ** ** |
|--------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **         | ** ** | **Average** | ** ** | **Average** | ** ** | **Maximum** | ** ** |
| **2007**           | ** ** | **Balance** | ** ** | **Rate**    | ** ** | **Balance** | ** ** |
| December 31,  |       | $           | 92,161     |        | 4.96       | %           | $          | 105,000 |   |
| September 30, |       | 100,147     |       | 5.01        | %          | 114,500     |       |
| June 30,      |       | 103,604     |       | 5.03        | %          | 116,800     |       |
| March 31,     |       | 51,373      |       | 5.12        | %          | 77,900      |       |
|                    |            |             |            |             |            |             |            |  |  |

 
| ** **         | ** ** | **Quarter** | ** ** | ** **  | ** ** | **Quarter** | ** ** |
|--------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **         | ** ** | **Average** | ** ** | **Average** | ** ** | **Maximum** | ** ** |
| **2006**           | ** ** | **Balance** | ** ** | **Rate**    | ** ** | **Balance** | ** ** |
| December 31,  |       | $           | 48,693     |        | 4.81       | %           | $          | 59,400 |   |
| September 30, |       | 63,035      |       | 5.14        | %          | 92,600      |       |
| June 30,      |       | 63,435      |       | 4.73        | %          | 83,100      |       |
| March 31,     |       | 67,267      |       | 4.27        | %          | 70,000      |       |
|                    |            |             |            |             |            |             |            |  |  |

 

The weighted averageinterest rate for FHLB borrowings at December 31, 2007 and 2006 was 4.82%and 4.96% respectively.

 

**10.**    SUBORDINATED DEBENTURES

** **

On June 27, 2002, Millennium CapitalTrust I, a subsidiary of the Corporation, was formed for the purpose of issuingredeemable trust preferred securities and purchasing the Corporation’s juniorsubordinated debentures, which are its sole assets.  The Corporation owns all of the Trust’soutstanding common securities.  On July 11,2002,  $8,000 of the trust preferredsecurities were issued in a pooled offering. The securities have a LIBOR-indexed floating rate of interest, which isset and payable on a quarterly basis. During 2007, the interest rates ranged from 8.89 percent to 9.02percent.  During 2006, the interest ratesranged from 7.80 percent to 9.16 percent. The securities have a maturity date of July 2032.  The Corporation has the option of redeemingthe securities beginning July 2007.

 

Up to 25 percent of Tier 1 capital mayinclude the above securities for regulatory capital adequacy determinationpurposes.  The portion of the securitiesnot considered as Tier 1 capital will be included in Tier 2 capital.   The Corporation and the Trust believe that,taken together, the Corporation’s obligations under the junior subordinateddebentures, the Indenture, the Trust declaration and the Guarantee entered intoin connection with the issuance of the trust preferred securities constitute afull and unconditional guarantee by the Corporation of the Trust’s obligationswith respect to the trust preferred securities. Subject to certain exceptions and limitations, the Corporation may electfrom time to time to defer interest payments on the junior subordinated debtsecurities, which would result in a deferral of distribution payments on therelated trust preferred securities.

 

In accordance with FASB Interpretation No. 46,the Trust is not consolidated with the Company. Accordingly, the Company does not report the securities issued by theTrust as liabilities, and instead reports as liabilities the subordinateddebentures issued by the Company and held by the Trust, as they are no longereliminated in consolidation.

 

67

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (dollars in thousands, except share data)

 

**11.    INCOME TAXES**

** **

Theprovision for federal income taxes from continuing operations consists of thefollowing:

 
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Current  (benefit) provision      |       | $        | —     |     | $          | 221 |   |
| Deferred  (benefit) provision     |       | (2,087   | )          | (166     | )          |
| Total provision  for income taxes |       | $        | (2,087     | )        | $          | 55 |   |

 

Deferred income taxes reflect temporarydifferences in the recognition of revenue and expenses for tax reporting andfinancial statement purposes, principally because certain items, such as,allowance for loan losses and loan fees, are recognized in different periodsfor financial reporting and tax return purposes.  A valuation allowance has not beenestablished for deferred tax assets. Realization of the deferred tax assets is dependent on generatingsufficient taxable income.  Althoughrealization is not assured management believes it is more likely than not thatall of the deferred tax asset will be realized. Deferred tax assets are recorded in other assets.

 

Net deferred tax assets from continuingoperations are comprised of the following at December 31:

 
| **Deferred Source**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Loan loss  reserve                                      |       | $        | 1,082      |     | $          | 919 |   |
| Unearned loan  fees                                     |       | 12       |       | 64       |       |
| Depreciation                                            |       | 80       |       | (13      | )          |
| Securities  impairment                                  |       | 407      |       | —   |       |
| AMT credit carry  forward                               |       | 255      |       | 255      |       |
| Net operating  loss carry forward                       |       | 6,744    |       | —   |       |
| Other                                                   |       | 31       |       | 31       |       |
| Subtotal                                                |       | 8,611    |       | 1,256    |       |
| Unrealized loss  included in other comprehensive income |       | 95       |       | 908      |       |
| Net deferred tax  assets                                |       | $        | 8,706      |     | $          | 2,164 |   |

 

Areconciliation between actual tax expense from continuing operations and taxescomputed at the statutory federal rate of 34% for the two years ended December 31follows:

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Tax computed at  statutory rate               |       | $        | (1,397     | )        | $          | 590 |   |
| Increases  (decreases) in tax resulting from: |       |     |       |     |       |
| Tax-exempt  interest income                   |       | (813     | )          | (508     | )          |
|   Bank owned life insurance              |       | (171     | )          | (153     | )          |
| Stock option  expense                         |       | 108      |       | 19       |       |
| Other                                         |       | 186      |       | 107      |       |
| Actual tax expense                            |       | $        | (2,087     | )        | $          | 55 |   |

 

AtDecember 31, 2007, the Corporation has a net operating loss carry forward ofapproximately $19.0 million, which expires in 2027.

 

The Corporation has no unrecognized tax benefits as ofJanuary 1, 2007 and did not recognize any increase in unrecognized benefitsduring 2007 relative to any tax positions taken in 2007. Should the accrual ofany interest or penalties relative to unrecognized tax benefits be necessary,it is the Corporation’s policy to record such accruals in its income taxexpense accounts; no such accruals existed as of December 31, 2007. TheCorporation and its subsidiaries file a conslidated U.S. federal income taxreturn and a consolidated return in the Commonwealth of Virginia. These returnsare subject to examination by taxing authorities for all years after 2003.

 

68

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except sharedata)

 

**12.    REGULATORYMATTERS**

 

The Corporation (on a consolidated basis)and the Bank’s primary supervisory agencies are the Federal Reserve and Officeof the Comptroller of the Currency (OCC). The supervisory agencies have mandated certain minimum capital standardsfor the industry and pursuant to the Federal Deposit Insurance CorporationImprovement Act of 1991 (“FDICIA”) have outlined various levels of capitaladequacy for the industry under “prompt corrective action” regulations.

 

Failure to meet minimum capitalrequirements can initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that if undertaken, could have a directmaterial affect on the Corporation and the Bank’s financial statements.  Under the regulatory capital adequacyguidelines and the regulatory framework for prompt corrective action, theCorporation and the Bank must meet specific capital guidelines that involvequantitative measures of its assets, liabilities, and certain off-balance-sheetitems as calculated under regulatory accounting practices.  The Corporation and the Bank’s capitalamounts and classification under the prompt corrective action guidelines arealso subject to qualitative judgments by the regulators about components, riskweightings, and other factors.

 

Quantitative measures established byregulation to ensure capital adequacy require the Bank to maintain minimumamounts and ratios (set forth in the table below) of total risk-based capitaland Tier I capital to risk-weighted assets (as defined in the regulations) andof Tier I capital to adjusted total assets (as defined).

 

Although the Bank would be deemed to bewell capitalized as of December 31, 2007 under the regulatory framework asset forth in the table, the most recent notification from the regulatorscategorized the Bank as only adequately capitalized due to the formal agreemententered into on January 28, 2008.

 

By March 31, 2008 the Bank isrequired to achieve and thereafter maintain a total risk-based capital ratioequal to 13% of risk-weighted assets, a tier 1 capital ratio equal to 12% ofrisk-weighted assets, and a leverage ratio equal to 10% of adjusted totalassets.

 

69

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except sharedata)

 

**12.    REGULATORYMATTERS**(continued)

** **

The Corporation’s actual capital amountsand ratios are as follows:

 
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Minimum**     | ** ** | **Minimum**              | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Capital**     | ** ** | **To be Well** | ** ** |
| ** **                                                       | ** ** | **Actual** | ** ** | ** ** | ** ** | **Requirement** | ** ** | **Capitalized (1)**      | ** ** |
| ** **                                                       | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount**      | ** ** | **Ratio**                | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As  of December 31, 2007                                    |       |       |       |       |       |            |       |                     |       |   |   |   |   |
| Total  Risk-based Capital  (to risk-weighted  assets)  |       |       |       |       |       |            |       |                     |       |   |   |   |   |
| Consolidated                                                     |       | $          | 50,654     |       | 13.73      | %               | 29,504     |                     | 8.00       |   | N/A |   | N/A |   |
| Bank                                                             |       | 40,926     |       | 11.20      |       | 29,238          |       | 8.00                     |       | 36,547 |   | 10.00 | % |
| Tier  I Capital (to risk-weighted assets)                        |       |       |       |       |       |            |       |                     |       |   |   |   |   |
| Consolidated                                                     |       | 46,665     |       | 12.65      |       | 14,752          |       | 4.00                     |       | N/A |   | N/A |   |
| Bank                                                             |       | 37,000     |       | 10.12      |       | 14,619          |       | 4.00                     |       | 21,928 |   | 6.00 |   |
| Tier  I Capital (to average assets)                              |       |       |       |       |       |            |       |                     |       |   |   |   |   |
| Consolidated                                                     |       | 46,665     |       | 8.65       |       | 21,587          |       | 4.00                     |       | N/A |   | N/A |   |
| Bank                                                             |       | 37,000     |       | 6.91       |       | 21,420          |       | 4.00                     |       | 26,774 |   | 5.00 |   |
|                                                                  |            |            |            |            |            |                 |            |                          |            |  |  |  |  |  |

 
| ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Minimum**     | ** ** | **Minimum**         | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|---------------------|------------|
| ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Capital**     | ** ** | **To be Well**      | ** ** |
| ** **                                                 | ** ** | **Actual** | ** ** | ** ** | ** ** | **Requirement** | ** ** | **Capitalized (1)** | ** ** |
| ** **                                                 | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount**      | ** ** | **Ratio**           | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| As  of December 31, 2006                              |       |       |       |       |       |            |       |                |       |   |   |   |   |
| Total  Risk-based Capital  (to risk-weighted  assets) |       |       |       |       |       |            |       |                |       |   |   |   |   |
| Consolidated                                               |       | $          | 61,959     |       | 16.75      | %               | $          | 29,589              |       | 8.00 | % | N/A |   | N/A |   |
| Bank                                                       |       | 51,453     |       | 14.08      |       | 29,227          |       | 8.00                |       | 36,534 |   | 10.00 | % |
| Tier  I Capital (to risk-weighted assets)             |       |       |       |       |       |            |       |                |       |   |   |   |   |
| Consolidated                                               |       | 57,314     |       | 15.50      |       | 14,795          |       | 4.00                |       | N/A |   | N/A |   |
| Bank                                                       |       | 46,865     |       | 12.83      |       | 14,613          |       | 4.00                |       | 21,920 |   | 6.00 |   |
| Tier  I Capital (to average assets)                   |       |       |       |       |       |            |       |                |       |   |   |   |   |
| Consolidated                                               |       | 57,314     |       | 9.74       |       | 23,546          |       | 4.00                |       | N/A |   | N/A |   |
| Bank                                                       |       | 46,865     |       | 8.09       |       | 23,183          |       | 4.00                |       | 28,979 |   | 5.00 |   |
|                                                            |            |            |            |            |            |                 |            |                     |            |  |  |  |  |  |  |

 

----

(1) The Consolidatedentity is not subject to the prompt corrective action rules.

 

70

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**13.    OPERATING LEASES**

** **

The Bank leases its corporateheadquarters and most of its branch facilities under non-cancelable leaseagreements.  Most of these leases providefor the payment of property taxes and other costs by the Bank and include oneor more renewal options ranging up to ten years.

 

The following are the future minimumlease payments at December 31, 2007:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2008                                         |       | $          | 564        |   |
| 2009                                         |       | 494        |       |
| 2010                                         |       | 277        |       |
| 2011                                         |       | 245        |       |
| 2012                                         |       | 252        |       |
| Thereafter                                   |       | 1,170      |       |
| Total                                        |       | $          | 3,002      |   |

 

Rent expense from continuing operations amountedto $536 and $567 for the years ended December 31, 2007 and 2006,respectively.

 

**14.**    PROFIT SHARING PLAN

** **

The Corporation maintains a 401(k) profitsharing plan, which has also been adopted by Millennium Bank, N.A. The Plancovers substantially all full time employees. The Plan allows the Corporation, and its affiliates, to makecontributions to the plan at the discretion of management.  The Corporation and affiliates madecontributions of $31 and $0 to the 401(k) plan for the years ended December 31,2007 and 2006, respectively.

 

**15.    OTHERINCOME AND OTHER OPERATING EXPENSE**

** **
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Other  income consists of the following: |       |     |       |     |       |
| Commissions  and fees                    |       | $        | 265        |     | $          | 129 |   |
| Other  income                            |       | (75      | )          | —   |       |
| Total  other income                      |       | $        | 190        |     | $          | 129 |   |

 
| ** **                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Other  operating expenses consist of the following: |       |     |       |     |       |
| Dues  and fees                                      |       | $        | 174        |     | $          | 152 |   |
| Franchise  taxes and miscellaneous taxes            |       | 481      |       | 249      |       |
| Insurance  expense                                  |       | 123      |       | 148      |       |
| Meetings  and seminar expense                       |       | 114      |       | 104      |       |
| Miscellaneous  operating expenses                   |       | 680      |       | 401      |       |
| Office  expenses                                    |       | 408      |       | 510      |       |
| Lawsuit  settlements and operating losses           |       | 45       |       | 20       |       |
| Outside  services                                   |       | 533      |       | 364      |       |
| Professional  fees                                  |       | 1,095    |       | 634      |       |
| Other  loan expense                                 |       | 86       |       | 82       |       |
| Merger  related expense                             |       | —   |       | 5        |       |
| Total  other operating expenses                     |       | $        | 3,739      |     | $          | 2,669 |   |

 

71

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**16.    RELATED PARTY TRANSACTIONS**

** **

The Corporation receives general legalservices from law firms under the control of certain Directors.  Legal fees paid to these law firms were $41and $38 for the years ended December 31, 2007 and 2006, respectively.

 

In 2007 and 2006, the Corporation leasedspace in Herndon, Virginia from a related party in the amount of $128 and $124,respectively and space in Reston, Virginia in the amount of $235 and $228,respectively.

 

The Bank has entered into loantransactions with certain directors, executive officers, and their affiliates.  The aggregate amount of loans to such relatedparties at December 31, 2007 and 2006 was $2,939 and $7,749,respectively.  During 2007, disbursementsmade to such related parties amounted to $155 and payments amounted to $634.The effect of changes in composition of related parties in 2007 was $(4,331).

 

The Bank has also entered into deposittransactions with certain directors, executive officers, and theiraffiliates.   Total deposits at December 31,2007 and 2006 were $1,622 and $2,152, respectively.

 

**17.    COMMITMENTS, CONTINGENCIES ANDCONCENTRATIONS OF CREDIT**

** **

**CreditRelated Financial Instruments**

** **

The Corporation is a party to creditrelated financial instruments with off-balance-sheet risk in the normal courseof business to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit, standby letters of credit and commercial lettersof credit.  Such commitments involve tovarying degrees elements of credit and interest rate risk in excess of theamount recognized in the consolidated balance sheets.

 

The Corporation’s exposure to credit lossis represented by the contractual amount of these commitments.  The Corporation follows the same creditpolicies in making commitments as it does for on-balance-sheet instruments.

 

At December 31, the followingfinancial instruments, the majority of which are at variable rates, wereoutstanding whose contract amounts represent credit risk:

 
| ** **                                                                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Commitments  to grant loans, commercial pipeline and unfunded commitments under lines of  credit |       | $        | 49,160     |     | $          | 63,814 |   |
| Commercial  and standby letters of credit                                                        |       | 2,109    |       | 1,163    |       |
|                                                                                             |       | $        | 51,269     |     | $          | 64,977 |   |

 

Commitments to grant loans are generallymade for periods of 60 days or less.  Thefixed rate loan commitments have interest rates ranging from 5.54% to 18% andmaturities up to 5 years.

 

72

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except share data)

 

**17.    COMMITMENTS, CONTINGENCIES ANDCONCENTRATIONS OF CREDIT** (continued)

** **

**Credit Related FinancialInstruments** (continued)

 

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. These loans are considered in the pipeline until closing of the loan.

 

Unfunded commitments are closed loanswhere the customer has not drawn the entire amount of the loan and includecommercial lines-of-credit, revolving credit lines and overdraft protectionagreements.  These commitments may expirewithout being drawn upon or may be partially drawn on.  Therefore, the total commitment amounts donot necessarily represent future cash requirements.

 

Commercial and standby letters-of-creditare conditional commitments issued by the Corporation to guarantee theperformance of a customer to a third party. These letters-of-credit are primarily issued to support public andprivate borrowing arrangements. Essentially all letters of credit issued have expiration dates withinone year.  The credit risk involved inissuing letters-of-credit is essentially the same as that involved in extendingloan facilities to customers.  TheCorporation generally holds collateral supporting those commitments if deemednecessary.

 

**Legal**

** **

Various legal claims arise from time totime in the normal course of business. No amount of loss, if any, can bereasonably estimated at this time; therefore, no liability has been recorded inthe consolidated financial statements. At year-end 2006, the Corporation reached a settlement in the lawsuitfiled on July 14, 2006 by a former management employee of MillenniumCapital, Inc., an indirect subsidiary of the Corporation. In response tothe lawsuit, the Corporation had filed motions to dismiss or otherwisechallenge all of the alleged claims that sought monetary relief. While thosemotions were pending, the parties reached a settlement under terms that did notresult in a material charge to the Corporation.

 

**Recourseon Loans**

** **

The Corporation has sold loans during theyear with limited recourse.   The lossfrom discontinued operations in 2006 included a $2.913 million charge toestablish a reserve for potential off-balance sheet exposure associated withloans already sold to investors or documented fraud.   Investor agreements provide that the sellermust buyback the loan under certain conditions, such as early payment defaultor documented fraud, and management determined at December 31, 2006 thatit was more likely than not that buyback conditions occurred in some of the2006 production sold to investors, particularly for identified loans that wereoriginated under sub prime underwriting guidelines. The Corporation has norecorded reserves for any recourse conditions as of December 31, 2007.

 

**18.    STOCKOPTION PLAN**

** **

On August 12, 1999, the Corporationadopted an Incentive Stock Option Plan. The total number of shares granted under the plan cannot exceed2,000,000 shares.  The Board of Directorsof the Corporation administers the plan and the plan will terminate as of August 11,2009.    Under the plan, the option priceof the shares must be granted at not less than fair market value, the optionsterm may not exceed ten years and the options are not transferable.

 

73

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except sharedata)

 

**18.    STOCK OPTION PLAN**(continued)

 
| ** **                                        | ** ** | **Weighted** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                        | ** ** | **Average**  | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Shares**   | ** ** | **Price**  | ** ** |
| Outstanding,  beginning of year beginning of year |       | 738,870      |       | $6.39      |       |
| Granted                                           |       | 196,142      |       | 9.91       |       |
| Exercised                                         |       | (1,170       | )          | 5.37       |       |
| Forfeited  or expired                             |       | (103,862     | )          | 7.23       |       |
| Outstanding, end of  year                         |       | 829,980      |       | 7.12       |       |
|                                              |       |         |       |       |       |
| Fully  vested and expected, to vest               |       | 829,980      |       | 7.12       |       |
| Options  exercisable at end of year               |       | 548,888      |       | 6.00       |       |

 

Intrinsic value ofoptions outstanding at December 31, 2007 was $84.

 

The following tabledetails stock options outstanding at December 31.

 
| **(dollars in thousands)**             | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Stock  options vested and currently exercisable: |       |     |       |     |       |
|                                             |       |     |       |     |       |
| Number                                           |       | 548,888  |       | 589,958  |       |
| Weighted  average exercise price                 |       | $        | 6.00       |     | $          | 6.00 |   |
| Aggregate  intrinsic value                       |       | $        | 84         |     | $          | 1,959 |   |
| Weighted  average remaining life (in years)      |       | 5.7      |       | 5.3      |       |

 

The intrinsic value of options exercisedin 2007 and 2006, respectively was $4 and $198, respectively.  Cash received from option exercises for thosesame periods were $6 and $500, respectively.

 

The fair value of eachstock option granted is estimated on the date of grant using the Black-Scholesbased stock option valuation model.  This model requires the input ofsubjective assumptions that will usually have a significant impact on the fairvalue estimate. Expected volatilities are based on historical volatility of theCompany’s stock, and other factors.  Expected dividends are based ondividend trends and the market price of the Company’s stock price atgrant.  The Company uses historical data to estimate option exerciseswithin the valuation model.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve at thetime of grant.

 

### **Theweighted average assumptions for options granted during the year and theresulting estimated weighted average fair values per share used in our optionpricing model are as follows:**

### ** **

| ** **                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Assumptions:  Risk free interest rate |       | 4.61     | %          | 4.65     | %          |
| Expected  dividend yield              |       | 0.80     | %          | 0.71     | %          |
| Expected  life of options (in years)  |       | 10       |       | 10       |       |
| Expected  volatility                  |       | 17.0     |       | 20.1     |       |
| Estimated  fair value per share       |       | $        | 3.45       |     | $          | 3.50 |   |
|                                       |            |          |            |          |            |  |  |

 

74

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS  (dollars in thousands, except sharedata)

 

**18.    STOCK OPTION PLAN**(continued)

 

SFAS 123R requires the recognition ofstock based compensation for the number of awards that are ultimately expectedto vest. The Company did not reduce its compensation expense for estimatedforfeitures prior to vesting primarily based on the limited number of holdersof unvested stock options in 2007.  Estimated forfeitures will bereassessed in subsequent periods and may change based on new facts andcircumstances.

 

As of December 31, 2007, there was $591of total unrecognized compensation cost related to nonvested stock optionsunder the plan.

 

Unrecognized stock optioncompensation expense related to unvested awards (net of estimated forfeitures)for 2008 and beyond is estimated as follows:

 
| **Year** | ** ** | **(in thousands)** | ** ** |
|----------|------------|-------------------------|------------|
| 2008     |       | 260                     |       |
| 2009     |       | 160                     |       |
| 2010     |       | 107                     |       |
| 2011     |       | 57                      |       |
| 2012     |       | 7                       |       |

 

**19.          EARNINGS PER SHARE**

** **

The following table shows the weightedaverage number of shares used in computing earnings per share and the effect onweighted average number of shares of potential dilutive common stock.

 
| ** **                                                    | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Income  (loss) from continuing operations                     |       | $                                                         | (2,021     | ) | $ | 1,680 |   |
|                                                          |       |                                                      |       |   |   |
| Weighted  average shares outstanding                          |       | 8,926,855                                                 |       | 8,902,634 |   |
|                                                          |       |                                                      |       |   |   |
| Basic  earnings per share from continuing operations          |       | $                                                         | (0.23      | ) | $ | 0.19 |   |
|                                                          |       |                                                      |       |   |   |
| Income  (loss) from continuing operations                     |       | $                                                         | (2,021     | ) | $ | 1,680 |   |
|                                                          |       |                                                      |       |   |   |
| Weighted  average shares outstanding                          |       | 8,926,855                                                 |       | 8,902,634 |   |
| Add  dilutive effects of assumed exercises of stock options   |       | —                                                    |       | 213,223 |   |
| Weighted  average shares outstanding adjusted for dilution    |       | 8,926,855                                                 |       | 9,115,857 |   |
|                                                          |       |                                                      |       |   |   |
| Diluted  earnings (loss) per share from continuing operations |       | $                                                         | (0.23      | ) | $ | 0.18 |   |

 

75

----

 

MILLENNIUM BANKSHARESCORPORATION

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS  (dollars in thousands, except sharedata)

 

**19.**                                                       EARNINGS PER SHARE (continued)

** **
| ** **                                                  | ** ** | **For the Years Ended  December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| Loss  from discontinued operations                          |       | $                                                         | (8,447     | ) | $ | (2,161 | ) |
|                                                        |       |                                                      |       |   |   |
| Weighted  average shares outstanding                        |       | 8,926,855                                                 |       | 8,902,634 |   |
|                                                        |       |                                                      |       |   |   |
| Basic  loss per share from discontinued operations          |       | $                                                         | (0.95      | ) | $ | (0.24 | ) |
|                                                        |       |                                                      |       |   |   |
| Loss  from discontinued operations                          |       | $                                                         | (8,447     | ) | $ | (2,161 | ) |
|                                                        |       |                                                      |       |   |   |
| Weighted  average shares outstanding                        |       | 8,926,855                                                 |       | 8,902,634 |   |
| Add  dilutive effects of assumed exercises of stock options |       | —                                                    |       | 213,223 |   |
| Weighted  average shares outstanding adjusted for dilution  |       | 8,926,855                                                 |       | 9,115,857 |   |
|                                                        |       |                                                      |       |   |   |
| Diluted  loss per share from discontinued operations        |       | $                                                         | (0.95      | ) | $ | (0.24 | ) |

 
| ** **                                                  | ** ** | **For the Years Ended  December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| Net  loss                                                   |       | $                                                         | (10,468    | ) | $ | (481 | ) |
|                                                        |       |                                                      |       |   |   |
| Weighted  average shares outstanding                        |       | 8,926,855                                                 |       | 8,902,634 |   |
|                                                        |       |                                                      |       |   |   |
| Basic  earnings per share                                   |       | $                                                         | (1.17      | ) | $ | (0.05 | ) |
|                                                        |       |                                                      |       |   |   |
| Net  loss                                                   |       | $                                                         | (10,468    | ) | $ | (481 | ) |
|                                                        |       |                                                      |       |   |   |
| Weighted  average shares outstanding                        |       | 8,926,855                                                 |       | 8,902,634 |   |
| Add  dilutive effects of assumed exercises of stock options |       | —                                                    |       | 213,223 |   |
| Weighted  average shares outstanding adjusted for dilution  |       | 8,926,855                                                 |       | 9,115,857 |   |
|                                                        |       |                                                      |       |   |   |
| Diluted  loss per share                                     |       | $                                                         | (1.17      | ) | $ | (0.05 | ) |

 

All stockoptions were considered anti-dilutive in computing weighted average shares for2007.

 

76

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (dollars in thousands, except sharedata)

 

| **20.**    | ** ** | **OTHER  COMPREHENSIVE INCOME**                                                       |
|------------|------------|---------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                            |
|       |       | The components of  other comprehensive income and related tax effects are as follows: |

 
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Change  in unrealized holding gains (losses) on Available-for-sale securities |       | $                                           | 1,188      |   | $ | 554 |   |
| Reclassification  adjustment for losses (gains) realized in income            |       | 1,202                                       |       | (56 | ) |
| Net  unrealized gains (losses)                                                |       | 2, 390                                      |       | 498 |   |
| Tax  effect                                                                   |       | (813                                        | )          | (170 | ) |
| Other  comprehensive income                                                   |       | $                                           | 1,577      |   | 328 |   |
|                                                                               |            |                                             |            |  |  |  |  |

 

**21.**                               PARENT COMPANY ACTIVITY

** **

CONDENSED BALANCE SHEETS

 
| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Assets:                                          |       |     |       |     |       |
| Interest  bearing deposits in banks              |       | $        | 5,547      |     | $          | 1,820 |   |
| Investment  in subsidiaries                      |       | 36,824   |       | 45,114   |       |
| Securities  available for sale                   |       | —   |       | 997      |       |
| Loans  (net)                                     |       | 3,199    |       | 6,992    |       |
| Other  assets                                    |       | 1,347    |       | 813      |       |
| Total  Assets                                    |       | $        | 46,917     |     | $          | 55,736 |   |
|                                             |       |     |       |     |       |
| Liabilities:                                     |       |     |       |     |       |
| Subordinated  debentures                         |       | 8,000    |       | 8,000    |       |
| Other  liabilities                               |       | 437      |       | 184      |       |
| Total  Liabilities                               |       | 8,437    |       | 8,184    |       |
|                                             |       |     |       |     |       |
| Stockholders’  equity:                      |       |     |       |     |       |
| Common  stock                                    |       | 44,637   |       | 44,631   |       |
| Additional  paid-in capital                      |       | 4,757    |       | 4,408    |       |
| Accumulated  other comprehensive income (loss)   |       | (185     | )          | (1,762   | )          |
| Retained  earnings                               |       | (10,729  | )          | 275      |       |
| Total  Stockholders’ Equity                 |       | 38,480   |       | 47,552   |       |
|                                             |       |     |       |     |       |
| Total  Liabilities and Stockholders’ Equity |       | $        | 46,917     |     | $          | 55,736 |   |

 

77

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**21.**                               PARENT COMPANY ACTIVITY (continued)

** **

CONDENSEDSTATEMENTS OF OPERATIONS

 
| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Equity  in earnings (loss) of Bank               |       | $        | (9,865     | )        | $          | (165 | ) |
| Equity  in earnings of Millennium Financial Inc. |       | —   |       | 3        |       |
| Other  expenses                                  |       | 454      |       | 338      |       |
| Interest  income, (expense) net                  |       | (149     | )          | 19       |       |
| Net  (loss)                                      |       | $        | (10,468    | )        | $          | (481 | ) |

 
| CONDENSED STATEMENTS OF CASH FLOWS |   |   |   |   |   |
|------------------------------------|--------|--------|--------|--------|--------|

 
| ** **                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash  Flows from Operating Activities                      |       |     |       |     |       |
| Net  loss                                                  |       | $        | (10,468    | )        | $          | (481 | ) |
| Equity  in undistributed net (income) loss of subsidiaries |       | 9,865    |       | 162      |       |
| Subtotal                                                   |       | (603     | )          | (319     | )          |
| Stock  compensation expense                                |       | 349      |       | 223      |       |
| (Increase  decrease in other assets)                       |       | (286     | )          | 224      |       |
| Increase  in other liabilities                             |       | 4        |       | 20       |       |
| Net  Cash (Used) Provided by Operating Activities          |       | (536     | )          | 148      |       |
| Cash Flows from  Investing Activities                      |       |     |       |     |       |
| Sales/Calls  of securities available for sale              |       | 1,000    |       | —   |       |
| Change  in loans                                           |       | 3,794    |       | 9,284    |       |
| Increase  in investment in subsidiaries                    |       | —   |       | (15,000  | )          |
| Net  Cash Provided (Used) by Investing Activities          |       | 4,794    |       | (5,716   | )          |
| Cash Flows from  Financing Activities                      |       |     |       |     |       |
| Net  proceeds from issuance of common stock                |       | 6        |       | 500      |       |
| Dividends  distributed                                     |       | (537     | )          | (712     | )          |
| Net  Cash Used by Financing Activities                     |       | (531     | )          | (212     | )          |
|                                                       |       |     |       |     |       |
| Net  Increase (Decrease) in Cash and Due from Banks        |       | 3,727    |       | (5,780   | )          |
| Cash  and Due from Banks, beginning of year                |       | 1,820    |       | 7,600    |       |
| Cash  and Due from Banks, end of year                      |       | $        | 5,547      |     | $          | 1,820 |   |

 

78

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**22.    ESTIMATEDFAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

Theassumptions used and the estimates disclosed represent management’s bestjudgment of appropriate valuation methods. These estimates are based on pertinent information available tomanagement as of the respective reporting dates.  In certain cases, fair values are not subjectto precise quantification or verification and may change as economic and marketfactors, and management’s evaluation of those factors change.

 

Althoughmanagement uses its best judgment in estimating the fair value of thesefinancial instruments, there are inherent limitations in any estimationtechnique.  Therefore, these fair valueestimates are not necessarily indicative of the amounts that the Corporationwould realize in a market transaction. Because of the wide range of valuation techniques and the numerousestimates, which must be made, it may be difficult to make reasonable comparisonsof the Corporation’s fair value information to that of other financialinstitutions.  SFAS 107 excludes certainfinancial instruments from its disclosure requirement.  Because of this and the many uncertaintiesdiscussed above, the aggregate fair value amount should in no way be construedas representative of the underlying value of the Corporation.  The estimated fair values of the Corporation’sfinancial instruments at December 31, 2007 and 2006 are as follows:

 
| ** **                                         | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **Carrying**                    | ** ** | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                         | ** ** | **Amount**                      | ** ** | **Value**                       | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial  assets:                                 |       |                            |       |                            |       |   |   |   |   |
| Cash  and due from banks                           |       | $                               | 3,894      |                            | $          | 3,894 |   | $ | 7,981 |   | $ | 7,981 |   |
| Federal  funds sold                                |       | 1,464                           |       | 1,464                           |       | 50,364 |   | 50,364 |   |
| Securities  available for sale                     |       | 173,476                         |       | 173,476                         |       | 172,703 |   | 172,703 |   |
| Loans  receivable, net                             |       | 243,376                         |       | 242,086                         |       | 249,900 |   | 249,001 |   |
| Accrued  interest receivable                       |       | 2,745                           |       | 2,745                           |       | 3,000 |   | 3,000 |   |
|                                               |       |                            |       |                            |       |   |   |   |   |
| Financial  liabilities:                            |       |                            |       |                            |       |   |   |   |   |
| Deposits                                           |       | 293,453                         |       | 290,383                         |       | 371,123 |   | 367,043 |   |
| Federal  funds purchased and repurchase agreements |       | 1,134                           |       | 1,134                           |       | — |   | — |   |
| FHLB  advances-long term                           |       | 91,490                          |       | 92,848                          |       | 47,900 |   | 47,524 |   |
| Subordinated  debentures                           |       | 8,000                           |       | 8,000                           |       | 8,000 |   | 8,000 |   |
| Accrued  interest payable                          |       | 1,070                           |       | 1,070                           |       | 1,226 |   | 1,226 |   |
|                                                    |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 

79

----

 

MILLENNIUM BANKSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except share data)

 

**22.    ESTIMATEDFAIR VALUE OF FINANCIAL INSTRUMENTS**(continued)

** **

Thefollowing methods and assumptions were used to estimate the fair value amountsat December 31, 2007 and 2006:

 

**Cashand Cash Equivalents**

** **

Carryingamount approximates fair value.

 

**LoansHeld for Sale**

** **

Fairvalue is based on selling prices arranged by arms-length contracts with thirdparties.

 

**LoansReceivable, Net of Allowance**

** **

Fairvalue of loans is estimated using discounted cash flow analyses based oncontractual repayment schedules.  Thediscount rates used in these analyses are based on either the interest ratespaid on U.S. Treasury securities of comparable maturities adjusted for creditrisk and non-interest operating costs or the interest rates currently offeredby the Bank for loans with similar terms to borrowers of similar creditquality.

 

**SecuritiesAvailable-for Sale**

** **

Fairvalue is based on quoted market prices, excluding Federal Home Loan Bank stock.

 

**DepositLiabilities**

** **

Thecarrying amount of deposit liabilities payable on demand, consisting of NOWaccounts, money market deposits, statement savings and other deposit accountsapproximates fair value.  Fair value offixed-rate certificates of deposit is estimated based on discounted cash flowanalysis using the remaining maturity of the underlying accounts and interestrates currently offered on certificates of deposit with similar originalmaturities.

 

**Borrowings**

** **

Thecarrying amount of short-term FHLB advances approximates fair value.  Fair value of all other borrowings isestimated based on discounted cash flow analysis using the remaining maturityof the borrowings and interest rates currently in effect on borrowings withsimilar original maturities.

 

**AccruedInterest**

** **

Thecarrying amounts of accrued interest approximate fair value.

 

80

----

 

| ITEM 9. |   | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|---------|--------|---------------------------------------------------------------------------------------|

 

Not applicable.

 

ITEM 9A(T).                           CONTROLSAND PROCEDURES

 

*Disclosure Controls and Procedures*.We maintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods required by theSecurities and Exchange Commission, including, without limitation, thosecontrols and procedures designed to ensure that such information is accumulatedand communicated to the Company’s management to allow timely decisionsregarding required disclosures.

 

TheCorporation’s management, under the supervision and with the participation ofthe Chief Executive Officer and Chief Financial Officer, evaluated, as of thelast day of the period covered by this report, the effectiveness of the designand operation of the Corporation’s disclosure controls and procedures.  Based on that evaluation, and as a result ofthe material weakness discussed below, which was discovered subsequent to yearend, the Chief Executive Officer and the Chief Financial Officer concluded thatdisclosure controls and procedures were not effective in timely alerting themto material information required to be included in our periodic filings withthe Commission.

 

*Management’sReport on Internal Control Over Financial Reporting. *The management of the Corporation isresponsible for the preparation, integrity and fair presentation of theconsolidated financial statements included in this Annual Report. The financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America and reflect management’sjudgments and estimates concerning the effects of events and transactions thatare accounted for or disclosed.

 

Management is alsoresponsible for establishing and maintaining an effective internal control overfinancial reporting.  The Corporation’sinternal control over financial reporting includes those policies andprocedures that pertain to the Corporation’s ability to record, process,summarize and report reliable financial data. The internal control systemcontains monitoring mechanisms, and appropriate actions are taken to correctidentified deficiencies. Management recognizes that there are inherentlimitations in the effectiveness of any internal control system, including thepossibility of human error and the circumvention or overriding of internalcontrols. Accordingly, even effective internal control over financial reportingcan provide only reasonable assurance with respect to financial statementpreparation. In addition, because of changes in conditions and circumstances,the effectiveness of internal control over financial reporting may vary overtime.

 

Management assessed theCorporation’s system of internal control over financial reporting as of December 31,2007. This assessment was conducted based on the Committee of SponsoringOrganizations (“COSO”) of the Treadway Commission “Internal Control -Integrated Framework”. Based on this assessment, management believes that theCorporation’s internal control over financial reporting was not effective as ofDecember 31, 2007. Management concluded that there was a material weaknesswithin the Corporation’s internal control structure related to its failure tointerpret subsequent event guidance properly. This weakness resulted in anadditional charge to 2007 earnings being made in April 2008. Under the PCAOBstandards, a “material weakness” is a control deficiency or combination ofcontrol deficiencies that results in more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected.

 

Because it related onlyto our financial information in the fourth quarter of 2007 and as of December31, 2007, the material weakness described above did not result in therestatement of any of the financial statements that we had previously filedwith the Securities and Exchange Commission.

 

The Board of Directors ofthe Corporation, acting through its Audit Committee (the “Committee”), isresponsible for the oversight of the Corporation’s accounting policies, financialreporting and internal control. The Committee is comprised entirely of outsidedirectors who are independent of management. The Committee is responsible forthe appointment and compensation of the independent auditors and approvesdecisions regarding the appointment or removal of members of the internal auditfunction. The Committee meets periodically with management, the independentauditors, and the internal auditors to insure that they are carrying out their 

 

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responsibilities. TheCommittee is also responsible for performing an oversight role by reviewing andmonitoring the financial, accounting, and auditing procedures of theCorporation in addition to reviewing the Corporation’s financial reports. Theindependent auditors and the internal auditors have full and unlimited accessto the Committee, with or without the presence of the management, to discussthe adequacy of internal control over financial reporting, and any othermatters which they believe should be brought to the attention of the Committee.

 

There were no changes inthe Corporation’s internal control over financial reporting during the quarterended December 31, 2007 that has materially affected, or is reasonablylikely to materially affect, the Corporation’s internal control over financialreporting.

 

Theannual report does not include an attestation report of the Corporation’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the Corporation’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Corporation to provide only management’s report in this annual report.

 

ITEM 9B.                                             OTHERINFORMATION

 

None.

 

##### **PART III**

##### ** **

ITEM 10.                                               DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information required bythis Item is incorporated by reference from Millennium’s definitive proxystatement for the 2008 Annual Meeting of Shareholders under the heading “PROPOSAL1-ELECTION OF DIRECTORS” and the caption “Section 16(a) BeneficialOwnership Reporting Compliance” under the heading “SECURITY OWNERSHIP” andunder the heading “CORPORATE GOVERNANCE.”

 

ITEM 11.                                               EXECUTIVECOMPENSATION

 

Information regardingexecutive compensation is incorporated by reference from Millennium’sdefinitive proxy statement for the 2008 Annual Meeting of Shareholders underthe headings “EXECUTIVE COMPENSATION” and the caption “Director Compensation”under the heading “CORPORATE GOVERNANCE”.

 

| ITEM 12. |   | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS |
|----------|--------|--------------------------------------------------------------------------------------------------|

 

Information regardingsecurity ownership of certain beneficial owners and management and securitiesauthorized under equity compensation plans is incorporated by reference fromMillennium’s definitive proxy statement for the 2008 Annual Meeting ofShareholders under the heading “SECURITY OWNERSHIP”

 

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Thefollowing table provides information, as of December 31, 2007, regardingsecurities authorized for issuance under Millennium’s equity compensationplans.

 

| **Plan Category**                                      | ** ** | **Number of Securities to Be  Issued upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans (1)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                                                 |       |                                                                                                             |       |                                                                                                                                             |       |
| Equity  Compensation Plans Approved by Shareholders         |       | 829,980                                                                                                                                              |       | $                                                                                                                | 7.12       |                                                                                                                                             | 899,658    |   |
|                                                        |       |                                                                                                                                                 |       |                                                                                                             |       |                                                                                                                                             |       |
| Equity  Compensation Plans Not Approved by Shareholders (2) |       | —                                                                                                                                               |       | —                                                                                                           |       | —                                                                                                                                           |       |
|                                                        |       |                                                                                                                                                 |       |                                                                                                             |       |                                                                                                                                             |       |
| Total                                                       |       | 829,980                                                                                                                                              |       | $                                                                                                                | 7.12       |                                                                                                                                             | 899,658    |   |

 

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(1)  Amounts excludeany securities to be issued upon exercise of outstanding options, warrants andrights.

 

(2) Millennium doesnot have any equity compensation plans that have not been approved byshareholders.

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information required bythis Item is incorporated by reference from Millennium’s definitive proxy statementfor the 2008 Annual Meeting of Shareholders under the heading, “CORPORATEGOVERNANCE.”

 

ITEM 14.                                               PRINCIPALACCOUNTANT FEES AND SERVICES

 

Information regardingapproval of audit and non-audit services by the audit committee as well as feespaid to auditors is incorporated by reference from Millennium’s definitiveproxy statement for the 2008 Annual Meeting of Shareholders under the captions “PreapprovalPolicies and Procedures” and “Fees to Audit Firm in 2007” under the heading “PROPOSAL2- RATIFICATION OF THE APPOINTMENT OF AUDITORS FOR THE FISCAL YEAR-ENDEDDECEMBER 31, 2008.”

 

**PART IV**

 

ITEM 15.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES

 

(a) (1) and (2).  The response to this portion of Item 15 issubmitted as a separate section of this report.

 

(a)(3) Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                        |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                   |
| 3.1                  |       | Articles of  Incorporation (restated in electronic format), attached as Exhibit 3.1  to the Registration Statement on Form SB-2/A, Registration No. 333-72500,  filed with the Commission on December 14, 2002, incorporated herein by  reference. |
|                 |       |                                                                                                                                                                                                                                                                   |
| 3.2                  |       | Bylaws, as amended  through September 27, 2007, attached as Exhibit 3.1 to the Current  Report on Form 8-K filed with the Commission on October 3, 2007,  incorporated herein by reference.                                                        |

 

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| 4.1    |   | Form of Common  Stock Certificate, attached as Exhibit 4.1 to the Form SB-2,  incorporated herein by reference.                                                                                                                                                                                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1   |   | Form of Employee  Stock Option of Millennium Bankshares Corporation, attached as Exhibit 10.2  to the Form SB-2, incorporated herein by reference.**                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Millennium Bankshares  Corporation Incentive Stock Option Plan, attached as Exhibit 4.3 to the  Registration Statement on Form S-8, Registration No. 333-101076,  filed with the Commission on November 7, 2002, incorporated herein by  reference.**                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Executive Employment  Agreement, dated as of June 6, 2005, between Millennium Bank and Dale  Phelps, attached as Exhibit 10.1 to the Current Report on Form 8-K  filed with the Commission on June 10, 2005, incorporated herein by  reference.**                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Commercial Lease  Agreement between 1051 Elden Street, L.L.C., the lessor, and Millennium Bank,  N.A., the lessee, dated April 2, 2003, attached as Exhibit 10.1 to  the Quarterly Report on Form 10-QSB for the period ended June 30,  2003, incorporated herein by reference.                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Employment Agreement of  Richard I. Linhart, dated as of March 28, 2007, by and among the  Corporation, the Bank and Richard I. Linhart, attached as Exhibit 10.1  to the Current Report on Form 8-K filed with the Commission on April 4,  2007, incorporated herein by reference.**                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Employment Agreement of  John F. Novak, effective March 1, 2005 by and between, the Bank and John  F. Novak, attached as Exhibit 10.2 to the Current Report on Form 8-K  filed with the Commission on April 4, 2007, incorporated herein by  reference**                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Agreement, dated as of August 4,  2006, by and among the Company, Hot Creek Capital, L.L.C., a Nevada limited  liability company, Hot Creek Investors L.P., a Nevada limited partnership,  David M.W. Harvey, Joseph Paulini and Charles Dean, attached as Exhibit 10.1  to the Current Report on Form 8-K filed with the Commission on August 7,  2006, incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21     |   | List of Subsidiaries*                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23     |   | Consent of Crowe Chizek  and Company LLC. *                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Rule 13a-14(a) Certification  of Principal Executive Officer*                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Rule 13a-14(a) Certification  of Principal Financial Officer*                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1   |   | Certification of  Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  § 1350*                                                                                                                                                                                                                                                                                                  |

 

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*                 Filedherewith

 

**          Management contracts andcompensatory plans and arrangements.

 

(b)         Exhibits

 

The response to this portion of Item 15 as listed in Item 15(a)(3) aboveis submitted as a separate section of this report.

 

(c)          Financial Statement Schedules

 

The response to this portion of Item 15 is submitted as a separatesection of this report.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                       |   |   | MILLENNIUM BANKSHARES  CORPORATION |
|----------------------------|--------|--------|------------------------------------|
|                       |   |   |                               |
|                       |   |   |                               |   |   |   |
| Date: April 18,  2008 |   |   | By:                                | /s/  Richard I. Linhart |
|                       |   |   |                               | Richard  I Linhart |
|                       |   |   |                               | Chairman,  President and |
|                       |   |   |                               | Chief  Executive Officer |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

| **Signature**           | ** ** | **Title**                                             | ** ** | **Date**             |
|-------------------------|------------|-------------------------------------------------------|------------|----------------------|
|                    |       |                                                  |       |                 |
| /s/ Richard I. Linhart  |       | Chairman,  President, Chief Executive                 |       | April 18,  2008 |
| Richard  I. Linhart     |       | Officer and  Director   (Principal Executive Officer) |       |                 |
|                    |       |                                                  |       |                 |
| /s/ Dale G. Phelps      |       | Chief Financial  Officer                              |       | April 18,  2008 |
| Dale  G. Phelps         |       | (Principal Financial  and Accounting Officer)         |       |                 |
|                    |       |                                                  |       |                 |
| /s/ William P. Haggerty |       | Director                                              |       | April 18,  2008 |
| William  P. Haggerty    |       |                                                  |       |                 |
|                    |       |                                                  |       |                 |
| /s/ Grayson P. Hanes    |       | Director                                              |       | April 18,  2008 |
| Grayson  P. Hanes       |       |                                                  |       |                 |
|                    |       |                                                  |       |                 |
| /s/ David M.W. Harvey   |       | Director                                              |       | April 18,  2008 |
| David  M. W. Harvey     |       |                                                  |       |                 |
|                    |       |                                                  |       |                 |
| /s/ Joseph W. Paulini   |       | Director                                              |       | April 18,  2008 |
| Joseph  W. Paulini      |       |                                                  |       |                 |
|                    |       |                                                  |       |                 |
|                    |       | Director                                              |       | April 18,  2008 |
| Robert  T. Smoot        |       |                                                  |       |                 |
|                    |       |                                                  |       |                 |
| /s/James W. Wolfe       |       | Director                                              |       | April 18,  2008 |
| James  W Wolfe          |       |                                                  |       |                 |
|                    |       |                                                  |       |                 |
|                    |       | Director                                              |       | April 18,  2008 |
| Barbara  Wortley        |       |                                                  |       |                 |

 

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